Share Based Payments

3 Months Ended

May 31, 2012

Share Based Payments [Abstract]

Share Based Payments

Note 2. 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 three years (one-third each year for three years), or cliff vest at the end of three 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. Prior to March 1, 2012, the Company used the simplified method to estimate the expected term for all options granted. Although the Company had granted options for many years, the historical exercise activity of our options was impacted by the way the Company processed the equitable adjustment of our November 2006 special dividend. Consequently, the Company believes that reliable data regarding exercise behavior only exists for the period subsequent to November 2006, which it determined was insufficient experience upon which to estimate the expected term through fiscal 2012. However, beginning in fiscal 2013, the Company determined that sufficient reliable data regarding its employees’ exercise behavior was available and it ceased using the simplified method. This change did not materially impact our results of operations. 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 three months ended May 31, 2011 and 2012:

	Three Months Ended May 31,
	2011	2012
Risk-Free Interest Rate:	2.3% - 2.5%	0.7%
Expected Dividend Yield:	0%	0%
Expected Life (Years):	6.0	4.2
Expected Volatility:	110.2% - 110.9%	129.5% - 131.4%

The following table presents a summary of the Company’s stock options outstanding at May 31, 2012, and stock option activity during the three months ended May 31, 2012 (“Price” reflects the weighted average exercise price per share):

					Weighted Average		Aggregate
					Remaining		Intrinsic
	Options		Price		Contractual Term		Value
Outstanding, beginning of period		8,426,564	$	7.26
Granted		2,348,000		0.86
Exercised (1)		70,000		0.30
Forfeited		—		—
Expired		488,053		19.78
Outstanding, end of period		10,216,511		5.24		6.2	$	4,181
Exercisable, end of period		6,930,845		7.30		4.7	$	2,185

(1) The Company did not record an income tax benefit related to option exercises in the three months ended May 31, 2012. No options were exercised during the three months ended May 31, 2011.

The weighted average grant date fair value of options granted during the three months ended May 31, 2011 and 2012, was $0.94 and $0.71, respectively.

A summary of the Company’s nonvested options at May 31, 2012, and changes during the three months ended May 31, 2012, is presented below:

			Weighted Average
			Grant Date
	Options		Fair Value
Nonvested, beginning of period		3,193,171	$	0.58
Granted		2,348,000		0.71
Vested		2,255,505		0.51
Forfeited		—		—
Nonvested, end of period		3,285,666		0.73

There were 1.4 million shares available for future grants under the Company’s various equity plans at May 31, 2012. The vesting dates of outstanding options at May 31, 2012 range from July 2012 to March 2017, and expiration dates range from June 2012 to May 2022.

Restricted Stock Awards

The Company grants restricted stock awards to directors annually, though it has granted restricted stock to employees in prior years. These awards to directors are granted on the date of our annual meeting of shareholders and vest on the earlier of (i) the completion of the director’s three-year term or (ii) the third anniversary of the date of grant. Restricted stock award grants prior to fiscal 2011 were granted out of the Company’s 2004 Equity Compensation Plan and restricted stock award grants since March 1, 2010 have been granted out of the Company’s 2010 Equity Compensation Plan. The Company may also award, out of the Company’s 2010 Equity Compensation Plan, stock to settle certain bonuses and other compensation that otherwise would be paid in cash. Any restrictions on these shares are immediately lapsed on the grant date.

The following table presents a summary of the Company’s restricted stock grants outstanding at May 31, 2012, and restricted stock activity during the three months ended May 31, 2012 (“Price” reflects the weighted average share price at the date of grant):

	Awards		Price
Grants outstanding, beginning of period		24,145	$	0.90
Granted		—		—
Vested (restriction lapsed)		—		—
Forfeited		—		—
Grants outstanding, end of period		24,145		0.90

The total grant date fair value of shares vested during the three months ended May 31, 2011 was $0.6 million. No shares vested during the three months ended May 31, 2012.

Preferred Stock and the 2012 Retention Plan

During the year ended February 29, 2012, the Company purchased rights in 1,484,679 shares of its Preferred Stock. The purchase price for the rights in the Preferred Stock was paid in cash, but these shares are subject to total return swap arrangements. We have entered into confirmations for total return swaps and voting agreements with several preferred holders. Pursuant to these agreements and arrangements, we have the ability to direct the vote of 1,484,679 shares of Preferred Stock, or approximately 61% of the Preferred Stock outstanding as of February 29, 2012.

On April 2, 2012, the shareholders of the Company approved the 2012 Retention Plan and Trust Agreement (the “Trust” or the “2012 Retention Plan”) at a special meeting of shareholders. The Company contributed 400,000 shares of its Preferred Stock to the Trust in connection with the approval of the 2012 Retention Plan. Awards granted under the 2012 Retention Plan entitle the participants to receive a distribution two years from the date of shareholder approval of the plan, provided the participant is still an employee and was an employee upon inception of the plan. Distributions may be in the form of Class A common stock if the Company elects to convert the Preferred Stock to common stock at the then-current conversion ratio prior to distribution. The initial Trustee of the plan is Jeffrey H. Smulyan, our Chairman of the Board, President and Chief Executive Officer.

As of the Trust’s inception and May 31, 2012, no preferred shares have been allocated to individual employees, nor is any individual entitled to any minimum number of shares. As a result, the service inception date for these awards precedes the grant date, and the Company is accounting for the 2012 Retention Plan as a liability plan, using variable accounting. Prior to establishment of a grant date, the Company will estimate the fair value of the shares at each reporting period, and will recognize the compensation expense over a two-year period that began on April 2, 2012. Upon the second anniversary of the Trust’s inception, the Trust’s governance may allocate the shares to individual employees, at which point fully vested shares will be distributed to employees. The Trust is consolidated by the Company and both the assets and deferred compensation obligation of the Trust are accounted for within preferred stock in the accompanying condensed consolidated balance sheets. The Company recognized approximately $0.1 million of compensation expense related to the 2012 Retention Plan in the quarter ended May 31, 2012.

In connection with the approval of the 2012 Retention Plan, the Trustee and the Trust entered into a Voting and Transfer Restriction Agreement with Emmis, pursuant to which Emmis has the right to direct the vote of the 400,000 shares of Preferred Stock contributed to the Trust under the 2012 Retention Plan. As such, the Company effectively controls approximately 66.8% of the outstanding Preferred Stock. The Company also has the right to exchange the 400,000 shares of Preferred Stock into shares of Class A common stock at the same ratio as the conversion formula in the Preferred Stock (currently 2.44 shares of Class A common stock for each share of Preferred Stock).

Recognized Non-Cash Compensation Expense

The following table summarizes stock-based compensation expense and related tax benefits recognized by the Company in the three months ended May 31, 2011 and 2012:

	Three months ended May 31,
	2011		2012
Station operating expenses	$	80	$	153
Corporate expenses		202		238
Stock-based compensation expense included in operating expenses		282		391
Tax benefit		—		—
Recognized stock-based compensation expense, net of tax	$	282	$	391

As of May 31, 2012, there was $3.3 million of unrecognized compensation cost, net of estimated forfeitures, related to nonvested share-based compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately 2.1 years.