NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS INDICATED OTHERWISE)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The following discussion pertains to Emmis Communications Corporation (“ECC”) and its subsidiaries (collectively, “Emmis,” the “Company,” or “we”). All significant intercompany balances and transactions have been eliminated.
b. Organization
Emmis is a diversified media company with radio broadcasting and magazine publishing operations. We own and operate
four
FM and
one
AM radio stations serving the nation’s top two markets – New York and Los Angeles, although one station in New York is operated pursuant to a Local Programming and Marketing Agreement ("LMA") whereby a third party provides the programming for the station and sells all advertising within that programming. See Note 1e below for more discussion of LMAs. Additionally, we own and operate
fifteen
FM and
three
AM radio stations with strong positions in St. Louis, Austin (we have a
50.1%
controlling interest in our radio stations located there), Indianapolis and Terre Haute. Emmis also developed and licenses TagStation
®
, a cloud-based software platform that allows a broadcaster to manage album art, meta data and enhanced advertising on its various broadcasts, and has developed NextRadio
®
, a smartphone application that marries over-the-air FM radio broadcasts with visual and interactive features on smartphones.
In addition to our radio businesses, we operate a radio news network in Indiana, publish
Texas Monthly
,
Los Angeles
,
Atlanta
,
Indianapolis Monthly
,
Cincinnati
and
Orange Coast
, and operate Digonex, a dynamic pricing business.
Substantially all of ECC’s business is conducted through its subsidiaries. Our credit agreement, dated June 10, 2014 (the “2014 Credit Agreement”), contains certain provisions that may restrict the ability of ECC’s subsidiaries to transfer funds to ECC in the form of cash dividends, loans or advances.
c. Revenue Recognition
Broadcasting revenue is recognized as advertisements are aired. Publication revenue is recognized in the month of delivery of the publication. Both broadcasting revenue and publication revenue recognition is subject to meeting certain conditions such as persuasive evidence that an arrangement exists and collection is reasonably assured. These criteria are generally met at the time the advertisement is aired for broadcasting revenue and upon delivery of the publication for publication revenue. Advertising revenues presented in the financial statements are reflected on a net basis, after the deduction of advertising agency fees, usually at a rate of
15%
of gross revenues.
Digonex provides a dynamic pricing service to online retailers, attractions, live event producers and other customers. Revenue is recognized as recommended prices are delivered to customers. In some cases, this is upon initial delivery of prices, such as for implementations, or over the period of the services agreement for fee-based pricing. Revenue pursuant to some service agreements is not earned until tickets or merchandise are sold and, therefore, revenue is recognized as tickets are sold for the related events or as merchandise is sold.
d. Allowance for Doubtful Accounts
An allowance for doubtful accounts is recorded based on management’s judgment of the collectability of receivables. When assessing the collectability of receivables, management considers, among other things, historical loss experience and existing economic conditions. Amounts are written off after all normal collection efforts have been exhausted. The activity in the allowance for doubtful accounts for the three years ended
February 29, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance At
Beginning
Of Year
|
|
Provision
|
|
Write-Offs
|
|
Balance
At End
Of Year
|
Year ended February 28, 2014
|
$
|
523
|
|
|
$
|
510
|
|
|
$
|
(459
|
)
|
|
$
|
574
|
|
Year ended February 28, 2015
|
574
|
|
|
627
|
|
|
(536
|
)
|
|
665
|
|
Year ended February 29, 2016
|
665
|
|
|
626
|
|
|
(357
|
)
|
|
934
|
|
e. Local Programming and Marketing Agreement Fees
The Company from time to time enters into LMAs in connection with acquisitions and dispositions of radio stations, pending regulatory approval of transfer of the FCC licenses. Under the terms of these agreements, the acquiring company makes specified periodic payments to the holder of the FCC license in exchange for the right to program and sell advertising for a specified portion of the station’s inventory of broadcast time. The acquiring company records revenues and expenses associated with the portion of the station’s inventory of broadcast time it manages. Nevertheless, as the holder of the FCC license, the owner-operator retains control and responsibility for the operation of the station, including responsibility over all programming broadcast on the station.
Active LMA
On April 26, 2012, the Company entered into an LMA with New York AM Radio, LLC (“98.7FM Programmer”) pursuant to which, commencing April 30, 2012, 98.7FM Programmer purchased from Emmis the right to provide programming on 98.7FM until August 31, 2024. Disney Enterprises, Inc., the parent company of 98.7FM Programmer, has guaranteed the obligations of 98.7FM Programmer under the LMA. The Company retains ownership and control of the station, including the related FCC license during the term of the LMA and received an annual fee from 98.7FM Programmer of
$8.4
million for the first year of the term under the LMA, which fee increases by
3.5%
each year thereafter until the LMA’s termination. This LMA fee revenue is recorded on a straight-line basis over the term of the LMA. Emmis retains the FCC license of 98.7FM after the term of the LMA expires.
Terminated LMAs
On February 11, 2014, the Company entered into an LMA in connection with its agreement to purchase WBLS-FM and WLIB-AM in New York City from YMF Media New York LLC and YMF Media New York License LLC (collectively, "YMF"). The LMA, which commenced on March 1, 2014, gave Emmis the right to program and sell advertising for the
two
New York stations. Emmis paid YMF
$1.3
million per month and reimbursed YMF for certain monthly expenses. The monthly LMA fee decreased to approximately
$0.74
million after the first closing of the purchase of the stations, which occurred on June 10, 2014, and ceased effective with the second closing on February 13, 2015. The LMA fees paid after the first closing were recognized as a liability as of the date of purchase of the stations on June 10, 2014. Accordingly, LMA fees incurred after June 10, 2014 did not impact our results of operations. During the year ended February 28, 2015, Emmis recorded
$4.2
million of LMA expense. See Note 7 for more discussion of the Company's purchase of WBLS-FM and WLIB-AM from YMF.
LMA fees recorded as net revenues in the accompanying consolidated statements of operations were as follows for the years ended February 2014, 2015 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended February 28 (29),
|
|
2014
|
|
2015
|
|
2016
|
98.7FM, New York
|
$
|
10,331
|
|
|
$
|
10,331
|
|
|
$
|
10,331
|
|
f. Share-based Compensation
The Company determines the fair value of its employee stock options at the date of grant using a Black-Scholes option-pricing model. The Black-Scholes option pricing model was developed for use in estimating the value of exchange-traded options that have no vesting restrictions and are fully transferable. The Company’s employee stock options have characteristics significantly different than these traded options. In addition, option pricing models require the input of highly subjective assumptions, including the expected stock price volatility and expected term of the options granted. The Company relies heavily upon historical data of its stock price when determining expected volatility, but each year the Company reassesses whether or not historical data is representative of expected results. See Notes 3 and 4 for more discussion of share-based compensation.
g. Cash and Cash Equivalents
Emmis considers time deposits, money market fund shares and all highly liquid debt investment instruments with original maturities of three months or less to be cash equivalents. At times, such deposits may be in excess of FDIC insurance limits.
h. Restricted Cash
Restricted cash generally represents either cash on deposit in trust accounts related to our 98.7FM LMA in New York City that services long-term debt as discussed in Note 5, or cash collected by our wholly-owned subsidiary, NextRadio LLC, from other radio broadcasters for payments to Sprint. Usage of cash collected by NextRadio LLC is restricted for specific purposes by funding agreements. For more discussion of NextRadio LLC, see Note 8.
i. Property and Equipment
Property and equipment are recorded at cost. Depreciation is generally computed using the straight-line method over the estimated useful lives of the related assets, which are
39
years for buildings, the shorter of economic life or expected lease term for leasehold improvements,
five
to
seven
years for broadcasting equipment,
five
years for automobiles, and
three
to
five
years for office equipment. Maintenance, repairs and minor renewals are expensed as incurred; improvements are capitalized. On a continuing basis, the Company reviews the carrying value of property and equipment for impairment. If events or changes in circumstances were to indicate that an asset carrying value may not be recoverable, a write-down of the asset would be recorded through a charge to operations. See Note 1p for more discussion of impairment policies related to our property and equipment. Depreciation expense for the years ended February 2014, 2015 and 2016 was
$4.8 million
,
$5.0 million
and
$4.3 million
, respectively.
j. Intangible Assets and Goodwill
Indefinite-lived Intangibles and Goodwill
In connection with past acquisitions, a significant amount of the purchase price was allocated to radio broadcasting licenses, goodwill and other intangible assets. Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired. In accordance with ASC Topic 350, “
Intangibles—Goodwill and Other,”
goodwill and radio broadcasting licenses are not amortized, but are tested at least annually for impairment at the reporting unit level and unit of accounting level, respectively. We test for impairment annually, on December 1 of each year, or more frequently when events or changes in circumstances or other conditions suggest impairment may have occurred. Impairment exists when the asset carrying values exceed their respective fair values, and the excess is then recorded to operations as an impairment charge. See Note 9, Intangible Assets and Goodwill, for more discussion of our interim and annual impairment tests performed during the three years ended February 29, 2016.
Definite-lived Intangibles
The Company’s definite-lived intangible assets primarily consist of patents, trademarks, customer lists and radio programming contracts which are amortized over the period of time the intangible assets are expected to contribute directly or indirectly to the Company’s future cash flows.
k. Advertising and Subscription Acquisition Costs
Advertising and subscription acquisition costs are expensed when incurred. Advertising expense for the years ended February 2014, 2015 and 2016 was
$2.8 million
,
$3.2 million
and
$4.1 million
, respectively.
l. Investments
For those investments in common stock or in-substance common stock in which the Company has the ability to exercise significant influence over the operating and financial policies of the investee, the investment is accounted for under the equity method. For other investments held at February 29, 2016, the Company applies the accounting guidance for certain investments in debt and equity securities. Emmis’ equity method investment reports on a fiscal year ending December 31, which Emmis incorporates into its fiscal year ended February 28 (29).
Emmis has two investments, the carrying values of which are summarized in the following table and discussed below:
|
|
|
|
|
|
|
|
|
|
For the years ending February 28 (29),
|
|
2015
|
|
2016
|
Available-for-sale investment
|
$
|
500
|
|
|
$
|
800
|
|
Equity method investment
|
526
|
|
|
337
|
|
Total investments
|
$
|
1,026
|
|
|
$
|
1,137
|
|
Equity method investment
Emmis has a minority interest in a partnership that owns and operates various entertainment websites.
Available for sale investment
Emmis’ available for sale investment is an investment in the preferred shares of a non-public company. During the year ended February 29, 2016, Emmis received an additional $0.3 million of preferred shares of this non-public company in
exchange for promotional airtime on its various radio stations. This investment is accounted for under the provisions of ASC 320, and as such, is carried at its fair value which Emmis believes approximates its cost basis of
$0.8 million
.
During the year ended February 28, 2013, Emmis made investments totaling
$6.0 million
in Courseload, Inc, a provider of online textbooks and other course material. Emmis made additional investments in Courseload Inc. of
$0.3 million
and
$0.4 million
during the years ended February 28, 2014 and 2015, respectively. During the year ended February 28, 2015, Emmis recorded a noncash impairment charge of
$6.7 million
in other income (expense), net in the accompanying consolidated statements of operations as it deemed the investment was impaired and the impairment was other-than-temporary. The impairment charge recorded during the year ended February 28, 2015 reduced the carrying value of this investment to
zero
as of February 28, 2015.
Unrealized gains and losses would be reported in other comprehensive income until realized, at which point they would be recognized in the consolidated statements of operations. If the Company determines that the value of an investment is other-than-temporarily impaired, the Company will recognize, through the statements of operations, a loss on the investment.
m. Deferred Revenue and Barter Transactions
Deferred revenue includes deferred magazine subscription revenue, deferred barter and other transactions in which payments are received prior to the performance of services (i.e. cash-in-advance advertising and prepaid LMA payments). Magazine subscription revenue is recognized when the publication is shipped. Barter transactions are recorded at the estimated fair value of the product or service received. Revenue from barter transactions is recognized when commercials are broadcast or a publication is delivered. The appropriate expense or asset is recognized when merchandise or services are used or received. Barter revenues for the years ended February 2014, 2015 and 2016 were
$8.5 million
,
$8.5 million
and
$8.5 million
, respectively, and barter expenses were
$8.7 million
,
$8.7 million
, and
$8.5 million
, respectively.
n. Earnings Per Share
ASC Topic 260 requires dual presentation of basic and diluted income (loss) per share (“EPS”) on the face of the income statement for all entities with complex capital structures. Basic EPS is computed by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at February 2014, 2015 and 2016 consisted of stock options, restricted stock awards and preferred stock.
The following table sets forth the calculation of basic and diluted net income (loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
February 28, 2014
|
|
February 28, 2015
|
|
February 29, 2016
|
|
Net Loss
|
|
Shares
|
|
Net Loss Per Share
|
|
Net Income
|
|
Shares
|
|
Net Income
Per Share
|
|
Net Loss
|
|
Shares
|
|
Net Loss
Per Share
|
|
(amounts in 000’s, except per share data)
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders from continuing operations
|
$
|
43,806
|
|
|
40,506
|
|
|
$
|
1.08
|
|
|
$
|
(99,259
|
)
|
|
42,537
|
|
|
$
|
(2.33
|
)
|
|
$
|
1,952
|
|
|
44,136
|
|
|
$
|
0.04
|
|
Impact of equity awards
|
—
|
|
|
3,264
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
1,128
|
|
|
|
Impact of conversion of preferred stock into common stock
|
(325
|
)
|
|
2,272
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders from continuing operations
|
$
|
43,481
|
|
|
46,042
|
|
|
$
|
0.94
|
|
|
$
|
(99,259
|
)
|
|
42,537
|
|
|
$
|
(2.33
|
)
|
|
$
|
1,952
|
|
|
45,264
|
|
|
$
|
0.04
|
|
Shares excluded from the calculation as the effect of their conversion into shares of our common stock would be antidilutive were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the year ended February 28 (29),
|
|
2014
|
|
2015
|
|
2016
|
|
(shares in 000’s )
|
Preferred stock
|
—
|
|
|
2,266
|
|
|
2,426
|
|
Stock options and restricted stock awards
|
1,995
|
|
|
4,324
|
|
|
5,115
|
|
Antidilutive common share equivalents
|
1,995
|
|
|
6,590
|
|
|
7,541
|
|
o. Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequence of events that have been recognized in the Company’s financial statements or income tax returns. Income taxes are recognized during the year in which the underlying transactions are reflected in the consolidated statements of operations. Deferred taxes are provided for temporary differences between amounts of assets and liabilities as recorded for financial reporting purposes and amounts recorded for income tax purposes. After determining the total amount of deferred tax assets, the Company determines whether it is more likely than not that some portion of the deferred tax assets will not be realized. If the Company determines that a deferred tax asset is not likely to be realized, a valuation allowance will be established against that asset to record it at its expected realizable value.
p. Long-Lived Tangible Assets
The Company periodically considers whether indicators of impairment of long-lived tangible assets are present. If such indicators are present, the Company determines whether the sum of the estimated undiscounted cash flows attributable to the assets in question are less than their carrying value. If less, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals and other methods. If the assets determined to be impaired are to be held and used, the Company recognizes an impairment charge to the extent the asset’s carrying value is greater than the fair value. The fair value of the asset then becomes the asset’s new carrying value, which, if applicable, the Company depreciates or amortizes over the remaining estimated useful life of the asset.
q. Noncontrolling Interests
The Company follows Accounting Standards Codification paragraph 810-10-65-1 to report the noncontrolling interests related to our Austin radio partnership and Digonex. We have a 50.1% controlling interest in our Austin radio partnership. We do not own any of the common equity of Digonex, but we consolidate the entity because we control its board of directors via rights granted in convertible preferred stock and convertible debt that we own.
Noncontrolling interests represents the noncontrolling interest holders' proportionate share of the equity of the Austin radio partnership and Digonex. Noncontrolling interests are adjusted for the noncontrolling interest holders' proportionate share of the earnings or losses of the applicable entity. The noncontrolling interest continues to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance. Below is a summary of the noncontrolling interest activity for the years ended February 2015 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Austin radio partnership
|
|
Digonex
|
|
Other
|
|
Total noncontrolling interests
|
Balance, February 28, 2014
|
|
$
|
47,604
|
|
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
47,618
|
|
Net income (loss)
|
|
5,697
|
|
|
(2,419
|
)
|
|
(4
|
)
|
|
3,274
|
|
Payments of dividends and distributions to noncontrolling interests
|
|
(5,418
|
)
|
|
—
|
|
|
(10
|
)
|
|
(5,428
|
)
|
Acquisition of noncontrolling interest
|
|
—
|
|
|
1,197
|
|
|
—
|
|
|
1,197
|
|
Balance, February 28, 2015
|
|
47,883
|
|
|
(1,222
|
)
|
|
$
|
—
|
|
|
46,661
|
|
Net income (loss)
|
|
5,519
|
|
|
(7,937
|
)
|
|
—
|
|
|
(2,418
|
)
|
Payments of dividends and distributions to noncontrolling interests
|
|
(5,846
|
)
|
|
—
|
|
|
—
|
|
|
(5,846
|
)
|
Balance, February 29, 2016
|
|
$
|
47,556
|
|
|
$
|
(9,159
|
)
|
|
$
|
—
|
|
|
$
|
38,397
|
|
r. Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements and in disclosures of contingent assets and liabilities. Actual results could differ from those estimates.
s. National Representation Agreement
On October 1, 2007, Emmis terminated its existing national sales representation agreement with Interep National Radio Sales, Inc. (“Interep”) and entered into a new agreement with Katz Communications, Inc. (“Katz”) extending through March 2018. Emmis’ existing contract with Interep at the time extended through September 2011. Emmis, Interep and Katz entered into a tri-party termination and mutual release agreement under which Interep agreed to release Emmis from its future contractual obligations in exchange for a one-time payment of
$15.3 million
, which was paid by Katz on behalf of Emmis as an inducement for Emmis to enter into the new long-term contract with Katz. Emmis measured and recognized the charge associated with terminating the Interep contract as of the effective termination date, which was recorded as a noncash contract termination fee in the year ended February 2008. The liability established as a result of the termination represents an incentive received from Katz that is being recognized as a reduction of our national agency commission expense over the term of the agreement with Katz. The current portion of this liability is included in other current liabilities and the long-term portion of this liability is included in other noncurrent liabilities in the accompanying consolidated balance sheets at February 28, 2015 and February 29, 2016.
t. Liquidity
The Company continually projects its anticipated cash needs, which include its operating needs, capital needs, and principal and interest payments on its indebtedness. As of the filing of this Form 10-K, management believes the Company can meet its liquidity needs through the end of fiscal year 2017 with cash and cash equivalents on hand, projected cash flows from operations, and, to the extent necessary, through its borrowing capacity under the 2014 Credit Agreement, which was
$17.0 million
at February 29, 2016. Based on these projections, management also believes the Company will be in compliance with its debt covenants through the end of fiscal year 2017.
u. Recent Accounting Standards Updates
Adoption of New Accounting Standards Updates
In April 2014, the FASB issued Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, to update the criteria for reporting discontinued operations and enhance related disclosures. Under the new guidance, only disposals that have a major effect through a strategic shift on an organization’s operations and financial results should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The guidance was effective for the Company as of March 1, 2015. This guidance did not have any affect on the Company's results of operations, cash flows or financial condition. The Company believes that implementation of this guidance will reduce the number of transactions that will qualify for reporting as discontinued operations in the future.
In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This update requires that all debt issuance costs be presented as an offset to the associated debt liability rather than as a deferred charge. This guidance was modified in August 2015 to allow the existing presentation to continue for line-of-credit arrangements. Although the guidance would have been effective for the Company as of March 1, 2016, the Company chose to adopt the provisions of this ASU as of February 29, 2016 as permitted by the FASB. The Company chose to early-adopt this Accounting Standards Update as it simplified the presentation of debt issuance costs and the associated debt liability.
As required by Accounting Standards Update 2015-03, the reclassification of debt issuance costs was applied retrospectively. The following depicts the impact of the adoption of this Accounting Standards Update on our consolidated balance sheets as of February 28, 2015. The adoption of this Accounting Standards Update did not have any effect on our
results of operations or cash flows.
|
|
|
|
|
|
|
|
|
February 28, 2015
(As originally reported)
|
Impact of Adoption
of ASU 2015-03
|
February 28, 2015
(As adjusted)
|
ASSETS:
|
|
|
|
Deferred debt issuance costs, net of accumulated amortization of $868
|
3,438
|
|
(3,438
|
)
|
—
|
|
Total other assets, net
|
10,420
|
|
(3,438
|
)
|
6,982
|
|
Total assets
|
334,732
|
|
(3,438
|
)
|
331,294
|
|
LIABILITIES AND DEFICIT:
|
|
|
|
Long-term debt, net of current portion
|
254,150
|
|
(3,438
|
)
|
250,712
|
|
Total liabilities
|
346,881
|
|
(3,438
|
)
|
343,443
|
|
Total liabilities and deficit
|
334,732
|
|
(3,438
|
)
|
331,294
|
|
In November 2015, the FASB issued Accounting Standards Update 2015-17, Income Taxes - Balance Sheet Classification of Deferred Taxes. This update simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities to be presented as noncurrent in a classified balance sheet. The Company early adopted this update as of September 1, 2015 as permitted by the FASB. Adoption of this update did not have any effect on the Company's financial position as the Company did not have any deferred tax assets or liabilities classified as current in any period presented in the accompanying consolidated balance sheets.
Recent Accounting Standards Updates Not Yet Adopted
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. In April 2015, the FASB voted to defer the effective date of this Accounting Standards Update for one year. This guidance will be effective for the Company as of March 1, 2018. The Company is currently evaluating the method of adoption and impact, if any, the adoption of this guidance will have on its consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This guidance was effective for the Company as of March 1, 2016. The adoption of this update is not expected to have an impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance as to when a company using a cloud computing service that includes a software license should capitalize and depreciate the software license. This guidance was effective for the Company as of March 1, 2016. The Company is currently evaluating this guidance, but does not anticipate it will have a material impact on its consolidated financial statements.
In September 2015, the FASB issued Accounting Standards Update 2015-16, Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments. This update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in the provisional amount as if the accounting had been completed at the acquisition date. This guidance was effective for the Company as of March 1, 2016. The Company does not anticipate this guidance will have any impact on its consolidated financial statements as the purchase price allocations of the Company's recent business combinations have been finalized.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842). This update requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance will be effective for the Company as of March 1, 2019. A modified retrospective transition method is required. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.
2. COMMON STOCK
Emmis has authorized Class A common stock, Class B common stock, and Class C common stock. The rights of these three classes are essentially identical except that each share of Class A common stock has
one
vote with respect to substantially all matters, each share of Class B common stock has
10
votes with respect to substantially all matters, and each share of Class C common stock has
no
voting rights with respect to substantially all matters. Class B common stock is owned by our Chairman, CEO and President, Jeffrey H. Smulyan. All shares of Class B common stock automatically convert to Class A common stock upon sale or other transfer to a party unaffiliated with Mr. Smulyan. At February 28 (29),
2015
and
2016
, no shares of Class C common stock were issued or outstanding.
On December 7, 2015, we received a notification from the Listing Qualifications Department of Nasdaq indicating that our Class A common stock was not in compliance with Markeplace Rule 5450(a)(1) (the “Minimum Bid Price Rule”) because the minimum bid price of our Class A common stock on the Nasdaq Global Select Market closed below
$1.00
per share for 30 consecutive business days. In accordance with Marketplace Rules 5810(c)(3)(A) and 5810(c)(3)(D), the Company has 180 calendar days, or until June 6, 2016 to regain compliance with the Minimum Bid Price Rule. During the 180 day period, the Class A common stock will continue to trade on the Nasdaq Global Select Market.
If the Company does not regain compliance prior to the end of the 180 day period, Nasdaq will notify us that the Class A common stock will be delisted from the Nasdaq Global Select Market. Nasdaq rules would then permit us to appeal any delisting determination by the Nasdaq staff to a Listing Qualifications Panel.
3. REDEEMABLE PREFERRED STOCK
The Company's redeemable Preferred Stock was delisted from the Nasdaq Global Select Market on March 28, 2016. Pursuant to the Company's Articles of Incorporation, all shares of Preferred Stock were converted into shares of Class A common stock on April 4, 2016. Subsequent to the mandatory conversion on April 4, 2016, no shares of the Company's redeemable Preferred Stock remain outstanding. On various dates subsequent to February 29, 2016, including the mandatory conversion date of April 4, 2016,
866,319
shares of Preferred Stock were converted into
2,425,692
shares of Class A common stock. See Note 16, Subsequent Events, for more details.
Each share of redeemable Preferred Stock was convertible into a number of shares of common stock, which was determined by dividing the liquidation preference of the share of preferred stock (
$50.00
per share) by the conversion price. The conversion price was originally
$20.495
, which resulted in a conversion ratio of approximately
2.44
shares of common stock per share of Preferred Stock. On February 17, 2016, shareholders of Emmis' common stock and Preferred Stock approved amendments to Emmis' Articles of Incorporation which, among other things, modified the conversion ratio to
2.80
shares of Class A common stock per share of Preferred Stock. In connection with this modification, the Company recorded a loss of
$0.2 million
.
On May 2, 2013, the Board of the Company approved a repurchase program for the Company’s Preferred Stock under which the Company could repurchase up to
$0.5 million
in aggregate purchase price of its Preferred Stock commencing May 9, 2013. During the year ended February 28, 2014, the Company purchased
8,650
shares of Preferred Stock at a weighted average price of
$12.38
per share. We recorded a gain on extinguishment of preferred stock of
$0.3 million
, net of transaction fees and expenses, which was recorded as a decrease to accumulated deficit and included in the computation of net income available to common shareholders in the accompanying consolidated financial statements. We did not repurchase any of our Preferred Stock during the years ended February 28, 2015 or February 29, 2016.
2012 Retention Plan and Trust
On April 2, 2012, the shareholders of the Company approved the 2012 Retention Plan at a special meeting of shareholders. The Company contributed
400,000
shares of its Preferred Stock to the Trust in connection with the approval of the 2012 Retention Plan. Awards granted under the 2012 Retention Plan entitled the participants to receive a distribution
two years
from the date of shareholder approval of the plan, provided the participant was an employee upon inception of the plan and remained an employee through the vesting date. The Trustee of the plan was Jeffrey H. Smulyan, our Chairman of the Board and Chief Executive Officer.
In connection with the approval of the 2012 Retention Plan, the Trustee and the Trust entered into a Voting and Transfer Restriction Agreement with Emmis, pursuant to which Emmis had the right to direct the vote of the
400,000
shares of Preferred Stock contributed to the Trust under the 2012 Retention Plan. The Company also had the right to exchange the
400,000
shares of Preferred Stock into shares of Class A common stock at the same ratio as the then current conversion formula in the Preferred Stock (approximately
2.44
shares of Class A common stock for each share of Preferred Stock).
On March 5, 2014, the Board of Directors of the Company approved the exercise of the Company's repurchase option under the Voting and Transfer Restriction Agreement with the Trustee of the 2012 Retention Plan and Trust. Pursuant to the
exercise of that option, the Company repurchased
400,000
shares of Preferred Stock from the trustee in exchange for
975,848
shares of the Company's Class A common stock. On April 2, 2014,
975,848
shares of Class A common stock were distributed to employees who met the vesting requirements of the plan. The Company recognized approximately
$2.2 million
and
$0.4 million
of compensation expense related to the 2012 Retention Plan during the years ended February 28, 2014 and 2015, respectively.
4. SHARE BASED PAYMENTS
The amounts recorded as share based compensation expense consist of stock option and restricted stock grants, common stock issued to employees and directors in lieu of cash payments, and Preferred Stock contributed to the 2012 Retention Plan.
Stock Option Awards
The Company has granted options to purchase its common stock to employees and directors of the Company under various stock option plans at no less than the fair market value of the underlying stock on the date of grant. These options are granted for a term not exceeding
10 years
and are forfeited, except in certain circumstances, in the event the employee or director terminates his or her employment or relationship with the Company. Generally, these options either vest annually over
3 years
(
one-third
each year for
3 years
), or cliff vest at the end of
3 years
. The Company issues new shares upon the exercise of stock options.
The fair value of each option awarded is estimated on the date of grant using a Black-Scholes option-pricing model and expensed on a straight-line basis over the vesting period. Expected volatilities are based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The Company includes estimated forfeitures in its compensation cost and updates the estimated forfeiture rate through the final vesting date of awards. The risk-free interest rate for periods within the life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following assumptions were used to calculate the fair value of the Company’s options on the date of grant during the years ended February 2014,
2015
and
2016
:
|
|
|
|
|
|
|
|
For the Years Ended February 28 (29),
|
|
2014
|
|
2015
|
|
2016
|
Risk-Free Interest Rate:
|
0.6% - 1.5%
|
|
1.2% - 1.5%
|
|
1.2% - 1.4%
|
Expected Dividend Yield:
|
0%
|
|
0%
|
|
0%
|
Expected Life (Years):
|
4.3
|
|
4.3
|
|
4.3
|
Expected Volatility:
|
80.4% - 115.9%
|
|
69.0% - 73.9%
|
|
57.2% - 64.6%
|
The following table presents a summary of the Company’s stock options outstanding at
February 29, 2016
, and stock option activity during the year ended
February 29, 2016
(“Price” reflects the weighted average exercise price per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding, beginning of period
|
5,724,446
|
|
|
$
|
1.76
|
|
|
|
|
|
Granted
|
2,478,719
|
|
|
1.48
|
|
|
|
|
|
Exercised (1)
|
190,000
|
|
|
0.70
|
|
|
|
|
|
Forfeited
|
135,000
|
|
|
2.29
|
|
|
|
|
|
Expired
|
84,463
|
|
|
10.87
|
|
|
|
|
|
Outstanding, end of period
|
7,793,702
|
|
|
1.59
|
|
|
6.8
|
|
$
|
104
|
|
Exercisable, end of period
|
4,470,449
|
|
|
1.52
|
|
|
5.2
|
|
$
|
92
|
|
|
|
(1)
|
The Company did not record an income tax benefit related to option exercises in the years ended February 2014, 2015 and 2016. Cash received from option exercises during the years ended February 2014, 2015 and 2016 was
$0.3
million,
$0.4
million and
$0.1
million, respectively.
|
The weighted average grant date fair value of options granted during the years ended February 2014, 2015 and
2016
, was
$1.67
,
$1.64
and
$0.75
, respectively.
A summary of the Company’s nonvested options at
February 29, 2016
, and changes during the year ended
February 29, 2016
, is presented below:
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted Average
Grant Date
Fair Value
|
Nonvested, beginning of period
|
3,167,083
|
|
|
$
|
1.08
|
|
Granted
|
2,478,719
|
|
|
0.75
|
|
Vested
|
2,187,549
|
|
|
0.93
|
|
Forfeited
|
135,000
|
|
|
1.22
|
|
Nonvested, end of period
|
3,323,253
|
|
|
0.93
|
|
There were
2.3 million
shares available for future grants under the Company’s various equity plans at
February 29, 2016
(
1.0 million
shares under the 2015 Equity Compensation Plan and
1.3 million
shares under other plans). The vesting dates of outstanding options at
February 29, 2016
range from March 2016 to January 2019, and expiration dates range from March 2016 to January 2026.
Restricted Stock Awards
The Company grants restricted stock awards to directors annually, and periodically grants restricted stock to employees in connection with employment agreements. Awards to directors are granted on the date of our annual meeting of shareholders and vest on the earlier of (i) the completion of the director’s
3
-year term or (ii) the third anniversary of the date of grant. Restricted stock award grants are granted out of the Company’s 2015 Equity Compensation Plan. The Company may also award, out of the Company’s 2015 Equity Compensation Plan, stock to settle certain bonuses and other compensation that otherwise would be paid in cash. Any restrictions on these shares may be immediately lapsed on the grant date.
On January 16, 2013, the Company commenced an option exchange program whereby optionees holding certain fully-vested underwater stock options were given the opportunity to exchange those stock options into restricted stock with a one-year vesting term. The exchange ratios were intended to result in little to no incremental accounting cost to the Company because the fair value of the options was measured immediately prior to the exchange and compared to the fair value of the restricted stock exchanged. The exchange offer closed February 15, 2013. Pursuant to the exchange offer and based on participant elections, approximately
2.2 million
stock options were canceled and approximately
0.5 million
shares of restricted stock were issued. These shares of restricted stock vested February 19, 2014. The exchange resulted in less than
$0.1 million
of incremental accounting cost during the year ended February 28, 2014.
The following table presents a summary of the Company’s restricted stock grants outstanding at
February 29, 2016
, and restricted stock activity during the year ended
February 29, 2016
(“Price” reflects the weighted average share price at the date of grant):
|
|
|
|
|
|
|
|
|
Awards
|
|
Price
|
Grants outstanding, beginning of period
|
677,634
|
|
|
$
|
2.26
|
|
Granted
|
3,138,673
|
|
|
1.09
|
|
Vested (restriction lapsed)
|
2,949,279
|
|
|
1.16
|
|
Forfeited
|
15,000
|
|
|
1.82
|
|
Grants outstanding, end of period
|
852,028
|
|
|
1.78
|
|
The total grant date fair value of shares vested during the years ended February 2014,
2015
and
2016
, was
$2.2 million
,
$4.1 million
and
$3.4 million
, respectively.
Recognized Non-Cash Compensation Expense
The following table summarizes stock-based compensation expense and related tax benefits recognized by the Company in the years ended February 2014,
2015
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended February 28 (29),
|
|
2014
|
|
2015
|
|
2016
|
Station operating expenses
|
$
|
2,236
|
|
|
$
|
720
|
|
|
$
|
1,760
|
|
Corporate expenses
|
2,648
|
|
|
2,093
|
|
|
3,144
|
|
Stock-based compensation expense included in operating expenses
|
4,884
|
|
|
2,813
|
|
|
4,904
|
|
Tax benefit
|
1,954
|
|
|
—
|
|
|
—
|
|
Recognized stock-based compensation expense, net of tax
|
$
|
2,930
|
|
|
$
|
2,813
|
|
|
$
|
4,904
|
|
As of
February 29, 2016
, there was
$2.3 million
of unrecognized compensation cost, net of estimated forfeitures, related to nonvested share-based compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately
1.7
years.
5. LONG-TERM DEBT
Long-term debt was comprised of the following at February 28 (29), 2015 and
2016
:
|
|
|
|
|
|
|
|
|
|
As of February 28, 2015
|
|
As of February 29, 2016
|
Revolver
|
8,000
|
|
|
3,000
|
|
Term Loan
|
185,000
|
|
|
181,762
|
|
Total 2014 Credit Agreement debt
|
193,000
|
|
|
184,762
|
|
|
|
|
|
Digonex nonrecourse debt
(1)
|
3,971
|
|
|
4,714
|
|
98.7FM nonrecourse debt
|
70,401
|
|
|
65,411
|
|
Current maturities
|
(6,840
|
)
|
|
(17,573
|
)
|
Unamortized original issue discount
|
(9,820
|
)
|
|
(9,287
|
)
|
Total long-term debt
|
$
|
250,712
|
|
|
$
|
228,027
|
|
(1)
The face value of Digonex nonrecourse debt is
$6.2 million
2014 Credit Agreement
On June 10, 2014, Emmis entered into the 2014 Credit Agreement, by and among the Company, EOC, as borrower (the “Borrower”), certain other subsidiaries of the Company, as guarantors (the “Subsidiary Guarantors”), the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and Fifth Third Bank, as syndication agent. Capitalized terms in this section not defined elsewhere in this Form 10-K are defined in the 2014 Credit Agreement and related amendments.
The 2014 Credit Agreement includes a senior secured term loan facility (the “Term Loan”) of
$185.0 million
and a senior secured revolving credit facility of
$20.0 million
, and contains provisions for an uncommitted increase of up to
$20.0 million
principal amount (plus additional amounts so long as a pro forma total net senior secured leverage ratio condition is met) of the revolving credit facility and/or the Term Loan subject to the satisfaction of certain conditions. The revolving credit facility includes a sub-facility for the issuance of up to
$5.0 million
of letters of credit. Pursuant to the 2014 Credit Agreement, the Borrower borrowed
$185.0 million
of the Term Loan on June 10, 2014;
$109.0 million
was disbursed to the Borrower (the “Initial Proceeds”) and the remaining
$76.0 million
was funded into escrow (the “Subsequent Acquisition Proceeds”).
The Initial Proceeds, coupled with
$13.0 million
of revolving credit facility borrowings, were used by the Borrower on June 10, 2014 to repay all amounts outstanding under its previous credit agreement, to make a
$55.0 million
initial payment associated with our acquisition of WBLS-FM and WLIB-AM, and to pay fees and expenses. The Subsequent Acquisition Proceeds were used to make the final
$76.0 million
payment related to the acquisition of WBLS-FM and WLIB-AM on February 13, 2015. See Note 7 for more discussion of our acquisition of WBLS-FM and WLIB-AM.
The Term Loan is due not later than June 10, 2021 and, prior to the Second Amendment to the 2014 Credit Agreement discussed below, amortized in an amount equal to
1%
per annum of the total principal amount outstanding, payable in quarterly
installments commencing April 1, 2015, with the balance payable on the maturity date. The revolving credit facility expires not later than June 10, 2019. An unused commitment fee of
50
basis points per annum is payable quarterly on the average unused amount of the revolving credit facility. Prior to the First Amendment and Second Amendment to the 2014 Credit Agreement discussed below, the Term Loan and amounts borrowed under the revolving credit facility bore interest, at the Borrower’s option, at either (i) the Alternate Base Rate (as defined in the 2014 Credit Agreement) (but not less than
2.00%
) plus
3.75%
or (ii) the Adjusted LIBO Rate (as defined in the 2014 Credit Agreement) (but not less than
1.00%
) plus
4.75%
.
Approximately
$1.0 million
of transaction fees related to the 2014 Credit Agreement were originally capitalized and included in other assets, net. The Company adopted the provisions of Accounting Standards Update 2015-03 during the year ended February 29, 2016. As such, the unamortized balance of existing deferred debt fees was reclassified and is now shown as a direct reduction of the carrying amount of long-term debt. These fees, along with an original issue discount of
$8.2 million
(
$6.1 million
incurred in connection with the original issuance of the 2014 Credit Agreement debt on June10, 2014,
$1.0 million
million incurred in connection with the November 7, 2014 amendment to the 2014 Credit Agreement and
$1.1 million
incurred in connection with the April 30, 2015 amendment to the 2014 Credit Agreement) are being amortized as additional interest expense over the life of the 2014 Credit Agreement.
The obligations under the 2014 Credit Agreement are secured by a perfected first priority security interest in substantially all of the assets of the Company, the Borrower and the Subsidiary Guarantors.
On November 7, 2014, Emmis entered into the First Amendment (the “First Amendment”) to the 2014 Credit Agreement. The First Amendment (i) increased the maximum Total Leverage Ratio to
6.00
:1.00 for the period February 28, 2015 through February 29, 2016, (ii) adjusted the definition of Consolidated EBITDA to exclude during the term of the 2014 Credit Agreement up to
$5 million
in severance and/or contract termination expenses and up to
$2.5 million
in losses attributable to the reformatting of the Company’s radio stations, (iii) extended the requirement for the Borrower to pay a
1.00%
fee on certain prepayments of the Term Loan to November 7, 2015, (iv) increased the Applicable Margin by
0.25%
for at least
six
months from the date of the First Amendment and until the Total Leverage Ratio is less than
5.00
:1.00, and (v) made certain technical adjustments to the definition of Consolidated Excess Cash Flow and to address the Foreign Account Tax Compliance Act. Emmis paid a total of approximately
$1.0 million
of transaction fees to the Lenders that consented to the First Amendment, which were recorded as original issue discount and are being amortized over the remaining life of the 2014 Credit Agreement.
On April 30, 2015, Emmis entered into a Second Amendment to our 2014 Credit Agreement. The Second Amendment (i) increased the maximum Total Leverage Ratio to (A)
6.75
:1.00 during the period from May 31, 2015 through February 29, 2016, (B)
6.50
:1.00 for the quarter ended May 31, 2016, (C)
6.25
:1.00 for the quarter ended August 31, 2016, (D)
6.00
:1.00 for the quarter ended November 30, 2016, and (E)
5.75
:1.00 for the quarter ended February 28, 2017, after which it reverts to the original ratio of
4.00
:1.00 for the quarters ended May 31, 2017 and thereafter, (ii) required Emmis to pay a
2.00%
fee on certain prepayments of the Term Loan prior to the first anniversary of the Second Amendment and requires Emmis to pay a
1.00%
fee on certain prepayments of the Term Loan from the first anniversary of the Second Amendment until the second anniversary of the Second Amendment, (iii) increased the Applicable Margin throughout the remainder of the term of the Credit Agreement to
5.00%
for ABR Loans (as defined in the Credit Agreement) and
6.00%
for Eurodollar Loans (as defined in the 2014 Credit Agreement), and (iv) increased the amortization to
0.50%
per calendar quarter through January 1, 2016 and to
1.25%
per calendar quarter thereafter commencing April 1, 2016. The Second Amendment also required Emmis to pay a fee of
0.50%
of the Term Loan and Revolving Commitment of each Lender that consented to the Second Amendment. This fee totaled
$1.1 million
and was recorded as additional original issue discount and is being amortized as interest expense over the remaining life of the 2014 Credit Agreement.
Borrowing under the 2014 Credit Agreement depends upon our continued compliance with certain operating covenants and financial ratios, including leverage and interest coverage as specifically defined. The operating covenants and other restrictions with which we must comply include, among others, restrictions on additional indebtedness, incurrence of liens, engaging in businesses other than our primary business, paying certain dividends, redeeming or repurchasing capital stock of Emmis, acquisitions and asset sales. No default or event of default has occurred or is continuing. The 2014 Credit Agreement provides that an event of default will occur if there is a “change in control” of Emmis, as defined. The payment of principal, premium and interest under the 2014 Credit Agreement is fully and unconditionally guaranteed, jointly and severally, by ECC and most of its existing wholly-owned domestic subsidiaries. Substantially all of Emmis’ assets, including the stock of most of Emmis’ wholly-owned, domestic subsidiaries are pledged to secure the 2014 Credit Agreement.
2012 Credit Agreement
On December 28, 2012, Emmis entered into a credit facility (the “2012 Credit Agreement”) to provide for total borrowings of up to
$100 million
, including (i) an
$80 million
term loan and (ii) a
$20 million
revolver, of which
$5 million
could be used for letters of credit. On June 10, 2014, Emmis entered into the 2014 Credit Agreement. In connection with the
execution of the 2014 Credit Agreement, the 2012 Credit Agreement was terminated effective June 10, 2014, and all amounts outstanding under that agreement were paid in full. During the three months ended August 31, 2014, the Company recorded a loss on debt extinguishment of
$1.5 million
related to the termination of the 2012 Credit Agreement.
2014 Credit Agreement Covenants
We were in compliance with all financial and non-financial covenants as of
February 29, 2016
. Our Total Leverage Ratio and Minimum Interest Coverage Ratio (each as defined in the 2014 Credit Agreement) requirements and actual amounts as of
February 29, 2016
were as follows:
|
|
|
|
|
|
As of February 29, 2016
|
|
Covenant Requirement
|
|
Actual Results
|
Maximum Total Leverage Ratio
|
6.75 : 1.00
|
|
5.40 : 1.00
|
Minimum Interest Coverage Ratio
|
2.00 : 1.00
|
|
2.49 : 1.00
|
98.7FM Nonrecourse Debt
On May 30, 2012, the Company, through wholly-owned, newly-created subsidiaries, issued
$82.2 million
of nonrecourse notes. Teachers Insurance and Annuity Association of America, through a participation agreement with Wells Fargo Bank Northwest, National Association, is entitled to receive payments made on the notes. The notes are obligations only of the newly-created subsidiaries, are non-recourse to the rest of the Company’s subsidiaries and are secured by the assets of the newly-created subsidiaries, including the payments made to the newly-created subsidiary related to the 98.7FM LMA, which are guaranteed by Disney Enterprises, Inc. The notes bear interest at
4.1%
.
Digonex Nonrecourse Debt
Digonex issued
$6.2 million
of notes payable prior to Emmis’ acquisition of a controlling interest of Digonex on June 16, 2014. Emmis recorded these notes at fair value in its purchase price allocation as of June 16, 2014. The difference between the fair value recorded on June 16, 2014 and the face value of the notes is being accreted as additional interest expense through the maturity date of the notes. The notes are obligations of Digonex only and are non-recourse to the rest of Emmis' subsidiaries. Approximately
$1.5 million
of the Digonex notes are secured by the assets of Digonex and the remaining
$4.7 million
are unsecured. The notes bear simple interest at
5%
with interest due at maturity of the notes on December 31, 2017. See Note 7 for more discussion of the acquisition of Digonex.
Based on amounts outstanding at
February 29, 2016
, mandatory principal payments of long-term debt for the next five years and thereafter are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
2014 Credit Agreement
|
|
|
|
|
|
|
February 28 (29),
|
Revolver
|
|
Term Loan
|
|
98.7FM Debt
|
|
Digonex Debt
|
|
Total
|
2017
|
$
|
—
|
|
|
$
|
12,120
|
|
|
$
|
5,453
|
|
|
$
|
—
|
|
|
$
|
17,573
|
|
2018
|
—
|
|
|
9,250
|
|
|
6,039
|
|
|
6,199
|
|
|
21,488
|
|
2019
|
—
|
|
|
9,250
|
|
|
6,587
|
|
|
—
|
|
|
15,837
|
|
2020
|
3,000
|
|
|
9,250
|
|
|
7,150
|
|
|
—
|
|
|
19,400
|
|
2021
|
—
|
|
|
9,250
|
|
|
7,755
|
|
|
—
|
|
|
17,005
|
|
Thereafter
|
—
|
|
|
132,642
|
|
|
32,427
|
|
|
—
|
|
|
165,069
|
|
Total
|
$
|
3,000
|
|
|
$
|
181,762
|
|
|
$
|
65,411
|
|
|
$
|
6,199
|
|
|
$
|
256,372
|
|
6. FAIR VALUE MEASUREMENTS
As defined in ASC Topic 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
Recurring Fair Value Measurements
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of February 28 (29), 2015 and 2016. The financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Total
|
Available for sale securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
800
|
|
Total assets measured at fair value on a recurring basis
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Total
|
Available for sale securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
500
|
|
Total assets measured at fair value on a recurring basis
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
500
|
|
Available for sale securities
— Emmis’ available for sale securities are comprised of preferred stock of a private company that is not traded in active markets. The preferred stock is recorded at fair value, which is generally estimated using significant unobservable market parameters, resulting in a level 3 categorization. The carrying value of our available for sale securities is determined by using implied valuations of recent rounds of financing and by other corroborating evidence, including the application of various valuation methodologies including option-pricing and discounted cash flow based models. During the year ended February 28, 2015, the Company determined that its investment in Courseload, Inc. was fully impaired and the impairment was other-than-temporary. As such, the Company recorded a noncash inpairment charge of
$6.7 million
. Available for sale securities are included in investments on our consolidated balance sheets. See Note 1l for more discussion.
The following table shows a reconciliation of the beginning and ending balances for fair value measurements using significant unobservable inputs:
|
|
|
|
|
|
|
|
|
|
Year Ended February 28 (29),
|
|
2015
|
|
2016
|
|
Available
For Sale
Securities
|
Beginning Balance
|
$
|
6,750
|
|
|
$
|
500
|
|
Purchases
|
432
|
|
|
300
|
|
Other than temporary impairment losses
|
(6,682
|
)
|
|
—
|
|
Ending Balance
|
$
|
500
|
|
|
$
|
800
|
|
Non-Recurring Fair Value Measurements
The Company has certain assets that are measured at fair value on a non-recurring basis under circumstances and events that include those described in Note 9, Intangible Assets and Goodwill, and are adjusted to fair value only when the carrying values are more than the fair values. The categorization of the framework used to price the assets is considered a Level 3 measurement due to the subjective nature of the unobservable inputs used to determine the fair value (see Note 9 for more discussion).
Fair Value of Other Financial Instruments
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. Assets and liabilities acquired in business combinations are recorded at their fair value as of the date of acquisition. Refer to Note 7 for the fair values of assets acquired and liabilities assumed in connection with the Company's acquisitions. The estimated fair value of financial instruments is determined using the best available market information and appropriate valuation methodologies. Considerable judgment is necessary, however, in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange, or the value that ultimately will be realized upon maturity or disposition. The use of different market assumptions may have a material effect on the estimated fair value amounts. The following methods and assumptions were used to estimate the fair value of financial instruments:
-
Cash and cash equivalents
: The carrying amount of these assets approximates fair value because of the short maturity of these instruments.
- 2014 Credit Agreement debt
: As of
February 29, 2016
, the fair value and carrying value, excluding original issue discount, of the Company's 2014 Credit Agreement debt was
$157.1 million
and
$184.8 million
, respectively. The Company's estimate of fair value was based on quoted prices of this instrument and is considered a Level 2 measurement.
-
Other long-term debt
: The Company’s 98.7FM non-recourse debt and Digonex non-recourse debt is not actively traded and is considered a level 3 measurement. The Company believes the current carrying value of its other long-term debt approximates its fair value.
7. ACQUISITIONS AND DISPOSITIONS
For the year ended February 28, 2015
WBLS-FM & WLIB-AM
On February 11, 2014, subsidiaries of Emmis entered into a Purchase and Sale Agreement with YMF, pursuant to which Emmis agreed to purchase the assets of New York radio stations WBLS-FM and WLIB-AM (collectively, the "Stations") for
$131.0 million
, subject to customary adjustments and prorations. The purchase of the Stations enhances the Company's scale in New York, the second largest market in the United States as measured by total radio revenues. Additionally, the Stations' adult urban and urban gospel formats complement the hip-hop format of our existing station in New York.
Upon approval of the transaction by the Federal Communications Commission, Emmis and YMF executed the first closing of the transaction on June 10, 2014, whereby YMF transferred the assets of the Stations to Emmis and Emmis paid YMF
$55.0 million
of cash and transferred to YMF Media New York a
49.9%
ownership interest in the Emmis subsidiaries that own the Stations' assets. The second closing occurred on February 13, 2015 and involved the payment of the balance of the purchase price of
$76.0 million
to YMF in exchange for the transfer to Emmis of YMF Media New York's interest in the Emmis subsidiaries that own the Stations' assets.
On February 11, 2014, Emmis and YMF entered into an LMA for the Stations. On March 1, 2014, Emmis began providing programming and selling advertising for the Stations. Under the terms of the LMA, Emmis paid
$1.275 million
per month to YMF for the right to program the Stations and sell advertising. The monthly LMA fee decreased to approximately
$0.74 million
after the first closing of the purchase of the Stations on June 10, 2014. The ongoing, reduced monthly LMA fees were recognized as additional purchase price of the Stations on June 10, 2014. Prior to the first closing of the purchase, LMA fees were recognized as operating expenses.
Emmis gained control over the Stations effective with the first closing on June 10, 2014 and consolidated the Stations beginning on that date. YMF was entitled to the remaining purchase price of
$76.0 million
at the second closing and the
$0.74 million
monthly LMA fees until the second closing, but did not otherwise share in the income or loss of the Stations subsequent to the first closing.
On June 10, 2014, Emmis entered into the 2014 Credit Agreement which included a senior secured term loan facility of
$185.0 million
and a senior secured revolving credit facility of
$20.0 million
. Pursuant to the 2014 Credit Agreement, the Company borrowed
$185.0 million
of the senior secured term loans on June 10, 2014;
$109.0 million
was disbursed to the Company and the remaining
$76.0 million
was funded into escrow. The proceeds from the term loan and additional funding from the revolving credit facility were used to fund the first closing of the acquisition described above, settle amounts due under the Company's former credit facility, and pay fees related to the issuance of the Credit Agreement. The
$76.0 million
of funds in escrow were used to fund substantially all of the second closing of the acquisition on February 13, 2015. See Note 5 for more discussion of the 2014 Credit Agreement.
The following table (in thousands) summarizes the fair values of the identifiable assets acquired and liabilities assumed in the acquisition of the Stations as of June 10, 2014. The second closing liability and the LMA payments made subsequent to the first closing that were recognized as additional purchase price were discounted as of the first closing on June 10, 2014. The purchase price allocation of WBLS-FM and WLIB-AM was based on the present values of these liabilities. Accretion of these liabilities, totaling
$3.1 million
, was recognized during the year ended February 28, 2015 as additional interest expense.
|
|
|
|
|
Other current assets
|
$
|
37
|
|
Property and equipment
|
4,054
|
|
Indefinite-lived intangibles
|
69,019
|
|
Goodwill
|
58,395
|
|
Other intangibles
|
2,469
|
|
Other current liabilities
|
(512
|
)
|
Total purchase price, including assumed liabilities
|
$
|
133,462
|
|
|
|
Cash paid at first closing on June 10, 2014
|
$
|
55,000
|
|
Cash paid for LMA payments subsequent to first closing and cash paid at second closing on February 13, 2015
|
81,563
|
|
Total cash paid for acquisition
|
136,563
|
|
Accretion of LMA payments liability and second closing liability recognized as interest expense
|
(3,101
|
)
|
Adjusted cash paid for acquisition
|
$
|
133,462
|
|
Goodwill was calculated as the excess of the purchase price over the net assets acquired. Management attributed the goodwill recognized in the acquisition of the Stations to the power of the existing WBLS-FM and WLIB-AM brands in the New York marketplace as well as the synergies and growth opportunities expected through the combination of the adult urban and urban gospel stations with the Company's existing hip-hop station. The
$58.4 million
of goodwill recognized in the transaction was included in our radio segment and is deductible for tax purposes. As part of our annual impairment testing conducted in December 2014, the Company determined that the goodwill associated with this transaction was fully impaired. See Note 9 for more discussion of the goodwill impairment.
The indefinite-lived intangible assets are comprised entirely of the Stations' FCC licenses. FCC broadcasting licenses are renewed every eight years; consequently, we continually monitor our stations’ compliance with the various regulatory requirements. Historically, all of our FCC broadcasting licenses have been renewed at or after the end of their respective periods, and we expect that these FCC broadcasting licenses will continue to be renewed in the future. Our indefinite-lived intangibles are not amortized.
Other intangibles consist of a customer list intangible asset of
$0.3 million
and a syndicated programming intangible asset of
$2.2 million
. The customer list intangible asset is being amortized over
3 years
and the syndicated programming intangible asset is being amortized over
7 years
, which is the remaining term of the programming agreement, including renewals which are at the option of the Company.
The results of operations of the Stations are largely included in the Company's results of operations for the year ended February 28, 2015 as the Company began providing programming and selling advertising of the Stations on March 1, 2014 pursuant to an LMA. Net revenues and station operating expenses, excluding LMA fees and depreciation and amortization expense, of WBLS-FM and WLIB-AM were
$28.1 million
and
$20.3 million
, respectively, for the year ended February 28, 2015.
We incurred acquisition costs related to the Stations totaling
$0.7 million
for the year ended February 28, 2015. Acquisition costs included in station operating expenses, excluding LMA fees and depreciation and amortization expense, in the accompanying consolidated statements of operations were
$0.4 million
for the year ended February 28, 2015. Acquisition costs included in corporate expenses, excluding depreciation and amortization expense, in the accompanying consolidated statements of operations were
$0.3 million
for the year ended February 28, 2015. Including acquisition costs incurred during the year ended February 28, 2014 of
$0.9 million
, cumulative acquisition costs related to the Stations through February 28, 2015 were
$1.6 million
.
In connection with the first closing, Emmis and YMF executed an amendment to their Asset Purchase Agreement dated April 5, 2012 relating to Emmis' sale of the intellectual property of WRKS-FM. The amendment, executed on June 10, 2014, fixed all future earn-out payments YMF owed to Emmis pursuant to the April 5, 2012 Asset Purchase Agreement based upon the parties' estimate of the earn-out payments that would otherwise be owed to Emmis under this pre-existing contractual
relationship. Emmis recognized a gain on settlement of the contract of
$2.5 million
, which is included in gain on contract settlement in the accompanying consolidated statements of operations. All amounts owed to Emmis pursuant to Emmis' sale of WRKS-FM intellectual property were collected prior to February 28, 2015.
The following table presents unaudited pro forma consolidated financial information as if the closing of our acquisition of the Stations and related debt refinancing had occurred on March 1, 2013 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Year ended February 28,
|
|
2014
|
|
2015
|
|
(in 000’s, except per share data)
|
Net revenues
|
$
|
237,171
|
|
|
$
|
237,938
|
|
Net income attributable to common shareholders
|
$
|
48,454
|
|
|
$
|
(94,035
|
)
|
Net income per common share attributable to common shareholders:
|
|
|
|
Basic
|
$
|
1.20
|
|
|
$
|
(2.21
|
)
|
Diluted
|
$
|
1.05
|
|
|
$
|
(2.21
|
)
|
As mentioned above and in Note 1, Emmis commenced an LMA on both WBLS-FM and WLIB-AM beginning on March 1, 2014. As Emmis programmed the stations and sold the related advertising, the majority of the results of operations for the two stations are included in Emmis' historical results for the year ended February 28, 2015. Certain adjustments were made to reflect the elimination of the LMA fee and other purchase accounting adjustments. The pro forma financial information for the year ended February 28, 2014 has been prepared by combining our historical results and the historical results of WBLS-FM and WLIB-AM and further reflects the effect of purchase accounting adjustments. This pro forma information is not necessarily indicative of the results of operations that actually would have resulted had the acquisition of the two radio stations occurred on March 1, 2013, or that may result in the future.
Acquisition of a controlling interest in Digonex Technologies, Inc.
On June 16, 2014, Emmis invested
$3.0 million
in Digonex Technologies, Inc ("Digonex"), an Indiana corporation that provides dynamic pricing solutions to customers in various industries. Emmis believes that its acquisition of Digonex gives it entry into the growing dynamic pricing marketplace which can serve a diverse clientèle, and can possibly help Emmis with yields on its own advertising inventory and special events. Emmis’ initial investment of
$3.0 million
(
$1.0 million
in Digonex Preferred Stock and
$2.0 million
in the form of convertible debt) resulted in Emmis appointing a majority of the board of directors of Digonex and holding rights convertible into
51%
of the fully diluted common equity of Digonex. As Emmis controlled the board of directors of Digonex as of its initial investment on June 16, 2014, Emmis began consolidating the results of Digonex as of that date. Subsequent to its consolidation of Digonex, Emmis has contributed an additional
$4.5 million
to Digonex in the form of convertible debt, which resulted in Emmis owning rights that are convertible into at least
76%
of the common equity of Digonex.
Digonex reports on a calendar year ending December 31, which Emmis consolidates into its fiscal year ending February 28(29). Net revenues and operating expenses, excluding depreciation and amortization expense, of Digonex for the period June 16, 2014 to December 31, 2014, which Emmis consolidated into its results of operations for the year ended February 28, 2015 were
$0.2 million
and
$1.4 million
, respectively. Unaudited pro forma consolidated financial information as if the closing of Digonex had occurred on March 1, 2013 is not presented as the results of operations of Digonex prior to its acquisition on June 16, 2014 were not material.
The following table (in thousands) summarizes the fair values of the identifiable assets acquired and liabilities assumed in the acquisition of Digonex as of June 16, 2014.
|
|
|
|
|
Cash
|
$
|
456
|
|
Other current and noncurrent assets
|
9
|
|
Goodwill
|
2,753
|
|
Other intangibles
|
6,180
|
|
Accounts payable and accrued expenses
|
(462
|
)
|
Other current liabilities and noncurrent liabilities
|
(1,139
|
)
|
Long-term debt
|
(3,600
|
)
|
Noncontrolling interests
|
(1,197
|
)
|
Total purchase price, including assumed liabilities
|
3,000
|
|
Less: Cash acquired
|
(456
|
)
|
Total purchase price, net of cash acquired
|
$
|
2,544
|
|
The goodwill recognized in the acquisition of Digonex is attributable to the assembled workforce and existing business processes. The
$2.8 million
of goodwill recognized in the transaction is included in our corporate and emerging technologies segment and is not deductible for tax purposes. As part of our annual impairment testing conducted in December 2015, the Company determined that the goodwill associated with Digonex was partially impaired, and recorded an impairment charge of $0.7 million. See Note 9 for more discussion of the goodwill impairment.
Other intangibles consist of patents of
$5.2 million
, a customer list intangible asset of
$0.7 million
and trademarks of
$0.3 million
. The patents are being amortized over
7 years
, the customer list intangible asset is being amortized over
3 years
and the trademarks are being amortized over
15 years
. See Note 9 for more discussion of the definite-lived intangible impairments.
8. OTHER SIGNIFICANT TRANSACTIONS
Next Radio LLC - Sprint Agreement
On August 9, 2013, NextRadio LLC, a wholly-owned subsidiary of Emmis, entered into an agreement with Sprint whereby Sprint agreed to pre-load the Company's smartphone application, NextRadio, in a minimum of
30 million
FM-enabled wireless devices on the Sprint wireless network over a
three
-year period. In return, NextRadio LLC agreed to pay Sprint
$15 million
per year in equal quarterly installments over the three year term and to share with Sprint certain revenue generated by the NextRadio application. Emmis has not guaranteed NextRadio LLC's performance under this agreement and Sprint does not have recourse to any Emmis related entity other than NextRadio LLC. Additionally, the agreement does not limit the ability of NextRadio LLC to place the NextRadio application on FM-enabled devices on other wireless networks. Through February 29, 2016, the NextRadio application had not generated a material amount of revenue.
Nearly all of the largest radio broadcasters and many smaller radio broadcasters expressed support for NextRadio LLC's agreement with Sprint. Accordingly, NextRadio LLC entered into a number of funding agreements with radio broadcasters and other participants in the radio industry to collect and remit cash to Sprint to fulfill the quarterly payment obligation. As part of some of these funding agreements, Emmis agreed to certain limitations on the operation of its NextRadio and TagStation businesses, including assurances of access to the NextRadio app and to TagStation (the cloud-based engine that provides data to the NextRadio application), and limitations on the sale of the businesses to potential competitors of the U.S. radio industry. Emmis also granted the U.S. radio industry (as defined in the funding agreements) a call option on substantially all of the assets used in the NextRadio and TagStation businesses in the United States. The call option may be exercised in August 2017 or August 2019 by paying Emmis a purchase price equal to the greater of (i) the appraised fair market value of the NextRadio and TagStation businesses, or (ii) two times Emmis' cumulative investments in the development of the businesses. If the call option is exercised, the businesses will continue to be subject to the operating limitations applicable today, and no radio operator will be permitted to own more than
30%
of the NextRadio and TagStation businesses.
Emmis determined that NextRadio LLC is a variable interest entity (VIE) and that Emmis is the primary beneficiary because the Company has the power to direct substantially all of the activities of NextRadio LLC, and because the Company may absorb certain losses and receive certain benefits from the operations of the VIE. Emmis does not record any revenue or expense related to the amounts that are collected and remitted to Sprint except the portion of any payment to Sprint that was actually contributed to NextRadio LLC by Emmis. Emmis contributed approximately
$1.1 million
,
$0.5 million
and
$0.4 million
to NextRadio LLC during the years ended February 2014, 2015 and 2016, respectively. These amounts were recorded as station operating expenses, excluding depreciation and amortization expense.
As of February 28, 2015, the carrying value of assets within NextRadio LLC totaled
$1.3 million
, which represented cash collected by NextRadio LLC from other broadcasting companies and other companies in the radio industry. This cash is restricted because it must be remitted to Sprint. NextRadio LLC had
$1.3 million
of liabilities at February 28, 2015, which represented the obligation to remit cash received from radio industry participants to Sprint. NextRadio LLC remitted all cash collected from other broadcasting companies and other companies in the radio industry to Sprint as of February 29, 2016, and thus has no assets or liabilities as of that date.
LMA of 98.7FM in New York, NY and Related Financing Transaction
On April 26, 2012 Emmis entered into an LMA with a subsidiary of Disney Enterprises, Inc., pursuant to which the Disney subsidiary purchased the right to provide programming for 98.7FM in New York, NY until August 24, 2024. Emmis retains ownership and control of 98.7FM, including the related FCC license during the term of the LMA and receives an annual fee from the Disney subsidiary. The fee, initially
$8.4 million
annually, increases by
3.5%
annually until the LMA's termination.
As discussed in Note 5, Emmis, through newly-created subsidiaries, issued
$82.2 million
of notes, which are nonrecourse to the rest of the Company's subsidiaries and are secured by the assets of the newly-created subsidiaries including the payments made in connection with the 98.7FM LMA. See Notes 1e and 5 for more discussion of the LMA payments and nonrecourse debt.
The following table summarizes Emmis' operating results of 98.7FM for all periods presented. Emmis programmed 98.7FM until the LMA commenced on April 26, 2012. 98.7FM is a part of our radio segment. Results of operations of 98.7FM for the years ended February 2014, 2015 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended February 28 (29),
|
|
2014
|
|
2015
|
|
2016
|
Net revenues
|
$
|
10,331
|
|
|
$
|
10,331
|
|
|
$
|
10,331
|
|
Station operating expenses, excluding depreciation and amortization expense
|
1,009
|
|
|
1,002
|
|
|
1,000
|
|
Impairment loss on intangible assets (Note 9)
|
—
|
|
|
9,462
|
|
|
1,766
|
|
Depreciation and amortization
|
—
|
|
|
—
|
|
|
21
|
|
Interest expense
|
3,416
|
|
|
3,238
|
|
|
3,042
|
|
Assets and liabilities of 98.7FM as of February 28 (29), 2015 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
As of February 28 (29),
|
|
2015
|
|
2016
|
Current assets:
|
|
|
|
Restricted cash
|
$
|
1,467
|
|
|
$
|
1,464
|
|
Prepaid expenses
|
603
|
|
|
545
|
|
Total current assets
|
2,070
|
|
|
2,009
|
|
Noncurrent assets:
|
|
|
|
Property and equipment
|
—
|
|
|
253
|
|
Indefinite lived intangibles
|
51,063
|
|
|
49,297
|
|
Deposits and other
|
4,428
|
|
|
5,460
|
|
Total noncurrent assets
|
55,491
|
|
|
55,010
|
|
Total assets
|
$
|
57,561
|
|
|
$
|
57,019
|
|
Current liabilities:
|
|
|
|
Accounts payable and accrued expenses
|
$
|
22
|
|
|
$
|
14
|
|
Current maturities of long-term debt
|
4,990
|
|
|
5,453
|
|
Deferred revenue
|
753
|
|
|
779
|
|
Other current liabilities
|
241
|
|
|
223
|
|
Total current liabilities
|
6,006
|
|
|
6,469
|
|
Noncurrent liabilities:
|
|
|
|
Long-term debt, net of current portion
|
62,916
|
|
|
57,728
|
|
Other noncurrent liabilities
|
27
|
|
|
—
|
|
Total noncurrent liabilities
|
62,943
|
|
|
57,728
|
|
Total liabilities
|
$
|
68,949
|
|
|
$
|
64,197
|
|
9. INTANGIBLE ASSETS AND GOODWILL
In accordance with ASC Topic 350,
Intangibles—Goodwill and Other,
the Company reviews goodwill and other intangibles at least annually for impairment. In connection with any such review, if the recorded value of goodwill and other intangibles is greater than its fair value, the intangibles are written down and charged to results of operations. FCC licenses are renewed every
eight years
at a nominal cost, and historically all of our FCC licenses have been renewed at the end of their respective
eight-year
periods. Since we expect that all of our FCC licenses will continue to be renewed in the future, we believe they have indefinite lives. Radio stations in a geographic market cluster are considered a single unit of accounting, provided that they are not being operated under a Local Marketing Agreement by another broadcaster.
Impairment testing
The Company generally performs its annual impairment review of indefinite-lived intangibles as of December 1 each year. At the time of each impairment review, if the fair value of the indefinite-lived intangible is less than its carrying value a charge is recorded to results of operations. When indicators of impairment are present, the Company will perform an interim impairment test. In connection with the April 2012 LMA with a subsidiary of Disney Enterprises, Inc. discussed in Note 1e, the Company separated its two New York stations into separate units of accounting. Concurrent with the separation of the stations into separate units of accounting, the Company performed an interim impairment test of those licenses. Impairment recorded as a result of our annual impairment testing is summarized in the table below. We will perform additional interim impairment assessments whenever triggering events suggest such testing for the recoverability of these assets is warranted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Assessment
|
|
|
|
FCC Licenses
|
|
Goodwill
|
|
Definite-lived
|
|
Total
|
Year Ended February 28, 2014
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Year Ended February 28, 2015
|
9,520
|
|
|
58,395
|
|
|
—
|
|
|
67,915
|
|
Year Ended February 29, 2016
|
5,440
|
|
|
695
|
|
|
3,364
|
|
|
9,499
|
|
Valuation of Indefinite-lived Broadcasting Licenses
Fair value of our FCC licenses is estimated to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine the fair value of our FCC licenses, the Company uses an income valuation method when it performs its impairment tests. Under this method, the Company projects cash flows that would be generated by each of its units of accounting assuming the unit of accounting was commencing operations in its respective market at the beginning of the valuation period. This cash flow stream is discounted to arrive at a value for the FCC license. The Company assumes the competitive situation that exists in each market remains unchanged, with the exception that its unit of accounting commenced operations at the beginning of the valuation period. In doing so, the Company extracts the value of going concern and any other assets acquired, and strictly values the FCC license. Major assumptions involved in this analysis include market revenue, market revenue growth rates, unit of accounting audience share, unit of accounting revenue share and discount rate. Each of these assumptions may change in the future based upon changes in general economic conditions, audience behavior, consummated transactions, and numerous other variables that may be beyond our control. The projections incorporated into our license valuations take into consideration then current economic conditions.
Below are some of the key assumptions used in our annual impairment assessments. As part of our December 1, 2014 and 2015 annual impairment assessments, we reduced long-term growth rates in most of the markets in which we operate based on recent industry trends and our expectations for the markets going forward. The methodology used to value our FCC licenses has not changed in the three-year period ended
February 29, 2016
.
|
|
|
|
|
|
|
|
December 1, 2013
|
|
December 1, 2014
|
|
December 1, 2015
|
Discount Rate
|
12.0% - 12.4%
|
|
12.1% - 12.5%
|
|
12.0% - 12.4%
|
Long-term Revenue Growth Rate
|
2.3% - 3.1%
|
|
1.5% - 3.0%
|
|
1.3% - 2.5%
|
Mature Market Share
|
3.5% - 30.2%
|
|
3.2% - 29.2%
|
|
3.2% - 29.3%
|
Operating Profit Margin
|
25.0% - 39.1%
|
|
25.1% - 39.2%
|
|
25.0% - 39.1%
|
As of February 28 (29),
2015
and
2016
, the carrying amounts of the Company’s FCC licenses were
$210.1 million
and
$205.1 million
, respectively. These amounts are entirely attributable to our radio division. The table below presents the changes to the carrying values of the Company’s FCC licenses for the years ended February 2015 and 2016 for each unit of accounting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in FCC License Carrying Values
|
Unit of Accounting
|
|
As of February 28, 2014
|
|
Purchase
|
|
Impairment
|
|
|
As of February 28, 2015
|
|
Purchase
|
|
Impairment
|
|
As of February 29, 2016
|
New York Cluster
|
|
$
|
2,597
|
|
|
$
|
69,019
|
|
|
$
|
—
|
|
|
|
$
|
71,616
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71,616
|
|
98.7FM (New York)
|
|
60,525
|
|
|
—
|
|
|
(9,462
|
)
|
|
|
$
|
51,063
|
|
|
—
|
|
|
(1,766
|
)
|
|
49,297
|
|
Austin Cluster
|
|
39,255
|
|
|
—
|
|
|
—
|
|
|
|
$
|
39,255
|
|
|
—
|
|
|
(2,343
|
)
|
|
36,912
|
|
St. Louis Cluster
|
|
27,692
|
|
|
—
|
|
|
—
|
|
|
|
$
|
27,692
|
|
|
—
|
|
|
(1,293
|
)
|
|
26,399
|
|
Indianapolis Cluster
|
|
17,654
|
|
|
—
|
|
|
—
|
|
|
|
$
|
17,654
|
|
|
512
|
|
|
—
|
|
|
18,166
|
|
KPWR-FM (Los Angeles)
|
|
2,018
|
|
|
—
|
|
|
—
|
|
|
|
$
|
2,018
|
|
|
—
|
|
|
—
|
|
|
2,018
|
|
Terre Haute Cluster
|
|
817
|
|
|
—
|
|
|
(58
|
)
|
|
|
$
|
759
|
|
|
—
|
|
|
(38
|
)
|
|
721
|
|
Total
|
|
$
|
150,558
|
|
|
$
|
69,019
|
|
|
$
|
(9,520
|
)
|
|
|
$
|
210,057
|
|
|
$
|
512
|
|
|
$
|
(5,440
|
)
|
|
$
|
205,129
|
|
The FCC license purchase of $69.0 million during the year ended February 28, 2015 solely relates to our purchase of WBLS-FM and WLIB-AM. See Note 7 for more discussion of this acquisition. The FCC license purchase of $0.5 million during the year ended February 29, 2016 solely relates to our purchase of an FM translator in Indianapolis.
Impairment recorded during the year ended February 28, 2015 mostly relates to our FCC license in New York that is being operated pursuant to an LMA and this license is assessed individually since it is the only FCC license in that unit of account. Additional impairment was recorded for our New York station being operated pursuant to an LMA during the year ended February 29, 2016 along with impairment for our Austin, St. Louis and Terre Haute clusters. Declining market revenues in calendar 2014 and 2015, coupled with a reduction in the Company's estimate of long-term revenue growth rates, led to a lower estimate of fair value for these FCC licenses.
Valuation of Goodwill
ASC Topic 350 requires the Company to test goodwill for impairment at least annually using a two-step process. The first step is a screen for potential impairment, while the second step measures the amount of impairment. The Company conducts the two-step impairment test on December 1 of each fiscal year, unless indications of impairment exist during an interim period. When assessing its goodwill for impairment, the Company uses an enterprise valuation approach to determine the fair value of each of the Company’s reporting units (radio stations grouped by market, excluding any stations that are being operated pursuant to an LMA, and magazines on an individual basis). Management determines enterprise value for each of its reporting units by multiplying the
two-year
average station operating income generated by each reporting unit (current year based on actual results and the next year based on budgeted results) by an estimated market multiple. The Company uses a blended station operating income trading multiple of publicly traded radio operators as well as recent market transactions as a benchmark for the multiple it applies to its radio reporting units. There are no publicly traded publishing companies that are focused predominantly on city and regional magazines as is our publishing segment. Therefore, the market multiple used as a benchmark for our publishing reporting units is based on recently completed transactions within the city and regional magazine industry or analyst reports that include valuations of magazine divisions within publicly traded media conglomerates. For the annual assessment performed as of December 1, 2015, the Company applied a market multiple of
8.0
and
6.0
times the reporting unit’s operating performance for our radio and publishing reporting units, respectively. Management believes this methodology for valuing radio and publishing properties is a common approach and believes that the multiples used in the valuation are reasonable given our peer comparisons and market transactions. To corroborate the step-one reporting unit fair values determined using the market approach described above, management also uses an income approach, which is a discounted cash flow method to determine the fair value of the reporting unit.
The Company used an income approach to determine the enterprise value of Digonex. Digonex is a dynamic pricing business that does not have well-established industry trading multiples, analyst estimates of valuations, or recently completed transactions that would indicate fair values of these businesses. As such, the Company used a discounted cash flow method to determine the fair value of Digonex.
This enterprise valuation is compared to the carrying value of the reporting unit for the first step of the goodwill impairment test. If the reporting unit exhibits impairment, the Company proceeds to the second step of the goodwill impairment test. For its step-two testing, the enterprise value is allocated among the tangible assets, indefinite-lived intangible assets (FCC licenses valued using a direct-method valuation approach) and unrecognized intangible assets, such as customer lists, with the residual amount representing the implied fair value of the goodwill. To the extent the carrying amount of the goodwill exceeds the implied fair value of the goodwill, the difference is recorded as an impairment charge in the statement of operations. The methodology used to value our goodwill has not changed in the three-year period ended February 29, 2016.
During our December 2015 annual goodwill impairment test, the Company wrote off
$0.7 million
of goodwill associated with Digonex. Emmis acquired a controlling interest in Digonex in June 2014 and recorded approximately
$2.8 million
of goodwill. The performance of Digonex since Emmis acquired its controlling interest has lagged the original assumptions used when estimating the fair values of the acquired assets and liabilities of the business. This, coupled with a reduction in long-term growth estimates for Digonex, resulted in a step-one indication of impairment. Upon completion of the step-two analysis, the Company determined that Digonex goodwill was partially impaired.
During our December 2014 annual goodwill impairment test, the Company wrote off
$58.4 million
of goodwill associated with our New York radio cluster. This goodwill related entirely to our purchase of WBLS-FM and WLIB-AM on June 10, 2014. Declining performance of the entire New York radio market significantly impacted our operating performance in New York. These declines, combined with lower projected revenue growth rates in the New York market, resulted in a step-one indication of impairment for our New York cluster on both the market and income approaches. Upon completing the step-two analysis, the Company determined that the full carrying amount of the New York cluster goodwill of $58.4 million was impaired. No goodwill impairment was recorded in connection with our annual test in December 2013.
As of February 28 (29),
2015
and
2016
, the carrying amount of the Company’s goodwill was
$15.4 million
and
$14.7 million
. The table below presents the changes to the carrying values of the Company’s goodwill for the years ended February 2015 and 2016 for each reporting unit. As noted above, each reporting unit is a cluster of radio stations in one geographical market (except for stations being operated pursuant to LMAs) and magazines on an individual basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Goodwill Carrying Values
|
Reporting Unit
|
As of February 28, 2014
|
|
Acquisitions
|
|
Impairment
|
|
|
As of February 28, 2015
|
|
|
Impairment
|
|
As of February 29, 2016
|
New York Cluster (Radio)
|
$
|
—
|
|
|
$
|
58,395
|
|
|
$
|
(58,395
|
)
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Indianapolis Cluster (Radio)
|
265
|
|
|
—
|
|
|
—
|
|
|
|
265
|
|
|
|
—
|
|
|
265
|
|
Austin Cluster (Radio)
|
4,338
|
|
|
—
|
|
|
—
|
|
|
|
4,338
|
|
|
|
—
|
|
|
4,338
|
|
Texas Monthly
|
8,036
|
|
|
—
|
|
|
—
|
|
|
|
8,036
|
|
|
|
—
|
|
|
8,036
|
|
Digonex
|
—
|
|
|
2,753
|
|
|
—
|
|
|
|
2,753
|
|
|
|
(695
|
)
|
|
2,058
|
|
Total
|
$
|
12,639
|
|
|
$
|
61,148
|
|
|
$
|
(58,395
|
)
|
|
|
$
|
15,392
|
|
|
|
$
|
(695
|
)
|
|
$
|
14,697
|
|
Definite-lived intangibles
The following table presents the weighted-average remaining useful life at
February 29, 2016
and gross carrying amount and accumulated amortization for each major class of definite-lived intangible assets at February 28 (29),
2015
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2015
|
|
As of February 29, 2016
|
|
Weighted
Average
Remaining Useful Life
(in years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Trademarks
|
6.7
|
|
$
|
1,240
|
|
|
$
|
585
|
|
|
$
|
655
|
|
|
$
|
1,240
|
|
|
$
|
727
|
|
|
$
|
513
|
|
Patents
|
5.5
|
|
5,180
|
|
|
401
|
|
|
4,779
|
|
|
1,815
|
|
|
1,141
|
|
|
674
|
|
Programming Contract
|
5.6
|
|
2,154
|
|
|
220
|
|
|
1,934
|
|
|
2,154
|
|
|
514
|
|
|
1,640
|
|
Customer List
|
1.4
|
|
1,015
|
|
|
205
|
|
|
810
|
|
|
1,015
|
|
|
543
|
|
|
472
|
|
Total
|
|
|
$
|
9,589
|
|
|
$
|
1,411
|
|
|
$
|
8,178
|
|
|
$
|
6,224
|
|
|
$
|
2,925
|
|
|
$
|
3,299
|
|
In accordance with Accounting Standards Codification paragraph 360-10, the Company performs an analysis to (i) determine if indicators of impairment of a long-lived asset are present, (ii) test the long-lived asset for recoverability by comparing undiscounted cash flows of the long-lived asset to its carrying value and (iii) measure any potential impairment by comparing the long-lived asset's fair value to its current carrying value. In connection with this analysis in the year ended February 29, 2016, the Company determined that the patents of Digonex were impaired and recorded an impairment charge of
$3.4 million
. Much like the goodwill impairment of Digonex, key factors that led to impairment of Digonex's definite-lived intangible assets include financial performance that has lagged the original assumptions used when estimating the fair values of Digonex's acquired assets in June 2014 and a reduction in long-term growth estimates for Digonex.
Total amortization expense from definite-lived intangibles was less than
$0.1 million
,
$0.9 million
and
$1.5 million
for the years ended February
2014
,
2015
and
2016
, respectively. The following table presents the Company's estimate of amortization expense for each of the five succeeding fiscal years for definite-lived intangibles:
|
|
|
|
|
Year ended February 28 (29),
|
|
Expected Amortization Expense
|
|
|
(in 000's)
|
2017
|
|
896
|
|
2018
|
|
691
|
|
2019
|
|
503
|
|
2020
|
|
457
|
|
2021
|
|
457
|
|
10. EMPLOYEE BENEFIT PLANS
a. Equity Incentive Plans
The Company has stock options and restricted stock grants outstanding that were issued to employees or non-employee directors under one or more of the following plans: the 2004 Equity Compensation Plan, the 2010 Equity Compensation Plan, the 2012 Equity Compensation Plan, the 2015 Equity Compensation Plan and the 2016 Equity Compensation Plan. These outstanding grants continue to be governed by the terms of the applicable plan.
2015 Equity Compensation Plan
At the 2015 annual meeting, the shareholders of Emmis approved the 2015 Equity Compensation Plan (“the 2015 Plan”). Under the 2015 Plan, awards equivalent to
3.0 million
shares of common stock may be granted. Furthermore, any unissued awards from the 2012 Equity Compensation Plan (or shares subject to outstanding awards that would again become available for awards under this plan) increases the number of shares of common stock available for grant under the 2015 Plan. The awards, which have certain restrictions, may be for incentive stock options, nonqualified stock options, shares of restricted stock, restricted stock units, stock appreciation rights or performance units. Under the 2015 Plan, all awards are granted with a purchase price equal to at least the fair market value of the stock except for shares of restricted stock and restricted stock units, which may be granted with any purchase price (including zero). The stock options under the 2015 Plan generally expire not more than
10
years from the date of grant. Under the 2015 Plan, awards equivalent to approximately
1.0 million
shares of common stock were available for grant at February 29, 2016.
2016 Equity Compensation Plan
On January 29, 2016, the board of directors of Emmis approved the 2016 Equity Compensation Plan and made certain amendments on May 3, 2016, in connection with their recommendation that our shareholders approve the 2016 Plan ("the 2016 Plan"). The 2016 Plan won't become effective until it is approved by Emmis' shareholders at the annual meeting in July 2016. However, Emmis' Chairman and Chief Executive Officer, Jeffrey H. Smulyan, controls more than
50%
of the vote on this matter and has informed the board of directors that he intends to vote in favor of approving the 2016 Plan. Under the 2016 Plan, awards equivalent to
6.0 million
shares of common stock may be granted. Furthermore, any unissued awards from the 2015 Equity Compensation Plan (or shares subject to outstanding awards that would again become available for awards under this plan) increases the number of shares of common stock available for grant under the 2016 Plan. The awards, which have certain restrictions, may be for incentive stock options, nonqualified stock options, shares of restricted stock, restricted stock units, stock appreciation rights or performance units. Under the 2016 Plan, all awards are granted with a purchase price equal to at least the fair market value of the stock except for shares of restricted stock and restricted stock units, which may be granted with any purchase price (including zero). The stock options under the 2016 Plan generally expire not more than
10
years from the date of grant. Under the 2016 Plan, stock option awards for
0.7 million
shares of common stock have been granted (subject to shareholder approval of the 2016 Plan) as of February 29, 2016.
b. 401(k) Retirement Savings Plan
Emmis sponsors a Section 401(k) retirement savings plan that is available to substantially all employees age
18
years and older who have at least
30
days of service. Employees may make pretax contributions to the plan up to
50%
of their compensation, not to exceed the annual limit prescribed by the Internal Revenue Service (“IRS”). Emmis may make discretionary matching contributions to the plan in the form of cash or shares of the Company’s Class A common stock.
Emmis has historically matched employee contributions at
33%
up to a maximum of
6%
of eligible compensation. Emmis' discretionary contributions were made in cash until March 2015. From March 2015 through December 2015, Emmis' discretionary contributions were made in the form of Class A common stock. Emmis suspended its discretionary contributions on January 1, 2016. Emmis’ discretionary contributions to the plan totaled
$0.9 million
,
$1.1 million
and
$0.9 million
for the years ended February 2014, 2015 and 2016, respectively.
c. Defined Contribution Health and Retirement Plan
Emmis contributes to a multi-employer defined contribution health and retirement plan for employees who are members of a certain labor union. Amounts charged to expense related to the multi-employer plan were approximately
$0.1 million
,
$0.3 million
and
$0.3 million
for the years ended February
2014
,
2015
and
2016
, respectively.
11. OTHER COMMITMENTS AND CONTINGENCIES
a. Commitments
The Company has various commitments under the following types of material contracts: (i) operating leases; (ii) radio syndicated programming; (iii) employment agreements and (iv) other contracts with annual commitments (mostly contractual services for audience measurement information) at February 29, 2016 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending
February 28 (29),
|
Operating
Leases
|
|
Syndicated
Programming
|
|
Employment
Agreements
|
|
Other
Contracts
|
|
Total
|
2017
|
$
|
8,745
|
|
|
$
|
272
|
|
|
$
|
15,306
|
|
|
$
|
11,490
|
|
|
$
|
35,813
|
|
2018
|
8,199
|
|
|
148
|
|
|
6,087
|
|
|
10,668
|
|
|
25,102
|
|
2019
|
8,150
|
|
|
—
|
|
|
3,095
|
|
|
9,740
|
|
|
20,985
|
|
2020
|
7,993
|
|
|
—
|
|
|
282
|
|
|
3,043
|
|
|
11,318
|
|
2021
|
7,864
|
|
|
—
|
|
|
37
|
|
|
90
|
|
|
7,991
|
|
Thereafter
|
14,991
|
|
|
—
|
|
|
—
|
|
|
150
|
|
|
15,141
|
|
Total
|
$
|
55,942
|
|
|
$
|
420
|
|
|
$
|
24,807
|
|
|
$
|
35,181
|
|
|
$
|
116,350
|
|
Emmis leases certain office space, tower space, equipment and automobiles under operating leases expiring at various dates through July 2027. Some of the lease agreements contain renewal options and annual rental escalation clauses, as well as provisions for payment of utilities and maintenance costs. The Company recognizes escalated rents on a straight-line basis over the term of the lease agreement. Rental expense during the years ended February 2014, 2015 and 2016 was approximately
$8.2 million
,
$9.1 million
and
$8.9 million
, respectively. The Company recognized approximately
$1.0 million
,
$0.3 million
and
$0.3 million
of sublease income as a reduction of rent expense for the years ended February 2014, 2015, and 2016 respectively. Total minimum sublease rentals to be received in the future under noncancelable subleases as of
February 29, 2016
were as follows:
|
|
|
|
|
Year ending
February 28 (29),
|
Noncancelable
Sublease rentals
|
2017
|
$
|
319
|
|
2018
|
258
|
|
2019
|
337
|
|
2020
|
317
|
|
2021
|
359
|
|
Total
|
$
|
1,590
|
|
b. Litigation
The Company is a party to various legal proceedings arising in the ordinary course of business. In the opinion of management of the Company, there are no legal proceedings pending against the Company likely to have a material adverse effect on the Company.
Emmis and certain of its officers and directors were named as defendants in a lawsuit filed April 16, 2012 by certain holders of Preferred Stock (the “Lock-Up Group”) in the United States District Court for the Southern District of Indiana entitled Corre Opportunities Fund, LP, et al. v. Emmis Communications Corporation, et al. The plaintiffs alleged, among other things, that Emmis and the other defendants violated various provisions of the federal securities laws and breached fiduciary duties in connection with Emmis’ entry into total return swap agreements and voting agreements with certain holders of Emmis Preferred Stock, as well as by issuing shares of Preferred Stock to Emmis’ 2012 Retention Plan and Trust (the “Trust”) and entering into a voting agreement with the trustee of the Trust. The plaintiffs also alleged that Emmis violated certain provisions of Indiana corporate law by directing the voting of the shares of Preferred Stock subject to the total return swap agreements (the “Swap Shares”) and the shares of Preferred Stock held by the Trust (the “Trust Shares”) in favor of certain amendments to Emmis’ Articles of Incorporation.
Emmis filed an answer denying the material allegations of the complaint, and filed a counterclaim seeking a declaratory judgment that Emmis could legally direct the voting of the Swap Shares and the Trust Shares in favor of the proposed amendments.
On August 31, 2012, the U.S. District Court denied the plaintiffs' request for a preliminary injunction. Plaintiffs subsequently filed an amended complaint seeking monetary damages and dismissing all claims against the individual officer and director defendants. On February 28, 2014, the U.S. District Court issued a ruling in favor of Emmis on all counts. In
March 2014, the Plaintiffs filed with the U.S. Court of Appeals for the Seventh Circuit an appeal of the U.S. District Court's decision. The U.S. Court of Appeals for the Seventh Circuit heard oral arguments in this case on December 5, 2014, and on July 2, 2015, unanimously affirmed the U.S. District Court's ruling.
On December 4, 2015, Emmis entered into a settlement agreement with the Lock-Up Group to settle any and all remaining issues with respect to the Lawsuit described above. Under the terms of the settlement agreement, (i) the Company withdrew its bill of costs with respect to certain reimbursable expenses in the Lawsuit; (ii) the Company agreed to submit to a vote of its shareholders, and the Lock-Up Group and Jeffrey H. Smulyan agreed to vote in favor of, an amendment to Exhibit A to the Company’s Second Amended and Restated Articles of Incorporation (the “Revisions”) to amend the terms of the Company’s Series A Non-Cumulative Convertible Preferred Stock (the “Preferred Stock”) to (A) change the voluntary conversion ratio to permit holders of Preferred Stock to convert their shares of Preferred Stock into Class A common stock at a ratio of
2.80
shares of the Company’s Class A common stock for each share of Preferred Stock, and (B) provide that all shares of Preferred Stock shall automatically convert into shares of Class A common stock at a ratio of 2.80 shares of Class A common stock for each share of Preferred Stock on the fifth business day after the delisting of the Preferred Stock by The NASDAQ Stock Market LLC ("Nasdaq"); and (iii) both the Company and the Lock-Up Group released each other from claims related to the lawsuit. The Revisions were approved at a special meeting of shareholders on February 17, 2016. Additionally, the Preferred Stock was delisted by Nasdaq on March 28, 2016, and pursuant to the Revisions, all outstanding Preferred Stock was automatically converted to Class A common stock on April 4, 2016. The value associated with the increase to the conversion ratio was accounted for upon the effective date of the Revisions and resulted in a decrease of approximately
$0.2 million
to earnings available to common shareholders.
On July 7, 2014, individuals who had been seeking to overturn the FCC’s approval of the transfer of the broadcast licenses for WBLS-FM and WLIB-AM from entities associated with Inner City Broadcasting to YMF (the entities that subsequently sold the two stations to Emmis) filed with the U.S. Court of Appeals for the District of Columbia Circuit a Notice of Appeal of the FCC’s approval of the transfer. The District of Columbia Circuit dismissed the case, but the individuals may still appeal to the United States Supreme Court. Additionally, in March 2015, an individual filed a lawsuit in the Federal District Court of New York challenging the transfer of the assets of WBLS-FM and WLIB-AM from Inner City to YMF, and claimed that Emmis had exerted undue influence in securing the FCC's consent to the transfer of the FCC licenses of WBLS-FM and WLIB-AM from YMF to Emmis. An amended complaint was filed in February 2016. Based upon the facts alleged in the cases and the extensive precedent of courts not overturning FCC approvals of transfers of broadcast licenses except in exceedingly rare circumstances, Emmis believes the claims presented lack merit.
12. INCOME TAXES
United States and foreign income (loss) before income taxes for the years ended February
2014
,
2015
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2015
|
|
2016
|
United States
|
$
|
16,659
|
|
|
$
|
(58,692
|
)
|
|
$
|
1,765
|
|
Foreign
|
(2,067
|
)
|
|
(345
|
)
|
|
—
|
|
Income (loss) before income taxes
|
$
|
14,592
|
|
|
$
|
(59,037
|
)
|
|
$
|
1,765
|
|
The (benefit) provision for income taxes for the years ended February
2014
,
2015
, and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2015
|
|
2016
|
Current:
|
|
|
|
|
|
State
|
$
|
(900
|
)
|
|
$
|
229
|
|
|
$
|
(31
|
)
|
Foreign
|
13
|
|
|
—
|
|
|
—
|
|
Total current
|
(887
|
)
|
|
229
|
|
|
(31
|
)
|
Deferred:
|
|
|
|
|
|
Federal
|
(25,219
|
)
|
|
27,431
|
|
|
1,793
|
|
State
|
(7,957
|
)
|
|
9,288
|
|
|
307
|
|
Total deferred
|
(33,176
|
)
|
|
36,719
|
|
|
2,100
|
|
(Benefit) provision for income taxes
|
$
|
(34,063
|
)
|
|
$
|
36,948
|
|
|
$
|
2,069
|
|
The (benefit) provision for income taxes for the years ended February
2014
,
2015
and
2016
differs from that computed at the Federal statutory corporate tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2015
|
|
2016
|
Computed income tax (benefit) provision at 35%
|
$
|
5,110
|
|
|
$
|
(20,663
|
)
|
|
$
|
618
|
|
State income tax (benefit) provision
|
(8,857
|
)
|
|
9,517
|
|
|
276
|
|
Foreign taxes
|
737
|
|
|
120
|
|
|
—
|
|
Tax benefit resulting from swap expiration and related OCI reversal
|
—
|
|
|
5
|
|
|
—
|
|
Nondeductible stock compensation
|
55
|
|
|
122
|
|
|
296
|
|
Entertainment disallowance
|
455
|
|
|
421
|
|
|
366
|
|
Change in valuation allowance
|
(31,059
|
)
|
|
50,250
|
|
|
2,376
|
|
Tax attributed to noncontrolling interest
|
(1,793
|
)
|
|
(1,994
|
)
|
|
(1,932
|
)
|
Federal tax credit
|
—
|
|
|
(173
|
)
|
|
(43
|
)
|
Other
|
1,289
|
|
|
(657
|
)
|
|
112
|
|
(Benefit) provision for income taxes
|
$
|
(34,063
|
)
|
|
$
|
36,948
|
|
|
$
|
2,069
|
|
The components of deferred tax assets and deferred tax liabilities at
February 28, 2015
and
February 29, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
2015
|
|
2016
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
|
32,627
|
|
|
$
|
34,341
|
|
Intangible assets
|
30,299
|
|
|
28,737
|
|
Compensation relating to stock options
|
1,438
|
|
|
1,768
|
|
Deferred revenue
|
1,260
|
|
|
840
|
|
Accrued rent
|
2,071
|
|
|
2,275
|
|
Tax credits
|
1,987
|
|
|
3,265
|
|
Investments in subsidiaries
|
2,951
|
|
|
214
|
|
Capital loss carryforward
|
—
|
|
|
2,740
|
|
Other
|
1,875
|
|
|
1,628
|
|
Valuation allowance
|
(62,984
|
)
|
|
(66,674
|
)
|
Total deferred tax assets
|
11,524
|
|
|
9,134
|
|
Deferred tax liabilities
|
|
|
|
Indefinite-lived intangible assets
|
(41,576
|
)
|
|
(43,673
|
)
|
Property and equipment
|
(751
|
)
|
|
(1,055
|
)
|
Cancellation of debt income
|
(10,772
|
)
|
|
(8,079
|
)
|
Other
|
(39
|
)
|
|
(42
|
)
|
Total deferred tax liabilities
|
(53,138
|
)
|
|
(52,849
|
)
|
Net deferred tax liabilities
|
$
|
(41,614
|
)
|
|
$
|
(43,715
|
)
|
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset ("DTA") will not be realized. The Company historically recorded a full valuation allowance on all U.S. (federal and state) deferred tax assets. During the year ended February 28, 2014, due to improved operating results, the Company determined that a valuation allowance on most of its deferred tax assets was no longer appropriate and reversed the valuation allowance on all U.S. deferred tax assets (with the exception of certain state net operating loss deferred DTAs). During the fourth quarter of the year ended February 28, 2015, an impairment charge of
$67.9 million
was recorded, resulting in a three year cumulative loss position. For that reason, the Company recorded a valuation allowance on the majority of its U.S. (federal and state) net deferred tax assets as of February 28, 2015. The Company does not benefit its deferred tax assets based on the deferred tax liabilities ("DTLs") related to indefinite-lived intangibles that are not expected to reverse during the carry-forward period. Because these DTLs would not reverse until some future indefinite period when the intangibles are either sold or impaired, any resulting temporary differences cannot be considered a source of future taxable income to support realization of the DTAs.
The Company increased its valuation allowance by
$3.7
million (
$2.4 million
federal and $
1.3
million state), from
$63.0
million as of February 28, 2015, to
$66.7
million as of February 29, 2016.
The Company has considered future taxable income and ongoing prudent and feasible tax-planning strategies in assessing the need for the valuation allowance. The Company will assess quarterly whether it remains more likely than not that the deferred tax assets will not be realized. In the event the Company determines at a future time that it could realize its deferred tax assets in excess of the net amount recorded, the Company will reduce its deferred tax asset valuation allowance and decrease income tax expense in the period when the Company makes such determination.
The Company has federal net operating losses ("NOLs") of
$82 million
and state NOLs of
$185 million
available to offset future taxable income. These NOLs include an unrealized benefit of approximately
$2.7 million
related to share-based compensation that will be recorded in equity when realized. The federal net operating loss carryforwards begin expiring in 2028, and the state net operating loss carryforwards expire between the years ending February 2017 and February 2037. A valuation allowance has been provided for the net operating loss carryforwards related to states in which the Company no longer has operating results as it is more likely than not that substantially all of these net operating losses will expire unutilized.
The
$3.3 million
of tax credits at February 29, 2016 primarily relates to alternative minimum tax carryforwards that can be carried forward indefinitely. This amount also includes tax credits in Illinois, Texas, and a federal research credit, all of which have a full valuation allowance.
The activities of Digonex Technologies, Inc., a C Corporation under the Internal Revenue Code, are consolidated for financial statement purposes, but are not included in the U.S. consolidated income tax return of Emmis. As of February 29, 2016, Digonex has federal NOLs of
$43 million
and state NOLs of
$43 million
. If Digonex produces pretax income in the future, it is possible that the utilization of these NOL carryforwards will be limited due to Section 382 of the Internal Revenue Code. The Company is in the process of completing a Section 382 study to determine the applicable limitation, if any. As of February 29, 2016, the Company was able to determine that at least
$13 million
of federal NOLs and
$13 million
of state NOLs will be fully available to offset future taxable income. These amounts are included in the above consolidated NOL totals of
$82 million
and
$185 million
.
Accounting Standards Codification paragraph 740-10 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken within a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest benefit that is greater than
50 percent
likely of being realized upon ultimate settlement. As of February 29, 2016, the estimated value of the Company’s net uncertain tax positions is approximately
$0.1 million
, most of which is included in other noncurrent liabilities, as the Company does not expect to settle the items within the next 12 months.
The following is a tabular reconciliation of the total amounts of gross unrecognized tax benefits for the years ending
February 28, 2015
and
February 29, 2016
:
|
|
|
|
|
|
|
|
|
|
For the year ending February 28 (29),
|
|
2015
|
|
2016
|
Gross unrecognized tax benefit – opening balance
|
$
|
(158
|
)
|
|
$
|
(172
|
)
|
Gross increases – tax positions in prior periods
|
(14
|
)
|
|
(21
|
)
|
Gross decreases—settlements with taxing authorities
|
—
|
|
|
81
|
|
Gross decreases – lapse of applicable statute of limitations
|
—
|
|
|
25
|
|
Gross unrecognized tax benefit – ending balance
|
$
|
(172
|
)
|
|
$
|
(87
|
)
|
Included in the balance of unrecognized tax benefits are tax benefits that, if recognized, would reduce the Company’s provision for income taxes totaling
$0.2 million
and
$0.1 million
as of
February 28, 2015
and
February 29, 2016
, respectively. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in liabilities that could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the tax provision, or reclassify amounts on the accompanying consolidated balance sheets in the period in which such matter is effectively settled with the taxing authority.
The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related to the uncertain tax benefits noted above, the Company accrued an immaterial amount of interest during the year ending
February 29, 2016
and in total, as of
February 29, 2016
, has recognized a liability for interest of
$9 thousand
.
13. SEGMENT INFORMATION
The Company’s operations are aligned into
three
business segments: (i) Radio, (ii) Publishing and (iii) Corporate & Emerging Technologies. Emerging Technologies includes our TagStation, NextRadio and Digonex businesses. Results of Emerging Technologies were reclassified from the Radio segment in the prior periods presented below and are not material.
These business segments are consistent with the Company’s management of these businesses and its financial reporting structure. Corporate expenses are not allocated to reportable segments. Our radio operations in New York and Los Angeles, including the LMA fee we receive from a subsidiary of Disney, accounted for more than
50%
of our radio revenues for the year ended February 29, 2016. The Company’s segments operate exclusively in the United States.
The accounting policies as described in the summary of significant accounting policies included in Note 1 to these consolidated financial statements, are applied consistently across segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended February 29, 2016
|
Radio
|
|
Publishing
|
|
Corporate & Emerging Technologies
|
|
Consolidated
|
Net revenues
|
$
|
169,228
|
|
|
$
|
60,992
|
|
|
$
|
1,213
|
|
|
$
|
231,433
|
|
Station operating expenses excluding depreciation and amortization expense
|
116,862
|
|
|
58,891
|
|
|
7,641
|
|
|
183,394
|
|
Corporate expenses excluding depreciation and amortization expense
|
—
|
|
|
—
|
|
|
13,023
|
|
|
13,023
|
|
Impairment loss
|
5,440
|
|
|
—
|
|
|
4,059
|
|
|
9,499
|
|
Depreciation and amortization
|
3,345
|
|
|
266
|
|
|
2,186
|
|
|
5,797
|
|
Loss on disposal of fixed assets
|
54
|
|
|
—
|
|
|
2
|
|
|
56
|
|
Operating income (loss)
|
$
|
43,527
|
|
|
$
|
1,835
|
|
|
$
|
(25,698
|
)
|
|
$
|
19,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended February 28, 2015
|
Radio
|
|
Publishing
|
|
Corporate & Emerging Technologies
|
|
Consolidated
|
Net revenues
|
$
|
176,250
|
|
|
$
|
61,142
|
|
|
$
|
546
|
|
|
$
|
237,938
|
|
Station operating expenses excluding depreciation and amortization expense
|
117,167
|
|
|
60,083
|
|
|
3,759
|
|
|
181,009
|
|
Corporate expenses excluding depreciation and amortization expense
|
—
|
|
|
—
|
|
|
14,922
|
|
|
14,922
|
|
LMA fee
|
4,208
|
|
|
—
|
|
|
—
|
|
|
4,208
|
|
Hungary license litigation and related expenses
|
521
|
|
|
—
|
|
|
—
|
|
|
521
|
|
Impairment loss
|
67,915
|
|
|
—
|
|
|
—
|
|
|
67,915
|
|
Depreciation and amortization
|
3,143
|
|
|
245
|
|
|
2,538
|
|
|
5,926
|
|
Gain on contract settlement
|
(2,500
|
)
|
|
—
|
|
|
—
|
|
|
(2,500
|
)
|
Operating income (loss)
|
$
|
(14,204
|
)
|
|
$
|
814
|
|
|
$
|
(20,673
|
)
|
|
$
|
(34,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended February 28, 2014
|
Radio
|
|
Publishing
|
|
Corporate & Emerging Technologies
|
|
Consolidated
|
Net revenues
|
$
|
145,276
|
|
|
$
|
59,747
|
|
|
$
|
123
|
|
|
$
|
205,146
|
|
Station operating expenses excluding depreciation and amortization expense
|
97,564
|
|
|
59,085
|
|
|
2,360
|
|
|
159,009
|
|
Corporate expenses excluding depreciation and amortization expense
|
—
|
|
|
—
|
|
|
17,024
|
|
|
17,024
|
|
Hungary license litigation and related expenses
|
2,058
|
|
|
—
|
|
|
—
|
|
|
2,058
|
|
Depreciation and amortization
|
2,476
|
|
|
235
|
|
|
2,155
|
|
|
4,866
|
|
(Gain) loss on sale of fixed assets
|
(10
|
)
|
|
2
|
|
|
—
|
|
|
(8
|
)
|
Operating income (loss)
|
$
|
43,188
|
|
|
$
|
425
|
|
|
$
|
(21,416
|
)
|
|
$
|
22,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
Radio
|
|
Publishing
|
|
Corporate & Emerging Technologies
|
|
Consolidated
|
As of February 28, 2015
|
|
$
|
280,158
|
|
|
$
|
21,622
|
|
|
$
|
29,514
|
|
|
$
|
331,294
|
|
As of February 29, 2016
|
|
271,336
|
|
|
22,060
|
|
|
23,210
|
|
|
316,606
|
|
14. OTHER INCOME (EXPENSE), NET
Components of other income (expense), net for the three years ended February
2014
,
2015
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended February 28 (29),
|
|
2014
|
|
2015
|
|
2016
|
Income (loss) from unconsolidated affiliate, including other-than-temporary impairment losses
|
$
|
96
|
|
|
$
|
11
|
|
|
$
|
(82
|
)
|
Other-than-temporary impairment loss on available for sale investments
|
—
|
|
|
(6,682
|
)
|
|
—
|
|
Interest income
|
38
|
|
|
78
|
|
|
36
|
|
Other
|
(18
|
)
|
|
175
|
|
|
1,103
|
|
Total other income (expense), net
|
$
|
116
|
|
|
$
|
(6,418
|
)
|
|
$
|
1,057
|
|
See Note 1l for further discussion of the other-than-temporary impairment loss on available for sale investments recorded in the year ended February 28, 2015. Other income in the year ended February 29, 2016 mostly relates to various nonrecurring recoveries and noncash gains.
15. RELATED PARTY TRANSACTIONS
Prior to 2002, the Company made certain life insurance premium payments for the benefit of Mr. Smulyan. The Company discontinued making such payments in 2001; however, pursuant to a Split Dollar Life Insurance Agreement and Limited Collateral Assignment dated November 2, 1997, the Company retains the right, upon Mr. Smulyan’s death, resignation or termination of employment, to recover all of the premium payments it has made, which total
$1.1 million
.
16. SUBSEQUENT EVENTS
On August 21, 2015, the Company received a notification from the Listing Qualifications Department of Nasdaq indicating that the Company's Series A preferred stock was not in compliance with Nasdaq Listing Rule 5450(a)(2) (the “Minimum Market Value Rule”) because the Market Value of Publicly Held Shares (as defined by Nasdaq, "MVPHS") of our Preferred Stock was under
$1 million
. In accordance with Nasdaq Listing Rule 5810(c)(3)(D), the Company had 180 calendar days to regain compliance with the requirements under the Minimum Market Value Rule. On March 17, 2016, Nasdaq filed with the United States Securities and Exchange Commission Form 25-NSE to formally delist from the Nasdaq Global Select Market our Preferred Stock. The delisting occurred on March 28, 2016. Thus, pursuant to Emmis' Articles of Incorporation, each outstanding share of Preferred Stock was automatically converted on April 4, 2016, into our Class A common stock at a ratio of
2.80
shares of Class A common stock for each share of Preferred Stock. Subsequent to the conversion, no shares of Preferred Stock remain outstanding.