NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS INDICATED OTHERWISE, EXCEPT SHARE DATA)
November 30, 2016
(Unaudited)
Note 1.
Summary of Significant Accounting Policies
Preparation of Interim Financial Statements
Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), the condensed consolidated interim financial statements included herein have been prepared, without audit, by Emmis Communications Corporation (“ECC”) and its subsidiaries (collectively, “our,” “us,” “we,” “Emmis” or the “Company”). As permitted under the applicable rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, Emmis believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report for Emmis filed on Form 10-K for the year ended
February 29, 2016
. The Company’s results are subject to seasonal fluctuations. Therefore, results shown on an interim basis are not necessarily indicative of results for a full year.
In the opinion of Emmis, the accompanying condensed consolidated interim financial statements contain all material adjustments (consisting only of normal recurring adjustments, except as otherwise noted) necessary to present fairly the consolidated financial position of Emmis at
November 30, 2016
, the results of its operations for the three-month and nine-month periods ended
November 30, 2015
and
2016
, and cash flows for the
nine
-month periods ended
November 30, 2015
and
2016
.
There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended
February 29, 2016
that have had a material impact on our condensed consolidated financial statements and related notes.
Common Stock Reverse Split
On July 8, 2016, the Company effected a one-for-four reverse stock split for its Class A, Class B and Class C common stock. All share and per share information has been retroactively adjusted to reflect the reverse stock split.
Basic and Diluted Net Income Per Common Share
Basic net income per common share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at
November 30, 2015
and
2016
consisted of stock options and restricted stock awards. Potentially dilutive securities at
November 30, 2015
also included Series A non-cumulative convertible preferred stock (the “Preferred Stock”). All shares of Preferred Stock were converted into Class A common stock during the three months ended May 31, 2016. The following table sets forth the calculation of basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
November 30, 2015
|
|
November 30, 2016
|
|
Net Income
|
|
Shares
|
|
Net Income
Per Share
|
|
Net Income
|
|
Shares
|
|
Net Income
Per Share
|
|
(amounts in 000’s, except per share data)
|
Basic net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
$
|
5,548
|
|
|
11,100
|
|
|
$
|
0.50
|
|
|
$
|
17,676
|
|
|
12,114
|
|
|
$
|
1.46
|
|
Impact of equity awards
|
—
|
|
|
247
|
|
|
|
|
—
|
|
|
273
|
|
|
|
Impact of conversion of preferred stock into common stock
|
—
|
|
|
529
|
|
|
|
|
—
|
|
|
—
|
|
|
|
Diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
$
|
5,548
|
|
|
11,876
|
|
|
$
|
0.47
|
|
|
$
|
17,676
|
|
|
12,387
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
November 30, 2015
|
|
November 30, 2016
|
|
Net Income
|
|
Shares
|
|
Net Income
Per Share
|
|
Net Income
|
|
Shares
|
|
Net Income
Per Share
|
|
(amounts in 000’s, except per share data)
|
Basic net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
$
|
11,467
|
|
|
10,961
|
|
|
$
|
1.05
|
|
|
$
|
20,697
|
|
|
11,989
|
|
|
$
|
1.73
|
|
Impact of equity awards
|
—
|
|
|
352
|
|
|
—
|
|
|
—
|
|
|
174
|
|
|
—
|
|
Impact of conversion of preferred stock into common stock
|
—
|
|
|
550
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
$
|
11,467
|
|
|
11,863
|
|
|
$
|
0.97
|
|
|
$
|
20,697
|
|
|
12,163
|
|
|
$
|
1.70
|
|
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 three month ended
November 30,
|
|
For the nine months ended
November 30,
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
(shares in 000’s )
|
Equity awards
|
1,346
|
|
|
1,237
|
|
|
987
|
|
|
1,362
|
|
Antidilutive common share equivalents
|
1,346
|
|
|
1,237
|
|
|
987
|
|
|
1,362
|
|
Local Programming and Marketing Agreement Fees
The Company from time to time enters into local programming and marketing agreements (“LMAs”), often pending regulatory approval of transfer of the Federal Communications Commission ("FCC") licenses in connection with acquisitions or dispositions of radio stations. 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.
On April 26, 2012, Emmis entered into an LMA with a subsidiary of Disney Enterprises, Inc. for 98.7FM in New York (formerly WRKS-FM and now WEPN-FM, hereinafter referred to as “98.7FM”). The LMA for this station started on April 30, 2012 and will continue until August 31, 2024. Emmis retains ownership and control of the station, including the related FCC license during the term of the LMA and is scheduled to receive an annual fee until the LMA’s termination. LMA fee revenue is recorded on a straight-line basis over the term of the LMA as a component of net revenues in our accompanying condensed consolidated statements of operations.
The following table summarizes certain operating results of 98.7FM for all periods presented. Net revenues for 98.7FM are solely related to LMA fees. 98.7FM is a part of our radio segment.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended November 30,
|
|
For the nine months
ended November 30,
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
(amounts in 000's)
|
Net revenues
|
$
|
2,582
|
|
|
$
|
2,582
|
|
|
$
|
7,748
|
|
|
$
|
7,748
|
|
Station operating expenses, excluding depreciation and amortization expense
|
232
|
|
|
346
|
|
|
748
|
|
|
960
|
|
Interest expense
|
754
|
|
|
699
|
|
|
2,302
|
|
|
2,142
|
|
Assets and liabilities of 98.7FM as of
February 29, 2016
and
November 30, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
As of February 29,
|
|
As of November 30,
|
|
2016
|
|
2016
|
|
(amounts in 000's)
|
Current assets:
|
|
|
|
Restricted cash
|
$
|
1,464
|
|
|
$
|
1,430
|
|
Prepaid expenses
|
545
|
|
|
459
|
|
Total current assets
|
2,009
|
|
|
1,889
|
|
Noncurrent assets:
|
|
|
|
Property and equipment, net
|
253
|
|
|
234
|
|
Indefinite lived intangibles
|
49,297
|
|
|
49,297
|
|
Deposits and other
|
5,460
|
|
|
6,042
|
|
Total noncurrent assets
|
55,010
|
|
|
55,573
|
|
Total assets
|
$
|
57,019
|
|
|
$
|
57,462
|
|
Current liabilities:
|
|
|
|
Accounts payable and accrued expenses
|
$
|
14
|
|
|
$
|
28
|
|
Current maturities of long-term debt
|
5,453
|
|
|
5,885
|
|
Deferred revenue
|
779
|
|
|
807
|
|
Other current liabilities
|
223
|
|
|
210
|
|
Total current liabilities
|
6,469
|
|
|
6,930
|
|
Noncurrent liabilities:
|
|
|
|
Long-term debt, net of current portion and unamortized debt discount
|
57,728
|
|
|
53,441
|
|
Total noncurrent liabilities
|
57,728
|
|
|
53,441
|
|
Total liabilities
|
$
|
64,197
|
|
|
$
|
60,371
|
|
Restricted Cash
The Company's restricted cash, included in current assets in the accompanying condensed consolidated balance sheets, totaled
$1.5 million
and
$2.1 million
as of
February 29, 2016
and
November 30, 2016
, respectively.
The terms of our 98.7FM non-recourse notes and related agreements discussed in Note 4 restrict a portion of our cash on deposit for specific operating and financing purposes. Restricted cash related to the 98.7FM non-recourse notes and related agreements totaled
$1.5 million
and
$1.4 million
as of
February 29, 2016
and
November 30, 2016
, respectively.
In connection with the Company's agreement with Sprint/United Management Company (“Sprint”), the Company collects cash from other participating companies in the radio industry and remits cash collected to Sprint. The entirety of cash collected but not yet remitted to Sprint classified as restricted cash as of
November 30, 2016
was
$0.6 million
. The Company had remitted to Sprint all collected cash related to its agreement as of February 29, 2016.
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 Technologies Inc., a dynamic pricing business (hereinafter "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 nine months ended November 30, 2015 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Austin radio partnership
|
|
Digonex
|
|
Total noncontrolling interests
|
Balance, February 28, 2015
|
|
$
|
47,883
|
|
|
$
|
(1,222
|
)
|
|
$
|
46,661
|
|
Net income (loss)
|
|
4,724
|
|
|
(3,150
|
)
|
|
1,574
|
|
Distributions to noncontrolling interests
|
|
(4,391
|
)
|
|
—
|
|
|
(4,391
|
)
|
Balance, November 30, 2015
|
|
$
|
48,216
|
|
|
$
|
(4,372
|
)
|
|
$
|
43,844
|
|
|
|
|
|
|
|
|
Balance, February 29, 2016
|
|
$
|
47,556
|
|
|
$
|
(9,159
|
)
|
|
$
|
38,397
|
|
Net income (loss)
|
|
4,453
|
|
|
(3,976
|
)
|
|
477
|
|
Distributions to noncontrolling interests
|
|
(4,263
|
)
|
|
—
|
|
|
(4,263
|
)
|
Balance, November 30, 2016
|
|
$
|
47,746
|
|
|
$
|
(13,135
|
)
|
|
$
|
34,611
|
|
Recent Accounting Pronouncements
In November, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2016-18, Statement of Cash Flows (230): Restricted Cash. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective in annual and quarterly periods in fiscal years beginning after December 15, 2017, with early adoption permitted, and requires a retrospective transition method. The Company is currently in the process of evaluating the impact of the adoption of this standard on its statement of cash flows.
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. The FASB deferred implementation of this guidance by one year with the issuance of Accounting Standards Update 2015-14. As such, this guidance will be effective for the Company in the first quarter of its fiscal year ending February 28, 2019. The Company is currently evaluating the method of adoption and impact, if any, the adoption of this guidance will have on its financial position and results of operations.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern - 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. ASU 2014-15 is effective for the fiscal year ending February 28, 2017, and for annual periods and interim periods thereafter. Early adoption is permitted. 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 adoption of this guidance did not have any effect on the Company's financial position, results of operations, or cash flows.
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 adoption of this guidance did not have any effect on the Company's financial position, results of operations, or cash flows.
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.
In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting (ASU 2016-09) to simplify the accounting for share-based payment transactions, including the income tax consequences, and standardize certain classifications on the statement of cash flows. As permitted by ASU 2016-09, the Company chose to early adopt the provisions of this update as of March 1, 2016. The adoption of this guidance did not have any effect on the Company's financial position, results of operations, or cash flows.
Note 2.
Share Based Payments
The amounts recorded as share based compensation expense consist of stock option grants, restricted stock grants, and common stock issued to employees and directors in lieu of cash payments.
Stock Option Awards
The Company has granted options to purchase its common stock to employees and directors of the Company under various stock option plans at no less than the fair market value of the underlying stock on the date of grant. These options are granted for a term not exceeding
10 years
and are forfeited, except in certain circumstances, in the event the employee or director terminates his or her employment or relationship with the Company. Generally, these options either vest annually over
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
nine
months ended
November 30, 2015
and
2016
:
|
|
|
|
|
|
Nine Months Ended November 30,
|
|
2015
|
|
2016
|
Risk-Free Interest Rate:
|
1.3% - 1.4%
|
|
0.9% - 1.2%
|
Expected Dividend Yield:
|
0%
|
|
0%
|
Expected Life (Years):
|
4.3
|
|
4.3
|
Expected Volatility:
|
57.2% - 64.6%
|
|
55.5% - 60.0%
|
The following table presents a summary of the Company’s stock options outstanding at
November 30, 2016
, and stock option activity during the
nine
months ended
November 30, 2016
(“Price” reflects the weighted average exercise price per share; "Aggregate Intrinsic Value" dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding, beginning of period
|
1,948,384
|
|
|
$
|
6.36
|
|
|
|
|
|
Granted
|
179,678
|
|
|
2.42
|
|
|
|
|
|
Exercised
|
57,738
|
|
|
1.98
|
|
|
|
|
|
Forfeited
|
12,499
|
|
|
7.12
|
|
|
|
|
|
Expired
|
21,307
|
|
|
39.59
|
|
|
|
|
|
Outstanding, end of period
|
2,036,518
|
|
|
5.79
|
|
|
6.4
|
|
$
|
745
|
|
Exercisable, end of period
|
1,203,843
|
|
|
6.00
|
|
|
4.9
|
|
$
|
327
|
|
Cash received from option exercises for the nine months ended
November 30, 2015
and 2016 was
$0.1 million
in both periods. The Company did not record an income tax benefit relating to the options exercised during the
nine
months ended
November 30, 2015
or 2016.
The weighted average per share grant date fair value of options granted during the
nine
months ended
November 30, 2015
and
2016
, was
$4.04
and
$1.15
, respectively.
A summary of the Company’s nonvested options at
November 30, 2016
, and changes during the
nine
months ended
November 30, 2016
, is presented below:
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted Average
Grant Date
Fair Value
|
Nonvested, beginning of period
|
830,803
|
|
|
$
|
3.71
|
|
Granted
|
179,678
|
|
|
1.15
|
|
Vested
|
165,307
|
|
|
5.31
|
|
Forfeited
|
12,499
|
|
|
3.62
|
|
Nonvested, end of period
|
832,675
|
|
|
2.84
|
|
There were
1.4 million
shares available for future grants under the Company’s various equity plans (
1.1 million
shares under the 2016 Equity Compensation Plan and
0.3 million
shares under other plans) at November 30, 2016, not including shares that may become available for future grants upon forfeiture, lapse or surrender for taxes.
The vesting dates of outstanding options at
November 30, 2016
range from January 2017 to July 2019, and expiration dates range from March 2017 to September 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 2016 Equity Compensation Plan. The Company may also award, out of the Company’s 2016 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.
The following table presents a summary of the Company’s restricted stock grants outstanding at
November 30, 2016
, and restricted stock activity during the
nine
months ended
November 30, 2016
(“Price” reflects the weighted average share price at the date of grant):
|
|
|
|
|
|
|
|
|
Awards
|
|
Price
|
Grants outstanding, beginning of period
|
212,995
|
|
|
$
|
7.12
|
|
Granted
|
340,461
|
|
|
3.11
|
|
Vested (restriction lapsed)
|
328,001
|
|
|
4.23
|
|
Grants outstanding, end of period
|
225,455
|
|
|
5.27
|
|
The total grant date fair value of shares vested during the
nine
months ended
November 30, 2015
and
2016
, was
$2.8 million
and
$1.4 million
, respectively.
Recognized Non-Cash Compensation Expense
The following table summarizes stock-based compensation expense recognized by the Company during the three and nine months ended
November 30, 2015
and
2016
. The Company did not recognize any tax benefits related to stock-based compensation during the periods presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30,
|
|
Nine Months Ended November 30,
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
Station operating expenses
|
$
|
365
|
|
|
$
|
221
|
|
|
$
|
1,610
|
|
|
$
|
755
|
|
Corporate expenses
|
539
|
|
|
480
|
|
|
3,059
|
|
|
1,462
|
|
Stock-based compensation expense included in operating expenses
|
$
|
904
|
|
|
$
|
701
|
|
|
$
|
4,669
|
|
|
$
|
2,217
|
|
As of
November 30, 2016
, there was
$1.6 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
1.3
years.
Note 3.
Intangible Assets and Goodwill
Valuation of Indefinite-lived Broadcasting Licenses
In accordance with ASC Topic 350,
Intangibles—Goodwill and Other,
the Company’s Federal Communications Commission (“FCC”) licenses are considered indefinite-lived intangibles. These assets, which the Company determined were its only indefinite-lived intangibles, are not subject to amortization, but are tested for impairment at least annually as discussed below.
The carrying amounts of the Company’s FCC licenses were
$205.1 million
as of
February 29, 2016
and
November 30, 2016
. As of November 30, 2016,
$0.7 million
of the Company's FCC licenses were classified as held for sale (see Note 10 for more discussion). Pursuant to Emmis’ accounting policy, stations in a geographic market cluster are considered a single unit of accounting, provided that they are not being operated under an LMA with another broadcaster. The Company generally performs its annual impairment test of indefinite-lived intangibles as of December 1 of each year. When indicators of impairment are present, the Company will perform an interim impairment test. During the nine months ended
November 30, 2016
, no new or additional impairment indicators emerged; hence, no interim impairment testing was warranted. These impairment tests may result in impairment charges in future periods.
Fair value of our FCC licenses is estimated to be the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. To determine the fair value of our FCC licenses, the Company uses an income valuation method when it performs its impairment tests. Under this method, the Company projects cash flows that would be generated by each of its units of accounting assuming the unit of accounting was commencing operations in its respective market at the beginning of the valuation period. This cash flow stream is discounted to arrive at a value for the FCC license. The Company assumes the competitive situation that exists in each market remains unchanged, with the exception that its unit of accounting commenced operations at the beginning of the valuation period. In doing so, the Company extracts the value of going concern and any other assets acquired, and strictly values the FCC license. Major assumptions involved in this analysis include market revenue, market revenue growth rates, unit of accounting audience share, unit of accounting revenue share and discount rate. Each of these assumptions may change in the future based upon changes in general economic conditions, audience behavior, consummated transactions, and numerous other variables that may be beyond our control. When evaluating our radio broadcasting licenses for impairment, the testing is performed at the unit of accounting level as determined by ASC Topic 350-30-35. In our case, radio stations in a geographic market cluster are considered a single unit of accounting, provided that they are not being operated under an LMA.
Valuation of Goodwill
ASC Topic 350-20-35 requires the Company to test goodwill for impairment at least annually using a two-step process. The first step is a screen for potential impairment, while the second step measures the amount of impairment. The Company conducts the two-step impairment test on December 1 of each fiscal year, unless indications of impairment exist during an interim period. During the quarter ended August 31, 2016, the Company lowered its growth expectations for Digonex for the next several years due to slow client adoption of dynamic pricing services. While the Company continues to believe in the long-term growth prospects of Digonex, the lengthy sales cycle has caused Digonex to perform below expectations to date. Despite lowering near-term growth expectations for Digonex in connection with our annual impairment review for fiscal 2016, which led to a goodwill impairment charge of
$0.7 million
, performance in the first six months of the current fiscal year indicated that a further revision was appropriate. Our projections now assume Digonex will generate cash flow losses in the
short and medium-term. The combination of lower-than-expected current period results, coupled with downward revisions to future revenue projections, resulted in an impairment indicator that caused the Company to assess goodwill and related intangibles on an interim basis during the quarter ended August 31, 2016. The Company's discounted cash flow analysis for Digonex indicated a nominal enterprise value. Therefore, in connection with the interim impairment test, Emmis determined that Digonex's goodwill was fully impaired and recorded an impairment loss of
$2.1 million
during the quarter ended August 31, 2016.
When assessing its goodwill of radio and publishing operations for impairment, the Company generally uses an enterprise valuation approach to determine the fair value of each of the Company’s reporting units (radio stations grouped by market and magazines on an individual basis). Management determines enterprise value for each of its reporting units by multiplying the two-year average station operating income generated by each reporting unit (current year based on actual results and the next year based on budgeted results) by an estimated market multiple. The Company uses a blended station operating income trading multiple of publicly traded radio operators as a benchmark for the multiple it applies to its radio reporting units. There are no publicly traded publishing companies that are focused predominantly on city and regional magazines as is our publishing segment. Therefore, the market multiple used as a benchmark for our publishing reporting units has been based on recently completed transactions within the city and regional magazine industry or analyst reports that include valuations of magazine divisions within publicly traded media conglomerates. Management believes this methodology for valuing radio and publishing properties is a common approach and believes that the multiples used in the valuation are reasonable given our peer comparisons and recent market transactions. 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.
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 following table summarizes the Company's goodwill by segment as of
February 29, 2016
and
November 30, 2016
.
|
|
|
|
|
|
|
|
|
|
As of February 29,
|
|
As of November 30,
|
|
2016
|
|
2016
|
Radio
|
$
|
4,603
|
|
|
$
|
4,603
|
|
Publishing
|
8,036
|
|
|
—
|
|
Corporate & Emerging Technologies
|
2,058
|
|
|
—
|
|
Total Goodwill
|
$
|
14,697
|
|
|
$
|
4,603
|
|
The change in publishing goodwill relates to the Company's sale of
Texas Monthl
y (see Note 10 for more discussion).
Definite-lived intangibles
The Company’s definite-lived intangible assets consist of trademarks, customer lists, and a syndicated programming contract, all of which are amortized over the period of time the assets are expected to contribute directly or indirectly to the Company’s future cash flows. The following table presents the weighted-average useful life, gross carrying amount and accumulated amortization for each major class of definite-lived intangible assets at
February 29, 2016
and
November 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29, 2016
|
|
As of November 30, 2016
|
|
|
|
|
(in 000's)
|
|
|
Weighted Average Remaining Useful Life (in years)
|
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net Carrying Amount
|
Trademarks
|
|
8.4
|
|
$
|
1,240
|
|
$
|
727
|
|
$
|
513
|
|
|
$
|
756
|
|
$
|
558
|
|
$
|
198
|
|
Patents
|
|
N/A
|
|
1,815
|
|
1,141
|
|
674
|
|
|
—
|
|
—
|
|
—
|
|
Customer lists
|
|
0.5
|
|
1,015
|
|
543
|
|
472
|
|
|
315
|
|
264
|
|
51
|
|
Programming agreement
|
|
4.8
|
|
2,154
|
|
514
|
|
1,640
|
|
|
2,154
|
|
734
|
|
1,420
|
|
TOTAL
|
|
|
|
$
|
6,224
|
|
$
|
2,925
|
|
$
|
3,299
|
|
|
$
|
3,225
|
|
$
|
1,556
|
|
$
|
1,669
|
|
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. As discussed above, performance below the Company's expectations, coupled with a downward revision of long-term forecasts for Digonex, led the Company to measure impairment for Digonex's definite-lived intangibles during the quarter ended August 31, 2016. The Company determined that the patents, customer list and trademarks of Digonex were fully impaired and recorded an impairment loss of
$0.9 million
.
Total amortization expense from definite-lived intangibles for the nine-month periods ended
November 30, 2015
and
2016
was
$0.5 million
and
$0.6 million
, respectively. The following table presents the Company's estimate of amortization expense for each of the five succeeding fiscal years for definite-lived intangibles:
|
|
|
|
|
|
Year ended February 28 (29),
|
|
Expected Amortization Expense
|
|
|
(in 000's)
|
2017
|
|
$
|
665
|
|
2018
|
|
344
|
|
2019
|
|
317
|
|
2020
|
|
317
|
|
2021
|
|
317
|
|
Note 4.
Long-term Debt
Long-term debt was comprised of the following at
February 29, 2016
and
November 30, 2016
:
|
|
|
|
|
|
|
|
|
|
February 29,
2016
|
|
November 30,
2016
|
2014 Credit Agreement debt :
|
|
|
|
Revolver
|
$
|
3,000
|
|
|
$
|
2,000
|
|
Term Loan
|
181,762
|
|
|
156,955
|
|
Total 2014 Credit Agreement debt
|
184,762
|
|
|
158,955
|
|
|
|
|
|
98.7FM non-recourse debt
|
65,411
|
|
|
61,356
|
|
Digonex non-recourse debt
(1)
|
4,714
|
|
|
5,270
|
|
Less: Current maturities
|
(17,573
|
)
|
|
(10,583
|
)
|
Less: Unamortized original issue discount
|
(9,287
|
)
|
|
(7,570
|
)
|
Total long-term debt
|
$
|
228,027
|
|
|
$
|
207,428
|
|
(1)
The face value of Digonex non-recourse 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.
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 the 2012 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.
The Term Loan is due not later than June 10, 2021 and initially amortized in an amount equal to
1%
per annum (subsequently amended, see below) of the original principal amount of the Term Loan, 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 will be payable quarterly on the average unused amount of the revolving credit facility. Prior to the amendments 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%
.
The 2014 Credit Agreement is carried on our condensed consolidated balance sheets net of an original issue discount. The original issue discount, which was
$7.1 million
and
$5.5 million
as of February 29, 2016 and
November 30, 2016
, respectively, is 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 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 the Second Amendment to the 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. Emmis paid a total of approximately
$1.1 million
of transaction fees to the Lenders that consented to the Second Amendment, which were recorded as original issue discount and are being amortized over the remaining life of the 2014 Credit Agreement.
On August 22, 2016, Emmis entered into the Third Amendment to the 2014 Credit Agreement. The Third Amendment made certain changes to the Credit Agreement to facilitate the Company's consideration of and, if approved by the Company's Board of Directors and shareholders, entry into a transaction that would have resulted in the Class A common stock of the Company ceasing to be registered under the Securities Act of 1934 (such potential transaction, a "Going Private Transaction"). Specifically, the Third Amendment added an exception to the covenant restricting transactions with affiliates that (i) permitted the Company to enter into a Going Private Transaction with an affiliate of the Company and (ii) permitted the Borrower to pay any costs incurred or reimbursed by an affiliate of the Company in connection with a Going Private Transaction, whether or not the transaction was consummated. The Third Amendment also allowed the Company to add certain costs and expenses incurred in connection with a Going Private Transaction to Consolidated EBITDA, as defined in the Credit Agreement, for purposes of determining compliance with the financial covenants in the Credit Agreement, subject to caps of (i)
$2.5 million
if a Going Private Transaction was not recommended by a special committee of the Company’s Board of Directors and (ii)
$8.0 million
if a Going Private Transaction was recommended by a special committee of the Company’s Board of Directors but not consummated. Finally, the Third Amendment made certain changes to the Credit Agreement that would have been effective only if a Going Private Transaction was consummated. The Third Amendment also required the Borrower to pay a
50
basis point fee to the lenders that consented to it either if a Going Private Transaction was consummated or if such a transaction was
recommended by a special committee of the board of directors of the Company but not consummated. The special committee of the board of directors did not recommend the Going Private Transaction and no such transaction was consummated. See Note 10 for discussion of the Going Private Transaction.
In connection with the closing of the sale of
Texas Monthly
on November 1, 2016, Emmis repaid
$15.0 million
of Term Loans and
$8.5 million
of Revolver borrowings (see Note 10 for more discussion of the sale of
Texas Monthly
). Under the terms of the 2014 Credit Agreement, Emmis was required to use all Net Available Proceeds (as defined in the 2014 Credit Agreement) from the sale of
Texas Monthly
to repay Term Loans unless it exercised its right under the 2014 Credit Agreement to reinvest a portion of the Net Available Proceeds in new long-term assets of the Company. On November 1, 2016, Emmis exercised this reinvestment right for up to
$10.0 million
of Net Available Proceeds. This election allows the Company to reduce the amount of Net Available Proceeds by amounts used to purchase assets within 365 days of the election, or 545 days of the election so long as the asset purchase is under contract within 365 days. Routine capital expenditures qualify as a reinvestment under the terms of the 2014 Credit Agreement. The calculation of Net Available Proceeds is also reduced for transaction-related costs and certain other estimates including severance obligations that Emmis may be required to fund if employees are terminated by the buyer of
Texas Monthly
prior to February 28, 2017. Future changes in these estimates will impact the calculation of Net Available Proceeds. The current calculation of Net Available Proceeds, reinvestments and Term Loan repayments related to the sale of
Texas Monthly
is as follows:
|
|
|
|
|
|
Term Loan Repayments
Texas Monthly
Sale
|
Gross proceeds from the sale of
Texas Monthly
|
$
|
25,000
|
|
Working capital and other closing adjustments
|
(747
|
)
|
Estimate of transaction costs
|
(126
|
)
|
Estimate of employee-related transaction costs, including maximum reimbursement to buyer for severance
|
(2,977
|
)
|
Subtotal
|
21,150
|
|
Less: Reinvestments - capital expenditures since November 1, 2016
|
(388
|
)
|
Less: Term Loan repayment on November 1, 2016
|
(15,000
|
)
|
Remaining Net Available Proceeds, subject to finalization of estimates and reinvestments
|
$
|
5,762
|
|
This amount is not included as a current maturity of long-term debt in the accompanying condensed consolidated balance sheet as of November 30, 2016 because the amount, if any, of additional Net Available Proceeds required to be used to repay Term Loans within one year is not determinable primarily because such amounts are reduced by future capital expenditures that we may incur.
We were in compliance with all financial and non-financial covenants as of
November 30, 2016
. Our Total Leverage Ratio and Interest Coverage Ratio (each as defined in the 2014 Credit Agreement) requirements and actual amounts as of
November 30, 2016
were as follows:
|
|
|
|
|
|
As of November 30, 2016
|
|
Covenant Requirement
|
|
Actual Results
|
Maximum Total Leverage Ratio
|
6.00 : 1.00
|
|
5.53 : 1.00
|
Minimum Interest Coverage Ratio
|
2.00 : 1.00
|
|
2.32 : 1.00
|
98.7FM Non-recourse Debt
On May 30, 2012, the Company, through wholly-owned, newly-created subsidiaries, issued
$82.2 million
of non-recourse 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 and its 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%
. The 98.7FM non-recourse notes are carried on our condensed consolidated balance sheets net of an original issue discount. The original issue discount, which was
$2.2 million
and
$2.0 million
as of February 29, 2016 and
November 30, 2016
, respectively, is being amortized as additional interest expense over the life of the notes.
Digonex Non-recourse Debt
Digonex non-recourse notes payable consist of notes payable issued by Digonex, which were recorded at fair value on June 16, 2014, the date that Emmis acquired a controlling interest in Digonex. The notes payable, some of which are secured by the assets of Digonex, are non-recourse to the rest of the Company and its subsidiaries. The notes payable mature on December 31, 2017 and accrue interest at
5.0%
per annum. Interest is due at maturity. The face value of the notes payable is
$6.2 million
. The Company is accreting the difference between this face value and the original
$3.6 million
fair value of the notes payable recorded in the acquisition of its controlling interest of the business as interest expense over the remaining term of the notes payable.
As a result of our mandatory repayment of Term Loans in connection with our sale of
Texas Monthly
, quarterly mandatory Term Loan repayments decreased from
$2.3 million
per quarter to
$1.6 million
per quarter. Also, no quarterly amortization payment is due on January 1, 2017. Quarterly amortization payments will resume effective April 1, 2017. Based on amounts outstanding at
November 30, 2016
, mandatory principal payments of long-term debt for the next five years and thereafter are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
2014 Credit Agreement
|
|
|
|
Digonex
|
|
Total
|
February 28 (29),
|
Revolver
|
|
Term Loan
|
|
98.7FM Debt
|
|
Notes payable
|
|
Payments
|
2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,398
|
|
|
$
|
—
|
|
|
$
|
1,398
|
|
2018
|
—
|
|
|
6,265
|
|
|
6,039
|
|
|
6,199
|
|
|
18,503
|
|
2019
|
—
|
|
|
6,265
|
|
|
6,587
|
|
|
—
|
|
|
12,852
|
|
2020
|
2,000
|
|
|
6,265
|
|
|
7,150
|
|
|
—
|
|
|
15,415
|
|
2021
|
—
|
|
|
6,265
|
|
|
7,756
|
|
|
—
|
|
|
14,021
|
|
Thereafter
|
—
|
|
|
131,895
|
|
|
32,426
|
|
|
—
|
|
|
164,321
|
|
Total
|
$
|
2,000
|
|
|
$
|
156,955
|
|
|
$
|
61,356
|
|
|
$
|
6,199
|
|
|
$
|
226,510
|
|
Note 5.
Liquidity
The Company continually projects its anticipated cash needs, which include its operating needs, capital needs, and principal and interest payments on its indebtedness. As of the filing of this Form 10-Q, management believes the Company can meet its liquidity needs through the end of fiscal year 2017 with cash and cash equivalents on hand and projected cash flows from operations. Based on these projections, management also believes the Company will be in compliance with its debt covenants through the end of fiscal year 2017.
Note 6.
Fair Value Measurements
As defined in ASC Topic 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
Recurring Fair Value Measurements
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of
February 29, 2016
and
November 30, 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 November 30, 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
|
|
(in 000's)
|
Available for sale securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
800
|
|
Total assets measured at fair value on a recurring basis
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(in 000's)
|
Available for sale securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
800
|
|
Total assets measured at fair value on a recurring basis
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
800
|
|
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 and is included in other assets, net in the accompanying condensed consolidated balance sheets. The investment is recorded at fair value, which was generally estimated using significant unobservable market parameters, resulting in a level 3 categorization. The carrying value of our preferred stock investment was determined by using implied valuations of recent rounds of financing and by other corroborating evidence, which may include the application of various valuation methodologies including option-pricing and discounted cash flow based models.
The following table shows a reconciliation of the beginning and ending balances for fair value measurements using significant unobservable inputs:
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended November 30,
|
|
2015
|
|
2016
|
|
Available
For Sale
Securities
|
|
Available
For Sale
Securities
|
Beginning Balance
|
$
|
500
|
|
|
$
|
800
|
|
Purchases
|
—
|
|
|
—
|
|
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 3, Intangible Assets and Goodwill, and are adjusted to fair value only when the carrying values are more than the fair values. The categorization of the framework used to price the assets is considered a Level 3 measurement due to the subjective nature of the unobservable inputs used to determine the fair value (see Note 3 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.
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
November 30, 2016
, the fair value and carrying value, excluding original issue discount, of the Company's 2014 Credit Agreement debt was
$144.6 million
and
$159.0 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.
Note 7.
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. These business segments are consistent with the Company’s management of these businesses and its financial reporting structure. Corporate expenses are not allocated to reportable segments. The Company’s segments operate exclusively in the United States.
The accounting policies as described in the summary of significant accounting policies included in the Company’s Annual Report filed on Form 10-K, for the year ended
February 29, 2016
, and in Note 1 to these condensed consolidated financial statements, are applied consistently across segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, 2016
|
Radio
|
|
Publishing
|
|
Corporate & Emerging Technologies
|
|
Consolidated
|
Net revenues
|
$
|
42,462
|
|
|
$
|
13,633
|
|
|
$
|
204
|
|
|
$
|
56,299
|
|
Station operating expenses excluding and depreciation and amortization expense
|
28,979
|
|
|
13,828
|
|
|
2,619
|
|
|
45,426
|
|
Corporate expenses excluding depreciation and amortization expense
|
—
|
|
|
—
|
|
|
3,397
|
|
|
3,397
|
|
Depreciation and amortization
|
854
|
|
|
59
|
|
|
219
|
|
|
1,132
|
|
Gain on sale of publishing assets, net of disposition costs
|
—
|
|
|
(17,491
|
)
|
|
—
|
|
|
(17,491
|
)
|
Operating income (loss)
|
$
|
12,629
|
|
|
$
|
17,237
|
|
|
$
|
(6,031
|
)
|
|
$
|
23,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, 2015
|
Radio
|
|
Publishing
|
|
Corporate & Emerging Technologies
|
|
Consolidated
|
Net revenues
|
$
|
42,634
|
|
|
$
|
16,658
|
|
|
$
|
322
|
|
|
$
|
59,614
|
|
Station operating expenses excluding LMA fees and depreciation and amortization expense
|
27,352
|
|
|
14,310
|
|
|
1,992
|
|
|
43,654
|
|
Corporate expenses excluding depreciation and amortization expense
|
—
|
|
|
—
|
|
|
2,810
|
|
|
2,810
|
|
Depreciation and amortization
|
934
|
|
|
68
|
|
|
530
|
|
|
1,532
|
|
Operating income (loss)
|
$
|
14,348
|
|
|
$
|
2,280
|
|
|
$
|
(5,010
|
)
|
|
$
|
11,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, 2016
|
Radio
|
|
Publishing
|
|
Corporate & Emerging Technologies
|
|
Consolidated
|
Net revenues
|
$
|
131,133
|
|
|
$
|
39,344
|
|
|
$
|
598
|
|
|
$
|
171,075
|
|
Station operating expenses excluding depreciation and amortization expense
|
87,915
|
|
|
40,265
|
|
|
7,226
|
|
|
135,406
|
|
Corporate expenses excluding depreciation and amortization expense
|
—
|
|
|
—
|
|
|
8,894
|
|
|
8,894
|
|
Impairment loss
|
—
|
|
|
—
|
|
|
2,988
|
|
|
2,988
|
|
Depreciation and amortization
|
2,642
|
|
|
201
|
|
|
903
|
|
|
3,746
|
|
Gain on sale of publishing assets, net of disposition costs
|
—
|
|
|
(17,491
|
)
|
|
—
|
|
|
(17,491
|
)
|
Loss on disposal of property and equipment
|
125
|
|
|
—
|
|
|
—
|
|
|
125
|
|
Operating income (loss)
|
$
|
40,451
|
|
|
$
|
16,369
|
|
|
$
|
(19,413
|
)
|
|
$
|
37,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, 2015
|
Radio
|
|
Publishing
|
|
Corporate & Emerging Technologies
|
|
Consolidated
|
Net revenues
|
$
|
132,789
|
|
|
$
|
46,775
|
|
|
$
|
985
|
|
|
$
|
180,549
|
|
Station operating expenses excluding depreciation and amortization expense
|
87,925
|
|
|
43,557
|
|
|
5,449
|
|
|
136,931
|
|
Corporate expenses excluding depreciation and amortization expense
|
—
|
|
|
—
|
|
|
10,116
|
|
|
10,116
|
|
Depreciation and amortization
|
2,528
|
|
|
192
|
|
|
1,665
|
|
|
4,385
|
|
Operating income (loss)
|
$
|
42,336
|
|
|
$
|
3,026
|
|
|
$
|
(16,245
|
)
|
|
$
|
29,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
Radio
|
|
Publishing
|
|
Corporate & Emerging Technologies
|
|
Consolidated
|
As of February 29, 2016
|
$
|
271,336
|
|
|
$
|
22,060
|
|
|
$
|
23,210
|
|
|
$
|
316,606
|
|
As of November 30, 2016
|
$
|
273,654
|
|
|
$
|
10,578
|
|
|
$
|
17,835
|
|
|
$
|
302,067
|
|
Note 8.
Regulatory, Legal and Other Matters
Emmis is a party to various legal proceedings arising in the ordinary course of business. In the opinion of management of the company, however, there are no legal proceedings pending against the company that we believe are likely to have a material adverse effect on the company.
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 U.S. Court of Appeals for the District of Columbia upheld the license transfer, but the plaintiffs filed a Petition for Writ of Certiorari with the United States Supreme Court. The United States Supreme Court declined to hear the appeal on October 17, 2016.
In March 2015, an individual filed a lawsuit in the Federal District Court in 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. The United States District Court for the Southern District of New York dismissed this case on September 14, 2016, and no appeal was timely filed.
Note 9.
Income Taxes
Our effective income tax rate was
17%
and
9%
for the nine-month periods ended November 30, 2015 and 2016. The Company recorded a valuation allowance for its net deferred tax assets generated during the period, including its net operating loss carryforwards, but excluding deferred tax liabilities related to indefinite-lived intangibles. The provision associated with deferred tax liabilities related to indefinite-lived intangibles is estimated to be approximately
$2.5 million
for the year ending February 28, 2017.
Note 10.
Other Significant Events
Sale of Texas Monthly
On November 1, 2016, Emmis closed on its sale of
Texas Monthly
for gross proceeds of
$25.0 million
in cash to a subsidiary of Genesis Park, LP. The Company previously announced that it was exploring strategic alternatives for its publishing division, excluding
Indianapolis Monthly
. Emmis believes that its publishing portfolio has significant brand value and plans to use proceeds from the sale of its publishing properties to repay debt. Emmis received net proceeds of
$23.5 million
, consisting of the stated purchase price of
$25.0 million
, net of estimated purchase price adjustments totaling
$0.7 million
and disposition costs totaling
$0.8 million
. The $0.8 million of disposition costs primarily relate to Emmis' agreement to reimburse the buyer for severance costs pursuant to a predetermined schedule to the extent that the buyer terminates employees of
Texas Monthly
prior to February 28, 2017. This amount represents the Company's estimate of the probable amount of exposure under this agreement, which has been accrued and recorded as a reduction of the disposal gain. Additional severance amounts of up to
$1.8 million
could be incurred during the quarter ended February 28, 2017, if the buyer chooses to terminate additional employees. Any additional severance amounts will be recorded during the quarter ended February 28, 2017, as an adjustment to the disposal gain. Substantially all of the proceeds were used to repay term and revolving loan indebtedness under Emmis’ senior credit facility. Emmis recorded a
$17.5 million
gain on the sale of
Texas Monthly
.
Texas Monthly
had historically been included in our Publishing segment. The following table summarizes certain operating results of
Texas Monthly
for all periods presented. Pursuant to Accounting Standards Codification 205-20-45-6, interest expense associated with the required Term Loan repayment associated with the sale of
Texas Monthly
is included in the magazine's results below. The Term Loan repayment is preliminary and may be adjusted for revisions to estimates and the Company's reinvestment of proceeds of the
Texas Monthly
transaction. See Note 4 for more discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended November 30,
|
|
Nine Months ended November 30,
|
|
2015
|
2016
|
|
2015
|
2016
|
Net revenues
|
$
|
6,525
|
|
$
|
4,146
|
|
|
$
|
19,454
|
|
$
|
14,774
|
|
Station operating expenses, excluding depreciation and amortization expense
|
5,415
|
|
4,284
|
|
|
16,545
|
|
14,367
|
|
Depreciation and amortization
|
30
|
|
21
|
|
|
87
|
|
84
|
|
Operating income
|
1,080
|
|
(159
|
)
|
|
2,822
|
|
323
|
|
Interest expense
|
287
|
|
195
|
|
|
840
|
|
782
|
|
Other expense (income)
|
3
|
|
—
|
|
|
(361
|
)
|
(7
|
)
|
Income before income taxes
|
790
|
|
(354
|
)
|
|
2,343
|
|
(452
|
)
|
The following table presents unaudited pro forma consolidated financial information as if the closing of our disposition of
Texas Monthly
and the related
$15.0 million
mandatory debt repayment had occurred on March 1, 2015 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30,
|
|
Nine Months Ended
November 30,
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
Net revenues
|
$
|
53,089
|
|
|
$
|
52,153
|
|
|
$
|
161,095
|
|
|
$
|
156,301
|
|
Station operating expenses, excluding depreciation and amortization
|
38,239
|
|
|
41,142
|
|
|
120,386
|
|
|
121,039
|
|
Consolidated net income
|
5,178
|
|
|
1,120
|
|
|
10,698
|
|
|
4,135
|
|
Net income attributable to the Company
|
4,758
|
|
|
539
|
|
|
9,124
|
|
|
3,658
|
|
Net income per share - basic
|
$
|
0.43
|
|
|
$
|
0.04
|
|
|
$
|
0.83
|
|
|
$
|
0.31
|
|
Net income per share - diluted
|
$
|
0.40
|
|
|
$
|
0.04
|
|
|
$
|
0.77
|
|
|
$
|
0.30
|
|
Sale of Terre Haute radio stations
On October 12, 2016, Emmis entered into agreements to sell its radio stations in Terre Haute, Indiana. Emmis previously announced that it was exploring strategic alternatives for its Terre Haute radio stations and WLIB-AM in New York. Emmis believes selling these non-core radio stations will help the company to continue to de-lever its balance sheet. Under one purchase agreement, Emmis will sell the assets of WTHI-FM and the intellectual property of WWVR-FM to Midwest Communications, Inc. for gross proceeds of
$4.3
, subject to working capital and other closing adjustments. Under another purchase agreement, Emmis will sell the assets of WFNF-AM, WFNB-FM, WWVR-FM (other than the intellectual property for that station) and an FM translator to DLC Media, Inc. for gross proceeds of
$0.9 million
, subject to working capital and
other closing adjustments. The purchase agreements contain customary representations, warranties, covenants and indemnities. Because Midwest Communications is currently at the FCC ownership limits for FM radio stations in the Terre Haute market, Midwest contemporaneously entered into an agreement to sell one of its stations, WDKE-FM, to DLC Media. The closings under these three transactions are cross conditioned. The transactions are subject to FCC approval and other customary closing conditions, and are expected to close on January 30, 2017. The Terre Haute radio stations are included in our Radio segment. The following table summarizes certain operating results for the Terre Haute radio stations for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended November 30,
|
|
Nine Months ended November 30,
|
|
2015
|
2016
|
|
2015
|
2016
|
Net revenues
|
$
|
614
|
|
$
|
849
|
|
|
$
|
1,950
|
|
$
|
2,035
|
|
Station operating expenses, excluding depreciation and amortization expense
|
556
|
|
741
|
|
|
1,883
|
|
1,796
|
|
Depreciation and amortization
|
42
|
|
29
|
|
|
119
|
|
117
|
|
Operating income
|
16
|
|
79
|
|
|
(52
|
)
|
122
|
|
Emmis determined that the Terre Haute radio stations met the requirements for held for sale classification as of November 30, 2016. Noncurrent assets related to our Terre Haute radio stations as of February 29, 2016 and November 30, 2016 consisted of property and equipment and FCC Licenses as summarized in the following table. Terre Haute assets held for sale of $1.4 million as of November 30, 2016 are included in other current assets in the accompanying condensed consolidated balance sheets as the Company expects to close on the sale of the stations within the next twelve months. No reclassifications were made to classify Terre Haute assets as held for sale as of February 29, 2016.
|
|
|
|
|
|
|
As of February 29, 2016
|
As of November 30, 2016
|
|
(included in Property and equipment, net and Indefinite-lived intangibles)
|
(included in Other current assets)
|
Property and equipment, net
|
809
|
|
700
|
|
Indefinite-lived intangibles
|
721
|
|
721
|
|
Total Terre Haute assets held for sale
|
1,530
|
|
1,421
|
|
Nasdaq listing requirements
On July 26, 2016, the Nasdaq Stock Market LLC ("Nasdaq") informed the Company that the Company was in compliance with all applicable requirements for continued listing of its Class A common stock on Nasdaq. The Company requested and received a hearing before the Nasdaq Hearing Panel regarding the Nasdaq Listing Qualifications Staff's June 7, 2016, determination to delist the Company's Class A common stock due to the Company's non-compliance with the minimum bid price requirement. The Hearing Panel determined the Company had regained compliance with the minimum bid price requirement as a result of the one-for-four reverse stock split adopted July 8, 2016, and is otherwise compliant with all applicable Nasdaq listing criteria.
On March 17, 2016, Nasdaq filed with the United States Securities and Exchange Commission Form 25-NSE to formally delist the Company's Preferred Stock from the Nasdaq Global Select Market (formerly listed under the symbol "EMMSP"). The delisting occurred on March 28, 2016. Subsequently, the Company filed a Certification and Notice of Termination of Registration to cause the Preferred Stock to be deregistered under Section 12(g) of the Securities Exchange Act of 1934. Pursuant to the Company's articles of incorporation, each outstanding share of Preferred Stock was automatically converted on April 4, 2016, into the Company's Class A common stock at a ratio of
2.80
shares of Class A common stock for each share of Preferred Stock.
Digonex investment
On March 1, 2016, June 7, 2016, and September 1, 2016, Emmis contributed an additional
$0.5 million
to Digonex in the form of convertible debt. As of November 30, 2016. Emmis owns rights that are convertible into at least
79%
of the common equity of Digonex.
Going private offer
On August 18, 2016, the Board of Directors of the Company received a letter from E Acquisition Corporation ("EAC"), an Indiana corporation owned by Jeffrey H. Smulyan, the Company’s Chairman of the Board, Chief Executive Officer and controlling shareholder, setting forth a non-binding proposal by which E Acquisition Corporation (the “Proposing Person”),
would acquire all the outstanding shares of Class A Common Stock of the Company that are not owned by the Proposing Person at a cash purchase price of
$4.10
per share (the “Proposal”). The Proposal contemplated that, following the closing of the proposed transaction, the Company’s shares would no longer be registered with the Securities and Exchange Commission and the Company would no longer be a reporting company or have any public shares traded on Nasdaq.
The Company’s Board of Directors formed a special committee of independent and disinterested directors (the “Special Committee”) to review and evaluate the Proposal. The members of the Special Committee were Susan Bayh and Peter Lund. On October 14, 2016, EAC delivered to the Special Committee a letter (the “Proposal Expiration Letter”) confirming that the offer had expired on October 14, 2016 and had not been extended.
The Special Committee engaged independent legal counsel and independent financial advisors to assist the Special Committee in the evaluation of the Proposal. Through November 30, 2016, the Company incurred
$0.9 million
of costs associated with the Proposal, which are included in corporate expenses, excluding depreciation and amortization expense in the accompanying condensed consolidated statements of operations. No further costs are expected to be incurred in connection with the going private offer as it has expired.
Note 11.
Subsequent Events
Amendment of NextRadio LLC agreement with Sprint
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 NextRadio
smartphone application 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 serve as a conduit for the radio industry 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. Through November 30, 2016, NextRadio LLC had remitted
$33.2 million
to Sprint under the terms of this agreement.
Effective December 8, 2016, NextRadio LLC and Sprint entered into an Amendment of their original agreement. The Amendment calls for NextRadio LLC to make installment payments totaling
$6.0 million
commencing with a
$0.6 million
payment that was made on December 12, 2016. Installment payments are to be made periodically, with the last one due on March 15, 2017. Once the installment payments are completed, Sprint will forgive the remaining
$5.8 million
that it was due under the original agreement. Also in connection with this amendment, NextRadio LLC and Sprint agreed to increase Sprint's share of certain revenue generated by the NextRadio application. NextRadio LLC has received a loan of up to
$4.0 million
for the sole purpose of fulfilling the payment obligations to Sprint under the Amendment. The loan is to be repaid out of proceeds from sales of enhanced advertising through the NextRadio application. On December 22, 2016, NextRadio LLC received
$1.4
million under the loan, which was promptly remitted to Sprint. NextRadio is in discussions with radio broadcasters and other companies involved in the radio industry to fund the remaining installment payments due to Sprint.
Modification of Digonex non-recourse debt
In December 2016, holders of Digonex secured notes payable agreed to extend the maturity date of the notes from December 31, 2017 to December 31, 2020, provided that the holders of Digonex's unsecured notes payable agree to a similar extension. The notes will continue to accrue interest at
5.0%
per annum with interest payable at maturity.
Additional investment in Digonex
On January 3, 2017, Emmis contributed an additional
$0.5 million
to Digonex in the form of convertible debt. Subsequent to this contribution, Emmis owns rights that are convertible into approximately
80%
of the common equity of Digonex.