XML 27 R22.htm IDEA: XBRL DOCUMENT

Summary of Significant Accounting Policies (Policies)

9 Months Ended

Nov. 30, 2019

Preparation of Interim Financial Statements

Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), the condensed consolidated interim financial statements included herein have been prepared, without audit, by Emmis Communications Corporation (“ECC”) and its subsidiaries (collectively, “our,” “us,” “we,” “Emmis” or the “Company”). As permitted under the applicable rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, Emmis believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report for Emmis filed on Form 10-K for the year ended February 28, 2019. The Company’s results are subject to seasonal fluctuations. Therefore, results shown on an interim basis are not necessarily indicative of results for a full year.

In the opinion of Emmis, the accompanying condensed consolidated interim financial statements contain all material adjustments (consisting only of normal recurring adjustments, except as otherwise noted) necessary to present fairly the consolidated financial position of Emmis at November 30, 2019, the results of its operations for the three-month and nine-month periods ended November 30, 2018 and 2019, and cash flows for the nine-month periods ended November 30, 2018 and 2019.

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended February 28, 2019 that have had a material impact on our condensed consolidated financial statements and related notes.

Basic and Diluted Net Income Per Common Share

Basic net income per common share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at November 30, 2018 and 2019 consisted of stock options and restricted stock awards. The following table sets forth the calculation of basic and diluted net income per share:

	For the Three Months Ended November 30,
	2018						2019
	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	$	712		12,609	$	0.06	$	52,725		12,937	$	4.08
Impact of equity awards		—		—				—		—
Diluted net income per common share:
Net income available to common shareholders	$	712		12,609	$	0.06	$	52,725		12,937	$	4.08

	For the Nine Months Ended November 30,
	2018						2019
	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	$	23,824		12,565	$	1.90	$	61,408		12,846	$	4.78
Impact of equity awards		—		921		—		—		—		—
Diluted net income per common share:
Net income available to common shareholders	$	23,824		13,486	$	1.77	$	61,408		12,846	$	4.78

Shares excluded from the calculation as the effect of their conversion into shares of our common stock would be antidilutive were as follows:

	For the Three Months Ended November 30,				For the Nine Months Ended November 30,
	2018		2019		2018		2019
	(shares in 000’s )
Equity awards		1,975		2,187		913		2,320
Antidilutive common share equivalents		1,975		2,187		913		2,320

Local Programming and Marketing Agreement Fees

The Company from time to time enters into local programming and marketing agreements (“LMAs”), often pending regulatory approval of transfer of the Federal Communications Commission ("FCC") licenses in connection with acquisitions or dispositions of radio stations. Under the terms of these agreements, the acquiring company makes specified periodic payments to the holder of the FCC license in exchange for the right to program and sell advertising for a specified portion of the station’s inventory of broadcast time. The acquiring company records revenues and expenses associated with the portion of the station’s inventory of broadcast time it manages. Nevertheless, as the holder of the FCC license, the owner-operator retains control and responsibility for the operation of the station, including responsibility over all programming broadcast on the station.

On April 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 was recognized as a component of net revenues in the accompanying condensed consolidated statements of operations for the nine-month period ending November 30, 2018.

On April 26, 2012, Emmis entered into an LMA with a subsidiary of Disney Enterprises, Inc. for 98.7FM in New York (formerly WRKS-FM and now WEPN-FM, hereinafter referred to as “98.7FM”). The LMA for this station started on April 30, 2012 and will continue until August 31, 2024. Emmis retains ownership and control of the station, including the related FCC license during the term of the LMA and is scheduled to receive an annual fee until the LMA’s termination. LMA fee revenue is recorded on a straight-line basis over the term of the LMA as a component of net revenues in our accompanying condensed consolidated statements of operations.

The following table summarizes certain operating results of 98.7FM for all periods presented. Net revenues for 98.7FM are solely related to LMA fees. 98.7FM is a part of our radio segment.

	For the Three Months Ended November 30,				For the Nine Months Ended November 30,
	2018		2019		2018		2019
Net revenues	$	2,582	$	2,582	$	7,748	$	7,748
Station operating expenses, excluding depreciation and amortization expense		305		346		901		1,032
Interest expense		574		503		1,775		1,565

Assets and liabilities of 98.7FM as of February 28, 2019 and November 30, 2019 were as follows:

	As of February 28, 2019		As of November 30, 2019
Current assets:
Restricted cash	$	1,504	$	1,397
Prepaid expenses		394		351
Other current assets		340		620
Total current assets		2,238		2,368
Noncurrent assets:
Property and equipment, net		188		237
Indefinite lived intangibles		46,390		46,390
Operating lease right-of-use assets		—		7,440
Other assets		6,255		5,736
Total noncurrent assets		52,833		59,803
Total assets	$	55,071	$	62,171
Current liabilities:
Accounts payable and accrued expenses	$	15	$	15
Current maturities of long-term debt		7,150		7,601
Deferred revenue		864		894
Operating lease liabilities		—		367
Other current liabilities		162		144
Total current liabilities		8,191		9,021
Noncurrent liabilities:
Long-term debt, net of current portion and unamortized debt discount		38,747		33,177
Operating lease liabilities, net of current		—		8,126
Total noncurrent liabilities		38,747		41,303
Total liabilities	$	46,938	$	50,324

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the same amounts shown in the condensed consolidated statements of cash flows.

	As of February 28, 2019		As of November 30, 2019
Cash and cash equivalents, excluding amounts classified as held for sale	$	4,343	$	111,345
Restricted cash:
98.7FM LMA restricted cash		1,504		1,397
Cash used to secure the Company's purchasing card and travel and expense program		1,000		225
Total cash, cash equivalents and restricted cash	$	6,847	$	112,967

As of February 28, 2019 and November 30, 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 program. Cash held by Emmis Austin Radio Broadcasting Company, L.P. is classified as held for sale as of February 28, 2019. See the discussion of our discontinued operations on the subsequent page for more information related to assets held for sale.

Noncontrolling Interests

The Company follows Accounting Standards Codification paragraph 810-10-65-1 to report the noncontrolling interests related to the Austin radio partnership and Digonex Technologies Inc., a dynamic pricing business (hereinafter "Digonex"). We owned a 50.1% controlling interest in the Austin radio partnership until its sale on October 1, 2019. As of November 30, 2019, 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. Emmis owns rights that are convertible into approximately 84% of Digonex's common equity.

Noncontrolling interests represent the noncontrolling interest holders' proportionate share of the equity of the Austin radio partnership until its sale and Digonex. Noncontrolling interests are adjusted for the noncontrolling interest holders' proportionate share of the earnings or losses of the applicable entity. The noncontrolling interest continues to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance. Below is a summary of the noncontrolling interest activity for the nine months ended November 30, 2018 and 2019:

	Austin Radio Partnership			Digonex			Total Noncontrolling Interests
Balance, February 28, 2018	$	47,424		$	(16,744	)	$	30,680
Net income (loss)		4,132			(1,736	)		2,396
Distributions to noncontrolling interests		(3,792	)		—			(3,792	)
Balance, November 30, 2018	$	47,764		$	(18,480	)	$	29,284
Balance, February 28, 2019	$	47,146		$	(18,993	)	$	28,153
Net income (loss)		3,047			(1,490	)		1,557
Distributions to noncontrolling interests		(2,217	)		—			(2,217	)
Sale of controlling interest in subsidiary		(47,976	)		—			(47,976	)
Balance, November 30, 2019	$	—		$	(20,483	)	$	(20,483	)

Discontinued Operations

During the quarter ended August 31, 2019, the Company entered into agreements to sell its 50.1% ownership interest in Emmis Austin Radio Broadcasting Company, L.P. (the “Austin Partnership”), as well as a controlling interest in WQHT-FM and WBLS-FM in New York. Both sales closed during the three months ended November 30, 2019. The Company concluded that each of these transactions is a disposal of a business that met the criteria to be classified as held for sale during the three months ended August 31, 2019, and each is a strategic shift that will have a significant impact on the Company’s operations and financial results. As such, the assets and liabilities of these businesses included in the disposal transactions have been classified as held for sale in the February 28 2019, balance sheet, and the results of operations and cash flows of these businesses have been classified as discontinued operations for all periods presented in the accompanying condensed consolidated financial statements. See below for more discussion of each of these transactions.

Summary of Discontinued Operations Activity:

	For the Three Months Ended November 30,				For the Nine Months Ended November 30,
	2018		2019		2018		2019
Income from discontinued operations:
Austin Radio Partnership	$	2,625	$	37,908	$	7,799	$	42,992
WQHT-FM and WBLS-FM		3,286		37,686		9,132		45,088
Total income before income taxes from discontinued operations		5,911		75,594		16,931		88,080
Less: provision for income taxes		2,649		16,673		1,635		10,867
Income from discontinued operations, net of tax	$	3,262	$	58,921	$	15,296	$	77,213

A discussion of each component of discontinued operations follows.

Austin Radio Partnership

On October 1, 2019, a subsidiary of Emmis sold its 50.1% ownership interest in the Austin Partnership to our minority partner, Sinclair Telecable, Inc., for $39.3 million (the “Austin Partnership Transaction”). Emmis recognized a gain on sale of $37.3 million. Gross cash proceeds, inclusive of purchase price adjustments, were approximately $40.7 million. Transaction-related expenses were approximately $0.7 million. $9.9 million of these proceeds were used to repay debt outstanding, with the balance held for general corporate purposes, including capital expenditures, working capital, and potential acquisitions and investments.

The Austin Partnership has historically been included in our Radio segment. The following table summarizes certain operating results of the Austin Partnership for all periods presented. A portion of Emmis’ mortgage debt was required to be repaid with proceeds of this transaction. In accordance with ASC 205-20-45-6, Emmis has allocated interest on the debt required to be repaid as a result of this disposal transaction to the results of the Austin Radio Partnership.

	For the Three Months Ended November 30,				For the Nine Months Ended November 30,
	2018		2019		2018		2019
Net revenues	$	7,991	$	2,660	$	24,456	$	19,539
Station operating expenses, excluding depreciation and amortization		5,106		2,012		15,848		13,428
Gain on sale of assets, net of disposition costs		—		37,292		—		37,292
Depreciation and amortization		115		—		386		120
Interest expense		145		32		423		291
Income before taxes	$	2,625	$	37,908	$	7,799	$	42,992

Major classes of assets and liabilities of the Austin Partnership that were classified as held for sale in the accompanying condensed consolidated balance sheet as of February 28, 2019 are as follows:

	As of February 28, 2019
Current assets:
Cash and cash equivalents	$	1,095
Accounts receivable, net		4,856
Prepaid expenses		357
Other current assets		121
Total current assets		6,429
Noncurrent assets:
Property and equipment, net		5,060
Indefinite lived intangibles		34,720
Goodwill		4,338
Other assets		25
Total noncurrent assets		44,143
Total assets	$	50,572
Current liabilities:
Accounts payable and accrued expenses	$	291
Accrued salaries and commissions		651
Deferred revenue		591
Income taxes payable		18
Other current liabilities		23
Total current liabilities		1,574
Noncurrent liabilities:
Other noncurrent liabilities		332
Total noncurrent liabilities		332
Total liabilities	$	1,906
Equity:
Noncontrolling interests	$	47,146

WQHT-FM and WBLS-FM

On November 25, 2019, Emmis contributed the assets and liabilities of WBLS-FM and WQHT-FM (the “Stations”) to MediaCo Holding Inc., an Indiana corporation (“MediaCo”) and in return, Emmis received $91.5 million in cash, a convertible promissory note payable to Emmis in the amount of $5.0 million and 1,666,667 shares of MediaCo Class A common stock (the “MediaCo Transaction”). These shares constitute all of the issued and outstanding MediaCo Class A common stock and represent in the aggregate an approximately 23.72% equity ownership interest and 3.02% of the outstanding voting interests of MediaCo immediately following the transaction. We expect that, on January 17, 2020, we will make a taxable pro rata distribution of 0.1265 shares of MediaCo Class A common stock for each outstanding share of Emmis’ Class A and Class B common stock at the close of business of January 3, 2020. The $5.0 million convertible promissory note carries interest at a base rate equal to the interest on MediaCo’s senior credit facility (London Interbank Offered Rate with a 2.0% floor plus 7.5%), or if no senior credit facility is outstanding, 6.00%, plus an additional 1.00% on any payment of interest in kind and, without regard to whether MediaCo pays such interest in kind, an additional increase of 1.00% following the second anniversary of the date of issuance and additional increases of 1.00% following each successive anniversary thereafter. The note is convertible, in whole or in part, into MediaCo Class A common stock at the option of Emmis beginning six months after issuance at a strike price equal to the thirty day volume weighted average price of the MediaCo Class A common stock on the date of conversion. The note matures on November 25, 2024. In addition, MediaCo’s net working capital as of the closing date must be reimbursed to Emmis within nine months of the MediaCo Transaction. Emmis has recorded an $8.5 million receivable from MediaCo related to this net working capital. SG Broadcasting LLC, an affiliate of Standard General L.P., a New York-based investment firm that manages event-driven opportunity funds (“Standard General”), purchased all of MediaCo’s Class B common stock, representing a 76.28% equity ownership interest. The common stock of MediaCo acquired by Standard General will be entitled to ten votes per share and the common stock acquired by Emmis and distributed to Emmis’ shareholders will be entitled to one vote per share. Emmis will continue to provide management services to the Stations under a Management Agreement, subject to the direction of the MediaCo board of directors which initially consists of four directors appointed by Standard General and three directors appointed by Emmis. Emmis will receive an annual management fee of $1.25 million, plus reimbursement of certain expenses directly related to the operation of MediaCo’s business. The shares held by Emmis at November 30, 2019, which will be distributed to Emmis’ shareholders in January 2020, constitute an equity investment as discussed in Note 12.

Gross cash proceeds at closing, inclusive of purchase price adjustments, were $91.8 million, $3.5 million of which was used by Emmis to repay debt outstanding. Transaction-related expenses were approximately $2.2 million. The remaining cash will be used for general corporate purposes, including capital expenditures, working capital, and potential acquisitions and investments. Upon the closing of the transaction, Emmis deconsolidated these stations, recorded the retained investment at fair value, and recognized a gain on sale of $35.6 million.

The Stations have historically been included in our Radio segment. The following table summarizes certain operating results of the Stations for all periods presented. In accordance with ASC 205-20-45-6, Emmis has allocated interest on the debt that was required to be repaid as a result of this disposal transaction to the results of the Stations.

	For the Three Months Ended November 30,				For the Nine Months Ended November 30,
	2018		2019		2018		2019
Net revenues	$	11,535	$	9,795	$	35,046	$	35,947
Station operating expenses, excluding depreciation and amortization		7,809		7,678		24,711		25,844
Gain on sale of assets, net of disposition costs		—		35,616		—		35,616
Depreciation and amortization		346		—		930		417
Interest expense		94		47		273		214
Income before taxes	$	3,286	$	37,686	$	9,132	$	45,088

Major classes of assets and liabilities of the Stations that are classified as held for sale in the accompanying condensed consolidated balance sheet as of February 28, 2019 are as follows:

	As of February 28, 2019
Current assets:
Prepaid expenses	$	100
Other current assets		100
Total current assets		200
Noncurrent assets:
Property and equipment, net		2,356
Indefinite lived intangibles		63,265
Other intangibles, net		758
Other assets		145
Total noncurrent assets		66,524
Total assets	$	66,724
Current liabilities:
Other current liabilities		498
Total current liabilities		498
Noncurrent liabilities:
Other noncurrent liabilities		1,778
Total noncurrent liabilities		1,778
Total liabilities	$	2,276

Implementation of Recent Accounting Pronouncements

On March 1, 2019, we adopted Accounting Standard Update 2016-02, Leases, using the modified retrospective approach, applied at the beginning of the period of adoption, and we elected the package of transitional practical expedients. The adoption of this standard resulted in recording operating lease liabilities of approximately $28.8 million as of March 1, 2019 along with a corresponding right-of-use asset. A significant portion of these amounts have been sold as part of the Austin Partnership and WBLS and WQHT sales. The implementation of this standard did not have an impact on our condensed consolidated statements of operations. See Note 11 for more discussion of the Company’s leases.

Recent Accounting Pronouncements Not Yet Implemented

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses, 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 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, 2023. We are currently evaluating the impact that the adoption of the new standard will have on our condensed consolidated financial statements.