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 March 31, 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):
Large
accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
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 May 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
|
Page
|
PART
I—FINANCIAL INFORMATION
|
|
Item 1.
Financial Statements
|
|
Condensed
Consolidated Balance Sheets — As of March 31, 2008
(unaudited) and As of December 31, 2007
|
3
|
Condensed
Consolidated Statements of Operations (unaudited) — Three Months Ended
March 31, 2008 and March 31, 2007
|
5
|
Condensed
Consolidated Statements of Cash Flows (unaudited) — Three Months Ended
March 31, 2008 and March 31, 2007
|
6
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
7
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
|
22
|
Item 4
. Controls and Procedures
|
22
|
PART
II—OTHER INFORMATION
|
|
Item
3. Defaults Upon Senior Securities
|
24
|
Item 6.
Exhibits
|
24
|
Signatures
|
25
|
Exhibit Index
|
26
|
|
|
EX-31.1
Section 302 Certification of COO
|
|
|
|
EX-31.2
Section 302 Certification of CFO
|
|
|
|
EX-32.1
Section 906 Certification of COO
|
|
|
|
EX-32.2
Section 906 Certification of CFO
|
|
|
|
EX-10.37
Second Amendment to Third Amended
and Restated Credit Agreement and Forbearance Agreement
dated April 28, 2008 and related schedules
|
|
|
|
PART
I—FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
EQUITY
MEDIA HOLDINGS CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March 31, 2008
|
|
|
|
|
|
(Unaudited)
|
|
December 31, 2007
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,193,880
|
|
$
|
634,314
|
|
Restricted
cash
|
|
|
202
|
|
|
4,162,567
|
|
Certificate
of deposit
|
|
|
112,107
|
|
|
112,107
|
|
Trade
accounts receivable, net of allowance for uncollectible
accounts
|
|
|
3,414,300
|
|
|
3,
514,635
|
|
Program
broadcast rights
|
|
|
6,449,330
|
|
|
6,921,465
|
|
Assets
held for sale
|
|
|
9,526,922
|
|
|
9,520,849
|
|
Other
current assets
|
|
|
221,827
|
|
|
321,434
|
|
Prepaid
expenses - related party
|
|
|
—
|
|
|
100,000
|
|
Total
current assets
|
|
|
20,918,568
|
|
|
25,287,371
|
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
|
|
|
|
|
Land
and improvements
|
|
|
2,017,698
|
|
|
2,017,698
|
|
Buildings
|
|
|
3,989,424
|
|
|
3,956,229
|
|
Broadcast
equipment
|
|
|
29,237,513
|
|
|
29,174,079
|
|
Transportation
equipment
|
|
|
283,151
|
|
|
283,151
|
|
Furniture
and fixtures
|
|
|
4,417,428
|
|
|
4,422,527
|
|
Construction
in progress
|
|
|
102,889
|
|
|
163,716
|
|
|
|
|
40,048,103
|
|
|
40,017,400
|
|
Accumulated
depreciation
|
|
|
(17,369,146
|
)
|
|
(16,350,882
|
)
|
Net
property and equipment
|
|
|
22,678,957
|
|
|
23,666,518
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
|
|
|
|
|
Indefinite-lived
assets, net
|
|
|
|
|
|
|
|
Broadcast
licenses
|
|
|
67,018,665
|
|
|
66,498,347
|
|
Goodwill
|
|
|
1,940,282
|
|
|
1,940,282
|
|
Total
indefinite-lived assets, net
|
|
|
68,958,947
|
|
|
68,438,629
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
Broadcasting
construction permits
|
|
|
399,302
|
|
|
885,665
|
|
Program
broadcast rights
|
|
|
4,228,549
|
|
|
4,001,625
|
|
Investment
in joint ventures
|
|
|
435,706
|
|
|
435,860
|
|
Deposits
and other assets
|
|
|
101,121
|
|
|
98,705
|
|
Broadcasting
station acquisition rights pursuant to assignment
agreements
|
|
|
440,000
|
|
|
440,000
|
|
Total
other assets
|
|
|
5,604,678
|
|
|
5,861,855
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
118,161,150
|
|
$
|
123,254,373
|
|
|
|
March 31, 2008
|
|
|
|
|
|
(Unaudited)
|
|
December 31, 2007
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$
|
5,264,044
|
|
$
|
3,644,475
|
|
Due
to affiliates and related parties
|
|
|
3,318,579
|
|
|
2,509,480
|
|
Lines
of credit
|
|
|
998,322
|
|
|
994,495
|
|
Accrued
expenses and other liabilities
|
|
|
2,188,549
|
|
|
1,777,240
|
|
Deposits
held for sales of broadcast licenses
|
|
|
1,024,601
|
|
|
1,024,601
|
|
Deferred
revenue
|
|
|
242,314
|
|
|
271,728
|
|
Current
portion of program broadcast rights obligations
|
|
|
2,038,691
|
|
|
2,094,741
|
|
Current
portion of deferred barter revenue
|
|
|
4,139,385
|
|
|
4,393,637
|
|
Note
payable to Univision
|
|
|
15,000,000
|
|
|
15,000,000
|
|
Current
portion of notes payable
|
|
|
54,477,112
|
|
|
52,233,322
|
|
Current
portion of capital lease obligations
|
|
|
39,191
|
|
|
44,546
|
|
Total
current liabilities
|
|
|
88,730,788
|
|
|
83,988,265
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
|
|
|
|
|
Notes
payable, net of current portion
|
|
|
8,870,532
|
|
|
8,996,705
|
|
Capital
lease obligations, net of current portion
|
|
|
136,721
|
|
|
141,491
|
|
Program
broadcast rights obligations, net of current portion
|
|
|
1,337,607
|
|
|
1,140,641
|
|
Deferred
barter revenue, net of current portion
|
|
|
2,608,670
|
|
|
2,618,143
|
|
Due
to affiliates and related parties
|
|
|
32,656
|
|
|
6,262
|
|
Security
and other deposits
|
|
|
213,500
|
|
|
213,500
|
|
Other
liabilities
|
|
|
740,376
|
|
|
556,795
|
|
Total
non-current liabilities
|
|
|
13,940,062
|
|
|
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’
EQUITY
|
|
|
|
|
|
|
|
Common
stock — $.0001 par value; 100,000,000 shares authorized; 40,278,642 issued
and outstanding at March 31, 2008 and December 31, 2007
|
|
|
4,028
|
|
|
4,028
|
|
Additional
paid-in-capital
|
|
|
136,570,040
|
|
|
136,217,425
|
|
Accumulated
deficit
|
|
|
(131,601,578
|
)
|
|
(121,146,692
|
)
|
|
|
|
4,972,490
|
|
|
15,074,761
|
|
Treasury
stock, at cost
|
|
|
(1,352
|
)
|
|
(1,352
|
)
|
Total
stockholders’ equity
|
|
|
4,971,138
|
|
|
15,073,409
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
118,161,150
|
|
$
|
123,254,373
|
|
See
Notes
to Unaudited Condensed Consolidated Financial Statements
EQUITY
MEDIA HOLDINGS CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three Months Ended
|
|
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Broadcast Revenue
|
|
$
|
7,322,112
|
|
$
|
6,774,075
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
Program,
production & promotion
|
|
|
4,810,556
|
|
|
3,420,928
|
|
Selling,
general & administrative
|
|
|
7,513,477
|
|
|
5,750,069
|
|
Selling,
general & administrative – related party
|
|
|
249,681
|
|
|
186,566
|
|
Management
agreement settlement
|
|
|
—
|
|
|
8,000,000
|
|
Management
fees – related party
|
|
|
375,000
|
|
|
347,749
|
|
Depreciation
& amortization
|
|
|
1,018,264
|
|
|
944,057
|
|
Rent
|
|
|
676,140
|
|
|
605,031
|
|
Total
operating expenses
|
|
|
14,643,118
|
|
|
19,254,400
|
|
Loss
from operations
|
|
|
(7,321,006
|
)
|
|
(12,480,325
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
Interest
income
|
|
|
21,483
|
|
|
3,875
|
|
Interest
expense
|
|
|
(2,792,851
|
)
|
|
(2,120,674
|
)
|
Interest
expense – related party
|
|
|
(262,500
|
)
|
|
—
|
|
Gain
on sale of assets
|
|
|
—
|
|
|
453,753
|
|
Other
income, net
|
|
|
83,728
|
|
|
160,399
|
|
Losses
from affiliates and joint ventures
|
|
|
(159
|
)
|
|
(30,261
|
)
|
Total
other expense, net
|
|
|
(2,950,299
|
)
|
|
(1,532,908
|
)
|
Loss
before provision for income taxes
|
|
|
(10,271,305
|
)
|
|
(14,013,233
|
)
|
Provision
for income taxes
|
|
|
—
|
|
|
—
|
|
Net
loss
|
|
|
(10,271,305
|
)
|
|
(14,013,233
|
)
|
Preferred
dividend
|
|
|
(183,581
|
)
|
|
(12,134,943
|
)
|
Net
loss available to common shareholders
|
|
$
|
(10,454,886
|
)
|
$
|
(26,148,176
|
)
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
40,278,642
|
|
|
25,668,789
|
|
Net
loss available to common shareholders per share:
|
|
|
|
|
|
|
|
Basic amd
Diluted
|
|
$
|
(0.26
|
)
|
$
|
(1.02
|
)
|
See
Notes
to Unaudited Condensed Consolidated Financial Statements.
EQUITY
MEDIA HOLDINGS CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three Months Ended
|
|
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,271,305
|
)
|
$
|
(14,013,233
|
)
|
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
|
|
|
|
|
|
|
Provision
for bad debt
|
|
|
94,446
|
|
|
432,335
|
|
Depreciation
|
|
|
1,018,264
|
|
|
913,871
|
|
Amortization
of intangibles
|
|
|
—
|
|
|
30,186
|
|
Amortization
of program broadcast rights
|
|
|
2,871,648
|
|
|
1,706,926
|
|
Amortization
of discounts on interest-free debt
|
|
|
—
|
|
|
14,634
|
|
Equity
in losses of subsidiaries and joint ventures
|
|
|
155
|
|
|
30,261
|
|
(Gain)
on sale of equipment
|
|
|
—
|
|
|
(453,753
|
)
|
Management
agreement settlement
|
|
|
—
|
|
|
4,800,000
|
|
Shared
based compensation
|
|
|
352,615
|
|
|
—
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
5,889
|
|
|
(456,865
|
)
|
Deposits
and other assets
|
|
|
197,191
|
|
|
(409,806
|
)
|
Restricted
cash
|
|
|
4,162,365
|
|
|
—
|
|
Accounts
payable and accrued expenses
|
|
|
2,030,876
|
|
|
1,308,084
|
|
Program
broadcast rights
|
|
|
(2,626,438
|
)
|
|
(1,843,102
|
)
|
Program
broadcast obligations
|
|
|
140,917
|
|
|
955,479
|
|
Deferred
barter revenue
|
|
|
(263,725
|
)
|
|
—
|
|
Security
deposits
|
|
|
—
|
|
|
(5,513
|
)
|
Deferred
income
|
|
|
(29,414
|
)
|
|
(780,125
|
)
|
Net
cash used by operating activities
|
|
|
(2,316,516
|
)
|
|
(7,770,621
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(36,777
|
)
|
|
(1,126,822
|
)
|
Proceeds
from sale of property and equipment
|
|
|
—
|
|
|
621,462
|
|
Acquisition
of broadcast assets
|
|
|
—
|
|
|
(1,225,000
|
)
|
Purchase
of certificate of deposit
|
|
|
—
|
|
|
(1,220
|
)
|
Net
advances from (to) affiliates
|
|
|
801,538
|
|
|
(227,011
|
)
|
Net
cash used in investing activities
|
|
|
764,761
|
|
|
(1,958,591
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
53,378,802
|
|
|
4,750,980
|
|
Payments
of notes payable
|
|
|
(51,257,357
|
)
|
|
(706,081
|
)
|
Payments
of capital lease obligations
|
|
|
(10,124
|
)
|
|
(7,556
|
)
|
Recapitalization
through merger
|
|
|
—
|
|
|
52,906,853
|
|
Purchase
of preferred stock
|
|
|
—
|
|
|
(25,000,000
|
)
|
Net
cash provided by financing activities
|
|
|
2,111,321
|
|
|
31,944,196
|
|
Net
increase (decrease) in cash and cash
equivalents
|
|
|
559,566
|
|
|
22,214,984
|
|
Cash
and cash equivalents — beginning of period
|
|
|
634,314
|
|
|
1,630,973
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents — end of period
|
|
$
|
1,193,880
|
|
$
|
23,845,957
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
3,384,724
|
|
$
|
1,859,178
|
|
Supplemental
non-cash activities:
|
|
|
|
|
|
|
|
Issuance
of note payable to redeem preferred stock
|
|
$
|
—
|
|
$
|
15,000,000
|
|
Settlement
with dissenting shareholders
|
|
$
|
—
|
|
$
|
10,899,882
|
|
Issuance
of mandatory redeemable preferred stock to pay accrued preferred
dividends
|
|
$
|
—
|
|
$
|
10,519,162
|
|
Issuance
of common stock to pay preferred dividends
|
|
$
|
—
|
|
$
|
1,615,781
|
|
Acquisition
of real property through assumption of debt
|
|
$
|
—
|
|
$
|
205,347
|
|
Charge
to stockholders’ equity for prepaid merger costs
|
|
$
|
—
|
|
$
|
750,006
|
|
Assumption
of net liabilities of Coconut Palm Acquisition Corporation
|
|
$
|
—
|
|
$
|
(2,267,340
|
)
|
Accretion
of preferred dividends
|
|
$
|
183,581
|
|
$
|
—
|
|
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
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 months ended March 31, 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 March 31, 2008 and the
results of its operations for the three months ended March 31, 2008 and 2007
and
cash flows for the three months ended March 31, 2008 and 2007. The results
of
operations for the three months ended March 31, 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— LIQUIDITY AND CAPITAL RESOURCES
The
Company currently has a working capital deficit of approximately $67.8 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 three months ended March 31, 2008, the
Company had a net loss of approximately $10.3 million and experienced cash
outflows from operations of approximately $2.3 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 March 31, 2008, the Company has approximately $1.2 million of unrestricted
cash on hand.
In
February 2008, we refinanced our previous credit facility with our existing
lender group. 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 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.
We
are 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. We are subject to new financial and operating covenants and
restrictions based on trailing monthly and twelve month information. We have
borrowed $50,512,500 under the new facility as of March 11, 2008. Due to certain
restrictions based on the value of the loan collateral, the Company does not
have access to the remaining $2,487,500 at this time.
On
March
19, 2008, the Company entered into an amendment (“Amendment”) to its Third
Amended and Restated Credit Agreement (“Credit Agreement”) with Silver Point
Finance, LLC and Wells Fargo Foothill, Inc. Under the terms of the Amendment,
the lender group has 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 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 has
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 provides
for the lender group to make additional loans to the Company in an amount not
to
exceed $5,495,541 (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 110% respectively.
Even
with
the refinanced Credit Facility, the additional funds provided by the Amended
Credit Facility 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 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.
NOTE
3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLOCIES
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 ___ for additional information.
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
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”
(“SFAS 161”), which requires enhanced disclosures for derivative and hedging
activities. SFAS 161 will become effective beginning in the first quarter of
2009. The Company is currently evaluating the impact of adopting SFAS 161 on
the
financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007)
“
Business
Combinations
”
(“FASB
No. 141(R)”). FASB No. 141(R) retains the fundamental requirements of
the original pronouncement requiring that the purchase method be used for all
business combinations. FASB No. 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. FASB No. 141(R) also requires that acquisition-related costs be
recognized separately from the acquisition. FASB No. 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 No. 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
(“FASB No. 160”)
.” The
objective of FASB No. 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.
FASB No. 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 FASB No. 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.
NOTE
4 — ASSET PURCHASE AGREEMENT
Purchase
from Renard Communications Corp.
The
Company entered into an asset purchase agreement (“Agreement”) with Renard
Communications Corp. (“Seller”) for the purchase of certain licenses,
construction permits and other instruments of authorization (collectively
“Licenses,” described below) issued by the Federal Communications Commission
(“FCC”) and certain other assets (together with the Licenses, “Assets”). The
Agreement became effective on August 15, 2007 upon approval by the
Company’s board of directors and the lender.
The
Assets include Licenses for Class A television station WMBQ-CA, Channel 46,
Manhattan, New York with a corresponding digital authorization for Channel
10
(WMBQ-LD) and WBQM-LP, Channel 3, Brooklyn, New York (collectively, the
“Stations”), and related items as specified in the Agreement.
The
Company will pay an aggregate of $8,000,000 for the Assets, which constitute
all
the assets used in connection with operating the Stations. In connection with
the transaction, the Company deposited $400,000 (“Deposit”), which will be held
in escrow pending closing. At the closing, the Company will pay $6,000,000
in
immediately available funds, which amount will include the Deposit, and will
deliver a secured promissory note (“Note”) for the remaining $2,000,000. The
Note will have a three-year term and will accrue interest at 6% per year,
requiring monthly interest payments only until the expiration of the term,
at
which time the principal amount will become due and payable. The Seller will
have a security interest, documented by a Security Agreement executed
simultaneously with the closing, in the Brooklyn station only. The payment
will
be increased or decreased such that Seller is entitled to all revenue and is
liable for all expenses allocable to the period prior to the closing and the
Company is entitled to all revenue and is liable for all expenses allocable
to
the period following the closing. Seller will assign and the Company will assume
certain listed contracts.
The
closing of the Agreement is subject to conditions, including FCC consent to
the
assignment of the Licenses. Seller and the Company agree to promptly prepare
an
application for assignment of the Licenses and to fully prosecute the
application, but neither party is required to engage in a trial-type hearing.
Each party will bear its own costs, and the filing fees shall be split evenly.
The closing will occur between five business days after the FCC grants consent
and ten business days after the grant becomes a final order.
The
Agreement may be terminated by either party if the closing has not occurred
by
June 1, 2008; the conditions of the other party have not been met as of the
closing date; or the other party is in breach.
The
FCC
granted its consent to the assignment by Public Notice dated February 7,
2008. By letter dated May 2, 2008, counsel for Seller alleged the Company
is in breach of the Agreement by failing to set a Closing Date. However,
the Stations are only operating pursuant to six month special temporary
authorizations from a replacement tower site. Seller has not yet filed at
the FCC for permanent authority to operate from this tower site. The Company
believes that under the Agreement it is a condition to closing that Seller
have
permanent licenses issued for the two New York stations, and that until those
are issued by the FCC, closing cannot occur.
Sale
to Luken Communications, LLC
On
April
3, 2008, EBC Southwest Florida, Inc. (“Seller”), a subsidiary of the Company
entered into an asset purchase agreement (“Purchase Agreement”) with Luken
Communications, LLC (“Buyer”) and Henry G. Luken III, individually (“Luken”),
for the sale of all of the assets used in the business and operations of five
low power and Class A television stations in Naples and Fort Myers, Florida
(“Stations”), including licenses, construction permits and other instruments of
authorization (“Licenses”) issued by the Federal Communications Commission
(“FCC”) and certain other assets (together with the Licenses, the “Assets”). The
Buyer is owned by Henry Luken, a shareholder of the Company and the former
Chairman of the Board, Chief Executive Officer and President of the Company
and
Thomas M. Arnost, the President and Chief Executive Officer of the Company’s
Broadcasting Station Group. Seller entered into the Purchase Agreement in order
for the Company to satisfy its obligations under the terms of an amendment,
dated as of March 19, 2008, to its Third Amended and Restated Credit Agreement
(“Credit Agreement”) with Silver Point Finance, LLC and Wells Fargo Foothill,
Inc., pursuant to which 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 its immediate capital requirements.
Buyer
has
agreed to pay an aggregate of $8,000,000 for the Assets (“Purchase Price”) in
immediately available funds at the closing (“Closing”). Luken has agreed to
personally guarantee the Buyer’s obligation to pay the Purchase Price. In
addition to the Purchase Price, if within the 12-month period following the
Closing, Buyer enters into an agreement to sell the Stations, collectively
or
individually, to an unaffiliated third party, then 50% of the purchase price
from that transaction that are of an amount greater than the Purchase Price
will
be paid to Seller. If, within the second 12-month period following the Closing,
Buyer enters into an agreement to sell the Stations, collectively or
individually, to an unaffiliated third party, then 25% of the purchase price
from that transaction that are of an amount greater than the Purchase Price
will
be paid to Seller.
The
Closing is subject to certain conditions, including FCC consent to the
assignment of the Licenses (“FCC Consent”). Seller and Buyer have agreed to
promptly prepare an application for assignment of the Licenses and to fully
prosecute the application. Each party will bear its own costs, and the filing
fees will be split evenly. The Closing will occur within ten business days
after
the grant of FCC Consent becomes a final order or, upon waiver of such condition
by Buyer, within ten business days following the publication of the grant of
FCC
Consent.
The
Purchase Agreement may be terminated under the following
circumstances:
|
·
|
by
Seller for any reason prior to the Closing with ten days’ written notice
to Buyer if Seller is not otherwise in breach of its obligations
under the
Purchase Agreement, provided that the Seller will reimburse Buyer
for
expenses incurred in entering into the Purchase Agreement. Seller
has
agreed to exercise this termination right if it refinances or retires
a
significant portion of its debt with its current lender. Therefore,
the
Company continues to account for the related assets as held for
use.
|
|
·
|
by
Buyer if the Closing has not occurred within 12 months from the date
the
application for FCC Consent is accepted for filing by the FCC; upon
Seller’s failure to perform environmental remediation on issues set forth
in an environmental audit to be performed that exceed $25,000; or
if
regular broadcast transmission is interrupted for a continuous period
of
72 hours or more prior to the Closing solely as a result of the actions
of
Seller.
|
|
·
|
by
either party if the conditions of the other party have not been met
as of
the Closing; the other party becomes or is declared insolvent; or
the
other party is in breach.
|
NOTE
5 — NOTES PAYABLE
Long-Term
Debt
Long-term
debt as of March 31, 2008 and December 31, 2007 consisted of the
following:
|
|
March 31, 2008
|
|
December 31, 2007
|
|
|
|
(
In thousands
)
|
|
Senior
Credit Facility
|
|
$
|
52,562
|
|
$
|
50,317
|
|
Merger
Related Party - Univision
|
|
|
15,000
|
|
|
15,000
|
|
Installment
Notes and other debt
|
|
|
10,786
|
|
|
10,913
|
|
Line
of Credit
|
|
|
998
|
|
|
994
|
|
Capital
Lease Obligations
|
|
|
176
|
|
|
186
|
|
|
|
|
|
|
|
|
|
Total
Debt
|
|
$
|
79,522
|
|
$
|
77,410
|
|
Less:
Current maturities
|
|
|
(70,515
|
)
|
|
(68,272
|
)
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
9,007
|
|
$
|
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. We are 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. We are subject to new financial and
operating covenants and restrictions based on trailing monthly and twelve month
information. The Company borrowed $50,512,500 under the new facility. Due to
certain restrictions based on the value of the loan collateral, the Company
does
not have access to the remaining $2,487,500 at this 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
has
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 has
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 provides
for the lender group to make additional loans to the Company in an amount not
to
exceed $5,495,541 (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.
The
Company is currently in default under its existing loan agreements with Silver
Point and Wells Fargo. 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
noted
above, on April 28, 2008, the Company entered into a Second Amendment to its
Third Amended and Restated Credit Agreement with Silver Point and Wells Fargo.
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.
As
of the
date of this report, the above-described forbearance period has ended. If the
Company is unable to secure an extension of such forbearance or the lenders
otherwise elect to declare a default under the credit agreement, the lenders
would have all rights and remedies available to them under the terms of the
Credit Agreement. The Company and the lenders continue to discuss all options
acceptable to both parties.
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 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 has the option to transfer the two television stations securing
the
obligation in lieu of a cash payment for the debt principal. Both the Company
and Univision have applied with the FCC for transfer of those licenses, which,
as of the date of this report, has yet to act on those requests. Until such
time
as the requests are granted, interest continues to accrue at an annual rate
of
7% and the note remains unpaid.
Line
of Credit
At
March
31, 2008, the Company had a $1.0 million line of credit with an Arkansas bank,
with interest payable monthly at 7.75%, due April 23, 2008 and secured by
various broadcast assets and Company guarantees. The outstanding balance at
March 31, 2008 was $998,322. On May 7, 2008, the line of credit was extended
until October 31, 2008, with interest payable monthly at 7.5% and secured by
the
same assets and guarantees.
NOTE
6 — STOCK OPTION PLANS
Stock-based
compensation expense for each of the three months ended March 31, 2008 and
2007
was $0.35 million and $0 respectively. The total deferred tax benefit
related thereto was $0 for the three months ended March 31, 2008 compared to
$0
during the same period in 2007. As of March 31, 2008, there was $3.4 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 $3.4
million, we expect to recognize approximately 30.6% during the remainder of
in
2008 and the balance in 2009 through 2012. The weighted average period over
which the $3.4 million is to be recognized is 2.67 years.
NOTE
7 — 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.” Although the motion has been fully briefed by
the parties, the plaintiffs have not yet sought a hearing date on the class
certification issue. Currently, the parties continue to engage in discovery.
No
court date has been set for 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.
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.
NOTE
8 — RELATED PARTY TRANSACTIONS
Amounts
due (to) from affiliates and related parties at March 31, 2008 and December
31, 2007 consist of the following:
|
|
March 31,
2008
|
|
December 31,
2007
|
|
Univision Communications, Inc.
|
|
$
|
(2,808,103
|
)
|
$
|
(2,295,837
|
)
|
Arkansas Media, LLC and affiliates
|
|
|
13,559
|
|
|
19,581
|
|
Royal
Palm Capital Management, LLP
|
|
|
(500,000
|
)
|
|
(225,000
|
)
|
Little
Rock TV 14, LLC
|
|
|
(78,626
|
)
|
|
(78,626
|
)
|
Retro
Television Network, Inc
|
|
|
(24,035
|
)
|
|
(8,224
|
)
|
Other
|
|
|
45,970
|
|
|
72,364
|
|
|
|
|
|
|
|
|
|
Due
(to) from affiliates and related parties
|
|
|
(3,351,235
|
)
|
|
(2,515,742
|
)
|
Less
current portion
|
|
|
(3,318,579
|
)
|
|
(2,509,480
|
)
|
|
|
|
|
|
|
|
|
Non
– current portion
|
|
$
|
(32,656
|
)
|
$
|
(6,262
|
)
|
NOTE
9 - FAIR VALUE MEASUREMENTS
The
Company adopted SFAS No. 157 effective January 1, 2008 for financial
assets and financial liabilities measured on a recurring basis. SFAS
No. 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 No. 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:
NOTE
10 - 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, the production and broadcasting of news, 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 and third party broadcasters
through the Company’s centralized 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 March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in thousands)
|
|
Broadcast
Revenue
|
|
|
|
|
|
|
|
Television
|
|
$
|
6,857
|
|
$
|
6,693
|
|
Retro
Television Network
|
|
|
428
|
|
|
70
|
|
Uplink
Services
|
|
|
218
|
|
|
174
|
|
Corporate
and eliminations
|
|
|
(181
|
)
|
|
(162
|
)
|
|
|
$
|
7,322
|
|
$
|
6,775
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
Television
|
|
$
|
492
|
|
$
|
563
|
|
Retro
Television Network
|
|
|
8
|
|
|
-
|
|
Uplink
Services
|
|
|
369
|
|
|
258
|
|
Corporate
and eliminations
|
|
|
149
|
|
|
123
|
|
|
|
$
|
1,018
|
|
$
|
944
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
|
|
|
|
|
Television
|
|
$
|
(2,514
|
)
|
$
|
(2,165
|
)
|
Retro
Television Network
|
|
|
(1,228
|
)
|
|
(216
|
)
|
Uplink
Services
|
|
|
(269
|
)
|
|
(334
|
)
|
Corporate
and eliminations
|
|
|
(3,310
|
)
|
|
(9,765
|
)
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
(7,321
|
)
|
$
|
(12,480
|
)
|
|
|
|
|
|
|
|
|
Impairment
charge
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(7,321
|
)
|
$
|
(12,480
|
)
|
NOTE 11—
SUBSEQUENT EVENTS
Asset
Purchase Agreement
On
April
3, 2008, EBC Southwest Florida, Inc. (“Seller”), a subsidiary of the Company
entered into an asset purchase agreement (“Purchase Agreement”) with Luken
Communications, LLC (“Buyer”) and Henry G. Luken III, individually (“Luken”),
for the sale of all of the assets used in the business and operations of
five
low power and Class A television stations in Naples and Fort Myers, Florida
(“Stations”), including licenses, construction permits and other instruments of
authorization (“Licenses”) issued by the Federal Communications Commission
(“FCC”) and certain other assets (together with the Licenses, the “Assets”). The
Buyer is owned by Henry Luken, the former Chairman of the Board, Chief Executive
Officer and President of the Company and Thomas M. Arnost, the President
and
Chief Executive Officer of the Company’s Broadcasting Station Group. See Note 4
for further details.
New
Retro Television Network (“RTN”) affiliates and contracts
The
following table shows stations that have been launched as RTN affiliates
since
March 31, 2008:
DMA
Ranking
|
|
Station
|
|
DMA
|
|
Launched
|
11
|
|
WXYZ-DT2
|
|
Detroit
|
|
4/1/08
|
55
|
|
KAIL-DT
|
|
Fresno –
Visalia
|
|
4/1/08
|
69
|
|
KGPT-LP
|
|
Wichita –
Hutchinson
|
|
4/1/08
|
87
|
|
KWWL-DT3
|
|
Cedar
Rapids – Waterloo
|
|
4/1/08
|
41
|
|
WHTM-DT
|
|
Harrisburg –
Lancaster
|
|
5/12/08
|
144
|
|
KDPX
|
|
Palm
Springs
|
|
5/12/08
|
Amendment
to Senior Credit Facility
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 in Note 5. Under the terms of the Second Amendment, the lender
group
has 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 provides
for the lender group to make additional loans to the Company in an amount
not to
exceed $5,495,541 (which includes additional loans funded pursuant to the
First
Amendment).
As
of the
date of this report, the above-described forbearance period has ended.
If the
Company is unable to secure an extension of such forbearance or the lenders
otherwise elect to declare a default under the credit agreement, the lenders
would have all rights and remedies available to them under the terms of
the
Credit Agreement. The Company and the lenders continue to discuss all options
acceptable to both parties.
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
will
now have 180 days until November 10, 2008 to regain compliance. Compliance
can
be achieved if the bid price of the common stock closes above $1 for a
minimum
of 10 consecutive business days. The Company will also issue an 8K and
a press
release relating to this notification in accordance with Marketplace rule
4803(a).
Changes
to the Board of Directors
On
May
15, 2008, the Company announced that Henry Luken resigned from the Company’s
Board of Directors and as CEO and President. The Board of Directors has
engaged
Richard Rochon as a member of the Board to fill an existing vacancy. John
Oxendine, an existing board member, was named Vice Chairman on an interim
basis.
The Board of Directors has commenced a search for a new CEO and
President.
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 March 31, 2008 and March 31,
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 (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
March 31, 2008, the Company has built and aggregated a total of 120 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, 38 Class A stations and 59 low power stations, including two
metropolitan New York City low power stations that the Company is currently
under contract to purchase. The Company’s English and Spanish-language stations
are in 41 markets that represent more than 32% 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:, 19 are affiliated with Univision, 12 are affiliated with the Company’s
Retro Television Network (“RTN”), five are affiliated with MyNetworkTV, four are
affiliated with FOX, three are affiliated with TeleFutura, and one is affiliated
with ABC.
The
Company is the second-largest affiliate group of the top-ranked Univision and
TeleFutura networks with 19 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
is
the first network designed for the digital arena. RTN takes some of the most
popular and entertaining programs from the 60s, 70s, 80s, and 90s, all ratings
proven and digitally re-mastered, and provides them to their RTN affiliates.
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 market basis, sell the station at an increased
valuation to fund operations and acquisitions and to service debt.
Following
the March 2007 merger, the Company’s business focus shifted from primarily
aggregating stations to increasing RTN affiliate penetration and maximizing
revenue and profit for each station. The Company intends to achieve revenue
growth and profitability through various entity and station-level initiatives.
These initiatives, which the Company has recently begun to implement,
include:
|
·
|
continued
growth of the RTN affiliate base in key U.S. television
markets;
|
|
·
|
focusing
on growing national business;
|
|
·
|
addition
of experienced managers in select local
markets;
|
|
·
|
upgrading
/ increasing sales staffs in select local
markets;
|
|
·
|
establishing
market appropriate rate cards;
|
|
·
|
upgrading
local news (where available) and expanding local programming in select
markets;
|
|
·
|
upgrading
syndicated programming; and
|
|
·
|
enhancing
cable and satellite distribution
|
Generally,
it takes a few years for the Company’s newly acquired or built stations to
generate operating cash flow. In addition, it requires time to gain viewer
awareness of new station programming and to attract advertisers. Accordingly,
the Company has incurred, and expects to continue to incur, with newly acquired
or built stations, losses at a station in the first few years after it acquires
or builds the station. Occasionally unforeseen expenses and delays increase
the
estimated initial start-up expenses. This requires the Company’s established
stations to generate revenues and cash flow sufficient to meet its business
plan
including the significant expenses related to our newly acquired or built
stations.
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
The
Company’s classic television network, RTN, currently has a total of 73
affiliations announced. Top DMA markets include San Francisco, Atlanta,
Washington, DC, Detroit, Phoenix, Seattle, Tacoma, Denver, Orlando, St. Louis,
Pittsburgh, and Charlotte.
RESULTS
OF OPERATIONS — THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2007
Revenue
The
following table sets forth the principal types of broadcast revenue earned
by
the Company and its stations for the periods indicated and the change from
one
period to the next both in dollars and percent:
|
|
For
the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
(In
thousands, except percentages)
|
|
Broadcast
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local
|
|
$
|
2,244
|
|
$
|
2,405
|
|
$
|
(161
|
)
|
|
(6.7
|
)%
|
National
|
|
|
2,072
|
|
|
1,987
|
|
|
85
|
|
|
4.3
|
|
Other
|
|
|
461
|
|
|
247
|
|
|
214
|
|
|
86.6
|
|
Trade
& Barter Revenue
|
|
|
2,545
|
|
|
2,136
|
|
|
409
|
|
|
19.1
|
|
Total
Broadcast Revenue
|
|
$
|
7,322
|
|
$
|
6,775
|
|
$
|
547
|
|
|
8.1
|
%
|
As
noted
in the Overview, the operating revenue of the Company’s stations 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.
Total
Broadcast Revenue increased $0.5 million, or 8.1%, to $7.3 million. The increase
in revenues is driven by an increase of $400,000 in trade and barter and
$200,000 in other revenue. The increase in trade and barter includes an increase
of $152,000 in trade programming and $200,000 in film barter income. This
increase is due primarily to the continued growth in the Company’s investment in
syndicated programming as it continues its commitment to reduce the amount
of
shopping and long-form commercials and increase traditional programming. Trade
advertising revenue increased $58,000. The increase in other income is led
by
political sales of $115,000, uplink share services revenue of $77,000 and Joint
Service Agreement’s revenue of $20,000.
Local
advertising revenue decreased $161,000 as result of lower direct and regional
sales which was offset by higher revenues derived from advertising agencies.
National sales increased $85,000 primarily due to higher billings to agencies
which were offset by lower paid programming. With the Company’s shift to
traditional programming, sales of available time shifts to spots advertisers.
Total local and national revenue from the Company’s Spanish-language stations
decreased by $.1 million or 6% when compared to the same period in 2007, while
local and national revenue from the Company’s English-language stations
decreased by $.1 million or 4%.
Results
of Operations
The
following table sets forth the Company’s operating results for the three month
period ended March 31, 2008, as compared to the three month period ended March
31, 2007:
|
|
For
the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
(In
thousands, except percentages, net income per share and weighted
average
shares)
|
|
Broadcast
Revenue
|
|
$
|
7,322
|
|
$
|
6,774
|
|
$
|
548
|
|
|
8.0
|
|
Program,
production & promotion
|
|
|
4,811
|
|
|
3,421
|
|
|
1,390
|
|
|
40.6
|
|
Selling,
general & administrative
|
|
|
8,138
|
|
|
6,284
|
|
|
1,854
|
|
|
29.5
|
|
Management
agreement settlement
|
|
|
—
|
|
|
8,000
|
|
|
(8,000
|
)
|
|
(100.0
|
)
|
Depreciation
expense
|
|
|
1,018
|
|
|
944
|
|
|
74
|
|
|
7.8
|
|
Rent
|
|
|
676
|
|
|
605
|
|
|
71
|
|
|
11.7
|
|
Operating
(loss)
|
|
|
(7,321
|
)
|
|
(12,480
|
)
|
|
5,159
|
|
|
41.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
21
|
|
|
4
|
|
|
17
|
|
|
425.0
|
|
Interest
Expense, net
|
|
|
(3,055
|
)
|
|
(2,121
|
)
|
|
(934
|
)
|
|
(44.0
|
)
|
Gain
on sale of assets
|
|
|
—
|
|
|
454
|
|
|
(454
|
)
|
|
(100.0
|
)
|
Other
income, net
|
|
|
84
|
|
|
130
|
|
|
(46
|
)
|
|
(35.4
|
)
|
|
|
|
(2,950
|
)
|
|
(1,533
|
)
|
|
(1,417
|
)
|
|
(42.4
|
)
|
(Loss)
before income taxes
|
|
|
(10,271
|
)
|
|
(14,013
|
)
|
|
3,742
|
|
|
26.7
|
|
Income
taxes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
(loss)
|
|
|
(10,271
|
)
|
|
(14,013
|
)
|
|
3,742
|
|
|
26.7
|
|
Preferred
dividend
|
|
|
(184
|
)
|
|
(12,135
|
)
|
|
11,951
|
|
|
98.5
|
|
Net
loss available to common shareholders
|
|
$
|
(10,455
|
)
|
$
|
(26,148
|
)
|
$
|
15,
693
|
|
|
60.0
|
|
Basic
net (loss) per common share
|
|
$
|
(0.26
|
)
|
$
|
(1.02
|
)
|
|
|
|
|
|
|
Basic
shares used in earnings per share calculation
|
|
|
40,278,642
|
|
|
25,668,789
|
|
|
|
|
|
|
|
Program,
production and promotion expenses
Program,
production and promotion expense was $4.8 million in the three month period
ended March 31, 2008, as compared to $3.4 million in the three month period
ended March 31, 2007, an increase of $1.4 million, or 40.6%. The increase was
due primarily to an increase in Syndicated Programming expense, barter/film
expense and license fees.
Selling,
general and administrative
Selling,
general and administrative expense was $8.1 million in the three month period
ended March 31, 2008, as compared to $6.3 million in the three month period
ended March 31, 2007, an increase of $1.8 million, or 29.5%. Contributing to
this increase were increases in personnel costs, including benefits and share
based compensation. This increase in personnel cost is attributed to hiring
of
management personnel following the March 2007 Merger Transaction to address
the
new strategic direction of the Company as well as demands of a publicly traded
company, together with staff increases related to TV broadcast and RTN
operations
Depreciation
and Amortization
Depreciation
and amortization was $1 million in the three month period ended March 31, 2008,
as compared to $1 million in the three month period ended March 31, 2007. Of
those expense amounts, amortization expense was $0.0 for the three month period
ended March 31, 2008 compared to $30,186 for the three month period ended March
31, 2007, a decrease of $30,186.
Rent
Rent
expense was $0.7 million in the three month period ended March 31, 2008, as
compared to $0.6 million in the three month period ended March 31, 2007, an
increase of $0.1 million, or 11.7%. An increase in tower rent expense was the
primary factor.
Interest
Expense, net
Interest
expense, net of interest income, was $3.0 million in the three month period
ended March 31, 2008, as compared to $2.1 million in the three month period
ended March 31, 2007, an increase of $0.9 million, or 44.0%. This increase
is
primarily attributable to higher average outstanding debt ($20 million) and
higher interest rates charged by lenders.. The combined average interest rates
on the Company’s senior credit facility were 14.0% and 13.1% for the three
months ended March 31, 2008 and 2007, respectively.
Gain
on sale of assets
The
gain
on sale of assets was $0.0 million in the three month period ended March 31,
2008, as compared $0.5 million in the three month period ended March 31, 2007,
a
decrease of $0.5 million. The gain on sale in 2007 included the sale of a
broadcast tower located in central Arkansas.
Other
income, net
Other
income, net was $84,000 for the three months ended March 31, 2008 as compared
to
$130,000 for the three months ended March 31, 2007, a decrease of $46,000.
Preferred
dividend
Preferred
dividend was $0.2 million in 2008 compared to $12.1 million in 2007. The
decrease of $11.9 million is due to the payment of $12.1 million to the former
preferred shareholders of EBC in connection with the March 2007 Merger
Transaction. Current preferred shares accrete dividends quarterly.
Liquidity
and Capital Resources
General
The
following table and discussion presents data the Company believes is helpful
in
evaluating it liquidity and capital resources:
|
|
As
of
|
|
|
|
March 31,
2008
|
|
December 31,
2007
|
|
|
|
(In
thousands)
|
|
Cash
and cash equivalents
|
|
$
|
1,194
|
|
$
|
634
|
|
Long
term debt including current portion and lines of credit
|
|
$
|
79,522
|
|
$
|
77,411
|
|
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 in
the
near term 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. Additional sources of
capital, if obtained, would likely come from sales by the Company of debt and/or
equity and/or the sale of material assets of the Company. The Company is
currently negotiating potential transactions that would supply it with capital
necessary to meet its current requirements. However, these negotiations may
not
result in successful consummation of any transaction. 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 to refinance the 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. We are 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.
We
are subject to new financial and operating covenants and restrictions based
on
trailing monthly and twelve month information. We have borrowed $52,561,593
under the new facility as of March 31, 2008. Due to certain restrictions based
on the value of the loan collateral, the Company does not have access to the
remaining $2,487,500 at this time.
On
March
19, 2008, the Company entered into an amendment to its Third Amended and
Restated Credit Agreement (“Credit Agreement”) with Silver Point Finance, LLC
and Wells Fargo Foothill, Inc. Under the terms of the Amendment, the lender
group has 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. If the
Company is unable to meet all criteria under the forbearance agreement, the
lender group will have all remedies available to them 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 in Note 5. Under the terms of the Second Amendment, the lender
group
has 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 provides
for the lender group to make additional loans to the Company in an amount not
to
exceed $5,495,541 (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.
As
of the
date of this report, the above-described forbearance period has ended. If the
Company is unable to secure an extension of such forbearance or the lenders
otherwise elect to declare a default under the credit agreement, the lenders
would have all rights and remedies available to them under the terms of the
Credit Agreement. The Company and the lenders continue to discuss all options
acceptable to both parties.
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 $67.8
million.
Even
with
the refinanced Credit Facility, the additional funds provided by the Amended
Credit Facility 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 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 Three Months
|
|
|
|
Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In
thousands)
|
|
Net
cash used by operating activities
|
|
$
|
(2,317
|
)
|
$
|
(7,771
|
)
|
Net
cash provided (used) by investing activities
|
|
|
765
|
|
|
(1,959
|
)
|
Net
cash provided by financing activities
|
|
|
2,111
|
|
|
31,944
|
|
Net
increase in cash and cash equivalents
|
|
$
|
559
|
|
$
|
22,214
|
|
Operating
Activities
Net
cash
used in operating activities for the three month periods ending March 31, 2008
and 2007 was $2.3 million and $7.8 million, respectively. The decrease in net
cash used by operating activities of $5.5 million was due primarily to an
decrease in the net loss of $3.8 million and a decrease in Management Agreement
Settlement of $4.8 million, a non-cash operating expense.
Investing
Activities
Net
cash
provided by investing activities was $0.8 million in the three month period
ended March 31, 2008, a variance of $2.7 million compared to the three month
period ended March 31, 2007, when $1.9 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 combined with cash received from
affiliates in repaymnet of advances.
Financing
Activities
Net
cash
provided by financing activities was $2.1 million in the three month period
ended March 31, 2008, compared to $31.9 million in the three month period ended
March 31, 2007, a decrease of $29.8 million. During the three month period
ended
March 31, 2007, the Company completed its merger 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 and $10.9 million
of
funds held in trust for the retirement of the stock held by Coconut Palm
shareholders who elected not to participate in the merger. The funds held in
trust are restricted and not available for any use by the Company. The Company’s
net increase in debt was $2.1 million for the three months ended March 31,
2008
as compared to $4.0 million for the three months ended March 31,
2007.
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. The Company is
subject to amended covenants as per the new credit agreement.
On
February 13, 2008, the Company and its lenders entered into the Third Amended
and Restated Credit Agreement to refinance the 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. We are 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.
We
are subject to new financial and operating covenants and restrictions based
on
trailing monthly and twelve month information. We have borrowed $52,561,593
under the new facility as of March 31, 2008. Due to certain restrictions based
on the value of the loan collateral, the Company does not have access to the
remaining $2,487,500 at this time.
On
March
19, 2008, the Company entered into an amendment to its Third Amended and
Restated Credit Agreement (“Credit Agreement”) with Silver Point Finance, LLC
and Wells Fargo Foothill, Inc. Under the terms of the Amendment, the lender
group has 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 9.05 respectively. If the
Company is unable to meet all criteria under the forbearance agreement, the
lender group will have all remedies available to them under the Credit
Agreement, including making the loan immediately due and payable.
On
April
28, 2008, Equity Media Holdings Corporation (“Company”) entered into a second
amendment (“Second Amendment”) to its third amended and restated credit
agreement (“Credit Agreement”) with Silver Point Finance, LLC and Wells Fargo
Foothill, Inc which had been previously amended on March 19, 2008 (“First
Amendment Under the terms of the Second Amendment, the lender group has 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 provides for the lender group
to make additional loans to the Company in an amount not to exceed $5,495,541
(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.
As
of
March 31, 2008, the applicable margins for base rate advances and LIBOR advances
under the revolver component of the Credit Facility were 9.0% and 10.0%,
respectively. The amount outstanding under the Credit Facility as of March
31,
2008 was $52.6 million and is allocated as follows: term loan facility of $12.0
million, term loans B of $35.1 million and a fully drawn revolving loan of
$5.5
million. At March 31, 2008, approximately $1 million was available to borrow
under the term loan B component of the Credit Facility.
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
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”),
which requires enhanced disclosures for derivative and hedging activities.
SFAS
161 will become effective beginning in the first quarter of 2009. The Company
is
currently evaluating the impact of adopting SFAS 161 on the financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) “
Business
Combinations
”
(“FASB
No. 141(R)”). FASB No. 141(R) retains the fundamental requirements of the
original pronouncement requiring that the purchase method be used for all
business combinations. FASB No. 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. FASB No. 141(R) also requires that acquisition-related costs be recognized
separately from the acquisition. FASB No. 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 No. 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 (“FASB
No. 160”)
.” The
objective of FASB No. 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.
FASB No. 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 FASB No. 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.
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 March 31, 2008, was not a party
to
any interest-rate derivative agreements.
Interest
Rates
At
March
31, 2008, the entire outstanding balance under our credit agreement,
approximately 66% 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 March 31, 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 $.6 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 quarter of 2008, other than discussed above, there has been no changes
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
3. DEFAULTS UPON SENIOR SECURITIES
The
Company is currently in default under its existing loan agreements with Silver
Point and Wells Fargo. 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 its Third Amended
and
Restated Credit Agreement with Silver Point and Wells Fargo. 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.
As
of the
date of this report, the above-described forbearance period has ended. If the
Company is unable to secure an extension of such forbearance or the lenders
otherwise elect to declare a default under the credit agreement, the lenders
would have all rights and remedies available to them under the terms of the
credit agreement. The Company and the Lender continue to discuss all options
acceptable to both parties.
ITEM
6. EXHIBITS
Exhibits
|
|
|
|
|
|
31.1
|
|
Certification
of Chief Operating 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.
|
|
|
|
31.2
|
|
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.
|
|
|
|
32.1
|
|
Certification
of Chief Operating 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.
|
|
|
|
32.2
|
|
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.
|
|
|
|
10.37
|
|
Second
Amendment to Third Amended and Restated Credit Agreement and Forbearance
Agreement dated April 28, 2008 and Related
Schedules.
|
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:
May 19, 2008
|
By:
|
/s/
Gregory Fess
|
|
|
Chief
Operating Officer
|
|
|
(principal
executive officer)
|
|
|
|
|
|
|
Date:
May 19, 2008
|
By:
|
/s/
Patrick Doran
|
|
|
Chief
Financial Officer
|
|
|
(principal
financial and accounting officer)
|
EXHIBIT
INDEX
31.1
|
|
Certification
of Chief Operating 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.
|
|
|
|
31.2
|
|
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.
|
|
|
|
32.1
|
|
Certification
of Chief Operating 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.
|
|
|
|
32.2
|
|
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.
|
|
|
|
10.37
|
|
Second
Amendment to Third Amended and Restated Credit Agreement and Forbearance
Agreement dated April 28, 2008 and Related
Schedules.
|
Equity Media Holdings Corp (MM) (NASDAQ:EMDA)
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