UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(MARK
ONE)
|
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ending September 30, 2008
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the transition period from
______________
to
______________
Commission
File Number: 000-51418
Equity
Media Holdings Corporation
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
20-2763411
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer Identification No.)
|
One
Shackleford Drive, Suite 400
Little
Rock, Arkansas 72211
(Address
of principal executive offices, including zip code)
(501) 219-2400
(Registrant’s
telephone number, including area code)
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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in rule 12b-2 of the Exchange Act. (Check
one):
o
Large
accelerated filer
o
Accelerated filer
o
Non-accelerated filer
þ
Smaller
reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
þ
As
of November 19, 2008, 40,278,642 shares of the Company’s common stock, $0.0001
par value per share, were outstanding.
EQUITY
MEDIA HOLDINGS CORPORATION
INDEX
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Page
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3
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3
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3
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5
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6
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7
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19
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27
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27
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28
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28
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28
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28
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29
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30
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PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
EQUITY
MEDIA HOLDINGS CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
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|
|
|
|
|
|
December 31, 2007
|
|
|
ASSETS
|
|
|
(Unaudited)
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
762,134
|
|
$
|
634,314
|
|
|
Restricted
cash
|
|
|
811
|
|
|
4,162,567
|
|
|
Certificate
of deposit
|
|
|
|
|
|
112,107
|
|
|
Trade
accounts receivable, net of allowance for uncollectible
accounts
|
|
|
3,820,403
|
|
|
3,514,635
|
|
|
Program
broadcast rights
|
|
|
7,597,011
|
|
|
6,921,465
|
|
|
Assets
held for sale
|
|
|
|
|
|
9,520,849
|
|
|
Other
current assets
|
|
|
794,670
|
|
|
321,434
|
|
|
Prepaid
expenses - related party
|
|
|
|
|
|
100,000
|
|
|
Total
current assets
|
|
|
12,975,029
|
|
|
25,287,371
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
|
|
|
|
|
|
Land
and improvements
|
|
|
2,026,698
|
|
|
2,017,698
|
|
|
Buildings
|
|
|
3,995,744
|
|
|
3,956,229
|
|
|
Broadcast
equipment
|
|
|
29,802,288
|
|
|
29,174,079
|
|
|
Transportation
equipment
|
|
|
301,857
|
|
|
283,151
|
|
|
Furniture
and fixtures
|
|
|
4,550,516
|
|
|
4,422,527
|
|
|
Construction
in progress
|
|
|
102,889
|
|
|
163,716
|
|
|
|
|
|
40,779,992
|
|
|
40,017,400
|
|
|
Accumulated
depreciation
|
|
|
(19,811,267
|
)
|
|
(16,350,882
|
)
|
|
Net
property and equipment
|
|
|
20,968,725
|
|
|
23,666,518
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
|
|
|
|
|
|
Indefinite-lived
assets, net
|
|
|
|
|
|
|
|
|
Broadcast
licenses
|
|
|
57,878,759
|
|
|
66,498,347
|
|
|
Goodwill
|
|
|
1,740,282
|
|
|
1,940,282
|
|
|
Total
indefinite-lived assets, net
|
|
|
59,619,041
|
|
|
68,438,629
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
Broadcasting
construction permits
|
|
|
399,302
|
|
|
885,665
|
|
|
Program
broadcast rights
|
|
|
8,458,643
|
|
|
4,001,625
|
|
|
Investment
in joint ventures
|
|
|
435,085
|
|
|
435,860
|
|
|
Deposits
and other assets
|
|
|
107,588
|
|
|
98,705
|
|
|
Broadcasting
station acquisition rights pursuant to assignment
agreements
|
|
|
156,000
|
|
|
440,000
|
|
|
Total
other assets
|
|
|
9,556,618
|
|
|
5,861,855
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
103,119,413
|
|
$
|
123,254,373
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
December 31, 2007
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$
|
6,404,935
|
|
$
|
3,644,475
|
|
|
Due
to affiliates and related parties
|
|
|
10,257,912
|
|
|
2,509,480
|
|
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Lines
of credit
|
|
|
991,771
|
|
|
994,495
|
|
|
Accrued
expenses and other liabilities
|
|
|
2,697,198
|
|
|
1,777,240
|
|
|
Deposits
held for sales of broadcast licenses
|
|
|
1,024,601
|
|
|
1,024,601
|
|
|
Deferred
revenue
|
|
|
239,416
|
|
|
271,728
|
|
|
Current
portion of program broadcast rights obligations
|
|
|
3,949,479
|
|
|
2,094,741
|
|
|
Current
portion of deferred barter revenue
|
|
|
3,774,929
|
|
|
4,393,637
|
|
|
Note
payable to Univision
|
|
|
15,000,000
|
|
|
15,000,000
|
|
|
Amounts
due to Luken Communications, LLC
|
|
|
25,000,000
|
|
|
—
|
|
|
Current
portion of notes payable
|
|
|
42,744,322
|
|
|
52,233,322
|
|
|
Current
portion of capital lease obligations
|
|
|
44,959
|
|
|
44,546
|
|
|
Total
current liabilities
|
|
|
112,129,522
|
|
|
83,988,265
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
|
|
|
|
|
|
Notes
payable, net of current portion
|
|
|
7,966,422
|
|
|
8,996,705
|
|
|
Capital
lease obligations, net of current portion
|
|
|
110,166
|
|
|
141,491
|
|
|
Program
broadcast rights obligations, net of current portion
|
|
|
5,610,522
|
|
|
1,140,641
|
|
|
Deferred
barter revenue, net of current portion
|
|
|
1,996,076
|
|
|
2,618,143
|
|
|
Due
to affiliates and related parties
|
|
|
896,009
|
|
|
6,262
|
|
|
Security
and other deposits
|
|
|
213,500
|
|
|
213,500
|
|
|
Other
liabilities
|
|
|
1,135,540
|
|
|
556,795
|
|
|
Total
non-current liabilities
|
|
|
17,928,235
|
|
|
13,673,537
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily
redeemable preferred stock — $.0001 par value; 25,000,000 shares
authorized; 2,050,519 issued and outstanding
|
|
|
10,519,162
|
|
|
10,519,162
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
(DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
Common
stock — $.0001 par value; 100,000,000 shares authorized; 40,278,642 issued
and outstanding at September 30, 2008 and December 31,
2007
|
|
|
4,028
|
|
|
4,028
|
|
|
Additional
paid-in-capital
|
|
|
137,357,300
|
|
|
136,217,425
|
|
|
Accumulated
deficit
|
|
|
(174,817,482
|
)
|
|
(121,146,692
|
)
|
|
|
|
|
(37,456,154
|
)
|
|
15,074,761
|
|
|
Treasury
stock, at cost
|
|
|
(1,352
|
)
|
|
(1,352
|
)
|
|
Total
stockholders’ (deficit) equity
|
|
|
(37,457,506
|
)
|
|
15,073,409
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ (deficit) equity
|
|
$
|
103,119,413
|
|
$
|
123,254,373
|
|
See
Notes
to Unaudited Condensed Consolidated Financial Statements
EQUITY
MEDIA HOLDINGS CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF
OPERATIONS
(UNAUDITED)
|
|
|
Three Months ended
September 30,
|
|
Nine Months ended
September 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Broadcast
Revenue
|
|
$
|
7,092,517
|
|
$
|
7,508,138
|
|
$
|
22,856,190
|
|
$
|
21,296,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program,
production & promotion
|
|
|
4,377,143
|
|
|
3,696,863
|
|
|
14,613,526
|
|
|
10,727,108
|
|
|
Selling,
general & administrative
|
|
|
5,784,397
|
|
|
7,271,801
|
|
|
21,571,141
|
|
|
21,476,927
|
|
|
Selling,
general & administrative – related party
|
|
|
163,380
|
|
|
199,796
|
|
|
1,913,647
|
|
|
802,529
|
|
|
Impairment
charge on broadcasting assets
|
|
|
18,263,563
|
|
|
—
|
|
|
18,263,563
|
|
|
—
|
|
|
Management
agreement settlement
|
|
|
|
|
|
—
|
|
|
|
|
|
8,000,000
|
|
|
Depreciation
& amortization
|
|
|
1,041,719
|
|
|
1,004,958
|
|
|
3,123,125
|
|
|
2,852,317
|
|
|
Management
fees – related party
|
|
|
375,000
|
|
|
375,000
|
|
|
750,000
|
|
|
1,172,581
|
|
|
Rent
|
|
|
657,496
|
|
|
604,316
|
|
|
2,029,606
|
|
|
1,836,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
30,662,698
|
|
|
13,152,734
|
|
|
62,264,608
|
|
|
46,868,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(23,570,181
|
)
|
|
(5,644,596
|
)
|
|
(39,408,418
|
)
|
|
(25,571,260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
7,369
|
|
|
85,421
|
|
|
33,245
|
|
|
117,931
|
|
|
Interest
expense
|
|
|
(1,929,770
|
)
|
|
(1,819,741
|
)
|
|
(7,947,776
|
)
|
|
(5,789,080
|
)
|
|
Interest
expense – related party
|
|
|
(4,964,157
|
)
|
|
(262,500
|
)
|
|
(5,795,157
|
)
|
|
(525,000
|
)
|
|
(Loss)
gain on disposal and/or sale of assets
|
|
|
(282,882
|
)
|
|
—
|
|
|
(482,882
|
)
|
|
453,753
|
|
|
Other
income, net
|
|
|
607,159
|
|
|
212,324
|
|
|
717,111
|
|
|
482,175
|
|
|
Losses
from affiliates and joint ventures
|
|
|
(166
|
)
|
|
(226,660
|
)
|
|
(775
|
)
|
|
(279,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other (expense), net
|
|
|
(6,562,447
|
)
|
|
(2,011,156
|
)
|
|
(13,476,234
|
)
|
|
(5,539,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(30,132,628
|
)
|
|
(7,655,752
|
)
|
|
(52,884,652
|
)
|
|
(31,110,830
|
)
|
|
Provision
(benefit) for income taxes
|
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(30,132,628
|
)
|
|
(7,655,752
|
)
|
|
(52,884,652
|
)
|
|
(31,110,830
|
)
|
|
Preferred
dividend
|
|
|
(198,661
|
)
|
|
(185,598
|
)
|
|
(786,138
|
)
|
|
(12,506,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(30,331,289
|
)
|
$
|
(7,841,350
|
)
|
$
|
(53,670,790
|
)
|
$
|
(43,616,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
40,278,382
|
|
|
40,646,137
|
|
|
40,278,382
|
|
|
35,104,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.75
|
)
|
$
|
(0.19
|
)
|
$
|
(1.33
|
)
|
$
|
(1.24
|
)
|
See
Notes
to Unaudited Condensed Consolidated Financial Statements.
EQUITY
MEDIA HOLDINGS CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(UNAUDITED)
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
2008
|
|
September
30,
2007
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(52,884,652
|
)
|
$
|
(31,110,830
|
)
|
|
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
|
|
|
|
|
|
|
|
Provision
for bad debt
|
|
|
295,230
|
|
|
1,030,315
|
|
|
Impairment
charge on broadcasting assets
|
|
|
18,263,563
|
|
|
|
|
|
Depreciation
|
|
|
3,123,126
|
|
|
2,811,832
|
|
|
Amortization
of intangibles
|
|
|
|
|
|
40,485
|
|
|
Amortization
of program broadcast rights
|
|
|
8,787,472
|
|
|
5,451,169
|
|
|
Amortization
of discounts on interest-free debt
|
|
|
|
|
|
29,723
|
|
|
Equity
in losses of subsidiaries and joint ventures
|
|
|
775
|
|
|
279,349
|
|
|
Loss
(gain) on disposal and/or sale of assets
|
|
|
(1,118
|
)
|
|
(453,753
|
)
|
|
(Gain)
loss on sale of intangibles
|
|
|
484,000
|
|
|
|
|
|
Management
agreement settlement
|
|
|
|
|
|
4,800,000
|
|
|
Share-based
compensation
|
|
|
784,415
|
|
|
1,658,678
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
(624,844
|
)
|
|
(852,699
|
)
|
|
Deposits
and other assets
|
|
|
(234,054
|
)
|
|
(526,225
|
)
|
|
Restricted
cash
|
|
|
4,161,757
|
|
|
—
|
|
|
Accounts
payable and accrued expenses
|
|
|
4,818,857
|
|
|
(75,397
|
)
|
|
Program
broadcast rights
|
|
|
(13,920,116
|
)
|
|
(8,580,136
|
)
|
|
Program
broadcast obligations
|
|
|
6,324,614
|
|
|
1,285,043
|
|
|
Deferred
barter revenue
|
|
|
(1,240,705
|
)
|
|
1,525,259
|
|
|
Security
deposits
|
|
|
|
|
|
(5,523
|
)
|
|
Deferred
income
|
|
|
(32,312
|
)
|
|
(13,657
|
)
|
|
Net
cash used by operating activities
|
|
|
(21,893,992
|
)
|
|
(22,706,367
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(38,657
|
)
|
|
(6,398,509
|
)
|
|
Proceeds
from sale of property and equipment
|
|
|
11,635
|
|
|
621,462
|
|
|
Acquisition
of broadcast assets
|
|
|
|
|
|
(1,625,000
|
)
|
|
Restriction
of cash for acquisitions
|
|
|
|
|
|
(5,684,739
|
)
|
|
Proceeds
(purchase) of certificate of deposit
|
|
|
112,107
|
|
|
(2,482
|
)
|
|
Net
advances from (to) related parties and affiliates
|
|
|
7,489,644
|
|
|
517,585
|
|
|
Net
cash provided by (used) in investing activities
|
|
|
7,574,729
|
|
|
(12,571,683
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
58,982,502
|
|
|
19,084,389
|
|
|
Payments
of notes payable
|
|
|
(69,504,508
|
)
|
|
(19,530,275
|
)
|
|
Payments
of capital lease obligations
|
|
|
(30,911
|
)
|
|
(27,264
|
)
|
|
Proceeds
from Luken transactions
|
|
|
25,000,000
|
|
|
—
|
|
|
Recapitalization
through merger
|
|
|
|
|
|
52,906,853
|
|
|
Purchase
of preferred stock
|
|
|
|
|
|
(25,000,000
|
)
|
|
Issuance
of common stock in private placement
|
|
|
|
|
|
9,000,000
|
|
|
Settlement
with dissenting shareholders
|
|
|
|
|
|
(368,410
|
)
|
|
Purchase
of common stock
|
|
|
|
|
|
(1,352
|
)
|
|
Net
cash provided by financing activities
|
|
|
14,447,083
|
|
|
36,063,941
|
|
|
Net
increase in cash and cash equivalents
|
|
|
127,820
|
|
|
785,891
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents — beginning of period
|
|
|
634,314
|
|
|
1,630,973
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents — end of period
|
|
$
|
762,134
|
|
$
|
2,416,864
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
8,260,144
|
|
$
|
5,196,589
|
|
|
Supplemental
non-cash activities:
|
|
|
|
|
|
|
|
|
Issuance
of note payable to redeem preferred stock
|
|
$
|
|
|
$
|
15,000,000
|
|
|
Distribution
to converting shareholders
|
|
$
|
|
|
$
|
10,899,882
|
|
|
Issuance
of mandatory redeemable preferred stock to pay accrued preferred
dividends
|
|
$
|
|
|
$
|
10,519,162
|
|
|
Assumption
of net liabilities of Coconut Palm Acquisition Corporation
|
|
$
|
|
|
$
|
(2,267,340
|
)
|
|
Issuance
of common stock to pay preferred dividends
|
|
$
|
|
|
$
|
1,615,781
|
|
|
Charge
to stockholders’ equity for prepaid merger costs
|
|
$
|
|
|
$
|
953,223
|
|
|
Issuance
of common stock to retire debt
|
|
$
|
|
|
$
|
500,000
|
|
|
Acquisition
of real property through assumption of debt
|
|
$
|
|
|
$
|
205,347
|
|
|
Accretion
of preferred dividends
|
|
$
|
578,743
|
|
$
|
371,197
|
|
|
Preferred
dividend attributable to beneficial conversion
|
|
$
|
207,395
|
|
$
|
—
|
|
See
Notes
to Unaudited Condensed Consolidated Financial Statements.
EQUITY
MEDIA HOLDINGS CORPORATION
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
1 — BASIS OF PRESENTATION
The
unaudited condensed consolidated financial statements include the accounts
of
Equity Media Holdings Corporation and its consolidated subsidiaries (the
“Company”) and its subsidiaries. All significant inter-company balances and
transactions have been eliminated. The accounting policies followed by the
Company and other pertinent information are set forth in the notes to the
Company’s financial statements for the fiscal year ended December 31, 2007
included in the Form 10-K/A filed with the Securities and Exchange Commission
on
April 1, 2008 (the “Form 10-K/A”). The accompanying condensed consolidated
balance sheet as of December 31, 2007, which has been derived from audited
consolidated financial statements, and the unaudited condensed consolidated
financial statements for the three and nine months ended September 30, 2008
and
2007 included herein have been prepared in accordance with the instructions
for
Form 10-Q under the Securities Exchange Act of 1934, as amended, and
Article 10 of Regulation S-X. 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 relating
to interim financial statements.
In
the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain only normal recurring adjustments necessary to
present fairly the Company’s financial position as of September 30, 2008 and the
results of its operations for the three and nine months ended September 30,
2008
and 2007 and cash flows for nine months ended September 30, 2008 and 2007.
The
results of operations for the three and nine months ended September 30, 2008
and
2007 are unaudited and are not necessarily indicative of the results to be
expected for the full year. The unaudited condensed consolidated financial
statements included herein should be read in conjunction with the Company’s
consolidated financial statements and related footnotes included in the Annual
Report on our Form 10-K/A for the year ended December 31, 2007.
Certain
changes in classifications have been made to the prior period financial
statements to conform to the current financial statement
presentation.
NOTE
2— GOING CONCERN, LIQUIDITY AND CAPITAL RESOURCES
The
Company currently has a working capital deficit of approximately $99.2 million
and has experienced losses from operations since inception. During the year
ended December 31, 2007, the Company had a net loss of approximately $40.8
million and experienced cash outflows from operations during the same period
of
approximately $30.8 million. For the nine months ended September 30, 2008,
the
Company had a net loss of approximately $52.9 million, which includes an
impairment loss on broadcast assets of $18,263,563, and experienced cash
outflows from operations of approximately $21.9 million. In the past, the
Company has relied on equity and debt financing and the sale of assets to
provide the necessary liquidity for the business to operate and will need to
have access to substantial funds over the next twelve months in order to fund
its operations. As of September 30, 2008, the Company has approximately $0.8
million of unrestricted cash on hand.
On
February 13, 2008, the Company and its lenders (together or separately, Silver
Point Capital and Wells Fargo FootHill) entered into the Third Amended and
Restated Credit Agreement (“Credit Agreement”) in which the Company refinanced
its previous senior credit facility. The amended $53.0 million credit facility,
comprised of an $8.0 million revolving credit line and term loans of $45.0
million, maturing on February 13, 2011, was used to refinance the existing
senior credit facility. Outstanding principal balance under the credit facility
bears interest at LIBOR or the alternate base rate, plus the applicable margin.
The applicable margin is 9.5% for the LIBOR loans and 8.5% on the alternate
base
rate loan. The minimum LIBOR is 4.5%. The alternate base rate is (i) the
greatest of (A) the Prime Rate, (B) the Federal Funds Rate in effect on such
day
plus fifty (50) basis points (0.50%), and (C) seven and one-half percent (7.50%)
per annum. The Company is required to pay an unused line fee of .5% on the
unused portion of the credit facility. The credit facility is secured by the
majority of the assets of the company. The Company is subject to new financial
and operating covenants and restrictions based on trailing monthly and twelve
month information. The Company borrowed $50.5 million under the new facility.
Due to certain restrictions based on the value of the loan collateral, the
Company did not have access to the remaining $2.5 million at that
time.
On
March
19, 2008, the Company entered into an amendment (“First Amendment”) to its
Credit Agreement. Under the terms of the First Amendment, the lender group
agreed to forbear from exercising certain of their rights and remedies with
respect to designated defaults under the Credit Agreement through the earlier
of
(a) April 18, 2008 and (b) the date of occurrence of certain events or by which
certain events have failed to occur, including the Company’s failure to enter
into agreements with respect to the sale of certain of its assets and the
Company’s failure to secure approvals for, and meet other criteria with respect
to, financing alternatives necessary to meet the Company’s immediate capital
requirements. Additionally, the applicable margins on LIBOR loans and
base rate loans were increased to 10.0% and 9.0% respectively. Pursuant to
the First Amendment the Lenders may exercise any and all remedies available
under the Credit Agreement, including making the loan immediately due and
payable.
On
April
28, 2008, the Company entered into a second amendment (“Second Amendment”) to
its Credit Agreement which had been previously amended on March 19, 2008 as
noted above. Under the terms of the Second Amendment, the lender group agreed
to
forbear from exercising certain of its rights and remedies with respect to
existing defaults and any other defaults or events of default under the Credit
Agreement other than any specified defaults described in the Second Amendment
(which include, but are not limited to, breaches of certain affirmative and
negative covenants, among others) through the earlier of (a) May 5, 2008 and
(b)
the date of occurrence of certain events or by which certain events have failed
to occur, including the Company’s failure to consummate a proposed financing
with certain investors. The Second Amendment also provided for the lender group
to make additional loans to the Company in an amount not to exceed $5.5 million
(which includes additional loans funded pursuant to the First Amendment) and
increases the applicable margins on LIBOR loans and base rate loans to 12.0%
and
11.0% respectively.
On
June
24, 2008, the Company entered into a third amendment (“Third Amendment”) to the
Credit Agreement. Under the terms of the Third Amendment, the lender group
has
agreed to forbear from exercising certain of its rights and remedies with
respect to existing defaults and certain other defaults described in the Third
Amendment through the earlier of (a) December 23, 2008 and (b) the date of
occurrence of events of default or certain other events. Notwithstanding the
foregoing, the lenders may terminate the forbearance on and after September
15,
2008 in their sole discretion. The Third Amendment also provides for the lender
group to make additional loans to the Company in an amount not to exceed $6.5
million, subject to certain conditions in the Third Amendment and the Lenders’
sole discretion. Additionally, the applicable margins on LIBOR loans and
base rate loans were decreased to 10.0% and 9.0% respectively. The Company
used
a portion ($17.5 million) of the proceeds from the transactions with Luken
Communications, LLC as described in Note 4 - Transactions with Luken
Communications, LLC to pay down a portion of the credit facility. Following
this
pay down and after additional advances under the Term C facility approximately
$40.1 million remains outstanding under the credit facility as of September
30,
2008.
The
Company is currently in default under its existing loan agreements with Silver
Point. Existing events of default include, but are not limited to, the Company’s
failure to pay interest when due, lateness on certain payments due under the
Company’s satellite and programming agreements and failure to achieve certain
performance metrics, including minimum monthly revenue and EBITDA
benchmarks.
Even
with
the refinanced credit facility, the additional funds provided by the amended
credit facility and the proceeds from the transactions as described in Note
4 -
Transactions with Luken Communications, LLC are not sufficient to meet all
of
the anticipated liquidity needs to continue operations of the Company for the
next twelve months. Accordingly, the Company will have to raise additional
capital or increase its debt immediately to continue operations. If the Company
is unable to obtain additional funds immediately or if the funds cannot be
obtained on favorable terms, management may be required to liquidate
substantially all available assets, restructure the company, cease all or a
part
of operations, seek protection under U.S. bankruptcy laws and regulations,
or
undertake other actions. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
NOTE
3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Adoption
of New Accounting Standards
Effective
January 1, 2008, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 157,
"Fair Value Measurements" ("SFAS 157") for its financial assets and
liabilities. In February 2008, the FASB issued FASB Staff Position ("FSP")
No.
FAS 157-2, "Effective Date of FASB Statement No. 157", which delays
the effective date of SFAS 157 for nonfinancial assets and liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), to fiscal years beginning
after November 15, 2008 and interim periods within those fiscal years.
SFAS 157 establishes a framework for measuring fair value under generally
accepted accounting principles and expands disclosures about fair value
measurement. The adoption of SFAS 157 on January 1, 2008 did not have
a material effect on the Company's Unaudited Condensed Consolidated Financial
Statements. See Note 11 for additional information. In October 2008, the
FASB issued FSP SFAS 157-3 “Determining the Fair Value of a Financial Asset When
the Market for That Asset is Not Active” (“FSP SFAS 157-3”), which is effective
upon issuance for all financial statements that have not been issued. FSP
SFAS 157-3 clarifies the application of SFAS 157, in a market that is not
active. We have adopted FSP SFAS 157-3 effective with this filing.
FSP SFAS 157-3 does not have a material impact on our financial position,
financial performance or cash flows.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of
FASB Statement No. 115" ("SFAS 159") effective as of the beginning of
the first fiscal year that begins after November 15, 2007. SFAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value with changes in fair value recognized in earnings
for
each reporting period. The adoption of SFAS 159 on January 1, 2008 did
not have any effect on the Company's Unaudited Condensed Consolidated Financial
Statements as the Company did not elect any eligible items for fair value
measurement.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007)
“
Business
Combinations
”
(“SFAS 141(R)”). SFAS 141(R) retains the fundamental requirements of
the original pronouncement requiring that the purchase method be used for all
business combinations. SFAS 141(R) defines the acquirer as the entity that
obtains control of one or more businesses in the business combination,
establishes the acquisition date as the date that the acquirer achieves control
and requires the acquirer to recognize the assets acquired, liabilities assumed
and any non-controlling interest at their fair values as of the acquisition
date. SFAS 141(R) also requires that acquisition-related costs be
recognized separately from the acquisition. SFAS 141(R) is effective for
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The impact of adopting SFAS 141(R) will be dependent on the future
business combinations that the Company may pursue after its effective date,
if
any.
In
December 2007, the FASB issued Statement No. 160, “
Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51
(“SFAS 160”)
.”
The
objective of SFAS 160 is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides
in
its consolidated financial statements by establishing accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. This Statement applies to all entities that
prepare consolidated financial statements, except not-for-profit organizations.
SFAS 160 amends ARB 51 to establish accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of
a
subsidiary. It also amends certain of ARB 51’s consolidation procedures for
consistency with the requirements of SFAS 141 (R). This Statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is prohibited.
The effective date of this Statement is the same as that of the related
Statement 141(R). This Statement shall be applied prospectively as of the
beginning of the fiscal year in which this Statement is initially applied,
except for the presentation and disclosure requirements. The presentation and
disclosure requirements shall be applied retrospectively for all periods
presented.
In
March
2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities, an amendment
of
FASB Statement No.133
(“SFAS 161”). SFAS 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (1) how and why an entity uses derivative
instruments, (2) how derivative instruments and related hedged items are
accounted for under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
(SFAS 133”), and its related interpretations, and (3) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS 161 is effective for fiscal
years beginning after November 15, 2008. The Company will be required to
adopt SFAS 161 in the first quarter of 2009. The Company is currently
evaluating the requirements of SFAS 161 and has not yet determined what
impact the adoption will have on its consolidated statement of financial
position, results of operations or cash flows.
In
April 2008, the FASB issued FASB Staff Position No. FAS
142-3,
Determination of the Useful Life of Intangible Assets
(“FSP 142-3”). FSP 142-3 amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful
life
of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
.
FSP 142-3 is effective for fiscal years beginning after December 15,
2008 and interim periods within those fiscal years, requiring prospective
application to intangible assets acquired after the effective date. The Company
will be required to adopt the principles of FSP 142-3 with respect to
intangible assets acquired on or after January 1, 2009. The impact that FSP
142-3 will have on the Company's consolidated financial statements when
effective will depend upon the nature, terms and size of any acquisitions
completed after the effective date.
In
June
2008, the FASB issued FASB Staff Position EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions
Are
Participating Securities
(“FSP
EITF 03-6-1”). FSP EITF 03-6-1 clarifies that all outstanding unvested
share-based payment awards that contain rights to non-forfeitable dividends
participate in undistributed earnings with common shareholders. Awards of this
nature are considered participating securities and the two-class method of
computing basic and diluted earnings per share must be applied. FSP EITF 03-6-1
is effective for fiscal years beginning after December 15, 2008. The Company
is
currently assessing the impact of FSP EITF 03-6-1 on its consolidated financial
position and results of operations.
NOTE
4 — TRANSACTIONS WITH LUKEN COMMUNICATIONS, LLC
On
June
24, 2008, the Company closed several transactions with Luken Communications,
LLC, a company controlled by Henry Luken, III, former President & CEO of the
Company and former Chairman of the Board of Directors, and currently the
Company’s largest shareholder with approximately 17% beneficial ownership of the
Company’s common stock (the “Investors”). The Investors purchased the
outstanding shares of the Company’s Retro Television Network (“RTN”) subsidiary,
Retro Programming Services, Inc., for $18.5 million (“Stock Purchase
Agreement”). The Company has the option to repurchase RTN at any time during the
six month option period which expires on December 24, 2008 on terms described
below. Concurrently with the closing of the RTN sale, the Investors purchased,
for $1.5 million, warrants (“Warrant Agreement”) to purchase up to 8,050,000
shares of the Company’s common stock for $1.10 per share. The Company also
entered into Asset Purchase Agreements with the Investors for the sale by the
Company of certain television stations (“Station Sales”) for $17.5 million. The
Company received a $5.0 million prepayment on the Station Sales from the
Investors at closing. The Station Sales will be consummated, and the Company
will receive the remaining payment of $12.5 million, upon receipt of Federal
Communications Commission (“FCC”) and certain other approvals.
The
transactions with the Investors were approved by a special committee of the
board of directors of the Company, which received a fairness opinion from an
independent investment bank that the financial consideration being received
in
the transactions was fair for the Company’s unaffiliated
stockholders.
The
Company retired a portion of its credit facilities in the principal amount
of
$17.5 million with a portion of the proceeds received from these transactions.
The remaining proceeds, together with any future proceeds, will be used for
additional reductions of debt and to the extent available to fund
operations.
Sale
of RTN
The
Company received $18.5 million in cash for all of the outstanding shares of
RTN,
a wholly owned subsidiary of the Company, from the Investors. RTN is a growing
network with 80 affiliates that currently covers 39% of U.S. television
households. The Company has the option (“RTN Option”) to repurchase RTN for
$27.75 million plus an amount equal to the capital and net operating
expenditures (capped at $1.75 million in the aggregate) invested by the
Investors prior to the repurchase (together with a return on such expenditures
at the rate of 12% per annum), collectively the “Option Price”, which is
exercisable at any time through December 24, 2008. Under certain circumstances
related to the Company’s failure to consummate the Station Sales (see herein
below), the Investors will be entitled to require the Company to exercise the
RTN Option. In connection with the Stock Purchase Agreement, the Company has
agreed to continue providing operational support services of the same scope,
quality and service levels that were being provided to RTN prior to its sale,
in
exchange for a stated monthly fee, and has also agreed to grant a cost-free,
non-exclusive, perpetual, non-transferable license to RTN to use the Company’s
Central Automated Satellite Hub (“CASH”) delivery technology solely in
connection with operating RTN and its providing of programming content and
advertising across the network. Additionally, the Company granted to the
Investor a second, cost-free, non-exclusive, perpetual, non-transferable license
to use the Seller’s CASH System in connection with the non-RTN network
operations of the Investor and its subsidiaries.
In
the
event the Company does not exercise the RTN Option and if within the 12-month
period following the closing of the RTN sale, the Investors sell RTN to an
unaffiliated third party, for an amount in excess of $18.5 million, the Company
will be entitled to receive 50% of such excess (net of transaction
costs).
In
the
event the RTN Option is exercised by the Company prior to the consummation
of
the Station Sales, $12.5 million of the Option Price shall be retained by the
Company and applied, effectively, as an additional prepayment by the Investors
of the $12.5 million balance due for the Station Sales.
The
Company has continued to engage an investment banking firm to explore strategic
alternatives, including potentially working with strategic partners, for the
repurchase of RTN during the option period and also will assist in identifying
additional sources to help finance additional digital networks, similar to
the
RTN model, that the Company may develop and deliver using the CASH technology
system.
Immediately
prior to the sale of RTN to the Investors, the Company entered into an agreement
(“New RTN Rights Agreement”) with Larry Morton, a director, and Neal Ardman,
consultant and co-founder of RTN and Retro Television Networks, LLC (“Retro
LLC”), a company affiliated with Messrs. Morton and Ardman, which superseded in
its entirety an agreement entered into with RTN and its affiliates and the
Company in December 2005 under which Retro LLC received certain rights to
receive 10% of net sales revenues of RTN and 20% of the sales price upon any
sale of RTN. Under the New RTN Rights Agreement, Retro LLC agreed, among other
things, that the sale of RTN by the Company to Luken Communications, LLC would
not trigger Retro LLC’s right to receive a portion of the re-purchase price and
that while RTN is owned by Luken Communications, LLC Retro LLC would be entitled
to 5% of pre-tax earnings. Retro LLC also agreed that any exercise of the RTN
Option by the Company would not trigger Retro LLC’s right to receive a portion
of the re-purchase price. Upon an exercise of the RTN Option pursuant to which
RTN is acquired by the Company or an affiliate thereof, Retro LLC would have
the
right going forward to 10% of pre-tax earnings of RTN and 20% of any future
sale
proceeds (net of transaction costs).
At
June
30, 2008, the Company recorded the sale of RTN as a financing transaction as
the
RTN Option was deemed to be a “right of return” and until the option period
expires the transaction cannot be recorded as a sale or gain from the sale
recognized. In addition, it is the intent of the Company to exercise the RTN
Option if the financing is available. Accordingly, the Company has recorded
the
proceeds from the sale, $18.5 million, as amounts due to Luken Communications,
LLC, a liability. The underlying assets of RTN and the results of its operations
continue to be included in the consolidated financial statements of the Company
until such time that the Company recognizes the sale of RTN for accounting
purposes.
Because
the sale of RTN is currently deemed to be, and reported as, a financing
transaction, the difference between the sales price of $18.5 million and the
repurchase price of $27.75 million, or $9.25 million, is deemed to be interest
expense and will be accrued and expensed pro-rata over the six-month option
period. Of this total, amounts of $4,701,657 and $5,007,657 were recognized
as
interest expense to related parties during the three and nine month periods
ended September 30, 2008. In the event the RTN Option is exercised and RTN
repurchased from the Investors for the Option Price, the repurchase will be
recognized and reported as the repayment of the $18.5 million and the difference
of $9.25 million recognized as interest expense over the six-month period.
No
gain or loss will be recognized on either transaction, and although the
Investors are related parties, because the debt will be extinguished at its
carrying value there will be no affect on the Company’s capital.
In
the
event the RTN Option expires un-exercised the Company will no longer recognize,
nor report, the transaction as a financing transaction. At that time the Company
will, instead, deem RTN to have been sold and account for the transaction
accordingly. Additionally at that time, the amount of the $9.25 million
previously recognized and reported as interest expense to related parties will
be reversed in the period of the event.
Warrant
Agreement
Simultaneous
with the RTN transaction, the Company sold warrants to Investors giving them
the
right to purchase 8,050,000 shares of the Company’s common stock at an exercise
price of $1.10 per share, exercisable through September 7, 2009 (the “Luken
Warrants”). The sales price of the warrants was $1.5 million. In the event the
Luken Warrants are exercised, the Investors’ beneficial ownership in the Company
would increase from approximately 17% to approximately 30%.
The
Warrant Agreement provides the Investors with the right to require the Company
to repurchase all, but not less than all, of the Luken Warrants for a price
of
$1.5 million upon a Seller Trigger Event, defined as (a) a failure by the
Company and its applicable subsidiaries to consummate the Station Sales on
or
prior to December 24, 2008 for any reason other than (i) circumstances
constituting a Purchaser Trigger Event or (ii) a termination by the Company
under the terms of the Station Sales by which the Company terminates such
agreement and returns the $5.0 million prepayment and makes other payments
as
required by the Asset Purchase Agreements; provided however that if Seller
has
duly filed applications with the FCC and at December 24, 2008 there is
reasonable basis for determining that the FCC will grant consent to the
consummation of the transfer of licenses in the Stations Purchase, such date
shall be extended to March 24, 2009 (the “Station Purchase Extension”); or (b)
any action is commenced in any liquidation or bankruptcy or similar proceeding
to set aside the Stock Purchase Agreement or Stations Sales or to otherwise
reject the agreements related thereto as executory contracts.
In
accordance with the Warrant Agreement, as soon as practicable after the
180
th
day
after June 24, 2008, the Company shall use commercially reasonable efforts
to
file a registration statement (on Form S-3 if eligible, or Form S-1 if not
eligible) covering the resale of the underlying securities by the Investor
and
use its commercially reasonable efforts to (i) respond promptly to all SEC
requests for information and filings and (ii) cause such registration statement
to become effective as soon as possible.
The
Company’s Condensed Consolidated Balance Sheet, as of September 30, 2008
classifies the $1.5 million received from the Luken Warrants as a liability
following guidance in accordance with FASB Statement No. 150 – “
Accounting
for Certain Financial Instruments with Characteristics of both Liabilities
and
Equity
”
(“SFAS
150”) as the Investor can put the warrants back to the Company for redemption if
certain events do not occur. These events are outside the control of the Company
as one of the events is the inability to consummate the Station Sales. While
it
is the intent of the Company to consummate this transaction it can only be
done
upon obtaining approval from the FCC. The Company has concluded that this
approval process is not perfunctory and customary and therefore cannot conclude
with certainty that it will occur.
The
Company has recorded the $1.5 million received in connection with the Luken
Warrants in Amounts due to Luken Communications, LLC in the condensed
consolidated balance sheet as of September 30, 2008. The Company will reassess
the classification of the Luken Warrants at each reporting period in accordance
with the applicable accounting pronouncements based on the facts at the
time.
Stations
Asset Purchase Agreements
On
June
24, 2008, the Company entered into agreements with the Investors for the sale
(“Station Sales”) of all of the assets used in the business and operations of
television stations located in six markets, including licenses, construction
permits and other instruments of authorization (“Licenses”) issued by the FCC
and certain other assets (collectively with the Licenses, the “Station Assets”)
for a total combined purchase price of $17.5 million (“Stations Purchase
Price”). The FCC approved these assignment applications by public notices dated
October 29, and October 30, 2008. The markets in which these stations operate
include:
|
|
·
|
Fort
Myers/Naples (Florida),
|
|
|
·
|
Minneapolis
(Minnesota),
|
|
|
·
|
Oklahoma
City (Oklahoma), and
|
The
Company received $5.0 million as prepayment on the Stations Purchase Price
from
the Investors, which payment is nonrefundable except in the event the Company
determines to sell the Station Assets to another party prior to consummating
the
sale of the Station Assets with the Investors and in certain other
circumstances. The $5.0 million prepayment is included in amounts due to Luken
Communications, LLC in the condensed consolidated balance sheet as of September
30, 2008 as the sale is subject to FCC approval and the transaction can be
terminated by either party under certain events requiring the repayment of
the
$5.0 million payment to the Investors. The Company will receive the remaining
$12.5 million of the Stations Purchase Price upon consummation of the Station
Sales with the Investors. The Company anticipates that the $12.5 million will
be
utilized primarily to service the Company’s debt to Silver
Point.
The
Company has the right to terminate the Station Sales agreements prior to
consummation of the sale, subject to certain provisions (including repayment
of
the $5.0 million initial prepayment). In the event the Company secures an offer
to sell the Station Assets to a party other than the Investors for a purchase
price of less than $22.0 million, the Investors shall have the right to match
the terms of such offer and proceed to consummation under such terms. The
Investors have the right to terminate the agreement if the Station Sales has
not
been consummated within 18 months of the filing date of the FCC transfer
applications.
In
addition to the Stations Purchase Price, if within the 12-month period following
the closing of the Station Sales, the Investors sell the Stations, collectively
or individually, to an unaffiliated third party, for an amount in excess of
the
Stations Purchase Price, the Company will be entitled to 50% of such excess.
If,
within the second 12-month period following the closing of the Station Sale,
the
Investors sell the Stations, collectively or individually, to an unaffiliated
third party, for an amount in excess of the Stations Purchase Price, the Company
will be entitled to 25% of such excess.
The
assignment applications were granted by the FCC and public notice given on
October 29, and October 30, 2008. Under the contracts, the closing of the
Station Sales is to occur within twenty business days after the grant of FCC
consent becomes a final order.
This
agreement supersedes a previous Asset Purchase Agreement dated April 3, 2008
with Luken Communications, LLC for the sale of certain broadcast assets and
television stations which are included in the current agreement.
The
Company has not reclassified the assets related to this transaction to assets
held for sale as it does not meet the criteria established by SFAS No. 144
-
Accounting for the Impairment or Disposal of Long-Lived Assets
, which
includes standards that determine the classification of long lived
assets.
Transaction
Fee and Related Warrants issued to Investment Advisors
In
connection with the agreement between the investment advisors and the Company,
the investment advisors received warrants to purchase up to 1,075,279 shares
on
the same terms as the Luken Warrants in exchange for a $200,000 reduction to
their fees, and $200,000 in cash as consideration for their assistance with
the
transactions with the Investors. The intrinsic value of the warrants was
determined to be $148,046, based on a Black-Scholes valuation, and is included
in other current assets in the condensed consolidated balance sheets at
September 30, 2008, pending final resolution of these transactions.
SEC
filing
The
transactions with Luken Communications, LLC and all of the agreements discussed
above were submitted to the SEC with the form 8-K filed by the Company on July
1, 2008.
NOTE
5 — ASSET PURCHASE AGREEMENTS
Purchase
from Renard Communications Corp.
On
August 15, 2007, the Company entered into an asset purchase agreement with
Renard Communications Corp. for the purchase of certain licenses, construction
permits and other instruments of authorization issued by the FCC and certain
other assets. The agreement was terminated on June 11, 2008 and the Company
has
negotiated the partial return of the initial $400,000 deposit which was held
in
escrow pending closing. The portion forfeited, or $284,000, was recorded as
a
charge to loss on disposal of assets during the period ended September 30,
2008.
The remaining portion, or $116,000, is classified as broadcasting station
acquisition rights pursuant to assignment agreements as of September 30, 2008,
since the funds were not received until subsequent to that date.
Other
Agreements
In
connection with the 2007 merger transaction, the Company and Univision
Television Group (“Univision”), preferred stock holders, entered into a one year
$15.0 million promissory note secured by two television stations located in
Utah. In lieu of a cash repayment, the Company filed an application with the
FCC
on July 26, 2007 to transfer the television stations to Univision
Television Group, Inc. in satisfaction of the principal amount of the note.
The
television station assets include broadcast licenses with book values of
$7,884,631 and broadcasting equipment with book values of $487,436, a total
of
$8,372,067, as of December 31, 2007. Accordingly, these assets were classified
as held for sale as of December 31, 2007. On June 19, 2008, the Company and
Univision filed with the FCC to dismiss the assignment of licenses related
to
these assets and file public notice of such intent on June 24, 2008. Therefore,
since these assets are no longer held for sale, the assets have been
reclassified and included in their respective accounts in the condensed
consolidated balance sheet as of September 30, 2008.
In
October, 2007, the Company signed a non-binding letter of intent for the sale
of
certain television stations which include broadcast licenses with book values
of
$1,052,548 and broadcasting equipment with book values of $102,307, a total
of
$1,154,855. The Company had classified these assets as held for sale as of
December 31, 2007. The option term under the letter of intent governing this
transaction has expired and as such the related amount was reclassified and
included in their respective accounts in the condensed consolidated balance
sheet as of September 30, 2008.
On
July
21, 2008, the Company signed a letter of intent and subsequently on October
7,
2008 executed an asset purchase agreement for the sale of certain television
stations including broadcast licenses with book values of $5,131,000 and
broadcasting equipment with book values of $453,000, a total of $5,584,000.
The
Company continues to account for the assets related to this transaction as
held
and used, since the transaction does not meet the criteria established by SFAS
No. 144 –
Accounting
for the Impairment or Disposal of Long-Lived Assets,
for
reclassifying assets as held for sale. However, since the selling price of
the
assets per the asset purchase agreement is less than the respective carrying
values the assets were deemed to be impaired with respect to that difference
and
a charge was recorded during the period ended September 30, 2008, as an
operating cost and a reduction in broadcast licenses. That charge totaled
$1,584,000.
NOTE
6 — INTANGIBLE ASSETS
The
Company recorded an impairment charge of approximately $18.3 million during
the
quarter ended September 30, 2008, which included an impairment to the carrying
values of our broadcast licenses of $18.1 million, related to 11 of our
television stations; and an impairment to the carrying values of our tangible
broadcast assets of $0.2 million, related to 2 of our television stations.
As
required by SFAS 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), we
tested our unamortized intangible assets for impairment at September 30,
2008, between the required annual tests, because we believed events had occurred
and circumstances changed that would more likely than not reduce the fair value
of our broadcast licenses and related tangible assets below their carrying
amounts. These events included primarily: (1) the completion of an appraisal
by
an independent party of our television stations; and (2) entering into an asset
purchase agreement (“
APA”)
to sell
one of our television stations located in Little Rock, Arkansas at an amount
less than its carrying value. Other factors considered include: (a) the
continued decline of the price of our common stock; (b) the decline in the
current selling prices of television stations; and (c) the lower growth in
advertising revenues.
Determining
the fair value of our television stations requires our management to make a
number of judgments about assumptions and estimates that are highly subjective
and that are based on unobservable inputs. Significant weight was given to
the
results of the third party appraisal and it was the primary basis for the amount
of the charge, along with the terms agreed to in the APA. However, the actual
results and the ultimate value of the stations may differ from the appraised
values; and it is possible that such differences could have a material impact
on
our financial statements.
As
noted
above, the Company is required under SFAS 142 to test its indefinite-lived
intangible assets on an annual basis or whenever events or changes in
circumstances indicate that these assets might be impaired. As a result,
if the current economic trends continue and the credit and capital markets
continue to be disrupted, or we enter into additional agreements to sell
broadcast assets at less than their carrying values, it is possible that the
Company may record further impairments in the fourth quarter of
2008.
NOTE
7 — NOTES PAYABLE
Long-Term
Debt
Long-term
debt as of September 30, 2008 and December 31, 2007 consisted of the
following:
|
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
(
In thousands
)
|
|
|
Senior
Credit Facility
|
|
$
|
40,062
|
|
$
|
50,317
|
|
|
Luken
Communications, LLC
|
|
|
25,000
|
|
|
—
|
|
|
Merger
Related Party - Univision
|
|
|
15,000
|
|
|
15,000
|
|
|
Installment
Notes and other debt
|
|
|
10,649
|
|
|
10,913
|
|
|
Line
of Credit
|
|
|
992
|
|
|
994
|
|
|
Capital
Lease Obligations
|
|
|
155
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
Total
Debt
|
|
$
|
91,858
|
|
$
|
77,410
|
|
|
Less:
Current maturities
|
|
|
(83,781
|
)
|
|
(68,272
|
)
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
8,077
|
|
$
|
9,138
|
|
Senior
Credit Facility
On
February 13, 2008, the Company and its lenders entered into the Third Amended
and Restated Credit Agreement (“Credit Agreement”) in which the Company
refinanced its previous credit facility. The amended $53.0 million credit
facility, comprised of an $8.0 million revolving credit line and term loans
of
$45.0 million, matures on February 13, 2011, was used to refinance the existing
indebtedness senior credit facility. Outstanding principal balance under the
credit facility bears interest at LIBOR or the alternate base rate, plus the
applicable margin. The applicable margin is 9.5% for the LIBOR loans and 8.5%
on
the alternate base rate loan. The minimum LIBOR is 4.5%. The alternate base
rate
is (i) the greatest of (A) the Prime Rate, (B) the Federal Funds Rate in effect
on such day plus fifty (50) basis points (0.50%), and (C) seven and one-half
percent (7.50%) per annum. The Company is required to pay an unused line fee
of
.5% on the unused portion of the credit facility. The credit facility is secured
by the majority of the assets of the company. The Company is subject to new
financial and operating covenants and restrictions based on trailing monthly
and
twelve month information. The Company borrowed $50.5 million under the new
facility. Due to certain restrictions based on the value of the loan collateral,
the Company did not have access to the remaining $2.5 million at that
time.
On
March
19, 2008, the Company entered into an amendment (“First Amendment”) to its
Credit Agreement. Under the terms of the First Amendment, the lender group
agreed to forbear from exercising certain of their rights and remedies with
respect to designated defaults under the Credit Agreement through the earlier
of
(a) April 18, 2008 and (b) the date of occurrence of certain events or by which
certain events have failed to occur, including the Company’s failure to enter
into agreements with respect to the sale of certain of its assets and the
Company’s failure to secure approvals for, and meet other criteria with respect
to, financing alternatives necessary to meet the Company’s immediate capital
requirements. Additionally, the applicable margins on LIBOR loans and base
rate loans were increased to 10.0% and 9.0% respectively. Pursuant to the
First Amendment the Lenders may exercise any and all remedies available under
the Credit Agreement, including making the loan immediately due and
payable.
On
April
28, 2008, the Company entered into a second amendment (“Second Amendment”) to
its Credit Agreement which had been previously amended on March 19, 2008 as
noted above. Under the terms of the Second Amendment, the lender group agreed
to
forbear from exercising certain of its rights and remedies with respect to
existing defaults and any other defaults or events of default under the Credit
Agreement other than any specified defaults described in the Second Amendment
(which include, but are not limited to, breaches of certain affirmative and
negative covenants, among others) through the earlier of (a) May 5, 2008 and
(b)
the date of occurrence of certain events or by which certain events have failed
to occur, including the Company’s failure to consummate a proposed financing
with certain investors. The Second Amendment also provided for the lender group
to make additional loans to the Company in an amount not to exceed $5.5 million
(which includes additional loans funded pursuant to the First Amendment) and
increased the applicable margins on LIBOR loans and base rate loans to 12.0%
and
11.0% respectively.
On
June
24, 2008, the Company entered into a third amendment (“Third Amendment”) to the
Credit Agreement. Under the terms of the Third Amendment, the lender group
has
agreed to forbear from exercising certain of its rights and remedies with
respect to existing defaults and certain other defaults described in the Third
Amendment through the earlier of (a) December 23, 2008 and (b) the date of
occurrence of events of default or certain other events. Notwithstanding the
foregoing, the lenders may terminate the forbearance on and after September
15,
2008 in their sole discretion. The Third Amendment also provides for the lender
group to make additional loans to the Company in an amount not to exceed $6.5
million, subject to certain conditions in the Third Amendment and the Lenders’
sole discretion. Additionally, the applicable margins on LIBOR loans and
base rate loans were decreased to 10.0% and 9.0% respectively. The Company
used
a portion ($17.5 million) of the proceeds from the transactions with Luken
Communications, LLC as described in Note 4 – Transactions with Luken
Communications, LLC to pay down a portion of the credit facility. Following
this
pay down and after additional advances under the Term C facility, approximately
$40.1 million remains outstanding under the credit facility as of September
30,
2008.
On
October 16, 2008, the Board appointed Mr. Paul Brissette as Chief Restructuring
Officer. Subsequent to Mr. Brissette’s appointment, the senior lender group
advanced $400,000 to the Company under the Term C facility.
The
Company is currently in default under its existing loan agreements with Silver
Point. Existing events of default include, but are not limited to, the Company’s
failure to pay interest when due, lateness on certain payments due under the
Company’s satellite and programming agreements and failure to achieve certain
performance metrics, including minimum monthly revenue and EBITDA
benchmarks.
Even
with
the refinanced credit facility, the additional funds provided by the amended
credit facility and the proceeds from the transactions as described in Note
4 –
Transactions with Luken Communications, LLC are not sufficient to meet all
of
the anticipated liquidity needs to continue operations of the Company for the
next twelve months. Accordingly, the Company will have to raise additional
capital or increase its debt immediately to continue operations. If the Company
is unable to obtain additional funds when they are required or if the funds
cannot be obtained on favorable terms, management may be required to liquidate
substantially all available assets, restructure the company or in the extreme
event, cease operations. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Merger
Related - Univision
Pursuant
to the March 2007 Merger Transaction, the Company issued a promissory note
to
Univision Television Group, Inc. as partial consideration for the exchange
of
their shares of EBC Series A preferred stock. This promissory note in the amount
of $15.0 million was due and payable March 30, 2008 with interest accruing
at an
annual rate of 7.0%.
The
promissory note is secured by two television stations, originally sought to
be
transferred under an asset purchase agreement entered into for the same purpose.
The Company had intended to transfer the two television stations securing the
obligation in lieu of a cash payment for the debt principal. However, on June
19, 2008, the Company and Univision filed with the FCC to dismiss the assignment
of licenses related to these assets and file public notice of such intent on
June 24, 2008. Until such time as the requests are granted, interest continues
to accrue at an annual rate of 7% and the note remains unpaid.
Installment
notes and other debt
In
September, 2008, the Company executed modification agreements for two
installment loans whereby monthly principal and interest payments totaling
$661,428 and $276,585 are suspended until June, 2009 and September, 2009
respectively, at which time balloon payments of $716,548 and $283,019
respectively are due and monthly principal and interest payments will resume
until maturity.
Line
of Credit
At
September 30, 2008, the Company had a $1.0 million line of credit with an
Arkansas bank, with interest payable monthly at 7.5%, due October 23, 2008
and
secured by various broadcast assets and Company guarantees. The outstanding
balance at September 30, 2008 was $991,771. The Company is currently negotiating
with the bank to extend the maturity date.
NOTE
8 — MANDATORILY REDEEMABLE SERIES A CONVERTIBLE NON-VOTING PREFERRED
STOCK
As
of
September 30, 2008, the Company had 2,050,519 shares issued and outstanding
of
the Company’s Series A Convertible Non-Voting Preferred Stock (the
“Series A Preferred”). The Series A Preferred ranks senior to all
outstanding shares of the Company’s common stock. The Series A Preferred
accrues compounded dividends at the rate of 7% per annum of the original
issue price whether or not the Company declares a dividend payable. In addition,
if the Company declares a dividend on its common stock at any time, the holders
of Series A Preferred automatically participate on an “as if” converted to
common stock basis with the common shareholders.
The
Series A Preferred contains liquidation provisions that rank senior to any
and all claims of the common stockholders, such that upon the involuntary
liquidation, dissolution, or winding up of the Company, the holders of
Series A Preferred would be entitled to receive a liquidation amount equal
to the amount of the original issue price plus accrued dividends. A change
of
control of the Company is also deemed to be an event equivalent to a
liquidation, dissolution or winding up event under the terms of the Certificate
of Designation for the Series A Preferred.
The
holders of Series A Preferred may convert their shares at any time into
shares of the common stock of the Company on a one-for-one basis. The conversion
rate is subject to adjustment such that if the Company were to issue any share
of common stock, except for (a) issuances pursuant to the exercise of any
preferred stock, (b) issuances subject to a compensation plan for
employees, directors, consultants or others approved by the board of directors
or majority holders of the common stock of the Company, (c) stock issued
pursuant to a declared dividend, stock split or recapitalization, (d) stock
issued to sellers of companies acquired pursuant to board approval,
(e) stock issued to banking institutions as compensation for financing
received and (f) stock issued from the treasury of the Company, or any
instrument convertible or exercisable into common stock of the Company at a
rate
which if added to the consideration per share of common stock received for
any
such purchase right is less than the current rate, the conversion rate
automatically adjusts to that lower rate. At any time after five years after
issuance, the Company may elect to redeem shares of Series A Preferred in
cash. In addition, after five years after issuance and upon a majority of the
holders of Series A Preferred voting to redeem their shares, the holders of
Series A Preferred may require the Company to redeem their Series A
Preferred for cash. The redemption price is equal to the original price of
the
Series A Preferred plus all accrued Dividends as of the date of
redemption.
In
connection with the sale of common stock warrants to Investors (“Luken
Warrants”), (see Note 4 – Transactions with Luken Communications, LLC), the
Company determined that the conversion rate is not subject to adjustment as
of
September 30, 2008 pursuant to EITF 00-27 Application of Issue No. 98-5 to
Certain Convertible Instruments
,
(“EITF
00-27”) which states that changes to the conversion terms that would be
triggered by future events not controlled by the issuer should be accounted
for
as contingent conversion options, and the intrinsic value of such conversion
options would not be recognized until and unless the triggering event occurs.
While the warrants have been issued to Luken Communications, LLC thus triggering
a conversion rate adjustment per the Certificate of Designation, there is a
period of time where the Luken Warrants can be put back to the Company for
redemption in cash, thus creating a change to the conversion terms triggered
by
a future event that is not in the control of the Company. Lack of FCC approval
for the Station Sales, which could trigger the put option in the Warrant
Agreement, is outside the control of the Company and therefore it is
management’s position that this is a contingent conversion
option.
In
the
event that the contingency is eliminated, the beneficial conversion feature
of
the Certificate of Designation will require that the conversion rate of the
Series A Preferred be adjusted. Following guidance provided by EITF 00-27 and
EITF 98-5
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios
, (“EITF
98-5”) the Company will record a dividend to preferred shareholders against
additional paid in capital in the amount of $1.5 million.
On
June
24, 2008, the Company issued warrants to an investment banking firm to purchase
1,075,279 shares of the Company’s common stock at an exercise price of $1.10 per
share as partial consideration for advisory services performed in connection
with the Luken transactions. Pursuant to EITF 00-27, the Company recorded a
preferred dividend in the amount of $207,395 to reflect value transferred to
the
holders of the Series A Preferred stock resulting from the adjustment of the
conversion rate from 1.0 to 1.02 and the reset of the conversion price from
$5.13 per share to $5.03 per share.
The
Company has evaluated the embedded conversion feature in the Series A
Preferred and determined it did not meet the criteria for bifurcation under
SFAS
No. 133 “Accounting for Derivative Instruments and Hedging Activities”
during the three and nine months ended September 30, 2008. In addition, the
Company accounts for the Series A Preferred in accordance with SEC
Accounting Series Release 268 — Presentation in Financial Statements of
Redeemable Preferred Stocks” and EITF D-98: “Classification and Measurement of
Redeemable Securities,” (“EITF D-98”) and thus has classified the Series A
Preferred outside of stockholders’ equity.
The
Company believes that it is not probable that the holders of the Series A
Preferred would currently elect to convert their shares to common stock because
the current trading price of the Company’s common stock is lower than the
conversion price. Therefore and under the guidance of EITF D-98, the carrying
value of the Series A Preferred as of September 30, 2008 is the original issue
amount and does not include any accreted dividends or any other
adjustment.
For
the
three month period ended September 30, 2008, the Company recorded dividends
in
the amount of $198,661. For the nine month period ended September 30, 2008,
the
Company recorded dividends, including these attributable to the beneficial
conversion of $207,395, in the amount of $786,138. These amounts are recorded
as
deductions from net loss attributable to common shareholders. As of September
30, 2008, dividends payable to the Series A Preferred shareholders are
$1,135,540 and included in other non-current liabilities.
NOTE
9 — STOCK OPTION PLANS
Stock-based
compensation expense for the three and nine months ended September 30, 2008
was
$0.2 million and $0.8 million, respectively, compared to $0.4 million and $1.7
million, respectively, in 2007. As of September 30, 2008, there was $1.7
million of total unrecognized compensation cost related to unvested share-based
compensation awards granted under the Incentive Plan, which does not include
the
effect of future grants of equity compensation, if any. Of the total $1.7
million, the Company expects to recognize approximately 10.3% during the
remainder of 2008 and the balance in 2009 through 2013. The weighted average
period over which the $1.7 million is to be recognized is 2.86
years.
NOTE
10 — CONTINGENCIES
Stock
options to underwriters
In
connection with the initial public offering (“Offering”), the Company sold to
the representatives of the underwriters in the offering (“Representatives”) an
option, for $100, to purchase up to a total of 1,000,000 units at $7.50 per
Unit. The Company accounted for the fair value of the option, inclusive of
the
receipt of the $100 cash payment, as an expense of the Offering resulting in
an
increase and a charge directly to stockholders’ equity. The option has been
valued at the date of issuance at $780,000 based upon a Black-Scholes valuation
model, using an expected life of five years, volatility of 15.90% and a
risk-free interest rate of 3.980%. The volatility calculation is based on the
180-day volatility of the Russell 2000 Index. An expected life of five years
was
taken into account for purposes of assigning a fair value to the option. The
option may be exercised for cash, or on a “cashless” basis, at the holder’s
option, such that the holder may receive a net amount of shares equal to the
appreciated value of the option. The Units issuable upon exercise of this option
are identical to the Units in the Offering, except that the Warrants included
in
the option have an exercise price of $6.00. Although the purchase option and
its
underlying securities have been registered under the Offering, the option grants
to holders demand and “piggy back” registration rights for periods of five and
seven years, respectively, from the date of the Offering with respect to the
registration under the Securities Act of the securities directly and indirectly
issuable upon exercise of the option. The Company will bear all fees and
expenses relating to the registration of the securities, other than underwriting
commissions which will be paid for by the holders themselves. The exercise
price
and number of units issuable upon exercise of the option may be adjusted in
certain circumstances including in the event of a stock dividend, or
recapitalization, reorganization, merger or consolidation. However, the option
will not be adjusted for issuances of common stock at a price below its exercise
price.
Litigation
In
connection with the merger between the Company and Equity Broadcasting
Corporation ("EBC") in March, 2007, EBC and each member of EBC’s board of
directors was named in a lawsuit filed by an EBC shareholder in the circuit
court of Pulaski County, Arkansas on June 14, 2006. As a result of the
merger between EBC and the Company, pursuant to which EBC merged into the
Company, the Company, which was renamed Equity Media Holdings Corporation,
is a
party to the lawsuit. The lawsuit contains both a class action component and
derivative claims. The class action claims allege various deficiencies in EBC’s
proxy used to inform its shareholders of the special meeting to consider the
merger. These allegations include: (i) the failure to provide sufficient
information regarding the fair value of EBC’s assets and the resulting fair
value of EBC’s Class A common stock; (ii) that the interests of
holders of EBC’s Class A common stock are improperly diluted as a result of
the merger to the benefit of the holders of EBC’s Class B common stock;
(iii) failure to sufficiently describe the further dilution that would
occur post-merger upon exercise of the Company’s outstanding warrants;
(iv) failure to provide pro-forma financial information; (v) failure
to disclose alleged related party transactions; (vi) failure to provide
access to audited consolidated financial statements during previous years;
(vii) failure to provide shareholders with adequate time to review a
fairness opinion obtained by EBC’s board of directors in connection with the
merger; and (viii) alleged sale of EBC below appraised market
value
of
its assets. The derivative components of the lawsuit allege instances of
improper self-dealing, including through a management agreement between EBC
and
Arkansas Media.
In
addition to requesting unspecified compensatory damages, the plaintiff also
requested injunctive relief to enjoin EBC’s annual shareholder meeting and the
vote on the merger. An injunction hearing was not held before EBC’s annual
meeting regarding the merger so the meeting and shareholder vote proceeded
as
planned and EBC’s shareholders approved the merger. On August 9, 2006,
EBC’s motion to dismiss the lawsuit was denied. On February 21, 2007, the
plaintiff filed a “Motion to Enforce Settlement Agreement” with the court
alleging the parties reached an oral agreement to settle the lawsuit. The
plaintiff subsequently filed a motion to withdraw the motion to settle and
filed
a “Third Amended Complaint” on April 10, 2007. This motion added two
additional plaintiffs and expanded on the issues recited in the previous
complaints. On July 31, 2007, the plaintiff filed a “Fourth Amended
Complaint”. This pleading added three new plaintiffs and three new defendants to
the proceedings. The three additional defendants bear a fiduciary relationship
to three previously named defendants. On July 31, 2007, the plaintiffs filed
a
“Motion for Class Certification.” A hearing on this issue was held on August 18,
2008. The judge has not issued a ruling in this case.
Management
believes that this lawsuit has no merit and asserts that the Company has
negotiated in good faith to attempt to settle the lawsuit. Regardless of the
outcome management does not expect this proceeding to have a material impact
of
its financial condition or results of operations in 2008 or any future
period.
The
Company, along with Retro Programming Services Inc. was named as defendants
in a
lawsuit filed in Los Angeles Superior Court on September 18, 2008. The plaintiff
is CBS Television Distribution Group, a unit of CBS Corporation. The suit
alleges breach of contract with respect to multiple broadcast licensing
agreements. The parties are in discussions to attempt to arrive at a settlement
with respect to this issue. Because of the uncertainty of the outcome no
adjustments have been made to the Company’s financial statements with respect to
this action.
Although
the Company is a party to certain other pending legal proceedings in the normal
course of business, management believes the ultimate outcome of these matters
will not be material to the financial condition and future operations of the
Company. The Company maintains liability insurance against risks arising out
of
the normal course of its business.
EBC
Dissenting Shareholders
In
connection with the March, 2007 Merger Transaction shareholders of EBC
representing 66,500 shares of EBC Class A common stock elected to convert
their shares to cash in accordance with Arkansas law. The Company recorded
a
liability in the amount of $368,410 to convert the shares plus $9,970 of accrued
interest based on a conversion rate of $5.54 per share plus interest accruing
from the date of the Merger Transaction at the rate of 9.78% per annum. On
July 10, 2007, the dissenting shareholders were paid $378,380 in cash for
the value of their shares including all interest accrued to date. Pursuant
to
Arkansas Code, the dissenting shareholders exercised their right to contest
the
Company’s valuation and have demanded payment of an additional $17.78 per share
plus accrued interest at 9.78% per annum. In accordance with Arkansas Code,
the Company has petitioned the court for a determination of the fair value
of
the shares and believes its valuation will prevail. A court date of December
8,
2008, has been set.
FCC
Inquiry
In
2007,
the FCC’s Enforcement Bureau commenced an inquiry into whether Montana License
Sub, Inc. (a wholly owned subsidiary of the Company), violated the multiple
ownership rules in connection with its operation of KLMN(TV), Great Falls,
Montana and its relationship with other television stations in the market.
A competitor in the market subsequently filed a petition to deny the license
renewal application for KLMN (TV), Great Falls, Montana. The Company filed
appropriate responses in each proceeding. The FCC staff has informed
the Company that the pendency of this complaint has resulted in a tolling on
processing other assignment and modification applications involving the
Company. In an attempt to resolve the KLMN dispute, the Company is
exploring the opportunity to enter into a Consent Decree, whereby the Company
will pay an agreed-upon forfeiture to the FCC, and in exchange, subject to
certain reporting conditions, will have the two pending complaints
dismissed.
NASDAQ
On
May
14, 2008, NASDAQ notified the Company of non-compliance with Marketplace Rule
4310(c)(4) due to failure of the Company’s common stock to close above the
required $1 minimum bid price for 30 consecutive business days. The Company
has
until November 10, 2008 to meet the compliance requirements. Compliance can
be
achieved if the bid price of the common stock closes above $1 for a minimum
of
10 consecutive business days during the 180 day period between May 14, 2008
and
November 10, 2008.
If
compliance with this Rule cannot be demonstrated by November 10, 2008, NASDAQ
staff will determine whether the Company meets The NASDAQ Capital Market initial
listing criteria as set forth in Marketplace Rule 4310(c), except for the bid
price requirement. If it meets the initial listing criteria, NASDAQ will notify
the Company that it has been granted an additional 180 day compliance period.
If
the Company is not eligible for an additional compliance period, NASDAQ will
provide written notification that the Company’s securities will be delisted. At
the time, the Company may appeal NASDAQ’s determination to delist its securities
to a Listing Qualifications Panel.
On
October 22, 2008, NASDAQ notified the Company that due to extraordinary market
conditions they have implemented a suspension of the compliance period for
bid
price deficiencies until 1/19/09. Accordingly, the Company’s new bid price
compliance deadline is February 17, 2009.
On
July
1, 2008, The Company received written notification from NASDAQ that the Company
was no longer in compliance with Marketplace Rule 4350(d) (2) (A), which
addresses Audit Committee composition. The Company’s Audit Committee was in
compliance until Audit Committee member John E. Oxendine’s appointment as Chief
Executive Officer which became effective on June 14, 2008. Once Mr. Oxendine
became the Company’s CEO, he no longer qualified as an independent Audit
Committee member. Pursuant to Marketplace Rule 4350(d)(4)(B), if an issuer
fails
to comply with the audit committee composition requirement under
Rule
4350
(d)(2)(A) due to one vacancy on the audit committee, the issuer will have until
the earlier of the next annual shareholders meeting or one year from the
occurrence of the event that caused the failure to comply with this requirement;
provided, however, that if the annual shareholders meeting occurs no later
than
180 days following the event that caused the vacancy, the issuer shall instead
have 180 days from such event to regain compliance. An issuer relying on this
provision must provide notice to NASDAQ immediately upon learning of the event
or circumstance that caused the non-compliance.
On
August
25, 2008, Staff notified the Company that with the appointments of Messrs.
Jacob
J. Barker and Paul Brissette to the Company’s Board of Directors, Staff had
determined that the Company complied with Marketplace Rule 4350(c) and the
matter relating to the independent director compliance was closed. Based on
the
Company’s submissions, dated September 3-15, 2008, which enclosed signed
unanimous consents of the board resolutions appointing directors to the three
independent committees, Staff has now determined that the Company is in
compliance with the audit committee requirements under Rule 4350(d)(2), and
this
matter is now closed.
On
August
25, 2008, the Company received written notification from NASDAQ that based
on
the Form 10-Q for the period ended June 30, 2008, Staff determined that the
Company’s stockholders’ equity was a deficit of ($7,302,327). In addition, as of
August 22, 2008, Staff determined that the market value of listed securities
was
$17,979,472. Finally, Staff determined that the Company reported net losses
from
operations in its annual filings for the years ended December 31, 2007, 2006,
and 2005, respectively. Accordingly, the Company does not comply with
Marketplace Rule 4310(c)(3), which requires the Company to have a minimum of
$2,500,000 in stockholders’ equity or $35,000,000 market value of listed
securities or $500,000 of net income from continuing operations for the most
recently completed fiscal year or two of the three most recently completed
fiscal years.
Under
these circumstances, Staff is reviewing the Company’s eligibility for continued
listing on The Nasdaq Capital Market. The Company may submit on or before
September 16, 2008, a specific plan on achieving and sustaining compliance
with
the Nasdaq Capital Market listing requirements, including the time frame for
completion of the plan. If, after the conclusion of Staff’s review of the plan,
Staff determines that the Company’s plan does not adequately address the issues
noted, Staff will provide written notification that the Company’s securities
will be delisted. At that time, the Company may appeal NASDAQ’s determination to
delist its securities to a Listing Qualifications Panel. The Company is
currently evaluating all options available with respect to these
issues.
The
Company submitted its compliance plan on September 16, 2008. NASDAQ is currently
in the process of reviewing the plan.
NOTE
11 — RELATED PARTY TRANSACTIONS
Amounts
due (to) from affiliates and related parties consist of the
following:
|
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
Univision Communications, Inc.
|
|
$
|
(3,650,475
|
)
|
$
|
(2,295,837
|
)
|
|
Arkansas Media, LLC and affiliates
|
|
|
5,741
|
|
|
19,581
|
|
|
Royal
Palm Capital Management, LLP
|
|
|
(1,250,000
|
)
|
|
(225,000
|
)
|
|
Little
Rock TV 14, LLC
|
|
|
(78,627
|
)
|
|
(78,626
|
)
|
|
Larry
Morton
|
|
|
(1,138,441
|
)
|
|
—
|
|
|
Luken
Communications, LLC
|
|
|
(5,007,657
|
)
|
|
—
|
|
|
Retro
Television Network, Inc
|
|
|
(34,462
|
)
|
|
(8,224
|
)
|
|
Other
|
|
|
__
|
|
|
72,364
|
|
|
|
|
|
|
|
|
|
|
|
Due
to affiliates and related parties
|
|
|
(11,153,921
|
)
|
|
(2,515,742
|
)
|
|
Less
current portion
|
|
|
(10,257,912
|
)
|
|
(2,509,480
|
)
|
|
|
|
|
|
|
|
|
|
|
Non
– current portion
|
|
$
|
(896,009
|
)
|
$
|
(6,262
|
)
|
Larry
Morton
Concurrently
with the sale of RTN to the Investors on June 24, 2008, the Company entered
into
a separation agreement with Larry Morton providing for Mr. Morton’s resignation
as RTN’s President and Chief Executive Officer and for severance payments and
benefits to be provided to Mr. Morton in connection with such resignation and
his previously announced departure from the Company as its President and Chief
Executive Officer. Mr. Morton remains as a director of Company. Additionally,
Mr. Morton entered into a thirty-six month consulting agreement with the Company
under which Mr. Morton is entitled to $5,000 monthly.
NOTE
12 - FAIR VALUE MEASUREMENTS
The
Company adopted SFAS 157 effective January 1, 2008 for financial
assets and financial liabilities measured on a recurring basis. SFAS 157
applies to all financial assets and financial liabilities that are being
measured and reported on a fair value basis. There was no impact for adoption
of
SFAS 157 to the Unaudited Condensed Consolidated Financial Statements as it
relates to financial assets and financial liabilities. SFAS No. 157
requires disclosure that establishes a framework for measuring fair value and
expands disclosure about fair value measurements. The statement requires fair
value measurement be classified and disclosed in one of the following three
categories:
Level
1:
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities;
Level
2:
Quoted prices in markets that are not active or inputs which are observable,
either directly or indirectly, for substantially the full term of the asset
or
liability;
Level
3:
Prices or valuation techniques that require inputs that are both significant
to
the fair value measurement and unobservable (i.e., supported by little or no
market activity).
The
Company invests in short-term interest bearing obligations with original
maturities less than 90 days, primarily money market funds. The Company does
not
enter into investments for trading or speculative purposes. As of September
30,
2008, there were no investments in marketable securities.
NOTE
13 - SEGMENT DATA
The
Company operates its business in three primary reporting segments; the
Television Group, Retro Television Network (“RTN”), and Uplink Services.
Operations of the Television Group consist of the sale of air time for
advertising, and the broadcasting of entertainment and other programming through
the Company’s television stations. Operations of RTN consist primarily of the
combination of popular entertainment programs of past decades with local sports,
weather and news to provide a customized digital feed to its affiliate
television stations. Uplink Services operations include the provision of
programming, traffic, accounting and billing services to Company-owned
television stations, RTN affiliates, and other third party broadcasters through
the Company’s centralized master control and satellite uplink facility in Little
Rock, Arkansas. The Company does not allocate corporate overhead or the
eliminations of intercompany transactions to the primary reporting
segments.
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
Broadcast
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television
|
|
$
|
6,012
|
|
$
|
7,480
|
|
$
|
20,746
|
|
$
|
21,126
|
|
|
Retro
Television Network
|
|
|
885
|
|
|
81
|
|
|
1,806
|
|
|
219
|
|
|
Uplink
Services
|
|
|
196
|
|
|
113
|
|
|
622
|
|
|
446
|
|
|
Corporate
and eliminations
|
|
|
—
|
|
|
(166
|
)
|
|
(318
|
)
|
|
(494
|
)
|
|
|
|
$
|
7,093
|
|
$
|
7,508
|
|
$
|
22,856
|
|
$
|
21,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television
|
|
$
|
514
|
|
$
|
482
|
|
$
|
1,523
|
|
$
|
1,475
|
|
|
Retro
Television Network
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Uplink
Services
|
|
|
360
|
|
|
356
|
|
|
1,096
|
|
|
924
|
|
|
Corporate
and eliminations
|
|
|
167
|
|
|
167
|
|
|
504
|
|
|
453
|
|
|
|
|
$
|
1,042
|
|
$
|
1,005
|
|
$
|
3,123
|
|
$
|
2,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television
|
|
$
|
(1,192
|
)
|
$
|
(1,759
|
)
|
$
|
(4,947
|
)
|
$
|
(6,090
|
)
|
|
Retro
Television Network
|
|
|
(1,446
|
)
|
|
(387
|
)
|
|
(4,457
|
)
|
|
(929
|
)
|
|
Uplink
Services
|
|
|
(203
|
)
|
|
(383
|
)
|
|
(680
|
)
|
|
(1,017
|
)
|
|
Corporate
and eliminations
|
|
|
(2,466
|
)
|
|
(3,117
|
)
|
|
(11,061
|
)
|
|
(17,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
(5,307
|
)
|
$
|
(5,645
|
)
|
$
|
(21,145
|
)
|
$
|
(25,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
charge – Television
|
|
|
(18,263
|
)
|
|
—
|
|
|
(18,263
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$
|
(23,570
|
)
|
$
|
(5,645
|
)
|
$
|
(39,408
|
)
|
$
|
(25,571
|
)
|
NOTE 14—
SUBSEQUENT EVENTS
New
Retro Television Network (“RTN”) affiliates and contracts
The
following table shows stations that have been launched as RTN affiliates since
September 30, 2008:
|
DMA Ranking
|
|
Station
|
|
DMA
|
|
Launched
|
|
60
|
|
KTUL-DT
|
|
Tulsa
|
|
October
6, 2008
|
|
12
|
|
KAZT-DT
|
|
Phoenix
|
|
October
13, 2008
|
Management
and Board Changes
On
October 16, 2008, the Board appointed Mr. Paul Brissette as Chief Restructuring
Officer.
Effective
as of October 20, 2008, Lori Withrow no longer serves as Secretary of the
Corporation and Greg Fess no longer serves as Chief Operating Officer of the
Corporation. Effective October 24, 2008, Jason Roberts was elected Secretary
of
the Corporation.
Effective
November 6, 2008, Paul Brissette resigned from the Company’s board of
directors.
Effective
November 13, 2008, Paul Brissette no longer
serves as Chief Restructuring Officer.
John
Oxendine continues to serve as Chief Executive and
Principal Executive Officer of the Company.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
following is a discussion of the Company’s financial condition and results of
operations comparing the interim quarters ended September 30, 2008 and September
30, 2007. You should read this section together with the Company’s consolidated
financial statements including the notes to those financial statements, as
applicable, for the years and periods mentioned above.
Overview
Equity
Media Holdings Corporation (“EMHC”, “we,” “us,” “our,” or the “Company”) was
incorporated in Delaware on April 29, 2005 as Coconut Palm Acquisition Corp.
(“Coconut Palm”) to serve as a vehicle for the acquisition of an operating
business through a merger, capital stock exchange, asset acquisition and/or
other similar transaction. On March 30, 2007, Coconut Palm merged with Equity
Broadcasting Corporation (“EBC”), with Coconut Palm remaining as the legal
surviving corporation; however, the financial statements and continued
operations are those of EBC as the accounting acquirer. Immediately following
the merger, Coconut Palm changed its name to Equity Media Holdings
Corporation.
As
of
September 30, 2008, the Company has built and aggregated a total of 119 full
and
low power permits, licenses and applications that it owns or has contracts
to
acquire. The Company’s FCC license asset portfolio includes 23 full power
stations, 34 Class A stations and 62 low power stations. The Company’s English
and Spanish-language stations are in 41 markets that represent more than 25%
of
the U.S. population.
While
the
Company originally targeted small to medium-sized markets for development,
it
has been able to leverage its original properties into stations in larger
metropolitan markets, including Denver, Detroit, Salt Lake City, Minneapolis
and
Oklahoma City. The Company’s stations are affiliated with broadcast networks as
follows: 12 are affiliated with Univision, 18 are affiliated with the Retro
Television Network (“RTN”), 3 are affiliated with MyNetworkTV, 4 are affiliated
with FOX, 2 are affiliated with TeleFutura, and 1 is affiliated with
ABC.
The
Company is the second-largest affiliate group of the top-ranked Univision and
TeleFutura networks with 14 affiliates, 13 of which are in the nation’s top-65
Hispanic television markets. The Company believes that it has growth opportunity
in these Hispanic properties because each station has a 15-year affiliation
agreement with either Univision or TeleFutura, respectively.
RTN
was
developed to fulfill a need in the broadcasting industry that is occurring
now
and will continue to occur as broadcast stations switch over to digital
programming pursuant to a Federal Communications Commission mandate with a
February 19, 2009 deadline.
Digital
Television (“DTV”), will allow broadcasters to offer television content with
movie-quality picture and CD-quality sound. DTV is a much more efficient
technology, allowing broadcasters to provide a “high definition” (“HDTV”),
program and multiple “standard definition” DTV programs simultaneously.
Providing several programs streams on one broadcast channel is called
“multicasting.” The challenge facing many broadcasters is how to effectively
program and monetize the value created by DTV.
RTN
affiliates enjoy a scalable, cost efficient content solution for their digital
channels. A major differentiator between RTN and other potential digital
solutions is RTN’s ability to deliver local news, sports, and weather updates to
the local RTN affiliate, in addition to the quality RTN programming. This
enables the local affiliate to sell local advertising spots to generate
revenue.
The
ability to deliver localized programs to the RTN affiliate is accomplished
through utilization of the Company’s proprietary digital satellite technology
system known as “C.A.S.H.” The Central Automated Satellite Hub (“CASH”), system
provides the means of delivering a fully automated, 24 hour a day custom feed
for each local affiliate. The Company has the capability to launch localized
network feeds in all 210 U.S. TV markets and internationally as
well.
The
Company has historically focused on aggregating stations and developing delivery
systems. Over the past eight years, the Company financed itself largely by
acquiring television construction permits and stations at attractive valuations.
After acquiring the stations, the Company would construct and/or upgrade the
facilities and, on a selective basis, sell the station at an increased valuation
to fund operations and acquisitions and to service debt.
Historically,
it took a few years for the Company’s newly acquired or built stations to
generate operating cash flow. In addition, it required time to gain viewer
awareness of new station programming and to attract advertisers. Accordingly,
the Company typically incurs losses in the first few years after it acquires
or
builds stations.
Following
the March 2007 merger with the Special Purpose Acquisition Company (“SPAC”),
Coconut Palm Acquisition Corporation, the Company’s business focus shifted from
primarily aggregating stations to increasing RTN affiliate penetration and
maximizing revenue and profit for each station.
Currently,
the Company is restructuring operations with the goal of increasing cash flow
and is executing the divesture of various stations following a strategic review
under new management. These initiatives, which the Company has recently begun
to
implement, include:
|
|
·
|
Leveraging
the C.A.S.H. system through third party leases and new network
development;
|
|
|
·
|
Pursuing
station divestitures;
|
|
|
·
|
Minimizing
cash burn at the Corporate and station level through sales generation
and
cost cutting initiatives;
|
|
|
·
|
Continued
growth of the RTN affiliate base in key U.S. television markets to
achieve
a national footprint;
|
|
|
·
|
Focusing
on increasing sales for RTN;
|
|
|
·
|
Diversifying
low cost syndicated programming alternatives for RTN;
|
|
|
·
|
Enhancing
cable and satellite distribution
|
|
|
·
|
Pursuing
spectrum monetization opportunities
|
The
Company is one of the largest holders of broadcast spectrum in the United
States. Each Company station is 6MHz and is located in the 480-680 MHz band.
This spectrum adjoins the 700 MHz band and offers similar propagation
characteristics. The Company anticipates that it will supplement its revenues
by
monetizing its significant spectrum portfolio through joint-ventures, leasing
or
sub-licensing to telecoms and new media companies.
The
Company also launched a new corporate and investor relations website
(
www.EMDAholdings.com
)
in
August 2007. The website features new and expanded content about the Company’s
operating businesses, senior management, news and public filings. All key
information on the website is available in an up-to-date, interactive
format.
Acquisition
and Expansion Activity
RTN,
currently has a total of 80 affiliations announced that cover 39% of the U.S.
television households. Included in this total are affiliations with television
stations located in top DMA markets that include San Francisco, Atlanta,
Washington, DC, Detroit, Phoenix, Seattle, Tacoma, Denver, Orlando, St. Louis,
Pittsburgh, and Charlotte.
RESULTS
OF OPERATIONS — THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2007
Revenue
The
following table sets forth the principal types of broadcast revenue earned
by
the Company for the periods indicated and the change from one period to the
next:
|
|
|
For the Three Months Ended September 30
|
|
For the Nine Months Ended September 30
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
|
|
|
(In thousands, except percentages)
|
|
|
Broadcast Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local
|
|
$
|
2,310
|
|
$
|
2,554
|
|
$
|
(244
|
)
|
|
(9.6
|
)
|
$
|
7,469
|
|
$
|
7,482
|
|
$
|
(13
|
)
|
|
(0.2
|
)
|
|
National
|
|
|
2,044
|
|
|
2,170
|
|
|
(126
|
)
|
|
(5.8
|
)
|
|
6,421
|
|
|
6,068
|
|
|
353
|
|
|
5.8
|
|
|
Other
|
|
|
330
|
|
|
273
|
|
|
57
|
|
|
20.9
|
|
|
1,151
|
|
|
766
|
|
|
385
|
|
|
50.3
|
|
|
Trade &
Barter Revenue
|
|
|
2,409
|
|
|
2,511
|
|
|
(102
|
)
|
|
(4.0
|
)
|
|
7,815
|
|
|
6,981
|
|
|
834
|
|
|
11.9
|
|
|
Total
Broadcast Revenue
|
|
$
|
7,093
|
|
$
|
7,508
|
|
$
|
(415
|
)
|
|
(5.5
|
)
|
$
|
22,856
|
|
$
|
21,297
|
|
$
|
1,559
|
|
|
7.3
|
|
As
noted
in the Overview, the Company’s operating revenue is derived primarily from
advertising revenue. The above table segregates revenue received from local
sources compared to national sources, together with gross trade and barter
revenues, which is non-cash. Other broadcast revenue is a combination of
production, uplink services, news services, and other non-spot broadcast
revenue.
For
the
three months ended September 30, 2008, total Broadcast Revenue decreased
$0.4 million, or 5.5%, to $7.1 million when compared to the same
period in 2007. Included in this overall decrease was a decline in local
broadcast revenues of $244,000, or 9.6%, a decline in national revenue of
$126,000, or 5.8%, an increase in other revenue of $57,000, or 20.9% and a
decrease in trade and barter revenue of $102,000, or 4.0%.. Increases in
political sales of $47,000 and uplink shared services revenue of $103,000
account for the increase in other revenue. These increases in other revenue
were
offset by a decrease in network compensation of $80,000.
The
decrease in revenue for the quarter ended September 30, 2008 of $0.4 million
is
distributed as follows: English language stations of $725,000, an 18% decline
and Spanish language stations of $577,000, also an 18% decline. These decreases
were offset by increases in revenue for RTN of $803,000, a growth of 987% and
for C.A.S.H. of $83,000, a 74% growth rate. The decrease in revenues derived
from English language stations is widespread across almost all the Company’s
English language stations. The exception is an increase in revenues of $351,000
attributable to three stations in Montana which were previously held for sale
and operated under a local management agreement (“LMA”) with the intended
purchaser. These stations, which are all FOX affiliates, are now being run
by
the Company since the LMA ended early in 2008.
The
Spanish language stations showing the greatest declines were the stations in
Detroit (WUDT), Salt Lake City (KUTH), and Ft. Myers (WUVF). Three month
revenues declined at those three stations by a total of $419,000, or $177,000,
$147,000 and $95,000, respectively.
For
the
nine months ended September 30, 2008 compared to the same period in 2007, total
Broadcast Revenue increased $1.6 million, or 7.3%, to $22.9 million.
This increase in revenues is driven by an increase of $834,000, or 11.9%, in
trade and barter revenues and increases in national advertising revenue of
$353,000, a growth of 5.8%. Other revenue also increased by $385,000, or 50.3%.
The increase in trade and barter is due primarily to the continued growth in
the
Company’s investment in syndicated programming especially as it relates to the
growth of RTN. The increases in national advertising revenues have been driven
by increased volumes from advertising agency activity of $1.1 million, but
was
offset by decreases in national paid programming revenue of $747,000. Increase
in other revenue resulted from increases in political sales of $215,000 and
uplink shared services revenue of $253,000.
Year
to
date revenue increases by station group or network are as follows: English
language stations of $291,000, a 2% growth rate; RTN of $1.588 million, a growth
rate of 726%, and C.A.S.H. of $176,000 or a 40% growth rate. These increases
were offset by a decrease in revenue for Spanish language stations of $483,000,
a 6% decline. Most of the increase in revenues derived from English language
stations is attributable to three stations in Montana which were previously
held
for sale and operated under an LMA with the intended purchaser. These stations,
which are FOX affiliates, are now being run by the Company. Revenue for these
three stations increased $1.1 million, an increase of 259%. In addition, our
ABC
affiliate in Cheyenne, WY had an increase in sales for the period of $176,000,
a
53% increase. In our Spanish language station group, WUVF, the Univision station
in Fort Myers, FL, recorded a $185,000 increase in revenue compared to the
same
period in 2007, a 16% growth for the period. This increase was offset by
decreases in revenue for our stations in Salt Lake City (KUTH - Univision and
KUTF - Telefutura), Kansas City (KUKC - Univision) and Detroit (WUDT -
Univision), of $310,000 (16%), $154,000 (47%), $186,000 (25%) and $244,000
(39%), respectively . The decline in revenue in these four stations was the
result of declines in locally generated revenue by a combined amount of
$797,000. National revenue declined at KUTF, KUKC and WUDT by a combined amount
of $161,000, but increased by 21%, or $90,000, at KUTH.
Results
of Operations
The
following table sets forth the Company’s operating results for the three and
nine month periods ended September 30, 2008, as compared to the three and nine
month period ended September 30, 2007:
|
|
|
For the Three Months Ended September 30
|
|
For the Nine Months Ended September 30
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
2008
|
|
2007
|
|
Change
|
|
%
Change
|
|
|
|
|
(In thousands, except percentages, net loss per share and weighted average shares)
|
|
|
Broadcast Revenue
|
|
$
|
7,093
|
|
$
|
7,508
|
|
$
|
(415
|
)
|
|
(5.5
|
)
|
$
|
22,856
|
|
$
|
21,297
|
|
$
|
1,559
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program,
production & promotion
|
|
|
4,377
|
|
|
3,697
|
|
|
680
|
|
|
18.4
|
|
|
14,614
|
|
|
10,727
|
|
|
3,887
|
|
|
36.2
|
|
|
Selling,
general & administrative
|
|
|
6,324
|
|
|
7,847
|
|
|
(1,523
|
)
|
|
(19.4
|
)
|
|
24,234
|
|
|
23,452
|
|
|
782
|
|
|
3.3
|
|
|
Impairment
charge on broadcasting assets
|
|
|
18,263
|
|
|
—
|
|
|
18,263
|
|
|
|
|
|
18,263
|
|
|
|
|
|
18,263
|
|
|
|
|
|
Management
agreement settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
(8,000
|
)
|
|
|
|
|
Depreciation
and amortization expense
|
|
|
1,042
|
|
|
1,005
|
|
|
37
|
|
|
3.7
|
|
|
3,123
|
|
|
2,852
|
|
|
271
|
|
|
9.5
|
|
|
Rent
|
|
|
657
|
|
|
604
|
|
|
53
|
|
|
8.8
|
|
|
2,030
|
|
|
1,837
|
|
|
193
|
|
|
10.5
|
|
|
Operating
(loss)
|
|
|
(23,570
|
)
|
|
(5,645
|
)
|
|
(17,925
|
)
|
|
(317.5
|
)
|
|
(39,408
|
)
|
|
(25,571
|
)
|
|
(13,837
|
)
|
|
54.1
|
|
|
Interest
income
|
|
|
7
|
|
|
85
|
|
|
(78
|
)
|
|
(91.8
|
)
|
|
33
|
|
|
118
|
|
|
(85
|
)
|
|
(72.0
|
)
|
|
Interest
Expense
|
|
|
(6,894
|
)
|
|
(2,082
|
)
|
|
(4,812
|
)
|
|
231.1
|
|
|
(13,743
|
)
|
|
(6,314
|
)
|
|
(7,429
|
)
|
|
117.7
|
|
|
Gain
on sale of assets
|
|
|
(283
|
)
|
|
—
|
|
|
(283
|
)
|
|
|
|
|
(483
|
)
|
|
454
|
|
|
(937
|
)
|
|
(206.4
|
)
|
|
Other
income (expense), net
|
|
|
608
|
|
|
(14
|
)
|
|
622
|
|
|
(4442.9
|
)
|
|
716
|
|
|
202
|
|
|
514
|
|
|
254.5
|
|
|
(Loss)
before income taxes
|
|
|
(30,132
|
)
|
|
(7,656
|
)
|
|
(22,476
|
)
|
|
293.6
|
|
|
(52,885
|
)
|
|
(31,111
|
)
|
|
(21,774
|
)
|
|
70.0
|
|
|
Income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
|
(30,132
|
)
|
|
(7,656
|
)
|
|
(22,476
|
)
|
|
293.6
|
|
|
(52,885
|
)
|
|
(31,111
|
)
|
|
(21,774
|
)
|
|
70.0
|
|
|
Preferred
dividend
|
|
|
(199
|
)
|
|
(185
|
)
|
|
(14
|
)
|
|
7.6
|
|
|
(786
|
)
|
|
(12,506
|
)
|
|
11,720
|
|
|
(93.7
|
)
|
|
Net
loss available to common shareholders
|
|
$
|
(30,331
|
)
|
$
|
(7,841
|
)
|
$
|
(22,490
|
)
|
|
286.8
|
|
$
|
(53,671
|
)
|
$
|
(43,617
|
)
|
$
|
(10,054
|
)
|
|
23.0
|
|
|
Basic
net (loss) per common share
|
|
$
|
(0.75
|
)
|
$
|
(0.19
|
)
|
$
|
(0.56
|
)
|
|
|
|
$
|
(1.33
|
)
|
$
|
(1.24
|
)
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
shares used in earnings per share calculation
|
|
|
40,278,382
|
|
|
40,646,137
|
|
|
|
|
|
|
|
|
40,278,382
|
|
|
35,104,786
|
|
|
|
|
|
|
|
Program,
production and promotion expenses
Program,
production and promotion expense was $4.4 million in the three month period
ended September 30, 2008, as compared to $3.7 million in the three month
period ended September 30, 2007, an increase of $0.7 million or 18.4%. The
increase in program, production and promotion expenses is primarily driven
by an
increase in syndicated films expense of $0.6 million or 101%, and an increase
in
satellite time expense of $165,000, or 23.6%.
Program,
production and promotion expense was $14.6 million in the nine month period
ended September 30, 2008, as compared to $10.7 million in the nine month
period ended September 30, 2007, an increase of $3.9 million, or
36.2%. The increase in program, production and promotion expenses is driven
by
an increase in syndicated films expense of $2.9 million, or 184%, an increase
in
license fees of $0.4 million, or 11.6%,, and satellite time expense of $0.5
million, or 22.5%.
Selling,
general and administrative
Selling,
general and administrative expense was $6.3 million in the three month
period ended September 30, 2008, as compared to $7.8 million in the three
month period ended September 30, 2007, a decrease of $1.5 million, or
19.4%. Our general and administrative expenses have decreased $1.5 million,
or
21.4%, and selling expenses $53,000, or 5.4%. Contributing to the decrease
in
general and administrative expenses were decreases in labor costs of $0.9
million, consulting fees of $155,000, and bad debt expense of $144,000. The
decreases were partially offset by an increase in legal and accounting fees
of
$185,000. The increase relates to the continuing negotiations with lenders
as
well as pursuing potential investors to raise additional capital.
Selling,
general and administrative expense was $24.2 million in the nine month
period ended September 30, 2008, as compared to $23.4 million in the nine
month period ended September 30, 2007, an increase of $0.8 million, or
3.3%. Our general and administrative expenses have increased $0.6 million,
or
3.3%, and selling expenses $0.2 million. Contributing to the increase in general
administrative expenses were increases in labor costs of $0.6 million; legal
and
accounting expense of $1.2 million and consulting fees $0.4 million, which
were
partially offset with reductions in JSA expense of $0.2 million and bad debt
expense of $0.7 million. Labor costs for the nine month period ended September
3, 2008, include a charge of $1.2 million attributed to the severance agreement
entered into by and between the Company and Larry Morton, former Chairman and
CEO of Retro Programming Services, Inc., a wholly owned subsidiary of EMHC,
and
cost of additional executives hired in connection with the 2007 Merger
transaction and becoming a publicly traded entity. The severance charge was
partially offset by a reduction in Share Based Compensation of $0.9 million
due
in part to the forfeiture of non-vested stock options which had been previously
granted to Larry Morton. (See footnote disclosure elsewhere in this report.)
The
increase in selling expenses is attributed to increase in agency commission
expense as a result of increase in revenues derived from sales to agencies,
to
both national and local advertisers, and expenses associated with Nielsen
ratings.
Impairment
Charge on Broadcasting Assets
We
recorded an impairment charge of approximately $18.3 million during the three
month period ended September 30, 2008, which included an impairment to the
carrying values of our broadcast licenses of $18.1 million, related to 11 of
our
television stations; and an impairment to the carrying values of our tangible
broadcast assets of $0.2 million, related to 2 of our television stations.
There
was no impairment charge in the three or nine month period ended September
30,
2007.
Management
Settlement Agreement
Management
settlement agreement expense in 2007 relates to the cancellation of a management
agreement between the Company and Arkansas Media in exchange for the following:
(i) payment to Arkansas Media of (a) $3,200,000 in cash, and
(b) shares of common stock valued at $4,800,000.
Depreciation
and Amortization
Depreciation
was $1.0 million in the three month period ended September 30, 2008, as
compared to $1.0 million in the three month period ended September 30,
2007. There was no amortization expense in the three month period ended
September 30 of either 2008 or 2007.
Depreciation
and amortization was $3.1 million in the nine month period ended September
30, 2008, as compared to $2.9 million in the nine month period ended
September 30, 2007. Amortization expense was $40,485 for the nine month
period ended September 30, 2007. There was no amortization expense for the
same period in 2008.
Rent
Rent
expense is predominantly attributable to the cost of renting transmission tower
sites as well as some station sales office premises.
Rent
expense was $0.66 million in the three month period ended September 30,
2008, as compared to $0.60 million in the three month period ended
September 30, 2007, an increase of $0.06 million or 8.8%. An increase
in tower rent expense was the primary factor.
Rent
expense was $2.0 million in the nine month period ended September 30, 2008,
as compared to $1.8 million in the nine month period ended
September 30, 2007, an increase of $0.2 million, or 10.5%. An increase
in tower rent expense was the primary factor.
Interest
Expense, net
Interest
expense, net of interest income, was $6.9 million in the three month period
ended September 30, 2008, as compared to $2.0 million in the three month
period ended September 30, 2007, an increase of $4.9 million, or 245%.
This increase is primarily attributable to $4.7 million of interest cost on
the
loan of $25 million from Henry Luken (as further described in note 4 to the
financial statements herein) , and a higher average outstanding balance of
the
senior credit facility in 2008, but offset somewhat by a weighted average
interest rate that was approximately 100 basis points lower than in 2007.
Interest
expense, net of interest income, was $13.7 million in the nine month period
ended September 30, 2008, as compared to $6.2 million in the nine month
period ended September 30, 2007, an increase of $7.5 million, or 121%.
This increase is primarily attributable to $4.7 million of interest expense
on
the loan of $25 million from Henry Luken (as further described in note 4 to
the
financial statements herein), fees paid to lenders in connection with the
renegotiation of the senior credit facility in February 2008 and subsequent
amendments and forbearance agreements in March, April and June, increases to
the
applicable margin interest rates in 2008 and a higher average outstanding
balance of the senior credit facility in 2008. The combined average interest
rates on the Company’s senior credit facility were 14.6% and 13.3% for the nine
months ended September 30, 2008 and 2007, respectively.
Loss
on sale of assets
In
the
three months ended September 30, 2008 the Company recognized a loss of $0.28
million associated with the loss of escrow funds originally intended to be
used
in the acquisition of various television stations in New York. There were no
sales or disposals of assets in the three months ended September 30,
2007.
During
the nine months ended September 30, 2008, the Company recognized a loss of
$0.20
million associated with the disposal of the Spanish language news division
and a
loss of $0.28 million associated with the loss of escrow funds originally
intended to be used in the acquisition of various television stations in New
York. The gain on sale of assets was $0.45 million in the nine month period
ended September 30, 2007 which included gains from the sale of several low
power television stations located both in Idaho and in Central
Arkansas.
Other
income, net
Other
income, net was approximately $0.6 million for the three months ended September
30, 2008 as compared to a loss of approximately $14,000 for the three months
ended September 30, 2007, an increase of $0.6 million. The increase
consists primarily of fees received from Luken Communications per the RTN sales
agreement of $0.5 million.
Other
income, net was approximately $0.7 million for the nine months ended September
30, 2008 as compared to approximately $0.2 million for the nine months ended
September 30, 2007, an increase of $0.5 million. The increase consists
primarily of fees received from Luken Communications per the RTN sales agreement
of $0.5 million.
Liquidity
and Capital Resources
General
The
following table and discussion presents data the Company believes is helpful
in
evaluating its liquidity and capital resources:
|
|
|
As of
|
|
|
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
762
|
|
$
|
634
|
|
|
Long
term debt including current portion and lines of credit
|
|
$
|
91,858
|
|
$
|
77,410
|
|
|
Available
credit under senior credit agreement
|
|
$
|
─0─
|
|
$
|
─0─
|
|
The
Company’s existing capital resources are not sufficient to fund its operations.
If the Company is unable to obtain adequate additional sources of
capital immediately it will need to cease all or a portion of its
operations, seek protection under U.S. bankruptcy laws and regulations, engage
in a restructuring or undertake a combination of these and other actions. The
Company has explored numerous sources of capital and has been unsuccesful in
identifying and securing such capital to date. The Company is continuing to
pursue potential transactions that may supply it with capital
necessary to meet its current requirements.
As
of the
date of this report no such transaction is imminent
. If the Company is
able to successfully consummate a transaction, such transaction may result
in
substantial dilution to the Company’s existing security holders and/or the
incurrence of substantial indebtedness on relatively expensive terms. The terms
of any such transaction would also likely involve covenants that serve to
substantially restrict the operations of the Company and its management and
could result in a change of control of the Company.
On
February 13, 2008, the Company and its lenders entered into the Third Amended
and Restated Credit Agreement (“Credit Agreement”) in which the Company
refinanced its previous credit facility. The amended $53.0 million credit
facility, comprised of an $8.0 million revolving credit line and term loans
of
$45.0 million, matures on February 13, 2011, was used to refinance the existing
indebtedness senior credit facility. Outstanding principal balance under the
credit facility bears interest at LIBOR or the alternate base rate, plus the
applicable margin. The applicable margin is 9.5% for the LIBOR loans and 8.5%
on
the alternate base rate loan. The minimum LIBOR is 4.5%. The alternate base
rate
is (i) the greatest of (A) the Prime Rate, (B) the Federal Funds Rate in effect
on such day plus fifty (50) basis points (0.50%), and (C) seven and one-half
percent (7.50%) per annum. The Company is required to pay an unused line fee
of
.5% on the unused portion of the credit facility. The credit facility is secured
by the majority of the assets of the company. The Company is subject to new
financial and operating covenants and restrictions based on trailing monthly
and
twelve month information. The Company borrowed $50.5 million under the new
facility. Due to certain restrictions based on the value of the loan collateral,
the Company did not have access to the remaining $2.5 million at that
time.
On
March
19, 2008, the Company entered into an amendment (“First Amendment”) to its
Credit Agreement. Under the terms of the First Amendment, the lender group
agreed to forbear from exercising certain of their rights and remedies with
respect to designated defaults under the Credit Agreement through the earlier
of
(a) April 18, 2008 and (b) the date of occurrence of certain events or by which
certain events have failed to occur, including the Company’s failure to enter
into agreements with respect to the sale of certain of its assets and the
Company’s failure to secure approvals for, and meet other criteria with respect
to, financing alternatives necessary to meet the Company’s immediate capital
requirements. Additionally, the applicable margins on LIBOR loans and base
rate loans were increased to 10.0% and 9.0% respectively. Pursuant to the
First Amendment the Lenders may exercise any and all remedies available under
the Credit Agreement, including making the loan immediately due and
payable.
On
April
28, 2008, the Company entered into a second amendment (“Second Amendment”) to
its Credit Agreement which had been previously amended on March 19, 2008 as
noted above. Under the terms of the Second Amendment, the lender group agreed
to
forbear from exercising certain of its rights and remedies with respect to
existing defaults and any other defaults or events of default under the Credit
Agreement other than any specified defaults described in the Second Amendment
(which include, but are not limited to, breaches of certain affirmative and
negative covenants, among others) through the earlier of (a) May 5, 2008 and
(b)
the date of occurrence of certain events or by which certain events have failed
to occur, including the Company’s failure to consummate a proposed financing
with certain investors. The Second Amendment also provided for the lender group
to make additional loans to the Company in an amount not to exceed $5.5 million
(which includes additional loans funded pursuant to the First Amendment) and
increased the applicable margins on LIBOR loans and base rate loans to 12.0%
and
11.0% respectively.
On
June
24, 2008, the Company entered into a third amendment (“Third Amendment”) to the
Credit Agreement. Under the terms of the Third Amendment, the lender group
has
agreed to forbear from exercising certain of its rights and remedies with
respect to existing defaults and certain other defaults described in the Third
Amendment through the earlier of (a) December 23, 2008 and (b) the date of
occurrence of events of default or certain other events. Notwithstanding the
foregoing, the lenders may terminate the forbearance on and after September
15,
2008 in their sole discretion. The Third Amendment also provides for the lender
group to make additional loans to the Company in an amount not to exceed $6.5
million, subject to certain conditions in the Third Amendment and the Lenders’
sole discretion. Additionally, the applicable margins on LIBOR loans and
base rate loans were decreased to 10.0% and 9.0% respectively. The Company
used
a portion ($17.5 million) of the proceeds from the transactions with Luken
Communications, LLC as described in Note 4 – Transactions with Luken
Communications, LLC to pay down a portion of the credit facility. Following
this
pay down and after additional advances under the Term C facility, approximately
$40.1 million remains outstanding under the credit facility as of September
30,
2008.
The
Company is currently in default under its existing loan agreements with Silver
Point. Existing events of default include, but are not limited to, the Company’s
failure to pay interest when due, lateness on certain payments due under the
Company’s satellite and programming agreements and failure to achieve certain
performance metrics, including minimum monthly revenue and EBITDA
benchmarks.
The
principal ongoing uses of cash that affect the Company’s liquidity position
include the following: the acquisition of and payments under syndicated
programming contracts, capital and operational expenditures and interest
payments on the Company’s debt. It should be noted that no principal is due on
the existing senior credit facility (as refinanced in February 2008 - see below)
until February 2011, except for mandatory principal payments from proceeds
generated from the sale of any collateral assets through that
period.
The
Company currently has a working capital deficit of approximately $99.2
million.
Even
with
the refinanced credit facility, the additional funds provided by the amended
credit facility and the proceeds from the transactions with Luken
Communications, LLC as described in Note 4 to the accompanying unaudited
condensed consolidated financial statements are not sufficient to meet all
of
the anticipated liquidity needs to continue operations of the Company for the
next twelve months. Accordingly, the Company will have to raise additional
capital or increase its debt immediately to continue operations. If the Company
is unable to obtain additional funds when they are required or if the funds
cannot be obtained on favorable terms, management may be required to liquidate
substantially all available assets, restructure the Company or in the extreme
event, cease operations. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Sources
and Uses of Cash
|
|
|
For the Nine Months
|
|
|
|
|
Ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
Net cash used by
operating activities
|
|
$
|
(21,893
|
)
|
$
|
(22,706
|
)
|
|
Net
cash provided (used) by investing activities
|
|
|
7,574
|
|
|
(12,572
|
)
|
|
Net
cash provided by financing activities
|
|
|
14,447
|
|
|
36,064
|
|
|
Net
increase in cash and cash equivalents
|
|
$
|
128
|
|
$
|
786
|
|
Operating
Activities
Net
cash
used in operating activities for the nine month periods ending September 30,
2008 and 2007 was $21.9 million and $22.7 million, respectively. The decrease
in
net cash used by operating activities of $0.8 million was due primarily to
an
increase in the net loss of $21.8 million, an increase in impairment of
broadcasting assets, a decrease in management agreement settlement of $4.8
million, a decrease in restricted cash of $4.2 million, an increase in accounts
payable and accrued expenses of $4.9 million, an increase in program broadcast
rights of $5.3 million, an increase in program broadcast obligations of $5.0
million, and a decrease in deferred barter revenue of $2.8 million.
Investing
Activities
Net
cash
provided by investing activities was $7.5 million in the nine month period
ended
September 30, 2008, a variance of $20.1 million compared to the nine month
period ended September 30, 2007, when $12.6 million was used by investing
activities. The variance was largely due to the acquisition of three low power
television stations located in Oklahoma and Arkansas, including KLRA, the
Univision affiliate in Little Rock, Arkansas in 2007, and an increase in amounts
due to related parties and affiliates of $7.0 million.
Financing
Activities
Net
cash
provided by financing activities was $14.4 million in the nine month period
ended September 30, 2008, compared to $36.0 million in the nine month period
ended September 30, 2007, a decrease of $21.6 million. The decrease in net
cash
provided by financing activities is explained by the Common Stock Private
placement in June of 2007, at which time the Company received $9.0 million
from
investors, in addition to the net proceeds of the March 2007 merger transaction
with Coconut Palm. As part of the Merger Transaction, the Company acquired
the
existing assets and liabilities of Coconut Palm, including operating cash of
$22.8 million before paying down the balance of the senior credit facility
in
the amount of $17.45 million. In June 2008, the Company received $25 million
in
connection with certain transactions as described in the notes to condensed
consolidated financial statements Note 4 – Transactions with Luken
Communications, LLC. The Company used $17.5 million of the proceeds to pay
down
a portion of the outstanding balance in the senior credit facility.
Debt
Instruments and Related Covenants
The
Company’s Credit Facility is collateralized by substantially all of the assets,
including real estate, of the Company and its subsidiaries. The Credit Facility
contains certain restrictive provisions which include, but are not limited
to,
requiring the Company to achieve certain revenue and earnings goals, limiting
the amount of annual capital investments, incur additional indebtedness, make
certain acquisitions and investments, sell assets or make other restricted
payments, including dividends (all are as defined in the loan agreement and
subsequent amendments.) As of December 31, 2007, the Company was not in
compliance with all covenants as required by the credit facility before its
amendment and restatement on February 13, 2008. In connection with and as part
of the amendment and restatement of the credit facility, the lenders waived
and
eliminated the covenant requirements as of December 31, 2007. As of September
30, 2008, the Company is subject to amended covenants as per the amended credit
agreement.
On
February 13, 2008, the Company and its lenders entered into the Third Amended
and Restated Credit Agreement (“Credit Agreement”) in which the Company
refinanced its previous credit facility. The amended $53.0 million credit
facility, comprised of an $8.0 million revolving credit line and term loans
of
$45.0 million, matures on February 13, 2011, was used to refinance the existing
indebtedness senior credit facility. Outstanding principal balance under the
credit facility bears interest at LIBOR or the alternate base rate, plus the
applicable margin. The applicable margin is 9.5% for the LIBOR loans and 8.5%
on
the alternate base rate loan. The minimum LIBOR is 4.5%. The alternate base
rate
is (i) the greatest of (A) the Prime Rate, (B) the Federal Funds Rate in effect
on such day plus fifty (50) basis points (0.50%), and (C) seven and one-half
percent (7.50%) per annum. The Company is required to pay an unused line fee
of
.5% on the unused portion of the credit facility. The credit facility is secured
by the majority of the assets of the company. The Company is subject to new
financial and operating covenants and restrictions based on trailing monthly
and
twelve month information. The Company borrowed $50.5 million under the new
facility. Due to certain restrictions based on the value of the loan collateral,
the Company did not have access to the remaining $2.5 million at that
time.
On
March
19, 2008, the Company entered into an amendment (“First Amendment”) to its
Credit Agreement. Under the terms of the First Amendment, the lender group
agreed to forbear from exercising certain of their rights and remedies with
respect to designated defaults under the Credit Agreement through the earlier
of
(a) April 18, 2008 and (b) the date of occurrence of certain events or by which
certain events have failed to occur, including the Company’s failure to enter
into agreements with respect to the sale of certain of its assets and the
Company’s failure to secure approvals for, and meet other criteria with respect
to, financing alternatives necessary to meet the Company’s immediate capital
requirements. Additionally, the applicable margins on LIBOR loans and base
rate loans were increased to 10.0% and 9.0% respectively. Pursuant to the
First Amendment the Lenders may exercise any and all remedies available under
the Credit Agreement, including making the loan immediately due and
payable.
On
April
28, 2008, the Company entered into a second amendment (“Second Amendment”) to
its Credit Agreement which had been previously amended on March 19, 2008 as
noted above. Under the terms of the Second Amendment, the lender group agreed
to
forbear from exercising certain of its rights and remedies with respect to
existing defaults and any other defaults or events of default under the Credit
Agreement other than any specified defaults described in the Second Amendment
(which include, but are not limited to, breaches of certain affirmative and
negative covenants, among others) through the earlier of (a) May 5, 2008 and
(b)
the date of occurrence of certain events or by which certain events have failed
to occur, including the Company’s failure to consummate a proposed financing
with certain investors. The Second Amendment also provided for the lender group
to make additional loans to the Company in an amount not to exceed $5.5 million
(which includes additional loans funded pursuant to the First Amendment) and
increased the applicable margins on LIBOR loans and base rate loans to 12.0%
and
11.0% respectively.
On
June
24, 2008, the Company entered into a third amendment (“Third Amendment”) to the
Credit Agreement. Under the terms of the Third Amendment, the lender group
has
agreed to forbear from exercising certain of its rights and remedies with
respect to existing defaults and certain other defaults described in the Third
Amendment through the earlier of (a) December 23, 2008 and (b) the date of
occurrence of events of default or certain other events. Notwithstanding the
foregoing, the lenders may terminate the forbearance on and after September
15,
2008 in their sole discretion. The Third Amendment also provides for the lender
group to make additional loans to the Company in an amount not to exceed $6.5
million, subject to certain conditions in the Third Amendment and the Lenders’
sole discretion. Additionally, the applicable margins on LIBOR loans and
base rate loans were decreased to 10.0% and 9.0% respectively. The Company
used
a portion ($17.5 million) of the proceeds from the transactions with Luken
Communications, LLC as described in Note 4 – Transactions with Luken
Communications, LLC to pay down a portion of the credit facility. Following
this
pay down and after additional advances under the Term C facility, approximately
$40.1 million remains outstanding under the credit facility as of September
30,
2008.
The
Company is currently in default under its existing loan agreements with Silver
Point. Existing events of default include, but are not limited to, the Company’s
failure to pay interest when due, lateness on certain payments due under the
Company’s satellite and programming agreements and failure to achieve certain
performance metrics, including minimum monthly revenue and EBITDA
benchmarks.
As
of
September 30, 2008, the applicable margins for base rate advances and LIBOR
advances under the revolver component of the Credit Facility were 10.0% and
9.0%, respectively. The amount outstanding under the credit facility as of
September 30, 2008 was $40.1 million, from its term loans B and C facilities.
At
September 30, 2008, approximately $4.9 million was available to borrow under
the
term loan C component of the credit facility subject to certain conditions
in
the Third Amendment and the lenders sole discretion.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements.
Critical
Accounting Policies and Estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires the appropriate application of certain
accounting policies, many of which require the Company to make estimates and
assumptions about future events and their impact on amounts reported in the
Company’s consolidated financial statements and related notes. Since future
events and their impact cannot be determined with certainty, the actual results
may differ from the Company’s estimates. Such differences may be material to the
consolidated financial statements.
The
Company believes its application of accounting policies, and the estimates
inherently required therein, are reasonable.
These
accounting policies and estimates are periodically reevaluated, and adjustments
are made when facts and circumstances dictate a change. Historically, the
Company has found its application of accounting policies to be appropriate,
and
actual results have not differed materially from those determined using
necessary estimates.
The
Securities and Exchange Commission has defined a company’s critical accounting
policies as the ones that are most important to the portrayal of the company’s
financial condition and results of operation, and which require the company
to
make its most difficult and subjective judgments, often as the result of the
need to make estimates of matters that are inherently uncertain. Our critical
accounting policies and estimates include the estimates used to determine the
recoverability of indefinite-lived assets, including goodwill, the
recoverability of long-lived tangible assets, the value of television broadcast
rights, the amount of allowance of doubtful accounts, the existence and
accounting for variable interest entities and the amount of stock-based
compensation. For a detailed discussion of our critical accounting policies
and
estimates, please refer to our 2007 audited financial statements as reported
in
our Form 10-K/A filed on April 1, 2008 with the Securities and Exchange
Commission. There have been no material changes in the application of our
critical accounting policies and estimates subsequent to that
report.
Recent
Accounting Pronouncements
Refer
to
Note 3 of our condensed consolidated financial statements in Part I, Item 1
of this Quarterly Report on Form 10-Q for a discussion of recently issued
accounting pronouncements, including our expected date of adoption and effects
on results of operations and financial position.
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us that may cause our actual results,
levels of activity, performance or achievements to be materially different
from
any future results, levels of activity, performance or achievements expressed
or
implied by such forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as “may,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or
the negative of such terms or other similar expressions. Factors that might
cause or contribute to such a discrepancy include, but are not limited to,
those
described in our other filings with the Securities and Exchange Commission,
including our Annual Report on Form 10-K for the fiscal year ended December
31,
2007. The forward-looking statements included in this Quarterly Report are
made
only as of the date hereof. The Company undertakes no obligation to update
such
forward-looking statements to reflect subsequent events or circumstances, except
as required by law.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
General
The
Company is exposed to market risk from changes in domestic and international
interest rates (i.e. prime and LIBOR). This market risk represents the risk
of
loss that may impact the financial position, results of operations and/or cash
flows of the Company due to adverse changes in interest rates. This exposure
is
directly related to our normal funding activities. The Company does not use
financial instruments for trading and, as of September 30, 2008, was not a
party
to any interest-rate derivative agreements.
Interest
Rates
At
September 30, 2008, the entire outstanding balance under our credit agreement,
approximately 44% of the Company’s total outstanding debt (credit agreement,
lines of credit, asset purchase loans, real estate mortgage, etc.) bears
interest at variable rates. The fair value of the Company’s fixed rate debt is
estimated based on current rates offered to the Company for debt of similar
terms and maturities and is not estimated to vary materially from its carrying
value.
Based
on
amounts outstanding at September 30, 2008, if the interest rate on the Company’s
variable debt were to increase by 1.0%, its annual interest expense would be
higher by approximately $.48 million.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
and Disclosure of Controls and Procedures
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f)
and
15d-15(f). The Company’s internal control system is a process designed by, or
under the supervision of, the Company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by
the
Company’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles (U.S. GAAP).
The
Company's internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. GAAP, and
that receipts and expenditures are being made only in accordance with the
authorization of its management and directors; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company's assets that could have a material effect on its
consolidated financial statements.
The
Company’s management, under the supervision and with the participation of the
Chief Executive Officer and the Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures, as defined in Exchange Act Rule 13a-15(e), as of December 31,
2007. Based on this evaluation Management identified and reported in the
December 31, 2007 10-K/A, filed April 1, 2008 a material weakness in the
Company's internal control over financial reporting as of December 31, 2007
relating to effective internal controls over the preparation, review, and
approval surrounding certain account reconciliations, journal entries and
accruals; including and related to analysis and evidence of management review.
As result of this material weakness, management concluded that the disclosure
controls and procedures were not effective as of December 31, 2007.
During
2008, the Company has taken and will continue to take actions to remediate
the
material weakness discussed above and it is continuing to assess additional
controls that may be required to substantially reduce the risk of similar
material weakness occurring in the future. The Company is in the process of
establishing more robust reconciliation and review procedures and has required
its accounting managers and supervisors to adequately review all
reconciliations, journal entries and accruals and to provide evidence of such
review and analysis.
As
part
of its fiscal 2008 assessment of internal control over financial reporting,
management will conduct sufficient testing and evaluation of the controls being
implemented as part of this remediation plan to ascertain that they operate
effectively. While the Company has taken measures to remediate the material
weakness and strengthen its internal control over financial reporting, these
steps may not be adequate to fully remediate the material weakness, and
additional measures may be required. The effectiveness of this remediation
measures will not be fully known until the Company completes its annual
evaluation of the effectiveness of its internal control over financial reporting
for the year ending December 31, 2008. Therefore, management has concluded
that
it can not assert that the control deficiencies related to the reported material
weakness have been effectively remediated.
Procedures
were undertaken so that management could conclude that reasonable assurance
exists regarding the reliability of financial reporting and the preparation
of
the condensed consolidated financial statements contained in this
filing.
Changes
in Internal Control Over Financial Reporting
During
the first nine months of 2008, other than discussed above, there has been no
change in the Company’s internal control over financial reporting that
materially affect or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
PART
II – OTHER INFORMATION
ITEM 2.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Sale
of Stock Warrants
On
June
24, 2008, the Company sold warrants to Luken Communications, LLC to purchase
8,050,000 shares of the Company’s common stock at an exercise price of $1.10 per
share, exercisable through September 7, 2009. The purchase price for the
warrants was $1.5 million. In the event the warrants are exercised, the
investors’ beneficial ownership in the Company would increase from approximately
17% to approximately 30%. A portion of the proceeds from the sale of warrants
were used for working capital purposes.
In
accordance with the Warrants Purchase Agreement, as soon as practicable after
the 180
th
day
after June 24, 2008, the Company shall use commercially reasonable efforts
to
file a registration statement (on Form S-3 if eligible, or Form S-1 if not
eligible) covering the resale of the underlying securities by the Investor
and
use its commercially reasonable efforts to (i) respond promptly to all SEC
requests for information and filings and (ii) cause such registration statement
to become effective as soon as possible.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
The
Company is currently in default under its existing loan agreements with Silver
Point. Existing events of default include, but are not limited to, the Company’s
failure to pay interest when due, lateness on certain payments due under the
Company’s satellite and programming agreements and failure to achieve certain
performance metrics, including minimum monthly revenue and EBITDA
benchmarks.
On
April
28, 2008, the Company entered into a Second Amendment to the Credit Agreement.
The credit agreement had been previously amended on March 19, 2008. Under the
terms of the two amendments, the lenders agreed to forbear from exercising
certain of their rights and remedies with respect to the Company’s existing
defaults through the earlier of May 5, 2008 and the date of occurrence of
certain events or by which certain events have failed to occur, including the
Company’s failure to consummate a proposed financing with certain
investors.
On
June
24, 2008, the Company entered into a third amendment (“Third Amendment”) to its
Third Amended and Restated Credit Agreement (“Credit Agreement”). Under the
terms of the Third Amendment, the lender group has agreed to forbear from
exercising certain of its rights and remedies with respect to existing defaults
and certain other defaults described in the Third Amendment through the earlier
of (a) December 23, 2008 and (b) the date of occurrence of events of default
or
certain other events. Notwithstanding the foregoing, the lenders may terminate
the forbearance on and after September 15, 2008 in their sole discretion. The
Third Amendment also provides for the lender group to make additional loans
to
the Company in an amount not to exceed $6.5 million, subject to certain
conditions in the Third Amendment and the Lenders’ sole discretion.
Additionally, the applicable margins on LIBOR loans and base rate loans
were decreased to 10.0% and 9.0% respectively.
ITEM
6. EXHIBITS
|
Exhibits
|
|
|
|
|
|
|
|
|
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a)
of the
Securities Exchange Act of 1934, As Adopted Pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a)
of the
Securities Exchange Act of 1934, As Adopted Pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(b) or 15d-14(b)
and 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(b) or 15d-14(b)
and 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
caused this report to be signed on its behalf by the undersigned, thereunto
duly
authorized.
|
|
EQUITY
MEDIA HOLDINGS CORPORATION
|
|
|
|
|
|
Date:
November 19, 2008
|
By:
|
/s/
John Oxendine
|
|
|
|
Chief
Executive Officer
|
|
|
|
(principal
executive officer)
|
|
|
|
|
|
Date:
November 19, 2008
|
By:
|
/s/
Patrick Doran
|
|
|
|
Chief
Financial Officer
|
|
|
|
(principal
financial and accounting officer)
|
EXHIBIT
INDEX
|
|
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a)
of the
Securities Exchange Act of 1934, As Adopted Pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a)
of the
Securities Exchange Act of 1934, As Adopted Pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(b) or 15d-14(b)
and 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(b) or 15d-14(b)
and 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
30
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