UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): March 10, 2020
EMMIS COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its
charter)
Indiana |
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0-23264 |
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35-1542018 |
(State or Other Jurisdiction of Incorporation) |
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(Commission File Number) |
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(I.R.S. Employer Identification No.) |
ONE EMMIS PLAZA
40 MONUMENT CIRCLE
SUITE 700
INDIANAPOLIS, INDIANA 46204
(Address of principal executive offices and Zip Code)
(317) 266-0100
(Registrant’s telephone number,
including area code)
N/A
(Former name or former address, if changed since last report
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
Class A common stock, $0.01 par value |
EMMS |
Nasdaq Global Select Market |
Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
This Amendment No. 1 to Current Report on Form 8-K (this “Amendment No. 1”) amends and supplements the Current Report on Form 8-K of Emmis Communications Corporation, an Indiana corporation (the “Company”) filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2020 (the “Original Form 8-K”). On March 10, 2020, Lencore Acoustics, LLC f/k/a Emmis QOZ Business, LLC (“EQOZB”), an Indiana limited liability company and wholly-owned subsidiary of Emmis Communications Corporation, an Indiana corporation (“Emmis”), Emmis Operating Company (“EOC”), an Indiana corporation and wholly-owned subsidiary of Emmis, Lencore Acoustics Corporation, a New York corporation (“Lencore”), and the stockholders listed therein (the “Stockholders”) entered into a certain Asset Purchase Agreement (the “APA”) pursuant to which EQOZB contemporaneously acquired (the “Acquisition”) substantially all of the assets of Lencore used and useful in Lencore’s sound masking business (the “Sound Masking Business”).
This Amendment No. 1 amends Item 9.01 of the Original Form 8-K for the purpose of filing the financial information required by Item 9.01(a) of Form 8-K and the pro forma financial information required by Item 9.01(b) of Form 8-K. This Amendment No. 1 does not otherwise update, modify or amend the Original Form 8-K and should be read in conjunction with the Original Form 8-K.
Item 9.01Financial Statements and Exhibits.
(a) Financial statements of businesses acquired
The audited financial statements of the Sound Masking Business as of and for the year ended December 31, 2018 and the unaudited financial statements of the Sound Masking Business as of and for the nine months ended September 30, 2019, which are filed as Exhibit 99.1 and 99.2 hereto and are incorporated by reference herein.
(b) Pro forma financial information.
The unaudited pro forma condensed combined balance sheet as of November 30, 2019, and the unaudited pro forma condensed combined statements of operations for the nine months ended November 30, 2019 and the year ended February 28, 2019 (collectively the “Unaudited Pro Forma Financial Statements”), which are filed as Exhibit 99.3 hereto and are incorporated by reference herein. The Unaudited Pro Forma Financial Statements give effect to the Acquisition.
(d) Exhibits.
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Exhibit No. |
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Description |
23.1 |
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99.1 |
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99.2 |
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99.3 |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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EMMIS COMMUNICATIONS CORPORATION |
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Date: May 13, 2020 |
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By: |
/s/ Ryan A. Hornaday |
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Ryan A. Hornaday |
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Executive Vice President, |
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Chief Financial Officer, & Treasurer |
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration Statements:
(1) |
Registration Statement (Form S-8 No. 333-71904) pertaining to the Emmis Communications Corporation 2001 Equity Incentive Plan; |
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(2) |
Registration Statement (Form S-8 No. 333-92318) pertaining to the Emmis Communications Corporation 2002 Equity Compensation Plan; |
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(3) |
Registration Statement (Form S-8 No. 333-117033) pertaining to the Emmis Communications Corporation 2004 Equity Compensation Plan; |
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(4) |
Registration Statement (Form S-8 No. 333-148249) pertaining to the Emmis Communications Corporation 401(K) Plan; |
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(5) |
Registration Statement (Form S-8 No. 333-171463) pertaining to the Emmis Communications Corporation 2010 Equity Compensation Plan; |
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(6) |
Registration Statement (Form S-8 No. 333-184933) pertaining to the Emmis Communications Corporation 2012 Equity Compensation Plan; |
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(7) |
Registration Statement (Form S-8 No. 333-205579) pertaining to the Emmis Communications Corporation 2015 Equity Compensation Plan; |
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(8) |
Registration Statement (Form S-8 No. 333-212419) pertaining to the Emmis Communications Corporation 2016 Equity Compensation Plan; and |
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(9) |
Registration Statement (Form S-8 No. 333-219267) pertaining to the Emmis Communications Corporation 2017 Equity Compensation Plan |
of our report dated February 28, 2020, with respect to the financial statements of Sound Masking Business (a carved-out business of Lencore Acoustics Corporation) included in this Current Report on Form 8-K.
/s/ Ernst & Young LLP
Indianapolis, Indiana
May 13, 2020
Exhibit 99.1
Sound Masking Business
Carved-out Business of LENCORE ACOUSTICS CORPORATION
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018
(Carved-out Business of LENCORE ACOUSTICS CORPORATION)
CONTENTS
Report of Independent Auditors |
1 |
Financial Statements Balance Sheet Statement of Income Statement of Changes in Net Parent Investment Statement of Cash Flows
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2 3 4 5 |
Notes to Financial Statements |
6-15 |
Report of Independent Auditors
The Board of Directors and Owners
Lencore Acoustics Corporation
We have audited the accompanying financial statements of Sound Masking Business (a carved-out business of Lencore Acoustics Corporation as described in Note 1) which comprise the balance sheet as of December 31, 2018, and the related statements of income, changes in net parent investment, and cash flows for the year then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sound Masking Business at December 31, 2018, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
February 28, 2020
1
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) |
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BALANCE SHEET |
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DECEMBER 31, 2018 |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
6,977,534 |
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Accounts receivable, net |
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5,846,929 |
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Inventory |
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1,644,224 |
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Deferred expenses |
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880,705 |
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Prepaid expenses |
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146,796 |
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Total Current Assets |
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15,496,188 |
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Property and Equipment, Net |
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755,962 |
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Total Assets |
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$ |
16,252,150 |
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Liabilities and Net Parent Investment |
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Liabilities |
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Accounts payable |
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$ |
3,552,937 |
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Deferred revenue |
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969,055 |
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Sales and use tax liability |
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4,769,914 |
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State tax liability |
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281,211 |
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Other current liabilities |
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10,812 |
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Total Liabilities |
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9,583,929 |
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Net Parent Investment |
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6,668,221 |
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Liabilities and Net Parent Investment |
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$ |
16,252,150 |
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2
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) |
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STATEMENT OF INCOME |
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FOR THE YEAR ENDED DECEMBER 31, 2018 |
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Net Sales |
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$ |
23,675,503 |
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Cost of Sales |
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9,835,516 |
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Gross Profit |
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13,839,987 |
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Operating Expenses |
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General and administrative expenses |
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7,941,779 |
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Operating Income |
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5,898,208 |
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Other Income |
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Interest income |
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$ |
11,666 |
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Other income |
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6,066 |
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Total Other Income |
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17,732 |
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Income Before Income Taxes |
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5,915,940 |
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Income Taxes |
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41,125 |
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Net Income |
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$ |
5,874,815 |
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3
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) |
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STATEMENT OF CHANGES IN NET PARENT INVESTMENT |
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FOR THE YEAR ENDED DECEMBER 31, 2018 |
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Net Parent Investment - January 1, 2018 |
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$ |
4,422,959 |
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Net Income |
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5,874,815 |
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Net transfers to parent |
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(3,629,553 |
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Net Parent Investment - December 31, 2018 |
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$ |
6,668,221 |
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4
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) |
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STATEMENT OF CASH FLOWS |
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FOR THE YEAR ENDED DECEMBER 31, 2018 |
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Cash Flows From Operating Activities |
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Net income |
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$ |
5,874,815 |
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Adjustments to reconcile net income to cash provided by operating activities: |
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Depreciation and amortization |
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$ |
67,856 |
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Provision for bad debts |
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51,699 |
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Inventory reserve |
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54,257 |
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Changes in operating assets and liabilities |
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Accounts receivable |
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(2,001,651 |
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Inventory |
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(731,503 |
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Prepaid expenses |
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(146,796 |
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Accounts payable |
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47,764 |
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Deferred expenses and revenue |
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(30,662 |
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Sales and use tax liability |
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345,356 |
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State tax liability |
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40,432 |
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Other current liabilities |
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(87,349 |
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Total Adjustments |
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(2,390,597 |
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Net Cash Provided By Operating Activities |
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3,484,218 |
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Cash Used in Investing Activities |
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Purchases of property and equipment |
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(20,227 |
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Cash Used in Financing Activities |
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Net transfers to Parent |
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(3,629,553 |
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Net Decrease in Cash and Cash Equivalents |
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(165,562 |
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Cash and Cash Equivalents - Beginning |
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7,143,096 |
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Cash and Cash Equivalents - Ending |
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$ |
6,977,534 |
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5
(Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018 |
Note 1 – Summary of Significant Accounting Policies
Nature of Business
Sound Masking Business (the Company) manufactures, installs and distributes sound masking equipment to offices, hospitals, hotels, education centers and other end users, distributors and contractors principally throughout the United States and Canada. The Company operates as part of Lencore Acoustics Corp. (the “Parent”), which also manufactures, installs and distributes distributed audio, mass notification and related equipment.
Basis of Presentation
The Company has historically operated as part of the Parent and not as a standalone company. Financial statements representing the historical operations of the Company have been derived from Parent’s historical accounting records and are presented on a carve-out basis. The financial statements of the Company give effect to accounting and allocation policies established by the Company's management for purposes of these financial statements and are in accordance with accounting principles generally accepted in the United States (U.S. GAAP). All revenues and costs as well as assets and liabilities directly associated with the business activity of the Company are included in the financial statements. The financial statements also include allocations of certain general, administrative, sales and marketing expenses from Parent on a basis that management believes to be reasonable to reflect the financial position, results of operations and cash flows of the Company, including allocated portions of the Parent’s expenses. However, amounts recognized by the Company are not necessarily representative of the amounts that would have been reflected in the financial statements had the Company operated independently of Parent.
All significant transactions between the Company and Parent have been included in the accompanying financial statements. Transactions with Parent are reflected in the accompanying Statement of Changes in Net Parent Investment as “Net transfers to parent” and in the accompanying Balance Sheet within “Net parent investment.”
6
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018 |
Note 1 – Summary of Significant Accounting Policies (continued)
The following allocation policies have been established by management of the Company and have been consistently applied in the financial statements. In the opinion of management, the methods for allocating these costs are reasonable. It is not practicable to estimate the costs that would have been incurred had the Company been operated on a stand-alone basis.
(i) |
Specifically-Identifiable Operating Expenses |
Costs which relate entirely to the operations of the Company are attributed entirely to the Company. These expenses consist of costs of personnel who are 100% dedicated to the operations of the Company, all costs associated with locations that conduct only the business of the Company and amounts paid to third parties for services rendered to the Company. In addition, any costs incurred by Parent, which are specifically identifiable to the operations of the Company, are attributed to the Company.
(ii) |
Shared Operating Expenses |
Parent incurs the cost of certain corporate general and administrative services and shared services that benefit all of its businesses, including the Company. These shared services include executive management, legal, accounting, consulting, information services, telecommunications, human resources, insurance, sales and marketing. These costs have been allocated to the Company based on one of the following allocation methods: (1) percentage of Company revenues, (2) headcount, and (3) time study estimations on an employee-by-employee basis. Management determined which allocation method was appropriate based on the nature of the shared service being provided.
Allocations of shared costs have been included in the accompany statement of income of the Company for the year ended December 31, 2018, as follows:
Cost of sales |
$ |
1,570,613 |
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General and administrative expenses |
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1,733,059 |
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Total |
$ |
3,303,672 |
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7
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018 |
Note 1 – Summary of Significant Accounting Policies (continued)
Intracompany transactions have been eliminated. The net effect of the settlement of transactions between the Company and the Parent together with the cash transfers to and from the Parent are reflected in the Statement of Changes in Net Parent Investment as net transfers to parent, in the Statement of Cash flows as a financing activity and in the Balance sheet as net parent investment.
Concentration of Credit Risk
The Company has cash balances in banks in excess of the maximum amount insured by the FDIC as of December 31, 2018. The Company places its cash and cash equivalents with high quality financial institutions. The Company does not believe it is exposed to any significant credit risk on cash and cash equivalents.
The Company considers all short-term investments with an original maturity of three months or less (i.e., money market accounts, certificates of deposit, etc.) to be cash equivalents.
Accounts Receivable
Accounts receivable are customers’ obligations due under normal trade terms. The Company routinely reviews accounts receivable by customer account aging to determine the collectability of the amounts due based on information received from the customer, past history and economic conditions. In doing so, the Company adjusts the allowance for doubtful accounts accordingly to reflect the net realizable value of an account receivable. Accounts receivable are written off once management determines that they are uncollectible. The allowance for doubtful accounts is $51,669 at December 31, 2018.
Inventories
Inventories, consisting of raw materials, work in progress and finished goods, are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method.
Property and Equipment
Property and equipment is stated at cost. Maintenance and repairs are charged to expense as incurred; costs of major additions and betterments are capitalized. When property and equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is reflected in income.
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Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018 |
Note 1 – Summary of Significant Accounting Policies (continued)
Deferred Charges
Deferred charges represent the expenses incurred by the Company in advance of merchandise being received by its customers and installations that have started but have not been completed at the end of the reporting period. The deferred charges are recognized once the shipment has been received and/or the installation has been completed.
Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company does not believe there was any impairment of long lived assets at December 31, 2018.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts receivable, accounts payable and accrued expenses. Management believes the carrying value of these instruments approximate their fair values due to their short-term maturities.
Shipping and Handling
Shipping and handling costs are charged to operations as incurred and are included in cost of sales in the accompanying statement of income. Shipping and handling costs amounted to $359,343 for the year ended December 31, 2018.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising costs charged to expense for the year ended December 31, 2018 was $268,584.
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Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018 |
Note 1 – Summary of Significant Accounting Policies (continued)
Revenue Recognition
The Company recognizes revenue when all of the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.
The Company derives its revenue from product sales and, in certain instances, from related installation. When a sale combines multiple elements, the Company accounts for multiple element arrangements under Accounting Standards Codification (“ASC”) Topic 605-25 – Revenue Arrangements with Multiple Deliverables.
Revenue under multiple element arrangements is allocated to product sales and installation services based upon the relative selling prices of those products and/or services. The Company offers its customer a one year warranty on any defects related to the products but warranty expense has been immaterial.
The Company has reviewed the new ASC Topic 606 – Recognizing Revenue from Contracts with Customers, which the Company must adopt for its annual financial statements for the year ended December 31, 2019. Based on management’s review of the Company’s accounting practices, the Company does not believe that adoption of the new accounting pronouncement will have a material impact on the financial statements.
Research And Development
Research and development costs are charged to operations when incurred and are included in selling, general and administrative expenses. Research and development costs for the year ended December 31, 2018 was $11,482.
Deferred Revenue
Deferred revenue represents amounts invoiced for installation services related to equipment which was shipped during the year but for which the installation was not completed as of December 31, 2018.
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Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018 |
Note 1 – Summary of Significant Accounting Policies (continued)
Income Taxes
The Parent, with the consent of its stockholders, has elected “S” Corporation status under the Internal Revenue Code. The stockholders of an “S” Corporation are taxed on their proportionate share of the “S” Corporation’s taxable income. Accordingly, no provision of liability for Federal income taxes has been included in the financial statements. However, the provision includes income taxes for the State of New York.
Management has concluded that the Company is a pass-through entity but evaluates its filing positions for uncertain tax positions. The Company has recorded approximately $280,000 as an uncertain tax position liability within the financial statements relating to states that administer entity-level taxes in which the Company is currently not filing an income tax return. Of that liability, approximately $40,000 was recorded during the year ended December 31, 2018 and is classified as income tax expense. The Company classifies interest and penalties, when material, as income tax expense. Management’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analyses of tax laws, regulations and interpretations thereof as well as other factors.
Use of Estimates In The Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Note 2 – Inventories
Inventories at December 31, 2018 consists of the following:
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Amount |
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Finished goods |
$ |
37,825 |
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Raw materials and subassemblies |
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1,606,399 |
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Inventories |
$ |
1,644,224 |
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11
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018 |
Note 3 – Property and Equipment
Property and equipment at December 31, 2018 consists of the following:
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Amount |
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Estimate Useful Lives |
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Machinery and equipment |
$ |
134,820 |
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5-7 years |
Trucks and autos |
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48,493 |
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5-7 years |
Furniture and fixtures |
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22,576 |
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5-7 years |
Computer equipment |
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12,149 |
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5-7 years |
Leasehold improvements |
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861,400 |
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Life of lease |
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1,079,438 |
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Less: accumulated depreciation and amortization |
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(323,476 |
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Property and Equipment, Net |
$ |
755,962 |
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Depreciation and amortization expense for the year ended December 31, 2018 was $67,856.
12
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018 |
NOTE 4 – RELATED PARTY Disclosures
During the year ending December 31, 2018, The Company rented its headquarter office in Woodbury, NY from Ship 142 LLC, an entity related through common ownership, on a month-to-month basis. The Company also pays insurance, real estate taxes and other operating expenses related to this property. Total payments paid to this entity was $336,643, for the year ended December 31, 2018 and it was included in the general and administrative expenses on the income statement. At December 31, 2018 Ship 142 owed the company $68,292. See Note 11 – Subsequent Events for further details regarding this entity.
The Company also rents additional warehouse space in Norfolk, NY from Meroke Realty Corp, a related entity through common ownership, on a month-to-month basis. Total payments paid to this entity was $66,633 for the year ended December 31, 2018 and are included in the general and administrative expenses on the income statement. At December 31, 2018 Meroke owed the Company $58,825.
The Company also outsources its warehouse operations in Norfolk, NY from Custom Acoustics Company, a related entity through a family relationship of the Parent’s owners. Total payments paid to this entity were $784,430 and are included in the cost of sales expenses on the income statement. At December 31, 2018 the Company owed Custom Acoustics $6,040.
Note 5 – Retirement Plan
The Parent maintains a 401(k) defined contribution plan and a profit sharing plan (the “Plan”) covering substantially all of its nonunion employees. The Plan allows for employees to defer up to 100% of annual compensation not to exceed the annual contribution limit as determined by the Internal Revenue Service. Participants age 50 and over are permitted to make additional contributions up to IRS limits. The Company contributions are pursuant to safe harbor rules. Company contributions for the year ended December 31, 2018 resulted in expense of $61,303.
Note 6 – Economic Dependency
Major Vendors
During 2018, one vendor accounted for 36.2% of total purchases and one vendor accounted for 57.5% of contract manufacturing costs. At December 31, 2018, the amounts due to these two vendors in accounts payable were $70,239and $0, respectively.
Note 7 – Commitments and Contingencies
Operating Leasing Commitments
The Company rents its headquarter office in Woodbury, NY from Ship 142 LLC an entity related through common ownership on a month-to-month basis. The Company also pays insurance, real
13
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018 |
estate taxes and other operating expenses related to this property. Total rent paid to this entity was $260,598, for the year ended December 31, 2018.
The Company also rents additional warehouse space in Norfolk, NY from Meroke LLC a related entity through common ownership on a month-to-month basis. Total rent paid to this entity was $66,360, for the year ended December 31, 2018.
Litigation
From time to time, the Company is a party to litigation arising in the normal course of its business operations. In the opinion of management, it is not anticipated that the settlement or resolution of any such matters will have a material adverse impact on the Company’s financial condition, liquidity or results of operations.
Sales and Use Tax
The Company has concluded that it failed to collect and remit sales and use taxes for certain sales and in certain jurisdictions during 2018 and previous periods. In analyzing this issue, the Company concluded that the nature of certain of its sales gave rise to a sales and use tax obligation that was neither collected from customers, nor remitted to the taxing authorities. Accordingly, the Company believes a loss contingency is probable of occurrence and conducted a state-by-state analysis, based on historical sales, the existence of valid exemption certificates, and other assumptions in order to estimate the exposure. Based upon its analysis the Company concluded the exposure is both probable and reasonably estimable and has recorded a liability of approximately $4.8 million as of December 31, 2018, of which approximately $350,000 was recorded to general and administrative expense during the year ended December 31, 2018 as an increase to the obligation.
14
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018 |
The Company has evaluated subsequent events through February 28, 2020, the date of which the financial statements were available to be issued.
On April 30, 2019, the Parent entered into a Loan Agreement with Bank of America for (a) a Line of Credit of up to $5,000,000 available until April 30, 2022 and (b) a Fixed Rate Term Loan of $5,000,000. The Line of Credit is available to the Parent subject to financial covenants and bears interest at a rate of LIBOR plus 225 basis points. The maximum amount available under the Line of Credit reduces to $4,000,000 on March 31, 2020 and to $3,000,000 on March 31, 2021. The Fixed Rate Term Loan bears interest at a rate of 4.66% and amortizes monthly over 3 years.
On May 9, 2019, the Parent advanced $10,568,750 to the majority stockholder and various individuals and an entity related to the Parent under five (5) various Promissory Notes totaling $12,500,000 including interest at 3.09% per annum. The total interest for the term of these notes aggregating $1,931,250 was withheld from the funds advanced under the terms of these Promissory Notes. The principal payments are due and payable in full on May 10, 2024.
On September 19, 2019, the Parent advanced $2,680,500 to the majority stockholder and various individuals and an entity related to the Parent under five (5) various Promissory Notes totaling $3,000,000 including interest at 2.13% per annum. The total interest for the term of these notes aggregating $319,500 was withheld from the funds advanced under the terms of these Promissory Notes. The principal payments are due and payable in full on September 19, 2024.
On August 21, 2019, the Parent entered into a commercial lease agreement with Ship 142 to rent space in the building in Woodbury, NY which houses its headquarters. The term of the lease is ten (10) years. The rent for the space is the greater of: (a) $23,150 or (b) an amount sufficient for Ship 142, LLC to satisfy a Basic Fixed Charge Coverage Ratio of 1.15 to 1.00 based on the definition of Basic Fixed Charge Coverage Ratio in the Loan Agreement dated August 21, 2019 between Ship 142, LLC and its lender.
On November 19, 2019 the Parent entered into a Letter of Intent with a third party to sell the sound masking business of the Parent pursuant to a share purchase agreement on or before January 31, 2020, for which the deadline was subsequently extended (the “Proposed Transaction”). The Proposed Transaction envisions that the Company will be sold on a cash-free/debt-free basis, will exclude i) all business activity and holdings other than the sound masking business and ii) all real estate owned by affiliates of the Parent – specifically, Meroke Realty Corp and Ship 142, LLC.
15
Exhibit 99.2
Sound Masking Business
Carved-out Business of LENCORE ACOUSTICS CORPORATION
UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Carved-out Business of LENCORE ACOUSTICS CORPORATION)
CONTENTS
Financial Statements Balance Sheet Statement of Income Statement of Changes in Net Parent Investment Statement of Cash Flows
|
2 3 4 5 |
Notes to Financial Statements |
6-15 |
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) |
|
|||||||
|
||||||||
AS OF SEPTEMBER 30, 2019 AND DECEMBER 31, 2018 |
|
|||||||
|
|
Sept 30, 2019 |
|
|
Dec 31, 2018 |
|
||
Assets |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,496,818 |
|
|
$ |
6,977,534 |
|
Accounts receivable, net |
|
|
5,905,293 |
|
|
|
5,846,929 |
|
Inventory |
|
|
2,646,313 |
|
|
|
1,644,224 |
|
Deferred expenses |
|
|
587,137 |
|
|
|
880,705 |
|
Prepaid expenses |
|
|
114,036 |
|
|
|
146,796 |
|
Total Current Assets |
|
|
11,749,597 |
|
|
|
15,496,188 |
|
Property and Equipment, Net |
|
|
740,347 |
|
|
|
755,962 |
|
Total Assets |
|
$ |
12,489,944 |
|
|
$ |
16,252,150 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Net Parent Investment |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
3,191,905 |
|
|
$ |
3,552,937 |
|
Deferred revenue |
|
|
646,037 |
|
|
|
969,055 |
|
Sales and use tax liability |
|
|
5,081,236 |
|
|
|
4,769,914 |
|
State tax liability |
|
|
281,211 |
|
|
|
281,211 |
|
Other current liabilities |
|
|
40,208 |
|
|
|
10,812 |
|
Total Liabilities |
|
|
9,240,597 |
|
|
|
9,583,929 |
|
Net Parent Investment |
|
|
3,249,347 |
|
|
|
6,668,221 |
|
Liabilities and Net Parent Investment |
|
$ |
12,489,944 |
|
|
$ |
16,252,150 |
|
2
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) |
|
|||||||
UNAUDITED STATEMENT OF INCOME |
|
|||||||
FOR THE NINE MONTHS ENDED SEPTEMBER 30th |
|
|||||||
|
|
2019 |
|
|
2018 |
|
||
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
17,011,201 |
|
|
$ |
17,334,706 |
|
Cost of Sales |
|
|
7,755,350 |
|
|
|
8,168,377 |
|
Gross Profit |
|
|
9,255,851 |
|
|
|
9,166,329 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
6,274,382 |
|
|
|
5,825,571 |
|
Operating Income |
|
|
2,981,469 |
|
|
|
3,340,758 |
|
Other Income |
|
|
|
|
|
|
|
|
Interest income |
|
|
— |
|
|
|
214 |
|
Other income |
|
|
— |
|
|
|
3,388 |
|
Total Other Income |
|
|
— |
|
|
|
3,602 |
|
Income Before Income Taxes |
|
|
2,981,469 |
|
|
|
3,344,360 |
|
Income Taxes |
|
|
— |
|
|
|
40,000 |
|
Net Income |
|
$ |
2,981,469 |
|
|
$ |
3,304,360 |
|
3
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) |
|
|||
UNAUDITED STATEMENT OF CHANGES IN |
|
|||
NET PARENT INVESTMENT |
|
|||
FOR THE NINE MONTHS ENDED SEPTEMBER 30th |
|
|||
Net Parent Investment - January 1, 2018 |
|
$ |
4,422,959 |
|
Net Income |
|
|
3,304,360 |
|
Net transfers to parent |
|
|
(2,369,256 |
) |
Net Parent Investment - September 30, 2018 |
|
$ |
5,358,063 |
|
|
|
|
|
|
Net Parent Investment - January 1, 2019 |
|
$ |
6,668,221 |
|
Net Income |
|
|
2,981,469 |
|
Net transfers to parent |
|
|
(6,400,343 |
) |
Net Parent Investment - September 30, 2019 |
|
$ |
3,249,347 |
|
4
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) |
|
|||||||
UNAUDITED STATEMENT OF CASH FLOWS |
|
|||||||
FOR THE NINE MONTHS ENDED SEPTEMBER 30th |
|
|||||||
|
|
2019 |
|
|
2018 |
|
||
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,981,469 |
|
|
$ |
3,304,360 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for bad debts |
|
|
6,402 |
|
|
|
51,699 |
|
Depreciation of P&E |
|
|
55,216 |
|
|
|
50,892 |
|
Inventory reserve |
|
|
37,261 |
|
|
|
14,257 |
|
Change in Working Capital |
|
|
|
|
|
|
|
|
A/R |
|
|
(64,766 |
) |
|
|
(2,253,460 |
) |
Inventory |
|
|
(1,039,350 |
) |
|
|
(437,884 |
) |
Deferred Expenses and Revenue |
|
|
(29,450 |
) |
|
|
1,185,939 |
|
Prepaid |
|
|
32,760 |
|
|
|
(221,947 |
) |
Accounts Payable |
|
|
(361,032 |
) |
|
|
68,894 |
|
S&U Tax |
|
|
311,322 |
|
|
|
259,017 |
|
State Tax |
|
|
— |
|
|
|
40,433 |
|
Other current liabilities |
|
|
29,395 |
|
|
|
(98,162 |
) |
Net cash used in operating activities |
|
$ |
1,959,227 |
|
|
$ |
1,964,038 |
|
Cash Used in Investing Activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(39,600 |
) |
|
|
(19,227 |
) |
Net cash used in investing activities |
|
$ |
(39,600 |
) |
|
$ |
(19,227 |
) |
Cash Used in Financing Activities |
|
|
|
|
|
|
|
|
Net transfers to Parent |
|
|
(6,400,343 |
) |
|
|
(2,369,256 |
) |
Net cash used in financing activities |
|
$ |
(6,400,343 |
) |
|
$ |
(2,369,256 |
) |
|
|
|
|
|
|
|
|
|
Decrease in Cash and Cash Equivalents |
|
|
(4,480,716 |
) |
|
|
(424,445 |
) |
Cash and Cash Equivalents - Beginning |
|
|
6,977,534 |
|
|
|
7,178,496 |
|
Cash and Cash Equivalents - Ending |
|
$ |
2,496,818 |
|
|
$ |
6,754,051 |
|
5
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO THE UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30TH, 2019 & 2018 |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Sound Masking Business (the Company) manufactures, installs and distributes sound masking equipment to offices, hospitals, hotels, education centers and other end users, distributors and contractors principally throughout the United States and Canada. The Company operates as part of Lencore Acoustics Corp. (the “Parent”), which also manufactures, installs and distributes distributed audio, mass notification and related equipment.
BASIS OF PRESENTATION
The Company has historically operated as part of the Parent and not as a standalone company. Financial statements representing the historical operations of the Company have been derived from Parent’s historical accounting records and are presented on a carve-out basis. The financial statements of the Company give effect to accounting and allocation policies established by the Company's management for purposes of these financial statements and are in accordance with accounting principles generally accepted in the United States (U.S. GAAP) . All revenues and costs as well as assets and liabilities directly associated with the business activity of the Company are included in the financial statements. The financial statements also include allocations of certain general, administrative, sales and marketing expenses from Parent on a basis that management believes to be reasonable to reflect the financial position, results of operations and cash flows of the Company, including allocated portions of the Parent’s expenses. However, amounts recognized by the Company are not necessarily representative of the amounts that would have been reflected in the financial statements had the Company operated independently of Parent.
All significant transactions between the Company and Parent have been included in the accompanying financial statements. Transactions with Parent are reflected in the accompanying Statement of Changes in Net Parent Investment as “Net transfers to parent” and in the accompanying Balance Sheet within “Net parent investment.”
6
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO THE UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30TH, 2019 & 2018 |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following allocation policies have been established by management of the Company and have been consistently applied in the financial statements. In the opinion of management, the methods for allocating these costs are reasonable. It is not practicable to estimate the costs that would have been incurred had the Company been operated on a stand-alone basis.
(i) |
Specifically-Identifiable Operating Expenses |
Costs which relate entirely to the operations of the Company are attributed entirely to the Company. These expenses consist of costs of personnel who are 100% dedicated to the operations of the Company, all costs associated with locations that conduct only the business of the Company and amounts paid to third parties for services rendered to the Company. In addition, any costs incurred by Parent, which are specifically identifiable to the operations of the Company, are attributed to the Company.
(ii) |
Shared Operating Expenses |
Parent incurs the cost of certain corporate general and administrative services and shared services that benefit all of its businesses, including the Company. These shared services include executive management, legal, accounting, consulting, information services, telecommunications, human resources, insurance, sales and marketing. These costs have been allocated to the Company based on one of the following allocation methods: (1) percentage of Company revenues, (2) headcount, and (3) time study estimations on an employee-by-employee basis. Management determined which allocation method was appropriate based on the nature of the shared service being provided.
Allocations of shared costs have been included in the accompany statement of income of the Company for the nine-months ended September 30th, as follows:
|
2019 |
|
|
2018 |
|
||
Cost of sales |
$ |
713,250 |
|
|
$ |
958,449 |
|
General and administrative expenses |
|
1,879,876 |
|
|
|
1,846,609 |
|
Total |
$ |
2,593,126 |
|
|
$ |
2,805,058 |
|
Intracompany transactions have been eliminated. The net effect of the settlement of transactions between the Company and the Parent together with the cash transfers to and from the Parent are reflected in the Statements of Changes in Net Parent Investment as net transfers to parent, in the Statements of Cash flows as a financing activity and in the Balance Sheets as net parent investment.
7
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO THE UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30TH, 2019 & 2018 |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company has cash balances in banks in excess of the maximum amount insured by the FDIC as of September 30th, 2019 and December 31, 2018. The Company places its cash and cash equivalents with high quality financial institutions. The Company does not believe it is exposed to any significant credit risk on cash and cash equivalents.
The Company considers all short-term investments with an original maturity of three months or less (i.e. money market accounts, certificates of deposit, etc.) to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are customers’ obligations due under normal trade terms. The Company routinely reviews accounts receivable by customer account aging to determine the collectability of the amounts due based on information received from the customer, past history and economic conditions. In doing so, the Company adjusts the allowance for doubtful accounts accordingly to reflect the net realizable value of an account receivable. Accounts receivable are written off once management determines that they are uncollectible. The allowance for doubtful accounts is $58,129 and $51,699 at September 30, 2019 and December 31, 2018, respectively.
INVENTORIES
Inventories, consisting of raw materials, work in progress and finished goods, are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Maintenance and repairs are charged to expense as incurred; costs of major additions and betterments are capitalized. When property and equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is reflected in income.
DEFERRED CHARGES
Deferred charges represent the expenses incurred by the Company in advance of merchandise being received by its customers and installations that have started but have not been completed at the end of the reporting period. The deferred charges are recognized once the shipment has been received and/or the installation has been completed.
8
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO THE UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30TH, 2019 & 2018 |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company does not believe there was any impairment of long-lived assets as of September 30th, 2019 and December 31, 2018.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts receivable, accounts payable and accrued expenses. Management believes the carrying value of these instruments approximate their fair values due to their short-term maturities.
SHIPPING AND HANDLING
Shipping and handling costs are charged to operations as incurred and are included in cost of sales in the accompanying statement of income. Shipping and handling costs amounted to $376,929 and $251,992 for the nine-months ended September 30th, 2019 and 2018, respectively.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Total advertising costs charged to expense for the nine-months ended September 30th, 2019 and 2018 were $207,085 and $60,091, respectively.
9
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO THE UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30TH, 2019 & 2018 |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company adopted Financial Accounting Standards Board Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) effective January 1, 2019. The adoption of Topic 606 did not have a material impact on the consolidated financial statements. The Company derives its revenue from product sales and, in certain instances, from related installation. For both revenue streams, the Company recognizes revenue from the sale of its products and related installation when obligations under the terms of a contract with our customers are satisfied; this occurs with the transfer of control of our products or throughout the completion of service work. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring promised goods or services to a customer. The Company offers its customer a one-year warranty on any defects related to the products, but warranty expense has been immaterial.
For performance obligations satisfied over time, which include the installation services performed, whereby the customer simultaneously receives and consumes the benefits provided, the Company recognizes revenue on the basis of the Company’s efforts or inputs to the satisfaction of these performance obligations, measured by actual total cost incurred to the total estimated costs for each project.
The Company has identified two separate and distinct performance obligations: 1) the sale of sound masking equipment and 2) installation services. For equipment sales, control is transferred, and revenue is recognized from the sale upon shipment to or pick up by the customer in accordance with the contract terms. For installation services, revenue is recognized as the performance of the installation occurs in accordance with the contract terms. Accounts receivable are recorded when the right to consideration becomes unconditional
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred and are included in selling, general and administrative expenses. Research and development costs for the nine-months ended September 30, 2019 and 2018 was $8,475 and $714, respectively.
DEFERRED REVENUE
Deferred revenue represents amounts invoiced for installation services related to equipment which was shipped during the year but for which the installation was not completed as of September 30, 2019 and December 31, 2018.
10
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO THE UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30TH, 2019 & 2018 |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Parent, with the consent of its stockholders, has elected “S” Corporation status under the Internal Revenue Code. The stockholders of an “S” Corporation are taxed on their proportionate share of the “S” Corporation’s taxable income. Accordingly, no provision of liability for Federal income taxes has been included in the financial statements. However, the provision includes income taxes for the State of New York.
Management has concluded that the Company is a pass-through entity but evaluates its filing positions for uncertain tax positions. The Company has recorded approximately $280,000 as an uncertain tax position liability within the financial statements relating to states that administer entity-level taxes in which the Company is currently not filing an income tax return. Of that liability, approximately $0 and $40,000 was recorded during the nine-months ended September 30, 2019 and 2018 and is classified as income tax expense. The Company classifies interest and penalties, when material, as income tax expense. Management’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analyses of tax laws, regulations and interpretations thereof as well as other factors.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 2 - INVENTORIES
Inventories at September 30, 2019 and December 31, 2018 consists of the following:
|
2019 |
|
|
2018 |
|
||
Finished goods |
$ |
62,311 |
|
|
$ |
37,825 |
|
Raw materials and subassemblies |
|
2,584,002 |
|
|
|
1,606,399 |
|
Inventories |
$ |
2,646,313 |
|
|
$ |
1,644,224 |
|
11
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO THE UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30TH, 2019 & 2018 |
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2019 and December 31, 2018 consists of the following:
|
2019 |
|
|
2018 |
|
Estimate Useful Lives |
||
Machinery and equipment |
$ |
134,820 |
|
|
$ |
134,820 |
|
5-7 years |
Trucks and autos |
|
48,493 |
|
|
|
48,493 |
|
5-7 years |
Furniture and fixtures |
|
22,576 |
|
|
|
22,576 |
|
5-7 years |
Computer equipment |
|
51,750 |
|
|
|
12,149 |
|
5-7 years |
Leasehold improvements |
|
861,400 |
|
|
|
861,400 |
|
Life of lease |
|
|
1,119,039 |
|
|
|
1,079,438 |
|
|
Less: accumulated depreciation and amortization |
|
(378,692 |
) |
|
|
(323,476 |
) |
|
Property and Equipment, Net |
$ |
740,347 |
|
|
$ |
755,962 |
|
|
Depreciation and amortization expense for the nine-months ended September 30, 2019 and 2018 was $55,216 and $50,892, respectively.
NOTE 4 - RELATED PARTY Disclosures
During the nine-months ended September 30, 2018 and 2019, the Company rented its headquarter office in Woodbury, NY from Ship 142 LLC, an entity related through common ownership. The Company also pays insurance, real estate taxes and other operating expenses related to this property. Total amounts paid to this entity were $233,282 and $280,338 for the nine-months ended September 30, 2019 and 2018, respectively and it was included in the general and administrative expenses on the income statement. At each of September 30, 2019 and December 31, 2018, Ship 142 owed the company $75,461 and $68,292, respectively.
The Company also rents additional warehouse space in Norfolk, NY from Meroke Realty Corp, a related entity through common ownership, on a month-to-month basis. Total amounts paid to this entity were $103,500 for both of the nine-months ended September 30, 2019 and 2018 respectively and are included in Cost of Sales expenses on the income statement. At each of September 30, 2019 and December 31, 2018, Meroke owed the Company $65,000 and $58,825, respectively.
12
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO THE UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30TH, 2019 & 2018 |
NOTE 4 - RELATED PARTY Disclosures (CONTINUED)
Until January 2020, The Company also outsourced its warehouse operations in Norfolk, NY to Custom Acoustics Company, a related entity through a family relationship of the Parent’s owners. Total payments paid to this entity were $625,235 and $561,933 for the nine-months ended September 30, 2019 and 2018, respectively and are included in Cost of Sales expenses on the income statement. At September 30, 2019 and December 31, 2018, the Company owed Custom Acoustics $0 and $6,040, respectively.
NOTE 5 - RETIREMENT PLAN
The Parent maintains a 401(k) defined contribution plan and a profit sharing plan (the “Plan”) covering substantially all of its nonunion employees. The Plan allows for employees to defer up to 100% of annual compensation not to exceed the annual contribution limit as determined by the Internal Revenue Service. Participants age 50 and over are permitted to make additional contributions up to IRS limits. The Company contributions are pursuant to safe harbor rules. Company contributions for the nine-months ended September 30th, 2019 and 2018 resulted in expense of $45,101 and $45,989, respectively.
NOTE 6 - ECONOMIC DEPENDENCY
MAJOR VENDORS
During the nine months ended September 30, 2019, and 2018 one vendor accounted for 31.9 % and 28.3% of total purchases and one vendor accounted for 48.7% and 54.4% of contract manufacturing costs, respectively. At September 30th, 2019 and December 31, 2018, the amounts due to the vendor in accounts payable were $119,905 and $70,239, respectively. At September 30th, 2019 and December 31, 2018, the amounts due to the contract manufacturing vendor was $71,752 and $0, respectively.
13
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO THE UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30TH, 2019 & 2018 |
NOTE 7 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASING COMMITMENTS
The Company rents its headquarter office in Woodbury, NY from Ship 142 LLC an entity related through common ownership on a month-to-month basis. The Company also pays insurance, real estate taxes and other operating expenses related to this property. Total rent paid to this entity was $75,381 and $71,428 for the nine-months ended September 30, 2019 and 2018, respectively. At each of September 30, 2019 and December 31, 2018, Ship 142 owed the company $75,461 and $68,292, respectively.
The Company also rents additional warehouse space in Norfolk, NY from Meroke Realty Corp a related entity through common ownership on a month-to-month basis. Total rent paid to this entity was $103,500 for both of the nine-months ended September 30, 2019 and 2018, respectively. At each of September 30, 2019 and December 31, 2018, Meroke owed the Company $65,000 and $58,825, respectively.
LITIGATION
From time to time, the Company is a party to litigation arising in the normal course of its business operations. In the opinion of management, it is not anticipated that the settlement or resolution of any such matters will have a material adverse impact on the Company’s financial condition, liquidity or results of operations.
Sales and Use Tax
The Company has concluded that it failed to collect and remit sales and use taxes for certain sales and in certain jurisdictions during 2019 and previous periods. In analyzing this issue, the Company concluded that the nature of certain of its sales gave rise to a sales and use tax obligation that was neither collected from customers, nor remitted to the taxing authorities. Accordingly, the Company believes a loss contingency is probable of occurrence and conducted a state-by-state analysis, based on historical sales, the existence of valid exemption certificates, and other assumptions in order to estimate the exposure. Based upon its analysis the Company concluded the exposure is both probable and reasonably estimable and has recorded a liability of approximately $5.1 million and $4.8 million as of September 30th, 2019 and as of December 31, 2018, respectively, of which approximately $310,000 and $260,000 was recorded to general and administrative expense for the nine-months ended September 30, 2019 and 2018 as an increase to the obligation.
14
Sound Masking Business (Carved-out Business of LENCORE ACOUSTICS CORPORATION) NOTES TO THE UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30TH, 2019 & 2018 |
The Company has evaluated subsequent events through March 6, 2020, the date of which the financial statements were available to be issued.
On November 19, 2019 the Parent entered into a Letter of Intent with a third party to sell the sound masking business of the Parent pursuant to a share purchase agreement on or before January 31, 2020, for which the deadline was subsequently extended (the “Proposed Transaction”). The Proposed Transaction envisions that the Company will be sold on a cash-free/debt-free basis, will exclude i) all business activity and holdings other than the sound masking business and ii) all real estate owned by affiliates of the Parent – specifically, Meroke Realty Corp and Ship 142, LLC.
On January 20, 2020, the Company discontinued its relationship with Custom Acoustics, a related party.
15
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following tables set forth unaudited pro forma condensed combined financial information of Emmis Communications Corporation (“Emmis” or the “Company”) and Lencore Acoustics Corporation (“Lencore”). The unaudited pro forma condensed combined financial statements consist of an unaudited pro forma condensed combined balance sheet as of November 30, 2019, and unaudited pro forma condensed combined statements of operations for the year ended February 28, 2019, and nine months ended November 30, 2019. As Emmis reports on a fiscal year ending in February and Lencore has historically reported on a calendar year, Lencore’s balance sheet as of September 30, 2019 is being used for the pro forma condensed combined balance sheet as of November 30, 2019. Similarly, Lencore’s statements of operations for the year and nine months ended December 31, 2018 and September 30, 2019, respectively, are being used for the pro forma condensed combined statements of operations for the year ended February 28, 2019 and nine months ended November 30, 2019, respectively.
In management's opinion, the unaudited pro forma condensed combined financial statements reflect certain adjustments that are necessary to present fairly our unaudited pro forma condensed combined results of operations and our unaudited pro forma condensed combined balance sheet as of and for the periods indicated. The pro forma adjustments give effect to events that are (i) directly attributable to the transactions described below, (ii) factually supportable, and, (iii) with respect to the statement of operations, expected to have a continuing impact on us. The pro forma adjustments are based on assumptions that management believes are reasonable given the best information currently available.
The unaudited pro forma condensed combined financial statements are for illustrative and informational purposes only and are not intended to represent what our results of operations or financial position would have been had the transactions described below actually occurred as of the dates indicated. The unaudited pro forma condensed combined financial statements also should not be considered indicative of our future results of operations or financial position. Our actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The unaudited pro forma condensed combined financial statements give effect to the acquisition of the sound masking business of Lencore for $75.1 million in cash, plus transaction fees and expenses of $3.1 million, (the “Lencore Transaction”) as if it had occurred on November 30, 2019 for the unaudited pro forma condensed combined balance sheet and on March 1, 2018 for the pro forma condensed combined statements of operations. The pro forma condensed combined financial statements also give effect to the step up to fair value of the assets acquired as part of the transaction.
The unaudited pro forma condensed combined statement of operations for the year ended February 28, 2019 gives effect to the disposition of our 50.1% ownership interest in Emmis Austin Radio Broadcasting Company, L.P. (the “Austin Partnership”) and a controlling interest in WQHT-FM and WBLS-FM in New York, each as described more fully in Note 1 to our condensed consolidated financial statements for the nine-months ended November 30, 2019 as filed on Form 10-Q on January 9, 2020. The operating results for these entities were reflected as discontinued operations in our historical results for the nine-month period ended November 30, 2019, so no adjustment is needed in the unaudited pro forma condensed combined statement of operations for that period, other than the elimination of noncontrolling interest attributable to the Austin Partnership.
1
Unaudited Pro Forma Condensed Combined Balance Sheet
As of November 30, 2019
|
|
Registrant |
|
|
Acquiree |
|
|
Pro Forma Adjustments |
|
|
Notes |
|
Pro Forma |
|
||||
|
|
(Dollars in thousands) |
|
|||||||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
111,345 |
|
|
$ |
2,497 |
|
|
$ |
(79,772 |
) |
|
(A) |
|
$ |
34,070 |
|
Restricted cash |
|
|
1,622 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
1,622 |
|
Accounts receivable, net |
|
|
5,599 |
|
|
|
5,905 |
|
|
|
(1,922 |
) |
|
(B) |
|
|
9,582 |
|
Inventory |
|
|
— |
|
|
|
2,646 |
|
|
|
(359 |
) |
|
(B) |
|
|
2,287 |
|
Prepaid expenses |
|
|
1,845 |
|
|
|
702 |
|
|
|
(586 |
) |
|
(B) |
|
|
1,961 |
|
Other current assets |
|
|
10,350 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
10,350 |
|
Total current assets |
|
|
130,761 |
|
|
|
11,750 |
|
|
|
(82,639 |
) |
|
|
|
|
59,872 |
|
PROPERTY AND EQUIPMENT, NET |
|
|
15,265 |
|
|
|
740 |
|
|
|
(669 |
) |
|
(B) |
|
|
15,336 |
|
INTANGIBLE ASSETS AND GOODWILL, NET |
|
|
68,540 |
|
|
|
— |
|
|
|
69,736 |
|
|
(B) |
|
|
138,276 |
|
OTHER ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
— |
|
Operating lease right of use assets |
|
|
8,634 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
8,634 |
|
Equity method investment - MediaCo Class A Common Stock |
|
|
5,485 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
5,485 |
|
Deposits and other |
|
|
12,822 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
12,822 |
|
Total other assets |
|
|
26,941 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
26,941 |
|
Total assets |
|
$ |
241,507 |
|
|
$ |
12,490 |
|
|
$ |
(13,572 |
) |
|
|
|
$ |
240,425 |
|
2
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
4,637 |
|
|
$ |
3,192 |
|
|
$ |
(1,192 |
) |
|
(B) |
|
$ |
6,637 |
|
Current portion of long-term debt |
|
|
7,830 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
7,830 |
|
Accrued salaries and commissions |
|
|
7,812 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
7,812 |
|
Deferred revenue |
|
|
2,639 |
|
|
|
646 |
|
|
|
(646 |
) |
|
(B) |
|
|
2,639 |
|
Income taxes payable |
|
|
15,657 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
15,657 |
|
Operating lease liabilities |
|
|
842 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
842 |
|
Other |
|
|
1,868 |
|
|
|
5,403 |
|
|
|
(5,403 |
) |
|
(C) |
|
|
1,868 |
|
Total current liabilities |
|
|
41,285 |
|
|
|
9,241 |
|
|
|
(7,241 |
) |
|
|
|
|
43,285 |
|
LONG-TERM DEBT, NET OF CURRENT |
|
|
55,662 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
55,662 |
|
OPERATING LEASE LIABILITIES, NET OF CURRENT |
|
|
9,372 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
9,372 |
|
DEFERRED INCOME TAXES |
|
|
18,263 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
18,263 |
|
OTHER NONCURRENT LIABILITIES |
|
|
2,328 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
2,328 |
|
Total liabilities |
|
|
126,910 |
|
|
|
9,241 |
|
|
|
(7,241 |
) |
|
|
|
|
128,910 |
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net parent investment |
|
|
— |
|
|
|
3,249 |
|
|
|
(3,249 |
) |
|
(D) |
|
|
— |
|
Class A common stock, $.01 par value; authorized 42,500,000 shares; issued and outstanding 11,809,291 shares at February 28, 2019 and 12,060,388 shares at November 30, 2019 |
|
|
121 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
121 |
|
Class B common stock, $.01 par value; authorized 7,500,000 shares; issued and outstanding 1,242,366 at February 28, 2019 and November 30, 2019 |
|
|
12 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
12 |
|
Additional paid-in capital |
|
|
597,439 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
597,439 |
|
Accumulated deficit |
|
|
(462,492 |
) |
|
|
— |
|
|
|
(3,082 |
) |
|
(E) |
|
|
(465,574 |
) |
Total shareholders' equity |
|
|
135,080 |
|
|
|
3,249 |
|
|
|
(6,331 |
) |
|
|
|
|
131,998 |
|
NONCONTROLLING INTERESTS |
|
|
(20,483 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
(20,483 |
) |
Total equity |
|
|
114,597 |
|
|
|
3,249 |
|
|
|
(6,331 |
) |
|
|
|
|
111,515 |
|
Total liabilities and equity |
|
$ |
241,507 |
|
|
$ |
12,490 |
|
|
$ |
(13,572 |
) |
|
|
|
$ |
240,425 |
|
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements
3
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended February 28, 2019
|
|
Registrant |
|
|
Registrant Dispositions |
|
|
Notes |
|
Acquiree |
|
|
Pro Forma Adjustments |
|
|
Notes |
|
Pro Forma |
|
|||||
|
|
(In thousands, except per share data) |
|
|||||||||||||||||||||
NET REVENUES |
|
$ |
114,131 |
|
|
$ |
(74,240 |
) |
|
(F) |
|
$ |
23,676 |
|
|
|
— |
|
|
|
|
$ |
63,567 |
|
COST OF GOODS SOLD |
|
|
— |
|
|
|
— |
|
|
|
|
|
9,836 |
|
|
|
— |
|
|
|
|
|
9,836 |
|
GROSS PROFIT |
|
|
114,131 |
|
|
|
(74,240 |
) |
|
|
|
|
13,840 |
|
|
|
— |
|
|
|
|
|
53,731 |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses excluding depreciation and amortization expense |
|
|
91,033 |
|
|
|
(51,721 |
) |
|
(F) |
|
|
7,874 |
|
|
|
— |
|
|
|
|
|
47,186 |
|
Corporate expenses excluding depreciation and amortization expense |
|
|
10,313 |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
10,313 |
|
Impairment loss on intangible assets |
|
|
343 |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
343 |
|
Depreciation and amortization |
|
|
3,213 |
|
|
|
(1,822 |
) |
|
(F) |
|
|
68 |
|
|
|
4,713 |
|
|
(I) |
|
|
6,172 |
|
Gain on sale of radio and publishing assets, net of disposition costs |
|
|
(31,817 |
) |
|
|
— |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
(31,817 |
) |
Loss on disposal of assets |
|
|
57 |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
57 |
|
Total operating expenses |
|
|
73,142 |
|
|
|
(53,543 |
) |
|
|
|
|
7,942 |
|
|
|
4,713 |
|
|
|
|
|
32,254 |
|
OPERATING INCOME |
|
|
40,989 |
|
|
|
(20,697 |
) |
|
|
|
|
5,898 |
|
|
|
(4,713 |
) |
|
|
|
|
21,477 |
|
OTHER INCOME (EXPENSE) |
|
|
(640 |
) |
|
|
— |
|
|
|
|
|
18 |
|
|
|
— |
|
|
|
|
|
(622 |
) |
INTEREST EXPENSE |
|
|
(8,103 |
) |
|
|
951 |
|
|
(G) |
|
|
— |
|
|
|
— |
|
|
|
|
|
(7,152 |
) |
INCOME BEFORE INCOME TAXES |
|
|
32,246 |
|
|
|
(19,746 |
) |
|
|
|
|
5,916 |
|
|
|
(4,713 |
) |
|
|
|
|
13,703 |
|
PROVISION (BENEFIT) FOR INCOME TAXES |
|
|
6,167 |
|
|
|
(2,615 |
) |
|
(H) |
|
|
41 |
|
|
|
(1,320 |
) |
|
(J) |
|
|
2,273 |
|
INCOME FROM CONTINUING OPERATIONS |
|
|
26,079 |
|
|
|
(17,131 |
) |
|
|
|
|
5,875 |
|
|
|
(3,393 |
) |
|
|
|
|
11,430 |
|
NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS |
|
|
2,727 |
|
|
|
(4,976 |
) |
|
(F) |
|
|
— |
|
|
|
— |
|
|
|
|
|
(2,249 |
) |
NET INCOME ATTRIBUTABLE TO THE COMPANY |
|
$ |
23,352 |
|
|
$ |
(12,155 |
) |
|
|
|
$ |
5,875 |
|
|
$ |
(3,393 |
) |
|
|
|
$ |
13,679 |
|
Basic net income per share |
|
$ |
1.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.09 |
|
Diluted net income per share |
|
$ |
1.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.02 |
|
Basic weighted average shares outstanding |
|
|
12,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,606 |
|
Diluted weighted average shares outstanding |
|
|
13,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,448 |
|
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements
4
Unaudited Pro Forma Condensed Combined Statement of Operations
Nine Months Ended November 30, 2019
|
|
Registrant |
|
|
Acquiree |
|
|
Pro Forma Adjustments |
|
|
Notes |
|
Pro Forma |
|
||||
|
|
(In thousands, except per share data) |
|
|||||||||||||||
NET REVENUES |
|
$ |
29,266 |
|
|
$ |
17,011 |
|
|
|
— |
|
|
|
|
$ |
46,277 |
|
COST OF GOODS SOLD |
|
|
— |
|
|
|
7,755 |
|
|
|
— |
|
|
|
|
|
7,755 |
|
GROSS PROFIT |
|
|
29,266 |
|
|
|
9,256 |
|
|
|
— |
|
|
|
|
|
38,522 |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses excluding depreciation and amortization expense |
|
|
23,667 |
|
|
|
6,220 |
|
|
|
— |
|
|
|
|
|
29,887 |
|
Corporate expenses excluding depreciation and amortization expense |
|
|
15,211 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
15,211 |
|
Impairment loss |
|
|
4,022 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
4,022 |
|
Depreciation and amortization |
|
|
866 |
|
|
|
55 |
|
|
|
3,531 |
|
|
(I) |
|
|
4,452 |
|
Loss on sale of assets, net of disposition costs |
|
|
31 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
31 |
|
Gain on legal matter |
|
|
(2,153 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
(2,153 |
) |
Total operating expenses |
|
|
41,644 |
|
|
|
6,275 |
|
|
|
3,531 |
|
|
|
|
|
51,450 |
|
OPERATING INCOME (LOSS) |
|
|
(12,378 |
) |
|
|
2,981 |
|
|
|
(3,531 |
) |
|
|
|
|
(12,928 |
) |
OTHER EXPENSE |
|
|
(363 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
(363 |
) |
INTEREST EXPENSE |
|
|
(3,040 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
(3,040 |
) |
INCOME (LOSS) BEFORE INCOME TAXES |
|
|
(15,781 |
) |
|
|
2,981 |
|
|
|
(3,531 |
) |
|
|
|
|
(16,331 |
) |
BENEFIT FOR INCOME TAXES |
|
|
(1,533 |
) |
|
|
— |
|
|
|
(989 |
) |
|
(J) |
|
|
(2,522 |
) |
(LOSS) INCOME FROM CONTINUING OPERATIONS |
|
|
(14,248 |
) |
|
|
2,981 |
|
|
|
(2,542 |
) |
|
|
|
|
(13,809 |
) |
NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS |
|
|
1,557 |
|
|
|
— |
|
|
|
(3,047 |
) |
|
(F) |
|
|
(1,490 |
) |
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY |
|
$ |
(15,805 |
) |
|
$ |
2,981 |
|
|
$ |
505 |
|
|
|
|
$ |
(12,319 |
) |
Basic net income per share |
|
$ |
(1.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.96 |
) |
Diluted net income per share |
|
$ |
(1.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.96 |
) |
Basic weighted average shares outstanding |
|
|
12,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12,846 |
|
Diluted weighted average shares outstanding |
|
|
12,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12,846 |
|
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements
5
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Note 1 – Preliminary purchase price allocation
The Company has performed a preliminary valuation analysis of the fair market value of the assets and liabilities acquired in the Lencore Transaction. The following table summarizes the allocation of the preliminary purchase price as of the acquisition date (in thousands).
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma balance sheet and statement of operations. The final purchase price will be completed when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary calculation used in the pro forma adjustments. The final allocation may include (1) changes in fair values of property, plant and equipment, (2) changes in allocations to intangible assets such as trade names, customer relationships, and goodwill and (3) other changes to assets and liabilities.
Cash consideration |
$ |
75,100 |
|
Preliminary working capital adjustment |
|
(907 |
) |
Total Consideration |
$ |
74,193 |
|
|
|
|
|
Accounts receivable |
$ |
3,983 |
|
Inventory |
|
2,287 |
|
Prepaid expenses |
|
116 |
|
Property, plant and equipment |
|
71 |
|
Goodwill |
|
40,286 |
|
Intangibles |
|
29,450 |
|
Assets Acquired |
$ |
76,193 |
|
|
|
|
|
Accounts payable |
$ |
1,934 |
|
Accrued expenses and other current liabilities |
|
66 |
|
Liabilities Assumed |
$ |
2,000 |
|
|
|
|
|
Net Assets Acquired |
$ |
74,193 |
|
(A) |
Pro forma adjustments include the following as a result of the Lencore Transaction: |
Distribution of purchase price |
$ |
(75,100 |
) |
Distribution for estimated transaction fees and expenses |
|
(3,082 |
) |
Lencore historical cash balance not included in purchase price |
|
(2,497 |
) |
Preliminary working capital adjustment |
|
907 |
|
Total pro forma adjustment |
$ |
(79,772 |
) |
(B) |
Reflects the impact of the preliminary purchase price allocation as of the acquisition date as shown in Note 1. |
(C) |
Principally consists of sales and use tax liabilities and state tax liabilities not assumed by Emmis in the Lencore Transaction. |
(D) |
Represents the reclassification of parent net investment to additional paid-in capital at the closing of the Lencore Transaction. |
6
(E) |
Represents the adjustments to additional paid-in capital and retained earnings resulting from the Lencore Transaction, calculated as follows: |
Distribution of purchase price |
$ |
(74,193 |
) |
Distribution for estimated transaction fees and expenses |
|
(3,082 |
) |
Distribution of assets and liabilities retained by seller in Lencore Transaction, net (i) |
|
2,906 |
|
Purchase price allocation of assets and liabilities acquired in Lencore Transaction (ii) |
|
68,038 |
|
Reclassification of NPI to APIC |
|
3,249 |
|
Total pro forma adjustment |
$ |
(3,082 |
) |
|
(i) |
Cash retained by seller, net of liabilities retained by seller, principally consisting of sales and use tax liabilities and state tax liabilities. |
|
(ii) |
Reflects the estimated net impact of the purchase price allocation of the Lencore Transaction as shown in Note 1. |
(F) |
Eliminate historical results of the Austin Partnership and WQHT-FM and WBLS-FM in New York. These entities were sold in the quarter ended November 30, 2019, as described more fully in Note 1 to our condensed consolidated financial statements for the nine-months ended November 30, 2019, as filed on Form 10-Q on January 9, 2020. |
(G) |
A portion of Emmis’ debt was required to be repaid with proceeds of these transactions. In accordance with ASC 205-20-45-6, Emmis has allocated interest on the debt required to be repaid as a result of these disposal transactions to the results of these entities. |
(H) |
An allocation of Emmis’ consolidated provision or benefit for income taxes is applied to continuing operations and discontinued operations using the with and without methodology. |
(I) |
Reflects the adjustment to depreciation and amortization based on preliminary fair values and useful lives as follows: |
Asset |
Preliminary Fair Value |
|
Estimated Useful Life (Years) |
|
||
Customer Relationships |
$ |
24,300 |
|
|
6 |
|
Developed Technologies |
|
2,800 |
|
|
6 |
|
Trade Name |
|
2,200 |
|
|
10 |
|
Non-compete Agreement |
|
150 |
|
|
5 |
|
Fixed Assets |
|
71 |
|
|
5 |
|
Pro forma adjustment to depreciation and amortization expense |
$ |
29,521 |
|
|
|
|
The fair value and useful lives calculations are preliminary and subject to change after the Company finalizes its review of the tangible and intangible assets acquired. The following table summarizes the changes in the estimated depreciation and amortization expense.
|
Nine Months September 30, 2019 |
|
Twelve Months February 28, 2019 |
|
||
Estimated depreciation and amortization expense |
$ |
3,586 |
|
$ |
4,781 |
|
Historical depreciation and amortization expense |
|
(55 |
) |
|
(68 |
) |
Pro forma adjustment to depreciation and amortization expense |
|
3,531 |
|
|
4,713 |
|
(J) |
Reflects the impact of the pro forma adjustments on income tax calculated using our statutory tax rate of 28% for all period presented. This represents our U.S. statutory rate during these periods, which differs from our effective rate and does not include the impact of valuation allowances. |
7