The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS INDICATED OTHERWISE)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Organization
We are a diversified media company, principally focused on radio broadcasting. Emmis owns 11 FM and 3 AM radio stations in New York, Indianapolis, and Austin (Emmis has a 50.1% controlling interest in Emmis’ radio stations located there). One of the FM radio stations that Emmis currently owns in New York is operated pursuant to a Local Marketing Agreement (“LMA”) whereby a third party provides the programming for the station and sells all advertising within that programming. On April 30, 2018, we sold our four radio stations in St. Louis. These stations were being operated pursuant to LMAs, which commenced on March 1, 2018 and remained in effect until the stations were sold.
In addition to our radio properties, we also publish
Indianapolis Monthly
and operate Digonex, a dynamic pricing business.
Substantially all of ECC’s business is conducted through its subsidiaries. Our long-term debt agreements contain 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.
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.
Revenue Recognition
The Company generates from the sale of services and products including, but not limited to: (i) on-air commercial broadcast time, (ii) magazine-related display advertising, (iii) magazine circulation and newsstand revenues, (iv) non-traditional revenues including event-related revenues and event sponsorship revenues, (v) revenues generated from LMAs and (vi) digital advertising. Payments received from advertisers before the performance obligation is satisfied are recorded as deferred revenue. Substantially all deferred revenue is recognized within twelve months of the payment date. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. 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.
Advertising
On-air broadcast revenue and magazine display revenue are recognized when or as performance obligations under the terms of a contract with a customer are satisfied. This typically occurs over the period of time that advertisements are provided, or as an event occurs. Revenues are reported at the amount the Company expects to be entitled to receive under the contract. Payments received by advertisers before the performance obligation is satisfied are recorded as deferred revenue in the consolidated balance sheet. Substantially all deferred revenue is recognized within twelve months of the payment date.
Circulation
Circulation revenue includes revenues for
Indianapolis Monthly
purchased by readers or distributors. Single copy newsstand sales are recognized when the monthly magazine is distributed, net of provisions for related returns. Circulation revenues from digital and home delivery subscriptions are recognized over the subscription period as the performance obligations are delivered.
Nontraditional
Nontraditional revenues principally consist of ticket sales and sponsorship of events our stations and magazine conduct in their local markets. These revenues are recognized when our performance obligations are fulfilled, which generally coincides with the occurrence of the related event.
LMA Fees
LMA fee revenue relates to fees that the Company collects from third parties in exchange for the right to program and sell advertising for a specified portion of a radio stations’ inventory of broadcast time. These revenues are generally recognized ratably over the duration that the third party programs the radio station.
Digital
Digital revenue relates to revenue generated from the sale of digital marketing services (including display advertisements and video sponsorships) to advertisers. Digital revenues are generally recognized as the digital advertising is delivered.
39
Table Of Contents
Disaggregation of Revenue
The following table presents the Company’s revenues disaggregated by revenue source:
|
|
For the Year Ended February 28,
|
|
|
|
2017
|
|
|
% of Total
|
|
|
2018
|
|
|
% of Total
|
|
|
2019
|
|
|
% of Total
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
145,710
|
|
|
|
67.9
|
%
|
|
$
|
98,667
|
|
|
|
66.4
|
%
|
|
$
|
74,597
|
|
|
|
65.4
|
%
|
Circulation
|
|
|
4,193
|
|
|
|
2.0
|
%
|
|
|
412
|
|
|
|
0.3
|
%
|
|
|
384
|
|
|
|
0.3
|
%
|
Non Traditional
|
|
|
22,936
|
|
|
|
10.7
|
%
|
|
|
17,280
|
|
|
|
11.6
|
%
|
|
|
12,897
|
|
|
|
11.3
|
%
|
LMA Fees
|
|
|
10,331
|
|
|
|
4.8
|
%
|
|
|
10,752
|
|
|
|
7.2
|
%
|
|
|
11,050
|
|
|
|
9.7
|
%
|
Digital
|
|
|
14,737
|
|
|
|
6.9
|
%
|
|
|
10,058
|
|
|
|
6.8
|
%
|
|
|
5,500
|
|
|
|
4.8
|
%
|
Other
|
|
|
16,661
|
|
|
|
7.7
|
%
|
|
|
11,318
|
|
|
|
7.7
|
%
|
|
|
9,703
|
|
|
|
8.5
|
%
|
Total net revenues
|
|
$
|
214,568
|
|
|
|
|
|
|
$
|
148,487
|
|
|
|
|
|
|
$
|
114,131
|
|
|
|
|
|
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 28, 2019 was as follows:
|
|
Balance At
Beginning
Of Year
|
|
|
Provision
|
|
|
Write-Offs
|
|
|
Balance
At End
Of Year
|
|
Year ended February 28, 2017
|
|
$
|
934
|
|
|
$
|
377
|
|
|
$
|
(408
|
)
|
|
$
|
903
|
|
Year ended February 28, 2018
|
|
|
903
|
|
|
|
699
|
|
|
|
(1,063
|
)
|
|
|
539
|
|
Year ended February 28, 2019
|
|
|
539
|
|
|
|
816
|
|
|
|
(960
|
)
|
|
|
395
|
|
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.
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.
On May 8, 2017, Emmis and an affiliate of the Meruelo Group (the “Meruelo Group”) entered into an LMA and asset purchase agreement related to KPWR-FM in Los Angeles. This LMA started on July 1, 2017 and terminated with the consummation of the sale of KPWR-FM on August 1, 2017. Emmis recognized $0.4 million of LMA fee revenue which is included in net revenues in our accompanying consolidated statements of operations during the year ended February 28, 2018. See Note 7 for more discussion of our sale of KPWR-FM to the Meruelo Group.
On April 30, 2018, Emmis closed on the sale of substantially all of its radio station assets in St. Louis. The St. Louis stations were operated pursuant to LMAs from March 1, 2018 through April 30, 2018. The buyers of the stations paid LMA fees totaling $0.7 million during the period, which is included in net revenues in our accompanying consolidated statements of operations during the year ended February 28, 2019. See Note 7 for more discussion of our sale of our St. Louis radio stations.
LMA fees recorded as net revenues in the accompanying consolidated statements of operations were as follows for the three years ended February 28, 2019:
|
|
For the years ended February 28,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
98.7FM, New York
|
|
$
|
10,331
|
|
|
$
|
10,331
|
|
|
$
|
10,331
|
|
KPWR-FM, Los Angeles
|
|
|
—
|
|
|
|
421
|
|
|
|
—
|
|
St. Louis Radio Cluster
|
|
|
—
|
|
|
|
—
|
|
|
|
719
|
|
Total LMA fees
|
|
$
|
10,331
|
|
|
$
|
10,752
|
|
|
$
|
11,050
|
|
40
Table Of Contents
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 Note 4 for more discussion of share-based compensation.
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.
Restricted Cash
As of February 28, 2019, restricted cash relates to cash on deposit in trust accounts related to our 98.7FM LMA in New York City that services long-term debt and cash held by JPMorgan Chase as collateral to secure the Company’s corporate purchasing card and travel and expense programs. Restricted cash as of February 28, 2018 also included cash held in escrow related to our sale of
Los Angeles Magazine
,
Atlanta Magazine
,
Cincinnati Magazine
and
Orange Coast Magazine
. The funds held in escrow as of February 28, 2018 were released during fiscal 2019 as the Company settled litigation with the buyer of these magazines during the year. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets to the same amounts shown in the consolidated statements of cash flows:
|
|
As of February 28,
|
|
|
|
2018
|
|
|
2019
|
|
Cash and cash equivalents
|
|
$
|
4,107
|
|
|
$
|
5,438
|
|
Restricted cash:
|
|
|
|
|
|
|
|
|
98.7FM LMA restricted cash (see Note 8)
|
|
|
1,358
|
|
|
|
1,504
|
|
Cash used to secure the Company's purchasing card and travel and expense programs
|
|
|
—
|
|
|
|
1,000
|
|
Cash held in escrow from magazine sale restricted cash (see Note 7)
|
|
|
650
|
|
|
|
—
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
6,115
|
|
|
$
|
7,942
|
|
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, office equipment and computer equipment, and three to five years for software. 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 below for more discussion of impairment policies related to our property and equipment. Depreciation expense for the years ended February 2017, 2018 and 2019 was $4.1 million, $3.3 million and $2.9 million, respectively.
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 28, 2019.
Definite-lived Intangibles
The Company’s definite-lived intangible assets primarily consist of trademarks, 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.
Advertising and Subscription Acquisition Costs
Advertising and subscription acquisition costs are expensed when incurred. Advertising expense and subscription acquisition costs for the years ended February 2017, 2018 and 2019 were $5.7 million, $2.6 million and $1.6 million, respectively.
41
Table Of Contents
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 those investments in which the Company does not have such significant influence, the Company applies the accounting guidance for certain investments in debt and equity securities.
Equity method investment
Emmis had a minority interest in a partnership that owns and operates various entertainment websites. During the year ended February 28, 2017, Emmis recorded a noncash impairment charge of $0.3 million in other (expense) income, net in the accompanying consolidated statements of operations as it deemed the investment was impaired and the impairment was other-than-temporary. This impairment charge reduced the carrying value of this investment to zero as of February 28, 2017. Emmis sold its noncontrolling stake in this partnership in March 2017. Proceeds from this sale were immaterial.
Available for sale investment
Emmis’ available for sale investment is an investment in the preferred shares of a non-public company. 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.
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.
Deferred Revenue and Barter Transactions
Deferred revenue includes deferred barter, other transactions in which payments are received prior to the performance of services (i.e. cash-in-advance advertising and prepaid LMA payments), and deferred magazine subscription revenue. 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. Magazine subscription revenue is recognized when the publication is shipped. Barter revenues for the years ended February 2017, 2018 and 2019 were $7.8 million, $4.7 million and $3.4 million, respectively, and barter expenses were $7.9 million, $4.8 million, and $3.5 million, respectively.
Earnings Per Share
ASC Topic 260 requires dual presentation of basic and diluted income 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 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 for the three years ended February 28, 2019 consisted of stock options and restricted stock awards.
The following table sets forth the calculation of basic and diluted net income per share from continuing operations:
|
|
For the year ended
|
|
|
|
February 28, 2017
|
|
|
February 28, 2018
|
|
|
February 28, 2019
|
|
|
|
Net Income
|
|
|
Shares
|
|
|
Net Income
Per Share
|
|
|
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 from continuing
operations
|
|
$
|
13,119
|
|
|
|
12,040
|
|
|
$
|
1.09
|
|
|
$
|
82,129
|
|
|
|
12,347
|
|
|
$
|
6.65
|
|
|
$
|
23,352
|
|
|
|
12,606
|
|
|
$
|
1.85
|
|
Impact of equity awards
|
|
|
—
|
|
|
|
189
|
|
|
|
|
|
|
|
—
|
|
|
|
279
|
|
|
|
|
|
|
|
—
|
|
|
|
842
|
|
|
|
|
|
Diluted net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders from continuing
operations
|
|
$
|
13,119
|
|
|
|
12,229
|
|
|
$
|
1.07
|
|
|
$
|
82,129
|
|
|
|
12,626
|
|
|
$
|
6.50
|
|
|
$
|
23,352
|
|
|
|
13,448
|
|
|
$
|
1.74
|
|
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,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
|
(shares in 000’s )
|
|
Stock options and restricted stock awards
|
|
|
1,341
|
|
|
|
1,951
|
|
|
|
1,089
|
|
42
Table Of Contents
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.
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.
During the year ended February 28, 2019, the Company dramatically scaled back the operations of its TagStation business in Chicago. In connection with this decision, the Company recorded an impairment charge of $0.3 million related to the long-lived tangible assets of TagStation. This charge is included in station operating expenses, excluding depreciation and amortization expense in the accompanying consolidated statements of operations.
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. As of February 28, 2019, Emmis owns rights that are convertible into approximately 84% of Digonex’s common equity.
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 2018 and 2019:
|
|
Austin Radio
Partnership
|
|
|
Digonex
|
|
|
Total
Noncontrolling
Interests
|
|
Balance, February 28, 2017
|
|
$
|
46,830
|
|
|
$
|
(13,909
|
)
|
|
$
|
32,921
|
|
Net income (loss)
|
|
|
5,465
|
|
|
|
(2,835
|
)
|
|
|
2,630
|
|
Payments of dividends and distributions to noncontrolling interests
|
|
|
(4,871
|
)
|
|
|
—
|
|
|
|
(4,871
|
)
|
Balance, February 28, 2018
|
|
|
47,424
|
|
|
|
(16,744
|
)
|
|
|
30,680
|
|
Net income (loss)
|
|
|
4,976
|
|
|
|
(2,249
|
)
|
|
|
2,727
|
|
Payments of dividends and distributions to noncontrolling interests
|
|
|
(5,254
|
)
|
|
|
—
|
|
|
|
(5,254
|
)
|
Balance, February 28, 2019
|
|
$
|
47,146
|
|
|
$
|
(18,993
|
)
|
|
$
|
28,153
|
|
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.
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 to 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 represented an incentive received from Katz that was recognized as a reduction of our national agency commission expense over the term of the agreement with Katz.
43
Table Of Contents
Liquidity and Going Concern
In accordance with 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, the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern each reporting period, including interim periods.
In evaluating the Company’s ability to continue as a going concern, management evaluated the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements were issued (May 9, 2019). Management considered the Company’s current projections of future cash flows, current financial condition, sources of liquidity and debt obligations due on or before May 9, 2020.
The Company successfully refinanced its 2014 Credit Agreement Debt in April 2019. Accordingly, the Company believes it has the ability to meet its obligations for at least one year from the date of issuance of this Form 10-K. See Note 16 for more discussion of the April 2019 refinance.
Recent Accounting Standards Updates
In January 2017, the FASB issued Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU was issued to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted this guidance on March 1, 2018 with no material impact on its consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 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. The Company adopted this guidance on March 1, 2018 with no material impact on its consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326), which introduces new guidance for an approach based on using expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. Instruments in scope include loans, held-to-maturity debt securities, and net investments in leases as well as reinsurance and trade receivables. This standard will be effective for us as of March 1, 2020. We are currently evaluating the impact that the adoption of the new standard will have on our consolidated financial statements.
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 statement of operations. Upon adoption on March 1, 2019, we expect to recognize a right of use asset and corresponding lease liability of $27 million to $31 million, representing the present value of future lease payments required under our lessee arrangements. We utilized lease terms ranging from 2019 to 2032, including periods for which exercising an extension option is reasonably assured and discount rates from 5.1% to 6.2% when determining the present value of future lease payments. All of our existing lessee arrangements upon adoption will continue to be classified as operating leases, in which case the pattern of lease expense recognition will be unchanged.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), 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. The Company adopted this guidance on March 1, 2018 using the modified retrospective method with no impact on its consolidated financial statements for the three years ending February 28, 2018. The cumulative effect of initially applying the new guidance had no impact on the opening balance of retained earnings as of March 1, 2018 and the Company does not expect this guidance will have a material impact on its consolidated financial statements in future periods.
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. All Class B common stock is owned by our Chairman, CEO and President, Jeffrey H. Smulyan, and automatically converts to Class A common stock upon sale or other transfer to a party unaffiliated with Mr. Smulyan. At February 28, 2018 and 2019, no shares of Class C common stock were issued or outstanding.
On July 8, 2016, the Company effected a one-for-four reverse stock split. As a result of the reverse stock split, every four shares of each class of the Company’s outstanding common stock were combined into one share of the same class of common stock and the authorized shares of each class of the Company’s common stock were reduced by the same ratio. In lieu of issuing fractional shares, the Company paid in cash the fair value of such fractions of a share as of July 7, 2016. Such fair value was $0.695 for each pre-split share of our outstanding common stock, which was the average closing sales price of the Class A common stock as reported by the Nasdaq Global Select Market for the thirty trading days preceding such date. The number and strike price of the Company’s outstanding stock options were adjusted proportionally. The par value of the Company’s common stock was not adjusted as a result of the reverse stock split.
44
Table Of Contents
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 during the year ended February 28, 2017, including the mandatory conversion date of April 4, 2016, 866,319 shares of Preferred Stock were originally converted into 2,452,692 shares of Class A common stock (606,423 shares of Class A common stock after the one-for-four reverse stock split).
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 2017, 2018 and 2019:
|
|
For the Years Ended February 28,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Risk-Free Interest Rate:
|
|
0.9% - 1.8%
|
|
|
1.7% - 2.0%
|
|
|
2.6% - 2.8%
|
|
Expected Dividend Yield:
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
Expected Life (Years):
|
|
4.3 - 4.4
|
|
|
|
4.4
|
|
|
4.8 - 4.9
|
|
Expected Volatility:
|
|
52.9% - 60.0%
|
|
|
52.9% - 53.9%
|
|
|
51.3% - 53.2%
|
|
The following table presents a summary of the Company’s stock options outstanding at February 28, 2019, and stock option activity during the year ended February 28, 2019 (“Price” reflects the weighted average exercise price per share):
|
|
Options
|
|
|
Price
|
|
|
Weighted
Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, beginning of period
|
|
|
2,691,329
|
|
|
$
|
4.66
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
259,000
|
|
|
|
4.64
|
|
|
|
|
|
|
|
|
|
Exercised (1)
|
|
|
157,918
|
|
|
|
2.32
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
5,500
|
|
|
|
4.16
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
46,995
|
|
|
|
8.92
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
2,739,916
|
|
|
|
4.72
|
|
|
|
6.0
|
|
|
$
|
1,770
|
|
Exercisable, end of period
|
|
|
2,131,741
|
|
|
|
5.08
|
|
|
|
5.2
|
|
|
$
|
1,334
|
|
(1)
|
The Company did not record an income tax benefit related to option exercises in the years ended February 2017, 2018 and 2019. Cash received from option exercises during the years ended February 2017, 2018 and 2019 was $0.1 million, $0.1 million and $0.4 million, respectively.
|
The weighted average grant date fair value of options granted during the years ended February 2017, 2018 and 2019, was $1.20 , $1.25 and $2.27, respectively.
45
Table Of Contents
A summary of the Company’s
nonvested options at February 28, 201
9
, and changes during the year ended February 28, 201
9
, is presented below:
|
|
Options
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Nonvested, beginning of period
|
|
|
691,114
|
|
|
$
|
2.10
|
|
Granted
|
|
|
259,000
|
|
|
|
2.27
|
|
Vested
|
|
|
336,439
|
|
|
|
3.07
|
|
Forfeited
|
|
|
5,500
|
|
|
|
2.03
|
|
Nonvested, end of period
|
|
|
608,175
|
|
|
|
1.64
|
|
There were 2.0 million shares available for future grants under the Company’s various equity plans at February 28, 2019 (1.7 million shares under the 2017 Equity Compensation Plan and 0.3 million shares under other plans). The vesting dates of outstanding options at February 28, 2019 range from March 2019 to July 2021, and expiration dates range from March 2019 to July 2028.
Restricted Stock Awards
The Company periodically grants restricted stock award to directors and employees. Awards to directors were historically granted on the date of our annual meeting of shareholders and vested on the earlier of (i) the completion of the director’s 3 -year term or (ii) the third anniversary of the date of grant. No such awards were made to directors at our last annual meeting of shareholders. Awards to employees are typically made pursuant to employment agreements. Restricted stock award grants are granted out of the Company’s 2017 Equity Compensation Plan. The Company also awards, out of the Company’s 2017 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 February 28, 2019, and restricted stock activity during the year ended February 28, 2019 (“Price” reflects the weighted average share price at the date of grant):
|
|
Awards
|
|
|
Price
|
|
Grants outstanding, beginning of period
|
|
|
353,394
|
|
|
$
|
3.05
|
|
Granted
|
|
|
219,356
|
|
|
|
4.45
|
|
Vested (restriction lapsed)
|
|
|
307,643
|
|
|
|
3.72
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Grants outstanding, end of period
|
|
|
265,107
|
|
|
|
3.43
|
|
The total grant date fair value of shares vested during the years ended February 2017, 2018 and 2019, was $1.8 million, $1.1 million and $1.1 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 2017, 2018 and 2019:
|
|
Year Ended February 28,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Station operating expenses
|
|
$
|
1,012
|
|
|
$
|
501
|
|
|
$
|
291
|
|
Corporate expenses
|
|
|
1,908
|
|
|
|
2,153
|
|
|
|
1,263
|
|
Stock-based compensation expense included in operating
expenses
|
|
|
2,920
|
|
|
|
2,654
|
|
|
|
1,554
|
|
Tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Recognized stock-based compensation expense, net of tax
|
|
$
|
2,920
|
|
|
$
|
2,654
|
|
|
$
|
1,554
|
|
As of February 28, 2019, there was $0.9 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 1.5 years.
46
Table Of Contents
5. LONG-TERM DEBT
Long-term debt was comprised of the following at February 28, 2018 and 2019:
|
|
As of
February
28, 2018
|
|
|
As of
February
28, 2019
|
|
Revolver
|
|
$
|
9,000
|
|
|
$
|
—
|
|
Term Loan
|
|
|
69,451
|
|
|
|
25,000
|
|
Total 2014 Credit Agreement debt
|
|
|
78,451
|
|
|
|
25,000
|
|
Other nonrecourse debt
(1)
|
|
|
9,992
|
|
|
|
10,074
|
|
98.7FM nonrecourse debt
|
|
|
53,919
|
|
|
|
47,332
|
|
Current maturities
|
|
|
(16,037
|
)
|
|
|
(32,150
|
)
|
Unamortized original issue discount
|
|
|
(3,476
|
)
|
|
|
(1,499
|
)
|
Total long-term debt
|
|
$
|
122,849
|
|
|
$
|
48,757
|
|
(1)
|
The face value of other nonrecourse debt was $10.2 million at February 28, 2018 and 2019.
|
On April 12, 2019, Emmis refinanced its 2014 Credit Agreement debt. See Note 16 for more discussion of our new long-term debt.
2014 Credit Agreement Debt
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”) and the lenders party thereto. Capitalized terms in this section not defined elsewhere in this 10-K are defined in the 2014 Credit Agreement and related amendments.
The 2014 Credit Agreement consisted of remaining balances of a term loan ($69.5 million and $25.0 million as of February 28, 2018 and 2019, respectively), and as of February 28, 2018, a revolving credit facility balance of $9.0 million. Our revolving credit facility, which had a maximum commitment of $20.0 million, expired on August 31, 2018. The revolving credit facility included a sub-facility for the issuance of up to $5.0 million of letters of credit. No letters of credit were outstanding during the periods presented in the accompanying consolidated financial statements.
The term loan was due not later than April 18, 2019. Amounts outstanding under the 2014 Credit Agreement bore interest, at the Company’s option, at either (i) the Alternate Base Rate (but not less than 2.00%) plus 6.00% or (ii) the Adjusted LIBO Rate plus 7.00% . Effective July 18, 2018, any principal payments on the term loans thereafter must be accompanied by a fee to the lenders equal to 2% of the amount being repaid. In addition, on each ninety day anniversary after July 18, 2018, such fee increased by an additional 0.5% and the interest rate on amounts outstanding increased by 0.5%. The weighted average borrowing rate of amounts outstanding related to the 2014 Credit Agreement was 8.7% and 10.5% at February 28, 2018 and 2019, respectively.
Our 2014 Credit Agreement debt was carried net of an unamortized original issue discount of $0.1 million as of February 28, 2019. The original issue discount was amortized as additional interest expense over the life of the 2014 Credit Agreement.
The 2014 Credit Agreement required mandatory prepayments for, among other things, proceeds from the sale of assets, insurance proceeds and Consolidated Excess Cash Flow (as defined in the 2014 Credit Agreement).
The obligations under the 2014 Credit Agreement were secured by a perfected first priority security interest in substantially all of the assets of the Company, the Borrower and the Subsidiary Guarantors.
The 2014 Credit Agreement required the Company to comply with certain financial and non-financial covenants. These covenants included a Total Leverage Ratio covenant of 4.00:1.00. Our Total Leverage Ratio for the year ended February 28, 2019 was 2.24:1.00. We were in compliance with all financial and non-financial covenants as of February 28, 2019.
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%.
Our 98.7FM nonrecourse debt is carried net of an unamortized original issue discount of $1.4 million as of February 28, 2019. The original issue discount is being amortized as additional interest expense over the life of the 98.7FM nonrecourse debt.
Other 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
47
Table Of Contents
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, 2020.
NextRadio, LLC issued $4.0 million of notes payable. As of February 28, 2019, these notes bear interest at 2.0%.The first interest payment on these notes was due on August 15, 2018. As of May 9, 2019, NextRadio, LLC has not made any interest payments to the lender. Although there are no penalties for nonpayment of interest, the lender, at its election, may convert the notes and all unpaid interest to senior preferred equity of Next Radio, LLC’s parent entity, TagStation, LLC. The lender has given notice of its intent to convert the notes to senior preferred equity of TagStation, LLC, but the steps required to effect this conversion as defined in the loan agreement have not yet been completed. These notes are obligations of NextRadio LLC and TagStation, LLC and are non-recourse to the rest of Emmis’ subsidiaries. TagStation, LLC and NextRadio, LLC never achieved profitability, with their losses having expanded in recent years as a result of investments in data attribution capabilities. During the year ended February 28, 2019, Emmis decided to cease further investments in TagStation, LLC and NextRadio, LLC. As a result, these businesses have reduced the scale of their operations to absolute minimum functionality and have terminated the employment of all of their employees.
Based on amounts outstanding at February 28, 2019, mandatory principal payments of long-term debt for the next five years and thereafter are summarized below:
Year ended February 28 (29),
|
|
Term Loan
|
|
|
98.7FM
Debt
|
|
|
Other
Nonrecourse Debt
|
|
|
Total
|
|
2020
|
|
$
|
25,000
|
|
|
$
|
7,150
|
|
|
$
|
—
|
|
|
$
|
32,150
|
|
2021
|
|
|
—
|
|
|
|
7,755
|
|
|
|
6,239
|
|
|
|
13,994
|
|
2022
|
|
|
—
|
|
|
|
8,394
|
|
|
|
4,000
|
|
|
|
12,394
|
|
2023
|
|
|
—
|
|
|
|
9,069
|
|
|
|
—
|
|
|
|
9,069
|
|
2024
|
|
|
—
|
|
|
|
9,783
|
|
|
|
—
|
|
|
|
9,783
|
|
Thereafter
|
|
|
—
|
|
|
|
5,181
|
|
|
|
—
|
|
|
|
5,181
|
|
Total
|
|
$
|
25,000
|
|
|
$
|
47,332
|
|
|
$
|
10,239
|
|
|
$
|
82,571
|
|
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, 2018 and 2019. 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 28, 2019
|
|
|
|
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, 2018
|
|
|
|
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
|
|
48
Table Of Contents
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 met
hodologies 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:
|
|
Year Ended February 28,
|
|
|
|
2018
|
|
|
2019
|
|
|
|
Available
For Sale
Securities
|
|
Beginning Balance
|
|
$
|
800
|
|
|
$
|
800
|
|
Purchases
|
|
|
—
|
|
|
|
—
|
|
Ending Balance
|
|
$
|
800
|
|
|
$
|
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. 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 28, 2019, the fair value and carrying value, excluding original issue discount, of the Company’s 2014 Credit Agreement debt was $24.6 million and $25.0 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 is not actively traded and is considered a level 3 measurement. The Company believes the current carrying value of this debt approximates its fair value.
7. ACQUISITIONS AND DISPOSITIONS
For the year ended February 28, 2019
Sale of St. Louis radio stations
On April 30, 2018, Emmis closed on its sale of substantially all of the assets of its radio stations in St. Louis in two separate transactions. In one transaction, Emmis sold the assets of KSHE-FM and KPNT-FM to affiliates of Hubbard Radio. In the other transaction, Emmis sold the assets of KFTK-FM and KNOU-FM to affiliates of Entercom Communications Corp. At closing, Emmis received aggregate proceeds of $60.0 million. After deducting estimated taxes payable and transaction-related expenses, net proceeds totaled approximately $40.5 million and were used to repay term loan indebtedness under Emmis’ senior credit facility. The taxes payable as a result of the transactions were not immediately due, so we repaid amounts outstanding under our revolver and we held excess cash on our balance sheet to enhance our liquidity position. Emmis recorded a $32.1 million gain on the sale of its St. Louis radio stations.
The St. Louis radio stations were operated pursuant to an LMA from March 1, 2018 through the closing of the transactions on April 30, 2018. Affiliates of Hubbard Radio and Entercom Communications Corp paid an LMA fee to Emmis totaling $0.7 million during this period, which is included in net revenues in the accompanying consolidated statements of operations and in the summary of our St. Louis radio station results included below.
In connection with the sale of our St. Louis stations, the Company originally recorded $1.2 million of restructuring charges related to the involuntary termination of employees and estimated cease-use costs related to our leased St. Louis office facility, net of estimated sublease rentals. During the three months ended November 30, 2018, the Company revised its estimate of cease-use costs related to the St. Louis office facility, which resulted in an additional charge of $0.2 million. These charges are included in the gain on sale of radio and publishing assets, net of disposition costs in the accompanying consolidated statements of operations. The table below summarizes the activity related to our restructuring charge for the year ended February 28, 2019.
49
Table Of Contents
|
|
For the year ended
|
|
|
|
February 28, 2019
|
|
Restructuring charges and estimated lease cease-use costs, beginning balance
|
|
$
|
—
|
|
Restructuring charges and estimated lease cease-use costs, St. Louis radio stations sale
|
|
|
1,424
|
|
Payments, net of accretion
|
|
|
(325
|
)
|
Restructuring charges and estimated lease cease-use costs unpaid and outstanding
|
|
$
|
1,099
|
|
The St. Louis stations had historically been included in our Radio segment. The following table summarizes certain operating results of the St. Louis stations 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 the St. Louis stations is included in the results below. The sale of the St. Louis stations did not qualify for reporting as a discontinued operation as it did not represent a strategic shift for the Company as described in Accounting Standards Codification 205-20-45. The following table summarizes certain operating results of the St. Louis stations for all periods presented.
|
|
For the year ended February 28,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Net revenues
|
|
$
|
23,851
|
|
|
$
|
24,238
|
|
|
$
|
711
|
|
Station operating expenses, excluding depreciation and amortization expense
|
|
|
18,464
|
|
|
|
20,071
|
|
|
|
505
|
|
Depreciation and amortization
|
|
|
502
|
|
|
|
558
|
|
|
|
—
|
|
Impairment loss
|
|
|
1,293
|
|
|
|
—
|
|
|
|
—
|
|
Gain on sale of radio assets, net of disposition costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(32,148
|
)
|
Loss on sale of fixed assets
|
|
|
123
|
|
|
|
—
|
|
|
|
—
|
|
Operating income
|
|
|
3,469
|
|
|
|
3,609
|
|
|
|
32,354
|
|
Interest expense
|
|
|
2,910
|
|
|
|
3,379
|
|
|
|
592
|
|
Income before income taxes
|
|
|
559
|
|
|
|
230
|
|
|
|
31,762
|
|
For the year ended February 28, 2018
Sale of KPWR-FM
On August 1, 2017, Emmis closed on its sale of substantially all of the assets of KPWR-FM for gross proceeds of approximately $80.1 million to affiliates of the Meruelo Group. Under the terms of the Fourth Amendment to Emmis’ senior credit facility, Emmis was required to enter into definitive agreements to sell assets that generated at least $80 million of proceeds by January 18, 2018 and to close on such transactions following receipt of required regulatory approvals. The sale of KPWR-FM satisfied these requirements. Emmis found it more advantageous to sell its standalone radio station in Los Angeles than to sell other assets to meet this requirement. After payment of transaction costs and withholding for estimated tax obligations, net proceeds totaled approximately $73.6 million and were used to repay term loan indebtedness under Emmis’ senior credit facility. Emmis recorded a $76.7 million gain on the sale of KPWR-FM.
KPWR-FM was operated pursuant to an LMA from July 1, 2017 through the closing of the sale on August 1, 2017. Affiliates of the Meruelo Group paid an LMA fee to Emmis totaling $0.4 million during this period, which is included in net revenues in the accompanying consolidated statements of operations and in the summary of KPWR-FM results included below.
KPWR-FM had historically been included in our Radio segment. The following table summarizes certain operating results of KPWR-FM 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 KPWR-FM is included in the results below. The sale of KPWR-FM did not qualify for reporting as a discontinued operation as it did not represent a strategic shift for the Company as described in Accounting Standards Codification 205-20-45. The following table summarizes certain operating results of KPWR-FM for all periods presented.
|
|
For the year ended February 28,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Net revenues
|
|
$
|
24,379
|
|
|
$
|
7,819
|
|
|
$
|
—
|
|
Station operating expenses, excluding depreciation and amortization expense
|
|
|
16,933
|
|
|
|
6,651
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
401
|
|
|
|
63
|
|
|
|
—
|
|
Gain on sale of assets, net of disposition costs
|
|
|
—
|
|
|
|
(76,745
|
)
|
|
|
—
|
|
Operating income
|
|
|
7,045
|
|
|
|
77,850
|
|
|
|
—
|
|
Interest expense
|
|
|
5,223
|
|
|
|
2,479
|
|
|
|
—
|
|
Income before income taxes
|
|
|
1,822
|
|
|
|
75,371
|
|
|
|
—
|
|
For the year ended February 28, 2017
Sale of Los Angeles Magazine, Atlanta Magazine, Cincinnati Magazine and Orange Coast Magazine
50
Table Of Contents
On February 28, 2017, Emmis closed on its sale of substantially all of the assets of
Los Angeles Magazine, Atlanta Magazine, Cincinnati Magazine
and
Orange Coast Magazine
(the “Hour Magazines”) for gross procee
ds of $6.5 million to Hour Media Group, LLC. The Company previously announced that it was exploring strategic alternatives for its publishing division, excluding
Indianapolis Monthly
. Emmis decided to sell most of its publishing assets to reduce debt outst
anding. Emmis received net proceeds of $2.9
million
, consisting of the stated purchase price of $6.5 million, less $0.7 million held in escrow and disposition costs totaling $2.9
million
. The $2.9 million of disposition costs primarily relate to $1.6 milli
on of employee-related costs, including severance, and transaction advisory fees of $1.0 million. The funds he
ld in escrow secure
d
Emmis’ post-
closing indemnification obligations in the purchase agreement and were scheduled to be released six months after
the closing of the transaction. The release of these funds from escrow
was subsequently
litigated.
The parties agreed to settle this dispute in May 2018. As part of the mutual settlement, all claims and counterclaims were dismissed with Emmis and Hour receiving $0.45 million and $0.
2
million, respectively. The Company recognized a loss of $0.2 million
related to this settlement during the year ended February 28, 2019, which is included in (gain) loss on sales of assets, net of disposition costs in the accompanying consolidated financial statements.
After settling retention bonuses to affected employees,
substantially all of the net proceeds were used to repay term loan indebtedness under Emmis’ senior credit facility. Emmis recorded a $2.7 million gain on the sale of the Hour Magazines. The Hour Magazines had historically been included in our Publishing
segment. This disposal did not qualify for reporting as a discontinued operation as it did not represent a strategic shift for the Company as described in Accounting Standards Codification 205-20-45. The following table summarizes certain operating results
of the Hour Magazines 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 the Hour Magazines is included in the magazines’ resu
lts below.
|
|
For the year ended February 28,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Net revenues
|
|
$
|
29,112
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Station operating expenses, excluding depreciation and amortization expense
|
|
|
31,076
|
|
|
|
172
|
|
|
|
35
|
|
Depreciation and amortization
|
|
|
122
|
|
|
|
—
|
|
|
|
—
|
|
(Gain) loss on sale of publishing assets, net of disposition costs
|
|
|
(2,677
|
)
|
|
|
141
|
|
|
|
331
|
|
Operating income (loss)
|
|
|
591
|
|
|
|
(313
|
)
|
|
|
(366
|
)
|
Interest expense
|
|
|
179
|
|
|
|
—
|
|
|
|
—
|
|
Income (loss) before income taxes
|
|
|
412
|
|
|
|
(313
|
)
|
|
|
(366
|
)
|
Sale of Terre Haute, Indiana radio stations
On January 30, 2017, Emmis closed on its sale of substantially all of the assets of its radio stations in Terre Haute, Indiana, in two contemporaneous transactions. In one transaction, Emmis sold the assets of WTHI-FM and the intellectual property of WWVR-FM to Midwest Communications, Inc. In the other transaction, Emmis sold 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. The Company previously announced that it was exploring strategic alternatives for these radio stations. Emmis believed that operating stations in Terre Haute, Indiana was not a core part of its radio strategy and its strong market position in the Terre Haute market would be attractive to potential buyers. At closing, Emmis received gross proceeds of approximately $5.2 million for both transactions. After payment of brokerage and other transaction costs, net proceeds totaled $4.8 million and were used to repay term loan indebtedness under Emmis’ senior credit facility. Emmis recorded a $3.5 million gain on the sale of its Terre Haute radio stations
.
The Terre Haute radio stations had historically been included in our Radio segment. This disposal did not qualify for reporting as a discontinued operation as it did not represent a strategic shift for the Company as described in Accounting Standards Codification 205-20-45. The following table summarizes certain operating results of our Terre Haute radio stations 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 the Terre Haute radio stations is included in the stations’ results below.
|
|
For the year ended February 28,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Net revenues
|
|
$
|
2,298
|
|
|
$
|
(6
|
)
|
|
$
|
—
|
|
Station operating expenses, excluding depreciation and amortization expense
|
|
|
2,258
|
|
|
|
24
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
117
|
|
|
|
—
|
|
|
|
—
|
|
Impairment loss
|
|
|
79
|
|
|
|
—
|
|
|
|
—
|
|
Gain on sale of radio assets, net of disposition costs
|
|
|
(3,478
|
)
|
|
|
—
|
|
|
|
—
|
|
Operating income (loss)
|
|
|
3,322
|
|
|
|
(30
|
)
|
|
|
—
|
|
Interest expense
|
|
|
307
|
|
|
|
—
|
|
|
|
—
|
|
Income (loss) before income taxes
|
|
|
3,015
|
|
|
|
(30
|
)
|
|
|
—
|
|
51
Table Of Contents
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 believed that its publishing portfolio had significant brand value and planned to use proceeds from the sale of its publishing properties to repay debt. Emmis received net proceeds of $23.4 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 $0.9 million. The $0.9 million of disposition costs primarily related to severance costs. Proceeds were used to repay term and revolving loan indebtedness under Emmis’ senior credit facility. Emmis recorded a $17.4 million gain on the sale of
Texas Monthly
.
Texas Monthly
had historically been included in our Publishing segment. This disposal did not qualify for reporting as a discontinued operation as it did not represent a strategic shift for the Company as described in Accounting Standards Codification 205-20-45. 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.
|
|
For the year ended February 28,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Net revenues
|
|
$
|
14,685
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
Station operating expenses, excluding depreciation and amortization expense
|
|
|
14,465
|
|
|
|
(78
|
)
|
|
|
—
|
|
Depreciation and amortization
|
|
|
84
|
|
|
|
—
|
|
|
|
—
|
|
Gain on sale of publishing assets, net of disposition costs
|
|
|
(17,402
|
)
|
|
|
—
|
|
|
|
—
|
|
Operating income
|
|
|
17,538
|
|
|
|
76
|
|
|
|
—
|
|
Interest expense
|
|
|
1,067
|
|
|
|
—
|
|
|
|
—
|
|
Other income
|
|
|
(37
|
)
|
|
|
—
|
|
|
|
—
|
|
Income before income taxes
|
|
|
16,508
|
|
|
|
76
|
|
|
|
—
|
|
Unaudited pro forma summary information is presented below for the years ended February 28, 2018 and 2019, assuming the dispositions discussed above and related mandatory debt repayments had occurred on the first day of the pro forma periods presented below.
|
|
For the year ended February 28,
|
|
|
|
2018
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net revenues
|
|
$
|
116,438
|
|
|
$
|
113,420
|
|
Station operating expenses, excluding depreciation and amortization
|
|
|
92,918
|
|
|
|
90,493
|
|
Consolidated net income
|
|
|
2,540
|
|
|
|
1,255
|
|
Net loss attributable to the Company
|
|
|
(90
|
)
|
|
|
(1,472
|
)
|
Net income per share - basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.12
|
)
|
Net income per share - diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.12
|
)
|
8. OTHER SIGNIFICANT TRANSACTIONS
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 were 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. During the year ended February 28, 2017, 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 consolidated statements of operations. No further costs are expected to be incurred in connection with the going private offer as it has expired.
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, on a minimum of 30 million FM-enabled wireless devices on the Sprint wireless
52
Table Of Contents
network over a three -ye
ar 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 applicat
ion. Emmis did not guarantee NextRadio LLC’s performance under this agreement and Sprint did not have recourse to any Emmis related entity other than NextRadio LLC. Additionally, the agreement
did
not limit the ability of NextRadio LLC to place the NextRad
io application on FM-enabled devices on other wireless net
works. Through February 28, 2019
, 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 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 through August 2015. 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.
From the inception of NextRadio LLC’s agreement with Sprint through December 7, 2016, NextRadio LLC had remitted to Sprint approximately $33.2 million. Effective December 8, 2016, NextRadio LLC and Sprint entered into an amendment of their original agreement. The amendment called for NextRadio LLC to make installment payments totaling $6.0 million through March 15, 2017, which have been paid. In exchange, Sprint agreed to forgive the remaining $5.8 million that it was due under the original agreement, and in return receive a higher share of certain revenue generated by the NextRadio application. NextRadio LLC received a loan of $4.0 million for the sole purpose of fulfilling the payment obligations to Sprint under the amendment. The loan was structured to be repaid out of proceeds from sales of enhanced advertising through the NextRadio application. See Note 5 for more discussion of this loan.
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 did not record any revenue or expense related to the amounts that were collected and remitted to Sprint except the portion of any payment to Sprint that was actually contributed to NextRadio LLC by Emmis (or the amounts funded by NextRadio LLC via the loan discussed above). Emmis contributed approximately $0.3 million to NextRadio LLC during the year ended February 28, 2018, and recorded its contributions as station operating expenses, excluding depreciation and amortization expense. Emmis did not fund any of NextRadio LLC’s payments to Sprint during the year ended February 28, 2017 and as discussed above, all monetary obligations to Sprint were satisfied during the year ended February 28, 2018.
As of February 28, 2018 and 2019, the carrying value of NextRadio LLC’s assets were less than $0.1 million and zero, respectively. As of February 28, 2018 and 2019, liabilities totaled $4.2 million and $4.4 million, respectively, and consisted solely of NextRadio LLC’s nonrecourse debt and related accrued interest as previously discussed.
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 1 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 2017, 2018 and 2019 were as follows:
|
|
For the year ended February 28,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Net revenues
|
|
$
|
10,331
|
|
|
$
|
10,331
|
|
|
$
|
10,331
|
|
Station operating expenses, excluding depreciation and amortization expense
|
|
|
1,275
|
|
|
|
1,169
|
|
|
|
1,198
|
|
Impairment loss on intangible assets (Note 9)
|
|
|
2,907
|
|
|
|
—
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
21
|
|
|
|
21
|
|
|
|
20
|
|
Interest expense
|
|
|
2,827
|
|
|
|
2,591
|
|
|
|
2,331
|
|
53
Table Of Contents
Assets and liabilities of 98.7FM as of February 28, 201
8 and 2019
were as follows:
|
|
As of February 28,
|
|
|
|
2018
|
|
|
2019
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
1,358
|
|
|
$
|
1,504
|
|
Prepaid expenses
|
|
|
448
|
|
|
|
394
|
|
Other
|
|
|
31
|
|
|
|
340
|
|
Total current assets
|
|
|
1,837
|
|
|
|
2,238
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
208
|
|
|
|
188
|
|
Indefinite lived intangibles
|
|
|
46,390
|
|
|
|
46,390
|
|
Deposits and other
|
|
|
6,543
|
|
|
|
6,255
|
|
Total noncurrent assets
|
|
|
53,141
|
|
|
|
52,833
|
|
Total assets
|
|
$
|
54,978
|
|
|
$
|
55,071
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
18
|
|
|
$
|
15
|
|
Current maturities of long-term debt
|
|
|
6,587
|
|
|
|
7,150
|
|
Deferred revenue
|
|
|
835
|
|
|
|
864
|
|
Other current liabilities
|
|
|
184
|
|
|
|
162
|
|
Total current liabilities
|
|
|
7,624
|
|
|
|
8,191
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
45,632
|
|
|
|
38,747
|
|
Total noncurrent liabilities
|
|
|
45,632
|
|
|
|
38,747
|
|
Total liabilities
|
|
$
|
53,256
|
|
|
$
|
46,938
|
|
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. Impairment recorded as a result of our interim and 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. The table below summarizes the results of our interim and annual impairment testing for the three years ending February 28, 2019.
|
|
Interim Assessment
|
|
|
Annual Assessment
|
|
|
|
|
|
|
|
Goodwill
|
|
|
Definite-lived
|
|
|
FCC Licenses
|
|
|
Goodwill
|
|
|
Total
|
|
Year Ended February 28, 2017
|
|
|
2,058
|
|
|
|
930
|
|
|
|
6,855
|
|
|
|
—
|
|
|
|
9,843
|
|
Year Ended February 28, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
265
|
|
|
|
265
|
|
Year Ended February 28, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
343
|
|
|
|
—
|
|
|
|
343
|
|
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
54
Table Of Contents
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 recent 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 28, 2019.
|
|
December 1, 2016
|
|
December 1, 2017
|
|
December 1, 2018
|
Discount Rate
|
|
12.2% - 12.5%
|
|
12.1% - 12.4%
|
|
11.9% - 12.3%
|
Long-term Revenue Growth Rate
|
|
1.0% - 2.0%
|
|
1.0% - 1.8%
|
|
0.3% - 1.0%
|
Mature Market Share
|
|
3.1% - 30.4%
|
|
12.7% - 31.1%
|
|
12.9% - 30.2%
|
Operating Profit Margin
|
|
25.1% - 39.1%
|
|
27.0% - 39.1%
|
|
26.0% - 38.0%
|
As of February 28, 2018 and 2019, excluding amounts classified as held for sale, the carrying amounts of the Company’s FCC licenses were $170.9 million and $170.5 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 2018 and 2019 for each unit of accounting.
|
|
Change in FCC License Carrying Values
|
|
Unit of Accounting
|
|
As of
February 28,
2017
|
|
|
Sale of
Stations
|
|
|
Reclassification
|
|
|
As of
February 28,
2018
|
|
|
Sale of
Stations
|
|
|
Impairment
|
|
|
As of
February 28,
2019
|
|
New York Cluster
|
|
$
|
71,614
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71,614
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71,614
|
|
98.7FM (New York)
|
|
|
46,390
|
|
|
|
—
|
|
|
|
—
|
|
|
|
46,390
|
|
|
|
—
|
|
|
|
—
|
|
|
|
46,390
|
|
Austin Cluster
|
|
|
34,720
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34,720
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34,720
|
|
St. Louis Cluster
|
|
|
24,758
|
|
|
|
—
|
|
|
|
(24,758
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Indianapolis Cluster
|
|
|
18,166
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,166
|
|
|
|
—
|
|
|
|
(343
|
)
|
|
|
17,823
|
|
KPWR-FM (Los Angeles)
|
|
|
2,018
|
|
|
|
(2,018
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subotal
|
|
|
197,666
|
|
|
|
(2,018
|
)
|
|
|
(24,758
|
)
|
|
|
170,890
|
|
|
|
—
|
|
|
|
(343
|
)
|
|
|
170,547
|
|
Assets held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
St. Louis Cluster
|
|
|
—
|
|
|
|
—
|
|
|
|
24,758
|
|
|
|
24,758
|
|
|
|
(24,758
|
)
|
|
|
—
|
|
|
|
—
|
|
Grand Total
|
|
$
|
197,666
|
|
|
$
|
(2,018
|
)
|
|
$
|
—
|
|
|
$
|
195,648
|
|
|
$
|
(24,758
|
)
|
|
$
|
(343
|
)
|
|
$
|
170,547
|
|
Impairment was recorded for our Indianapolis radio cluster in connection with our most recent annual impairment review. Stagnant market revenues in recent years, 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.
During the three years ended February 2019, we sold our stations in Terre Haute, Los Angeles and St. Louis. See Note 7 for more discussion of these transactions.
Valuation of Goodwill
ASC Topic 350-20-35 requires the Company to test goodwill for impairment at least annually. The Company conducts its 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). 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. For the annual assessment performed as of December 1, 2018, the Company applied a market multiple of 8.0 times the reporting unit’s operating performance. Management believes this methodology for valuing radio 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 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. If the carrying value of a reporting unit’s goodwill exceeds its fair value, the Company recognizes an impairment charge equal to the difference in the statement of operations.
The Company adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment as of March 1, 2017. Prior to March 1, 2017, the Company performed a two-step impairment test for goodwill. Goodwill impairment recorded during the year ended February 28, 2017 was recorded using the two-step methodology. Goodwill impairments recorded from March 1, 2017 forward will be recorded using the simplified method as described above.
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.
55
Table Of Contents
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 service
s. 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. Subsequent to our impairment of Digonex goodwill and the sale of
Texas Monthly
(see note 7 for more discussion), the Company’s goodwill relates entirely to its Radio segment.
During our December 2017 annual goodwill impairment test, the Company wrote off $0.3 million of goodwill associated with our Indianapolis radio cluster. Weak ratings and declining market revenues significantly impacted our operating performance in Indianapolis. This resulted in the carrying value of our Indianapolis radio cluster exceeding its estimated fair value by more than the amount of goodwill we had recorded for the cluster on the assessment date. As such, the Company fully impaired the goodwill of this cluster.
As of February 28, 2018 and 2019, the carrying amount of the Company’s goodwill was $4.3 million. The table below presents the changes to the carrying values of the Company’s goodwill for the years ended February 2018 and 2019 for each reporting unit. A reporting unit is a cluster of radio stations in one geographical market (except for stations being operated pursuant to LMAs) and each magazine on an individual basis.
|
|
Change in Goodwill Carrying Values
|
|
Reporting Unit (Segment)
|
|
As of
February 28,
2017
|
|
|
Impairment
|
|
|
As of
February 28,
2018
|
|
|
Impairment
|
|
|
As of
February 28,
2019
|
|
Indianapolis Cluster (Radio)
|
|
$
|
265
|
|
|
$
|
(265
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Austin Cluster (Radio)
|
|
|
4,338
|
|
|
|
—
|
|
|
|
4,338
|
|
|
|
—
|
|
|
|
4,338
|
|
Total
|
|
$
|
4,603
|
|
|
$
|
(265
|
)
|
|
$
|
4,338
|
|
|
$
|
—
|
|
|
$
|
4,338
|
|
Definite-lived intangibles
The following table presents the weighted-average remaining useful life at February 28, 2019 and gross carrying amount and accumulated amortization for each major class of definite-lived intangible assets at February 28, 2018 and 2019:
|
|
|
|
|
|
As of February 28, 2018
|
|
|
As of February 28, 2019
|
|
|
|
Weighted
Average
Remaining
Useful Life
(in years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Programming Contract
|
|
|
2.6
|
|
|
$
|
2,154
|
|
|
$
|
1,101
|
|
|
$
|
1,053
|
|
|
$
|
2,154
|
|
|
$
|
1,396
|
|
|
$
|
758
|
|
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 was $0.7 million, $0.3 million and $0.3 million for the years ended February 2017, 2018 and 2019, 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)
|
|
2020
|
|
$
|
294
|
|
2021
|
|
|
294
|
|
2022
|
|
|
170
|
|
2023
|
|
|
—
|
|
2024
|
|
|
—
|
|
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, the 2016 Equity Compensation Plan and the 2017 Equity Compensation Plan. These outstanding grants continue to be governed by the terms of the applicable plan.
56
Table Of Contents
2017 Equity Compensation Plan
At the 2017 annual meeting, the shareholders approved the 2017 Equity Compensation Plan (the “2017 Plan”). Under the 2017 Plan, awards equivalent to 2.0 million shares of common stock may be granted. Furthermore, any unissued awards from prior equity compensation plans (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 2017 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 2017 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 2017 Plan generally expire not more than 10 years from the date of grant. Under the 2017 Plan, awards equivalent to approximately 1.7 million shares of common stock were available for grant as of February 28, 2019.
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”). Although Emmis may make discretionary matching contributions to the plan in the form of cash or shares of the Company’s Class A common stock, none were made during the three years ended February 28, 2019.
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 $0.3 million for each of the years ended February 2017, 2018 and 2019.
11. OTHER COMMITMENTS AND CONTINGENCIES
a. Commitments
The Company has various commitments under the following types of material contracts: (i) operating leases; (ii) employment agreements and (iii) other contracts with annual commitments (mostly contractual services for audience measurement information) at February 28, 2019 as follows:
Year ending February 28 (29),
|
|
Operating
Leases
|
|
|
Employment
Agreements
|
|
|
Other
Contracts
|
|
|
Total
|
|
2020
|
|
$
|
5,547
|
|
|
$
|
10,062
|
|
|
$
|
3,955
|
|
|
$
|
19,564
|
|
2021
|
|
|
5,305
|
|
|
|
3,009
|
|
|
|
763
|
|
|
|
9,077
|
|
2022
|
|
|
5,284
|
|
|
|
1,223
|
|
|
|
526
|
|
|
|
7,033
|
|
2023
|
|
|
5,186
|
|
|
|
123
|
|
|
|
—
|
|
|
|
5,309
|
|
2024
|
|
|
3,666
|
|
|
|
123
|
|
|
|
—
|
|
|
|
3,789
|
|
Thereafter
|
|
|
13,118
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,118
|
|
Total
|
|
$
|
38,106
|
|
|
$
|
14,540
|
|
|
$
|
5,244
|
|
|
$
|
57,890
|
|
Emmis leases certain office space, tower space, equipment and automobiles under operating leases expiring at various dates through March 2032. 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 2017, 2018 and 2019 was approximately $8.3 million, $6.0 million and $5.0 million, respectively. The Company recognized approximately $0.3 million, less than $0.1 million and $0.2 million of sublease income as a reduction of rent expense for the years ended February 2017, 2018, and 2019 respectively.
The total minimum sublease rentals to be received in the future under noncancelable subleases as of February 28, 2019 were as follows:
Year ending February 28 (29),
|
|
Noncancelable
Sublease rentals
|
|
2020
|
|
$
|
441
|
|
2021
|
|
|
276
|
|
2022
|
|
|
129
|
|
2023
|
|
|
126
|
|
2024
|
|
|
88
|
|
Total
|
|
$
|
1,060
|
|
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.
57
Table Of Contents
Emmis filed suit against Illinois National Insurance Company (“INI
C”) in 2015 related to INIC’s decision to not cover Emmis’ defense costs under Emmis’ directors and officers insurance policy in a lawsuit related to the Company’s preferred stock in which Emmis was the defendant (the “Prior Litigation”). On March 21, 2018
, Emmis was granted summary judgment entitling it to coverage of its defense costs in the Prior Litigation. On October 10, 2018, Emmis and INIC agreed that the amount of Emmis’ damages are $3.5 million. On November 7, 2018, INIC appealed the District Court
’s summary judgment determination that the insurance policy covers Emmis’ defense costs.
The United States Court of Appeals for the Seventh Circuit is scheduled to hear oral arguments by both parties on May 30, 2019.
Accordingly, Emmis cannot estimate the
amount o
r
timing of a recovery, if any.
12. INCOME TAXES
The provision (benefit) for income taxes for the years ended February 2017, 2018 and 2019 consisted of the following:
|
|
For the year ended February 28,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(1,209
|
)
|
|
$
|
10,274
|
|
State
|
|
|
68
|
|
|
|
1,611
|
|
|
|
2,064
|
|
Total current
|
|
|
68
|
|
|
|
402
|
|
|
|
12,338
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(152
|
)
|
|
|
(13,612
|
)
|
|
|
(4,033
|
)
|
State
|
|
|
(26
|
)
|
|
|
1,478
|
|
|
|
(2,138
|
)
|
Total deferred
|
|
|
(178
|
)
|
|
|
(12,134
|
)
|
|
|
(6,171
|
)
|
(Benefit) provision for income taxes
|
|
$
|
(110
|
)
|
|
$
|
(11,732
|
)
|
|
$
|
6,167
|
|
The provision (benefit) for income taxes for the years ended February 2017, 2018 and 2019 differs from that computed at the Federal statutory corporate tax rate as follows:
|
|
For the year ended February 28,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Federal statutory income tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
21
|
%
|
Computed income tax provision at federal statutory rate
|
|
$
|
4,588
|
|
|
$
|
23,855
|
|
|
$
|
6,772
|
|
State income tax
|
|
|
42
|
|
|
|
3,089
|
|
|
|
(74
|
)
|
Nondeductible stock compensation
|
|
|
444
|
|
|
|
261
|
|
|
|
63
|
|
Entertainment disallowance
|
|
|
366
|
|
|
|
235
|
|
|
|
215
|
|
Disposal of goodwill with no tax basis
|
|
|
3,533
|
|
|
|
—
|
|
|
|
—
|
|
Change in federal valuation allowance
|
|
|
(7,387
|
)
|
|
|
(20,373
|
)
|
|
|
599
|
|
Tax attributed to noncontrolling interest
|
|
|
(1,698
|
)
|
|
|
(1,785
|
)
|
|
|
(1,045
|
)
|
Federal tax credit
|
|
|
(171
|
)
|
|
|
(85
|
)
|
|
|
(85
|
)
|
Federal tax reform
|
|
|
—
|
|
|
|
(15,546
|
)
|
|
|
—
|
|
Reclassification of AMT credit
|
|
|
—
|
|
|
|
(2,162
|
)
|
|
|
82
|
|
Other
|
|
|
173
|
|
|
|
779
|
|
|
|
(360
|
)
|
(Benefit) provision for income taxes
|
|
$
|
(110
|
)
|
|
$
|
(11,732
|
)
|
|
$
|
6,167
|
|
The final determination of our income tax liability may be materially different from our income tax provision. Significant judgment is required in determining our provision for income taxes. Our calculation of the provision for income taxes is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. In addition, our income tax returns are subject to periodic examination by the Internal Revenue Service and other taxing authorities. As of February 28, 2019, the Company had no open income tax examinations. The Company’s tax years ended February 28, 2016 through 2019 remain subject to federal income tax examination. For state and local jurisdictions, the tax years February 28, 2015 through 2019 remain subject to income tax examination. To the extent that net operating losses are utilized, the year of loss is open to examination.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into federal law. The provisions of this major tax reform were generally effective January 1, 2018. The most significant change impacting the Company is the reduction of the corporate federal income tax rate from 35% to 21% effective January 1, 2018. The Company made reasonable estimates in order to remeasure its deferred tax balances and account for the effects of the Tax Act, as reflected in the February 28, 2018 financial statements. The adjustment to federal deferred tax balances resulted in a benefit of $15.5 million and the adjustment to state deferred tax balances resulted in an expense of $1.4 million. As of February 28, 2019, Emmis completed the accounting for enactment date income tax effects of the Tax Act, which resulted in an immaterial impact to our financial statements.
58
Table Of Contents
The components
of deferred tax assets and deferred tax liabilities at February
28, 201
8
and
2019
we
re as follows:
|
|
As of February 28,
|
|
|
|
2018
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
10,977
|
|
|
$
|
11,173
|
|
Intangible assets
|
|
|
14,072
|
|
|
|
13,023
|
|
Compensation relating to stock options
|
|
|
1,600
|
|
|
|
1,506
|
|
Accrued rent
|
|
|
1,204
|
|
|
|
974
|
|
Tax credits
|
|
|
1,464
|
|
|
|
1,165
|
|
Investments in subsidiaries
|
|
|
143
|
|
|
|
148
|
|
Other
|
|
|
332
|
|
|
|
298
|
|
Valuation allowance
|
|
|
(27,099
|
)
|
|
|
(26,724
|
)
|
Total deferred tax assets
|
|
|
2,693
|
|
|
|
1,563
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
(31,383
|
)
|
|
|
(26,005
|
)
|
Property and equipment
|
|
|
(483
|
)
|
|
|
(698
|
)
|
Cancellation of debt income
|
|
|
(1,839
|
)
|
|
|
—
|
|
Other
|
|
|
(391
|
)
|
|
|
(92
|
)
|
Total deferred tax liabilities
|
|
|
(34,096
|
)
|
|
|
(26,795
|
)
|
Net deferred tax liabilities
|
|
$
|
(31,403
|
)
|
|
$
|
(25,232
|
)
|
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. 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 decreased its valuation allowance by $0.4 million (consisting of a $0.7 million federal increase and a $ 1.1 million state decrease), from $27.1 million as of February 28, 2018, to $26.7 million as of February 28, 2019.
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 $20 million and state NOLs of $135 million available to offset future taxable income. The federal net operating loss carryforwards begin expiring in 2031, and the state net operating loss carryforwards expire between the years ending February 2020 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 activities of Digonex, which is a C Corporation, are consolidated for financial statement purposes, but are not included in the U.S. consolidated income tax return of Emmis. As of February 28, 2019, Digonex has federal NOLs of $49 million and state NOLs of $49 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 28, 2019, the Company was able to determine that at least $20 million of federal NOLs and $20 million of state NOLs will be fully available to offset future taxable income. These amounts are included in the above consolidated federal and state NOL totals of $20 million and $135 million, respectively.
The Company had $1.5 million of tax credits at February 28, 2019, including tax credits in California and Illinois, which have a full valuation allowance, and in Texas, which is expected to be fully utilized in future years.
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 28, 2019, 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.
59
Table Of Contents
The following is a tabular reconciliation of the total amounts of gross unrecognized tax
benefits for the years ending
February 28, 2018
and February 28, 2019
:
|
|
For the year ending February 28,
|
|
|
|
2018
|
|
|
2019
|
|
Gross unrecognized tax benefit – opening balance
|
|
$
|
(60
|
)
|
|
$
|
(38
|
)
|
Gross decreases – lapse of applicable statute of limitations
|
|
|
22
|
|
|
|
16
|
|
Gross unrecognized tax benefit – ending balance
|
|
$
|
(38
|
)
|
|
$
|
(22
|
)
|
Included in the balance of unrecognized tax benefits are tax benefits that, if recognized, would reduce the Company’s provision for income taxes by less than $0.1 million as of February 28, 2018 and February 28, 2019. 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 28, 2019 and in total, as of February 28, 2019, has recognized a liability for interest of $4 thousand.
13. SEGMENT INFORMATION
The Company’s operations have historically been aligned into three business segments: (i) Radio, (ii) Publishing and (iii) Corporate & Emerging Technologies. Emerging Technologies includes our TagStation, NextRadio and Digonex businesses, although our TagStation and Next Radio businesses were dramatically scaled-down during our year ended February 28, 2019.
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, including the LMA fee we receive from a subsidiary of Disney, accounted for approximately 50% of our radio revenues for the year ended February 28, 2019. The Company’s segments operate exclusively in the United States.
During the three years ended February 28, 2019, we sold our radio clusters in Terre Haute and St. Louis, sold our radio station in Los Angeles and sold five of our six magazines. See Note 7 for more discussion of our dispositions.
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 28, 2019
|
|
Radio
|
|
|
Publishing
|
|
|
Corporate &
Emerging
Technologies
|
|
|
Consolidated
|
|
Net revenues
|
|
$
|
108,018
|
|
|
$
|
4,678
|
|
|
$
|
1,435
|
|
|
$
|
114,131
|
|
Station operating expenses excluding depreciation and amortization
expense
|
|
|
76,128
|
|
|
|
4,822
|
|
|
|
10,083
|
|
|
|
91,033
|
|
Corporate expenses excluding depreciation and amortization expense
|
|
|
—
|
|
|
|
—
|
|
|
|
10,313
|
|
|
|
10,313
|
|
Impairment loss
|
|
|
343
|
|
|
|
—
|
|
|
|
—
|
|
|
|
343
|
|
Depreciation and amortization
|
|
|
2,338
|
|
|
|
18
|
|
|
|
857
|
|
|
|
3,213
|
|
(Gain) loss on sale of radio and publishing assets, net of disposition costs
|
|
|
(32,148
|
)
|
|
|
331
|
|
|
|
—
|
|
|
|
(31,817
|
)
|
Loss on disposal of fixed assets
|
|
|
57
|
|
|
|
—
|
|
|
|
—
|
|
|
|
57
|
|
Operating income (loss)
|
|
$
|
61,300
|
|
|
$
|
(493
|
)
|
|
$
|
(19,818
|
)
|
|
$
|
40,989
|
|
Year Ended February 28, 2018
|
|
Radio
|
|
|
Publishing
|
|
|
Corporate &
Emerging
Technologies
|
|
|
Consolidated
|
|
Net revenues
|
|
$
|
142,852
|
|
|
$
|
4,521
|
|
|
$
|
1,114
|
|
|
$
|
148,487
|
|
Station operating expenses excluding depreciation and amortization
expense
|
|
|
102,413
|
|
|
|
5,035
|
|
|
|
12,310
|
|
|
|
119,758
|
|
Corporate expenses excluding depreciation and amortization expense
|
|
|
—
|
|
|
|
—
|
|
|
|
10,712
|
|
|
|
10,712
|
|
Impairment loss
|
|
|
265
|
|
|
|
—
|
|
|
|
—
|
|
|
|
265
|
|
Depreciation and amortization
|
|
|
2,792
|
|
|
|
19
|
|
|
|
817
|
|
|
|
3,628
|
|
(Gain) loss on sale of radio and publishing assets, net of disposition costs
|
|
|
(76,745
|
)
|
|
|
141
|
|
|
|
—
|
|
|
|
(76,604
|
)
|
(Gain) loss on sale of fixed assets
|
|
|
(82
|
)
|
|
|
13
|
|
|
|
—
|
|
|
|
(69
|
)
|
Operating income (loss)
|
|
$
|
114,209
|
|
|
$
|
(687
|
)
|
|
$
|
(22,725
|
)
|
|
$
|
90,797
|
|
60
Table Of Contents
Year Ended February 28, 2017
|
|
Radio
|
|
|
Publishing
|
|
|
Corporate &
Emerging
Technologies
|
|
|
Consolidated
|
|
Net revenues
|
|
$
|
165,148
|
|
|
$
|
48,559
|
|
|
$
|
861
|
|
|
$
|
214,568
|
|
Station operating expenses excluding depreciation and amortization
expense
|
|
|
115,366
|
|
|
|
51,063
|
|
|
|
13,656
|
|
|
|
180,085
|
|
Corporate expenses excluding depreciation and amortization expense
|
|
|
—
|
|
|
|
—
|
|
|
|
11,359
|
|
|
|
11,359
|
|
Impairment loss
|
|
|
6,855
|
|
|
|
—
|
|
|
|
2,988
|
|
|
|
9,843
|
|
Depreciation and amortization
|
|
|
3,462
|
|
|
|
230
|
|
|
|
1,114
|
|
|
|
4,806
|
|
Gain on sale of radio and publishing assets, net of disposition costs
|
|
|
(3,478
|
)
|
|
|
(20,079
|
)
|
|
|
—
|
|
|
|
(23,557
|
)
|
Loss on sale of fixed assets
|
|
|
124
|
|
|
|
—
|
|
|
|
—
|
|
|
|
124
|
|
Operating income (loss)
|
|
$
|
42,819
|
|
|
$
|
17,345
|
|
|
$
|
(28,256
|
)
|
|
$
|
31,908
|
|
Total Assets
|
|
Radio
|
|
|
Publishing
|
|
|
Corporate &
Emerging
Technologies
|
|
|
Consolidated
|
|
As of February 28, 2018
|
|
$
|
249,044
|
|
|
$
|
1,293
|
|
|
$
|
20,807
|
|
|
$
|
271,144
|
|
As of February 28, 2019
|
|
|
216,473
|
|
|
|
728
|
|
|
|
20,545
|
|
|
|
237,746
|
|
14. OTHER (EXPENSE) INCOME, NET
Components of other (expense) income, net for the three years ended February 2017, 2018 and 2019 were as follows:
|
|
For the year ended February 28,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Loss from unconsolidated affiliate, including other-than-temporary
impairment losses
|
|
$
|
(28
|
)
|
|
$
|
(15
|
)
|
|
$
|
—
|
|
Other-than-temporary impairment loss on investments
|
|
|
(254
|
)
|
|
|
—
|
|
|
|
—
|
|
Interest income
|
|
|
38
|
|
|
|
60
|
|
|
|
132
|
|
Other
|
|
|
84
|
|
|
|
(10
|
)
|
|
|
7
|
|
Total other (expense) income, net
|
|
$
|
(160
|
)
|
|
$
|
35
|
|
|
$
|
139
|
|
See Note 1 for further discussion of the other-than-temporary impairment loss on investments recorded during the year ended February 28, 2017.
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.
As previously discussed in Note 8, the Company received an offer in August 2016 from 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 EAC would acquire all the outstanding shares of Class A common stock of the Company. During the year ended February 28, 2017, the Company incurred $0.9 of costs associated with the offer, which are included in corporate expenses, excluding depreciation and amortization expense in the accompanying consolidated statements of operations. The going private offer expired on October 14, 2016. No further costs are expected to be incurred in connection with the going private offer as it has expired. See Note 8 for further discussion of the going private offer.
16. SUBSEQUENT EVENTS
On April 12, 2019, the Company and certain of its subsidiaries entered into three loan agreements, consisting of:
|
1.
|
$12 million revolving credit agreement by and among Wells Fargo Bank, National Association, as lender, the Company, Emmis Operating Company, a wholly owned subsidiary of the Company, and certain other subsidiaries as borrowers (the “Revolving Credit Agreement”)
|
|
2.
|
$23 million mortgage by and between Emmis Operating Company and Emmis Indiana Broadcasting, L.P., as borrowers, and Star Financial Bank, as lender (the “Mortgage”)
|
|
3.
|
$4 million term loan, by and between Emmis Operating Company, as borrower, and Barrett Investment Partners, LLC, as lender (the “Term Loan”)
|
61
Table Of Contents
The
Revolving
Credit Agreement expires April 12, 2024, provided the Term Loan is repaid, replaced, or extended by October 12, 2021. Amounts borrowed under the
Revolving
Credit Agreement bear interest at daily t
hree-month LIBOR plus 2.50%. A commitment fee of 0.50% per annum is charged for unused amounts under the
Revolving
Credit Agreement. Pursuant to a Guaranty and Security Agreement, dated as of April 12, 2019, by and among Wells Fargo Bank, National Associat
ion, as lender, the Company, Emmis Operating Company, and certain other subsidiaries as borrowers (the “GSA”), the obligations under the
Revolving
Credit Agreement are secured by a perfected first priority security interest in certain of the Company’s acco
unts receivable and fixed assets, as well as security interests in certain other assets of the Company. Borrowing under the
Revolving
Credit Agreement depends upon continued compliance with certain operating covenants and financial covenants, including mai
ntaining a fixed charge coverage ratio, as specifically defined in the
Revolving
Credit Agreement, of at least 1.10:1.00. No amounts may be borrowed under the
Revolving
Credit Agreement unless and until all (i) existing income tax obligations, currently es
timated to be approximately $7 million, are paid in full, or (ii) the borrowing is used to pay such income tax obligations.
The operating and other restrictions with which the Company must comply include, among others, restrictions on additional indebtedne
ss, incurrence of liens, engaging in businesses other than our primary business, paying certain dividends, redeeming or repurchasing capital stock, acquisitions and asset sales.
No default or event of default has occurred or is continuing.
The Mortgage expires April 12, 2029, and is secured by a perfected first priority security interest in the Company’s headquarters building in Indianapolis, Indiana, and approximately 70 acres of land owned by the Company in Whitestown, Indiana, which currently is used as a tower site for one of the Company’s radio stations. The Mortgage bears interest at 5.48% per annum and requires monthly principal and interest payments using a 25 year amortization period, with a balloon payment due at expiration. The Mortgage requires continued compliance with certain operating covenants and financial covenants, including maintaining a fixed charge coverage ratio, as specifically defined in the Mortgage, of at least 1.10:1.00, and requires certain proceeds from asset sales to be used to repay the Mortgage indebtedness.
The Term Loan expires April 12, 2022, and is secured by a pledge of the Company’s controlling ownership interest in a partnership that owns and operates 6 radio stations in Austin, Texas. The Term Loan bears interest at 10% per annum the first year, with the rate increasing to 12% in the second year and to 14% in the third year. The Term Loan requires monthly principal and interest payments, and is prepayable at par at any time provided that interest of at least $125 thousand must be paid to the lender.
In connection with the execution of the Revolving Credit Agreement, Mortgage, and Term Loan, the 2014 Credit Agreement was terminated effective April 12, 2019, and all amounts outstanding under that agreement were paid in full.
62
Table Of Contents