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EX-32.2 - EXHIBIT 32.2 - EMMIS COMMUNICATIONS CORPa83117ex322.htm
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EX-31.2 - EXHIBIT 31.2 - EMMIS COMMUNICATIONS CORPa83117ex312.htm
EX-31.1 - EXHIBIT 31.1 - EMMIS COMMUNICATIONS CORPa83117ex311.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2017
 
EMMIS COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
  
 
INDIANA
(State of incorporation or organization)
0-23264
(Commission file number)
35-1542018
(I.R.S. Employer Identification No.)
ONE EMMIS PLAZA
40 MONUMENT CIRCLE, SUITE 700
INDIANAPOLIS, INDIANA 46204
(Address of principal executive offices)
(317) 266-0100
(Registrant’s Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
Smaller reporting company
 
ý
 
 
 
 
 
 
 
 
 
 
 
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 pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý



The number of shares outstanding of each of Emmis Communications Corporation’s classes of common stock, as of October 9, 2017, was:
11,568,454

  
Shares of Class A Common Stock, $.01 Par Value
1,142,366

  
Shares of Class B Common Stock, $.01 Par Value

  
Shares of Class C Common Stock, $.01 Par Value
 
INDEX

 
Page
 
 
 




PART I — FINANCIAL INFORMATION
 

ITEM 1.    FINANCIAL STATEMENTS

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
 
Three Months Ended 
 August 31,
 
Six Months Ended 
 August 31,
 
2016
 
2017
 
2016
 
2017
NET REVENUES
$
58,774

 
$
42,848

 
$
114,776

 
$
83,012

OPERATING EXPENSES:
 
 
 
 
 
 
 
Station operating expenses excluding depreciation and amortization expense of $1,085, $701, $2,195 and $1,495, respectively
46,991

 
33,904

 
89,980

 
65,134

Corporate expenses excluding depreciation and amortization expense of $197, $180, $419, and $364, respectively
2,453

 
2,538

 
5,497

 
5,281

Impairment loss on intangible assets
2,988

 

 
2,988

 

Depreciation and amortization
1,282

 
881

 
2,614

 
1,859

Gain on sale of assets, net of disposition costs

 
(76,706
)
 

 
(76,706
)
Loss on disposal of property and equipment
125

 
12

 
125

 
12

Total operating expenses
53,839

 
(39,371
)
 
101,204

 
(4,420
)
OPERATING INCOME
4,935

 
82,219

 
13,572

 
87,432

OTHER EXPENSE:
 
 
 
 

 
 
Interest expense
(4,758
)
 
(4,548
)
 
(9,448
)
 
(9,214
)
Loss on debt extinguishment

 
(2,523
)
 

 
(2,523
)
Other income, net
89

 
11

 
132

 
14

Total other expense
(4,669
)
 
(7,060
)
 
(9,316
)
 
(11,723
)
INCOME BEFORE INCOME TAXES
266

 
75,159

 
4,256

 
75,709

PROVISION FOR INCOME TAXES
664

 
4,394

 
1,339

 
4,372

CONSOLIDATED NET (LOSS) INCOME
(398
)
 
70,765

 
2,917

 
71,337

NET (LOSS) INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(733
)
 
808

 
(104
)
 
1,647

NET INCOME ATTRIBUTABLE TO THE COMPANY
335

 
69,957

 
3,021

 
69,690

 
 
 
 
 
 
 
 
NET INCOME PER SHARE - BASIC
$
0.03

 
$
5.69

 
$
0.25

 
$
5.67

NET INCOME PER SHARE - DILUTED
$
0.03

 
$
5.59

 
$
0.25

 
$
5.59

WEIGHTED AVERAGE SHARES OUTSTANDING:
 
 
 
 
 
 
 
Basic
12,047

 
12,292

 
11,922

 
12,287

Diluted
12,299

 
12,513

 
12,043

 
12,463

 
The accompanying notes are an integral part of these unaudited condensed consolidated statements.
 
 
 
 


-3-



EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
 
Three Months Ended 
 August 31,
 
Six Months Ended 
 August 31,
 
2016
 
2017
 
2016
 
2017
CONSOLIDATED NET (LOSS) INCOME
$
(398
)
 
$
70,765

 
$
2,917

 
$
71,337

LESS: COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(733
)
 
808

 
(104
)
 
1,647

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
335

 
$
69,957

 
$
3,021

 
$
69,690


The accompanying notes are an integral part of these unaudited condensed consolidated statements.


-4-


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
 
February 28,
2017
 
August 31,
2017
 
 
(Unaudited)
ASSETS
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
11,349

 
$
4,718

Restricted cash
2,323

 
2,161

Accounts receivable, net
26,484

 
25,454

Prepaid expenses
4,798

 
4,877

Other current assets
1,503

 
1,502

Total current assets
46,457

 
38,712

PROPERTY AND EQUIPMENT, NET
30,845

 
28,613

INTANGIBLE ASSETS (NOTE 3):
 
 
 
Indefinite-lived intangibles
197,666

 
195,648

Goodwill
4,603

 
4,603

Other intangibles, net
1,523

 
1,278

Total intangible assets
203,792

 
201,529

OTHER ASSETS, NET
8,244

 
8,422

Total assets
$
289,338

 
$
277,276

 
The accompanying notes are an integral part of these unaudited condensed consolidated statements.

-5-


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share data)
 
 
February 28,
2017
 
August 31,
2017
 
 
(Unaudited)
LIABILITIES AND (DEFICIT) EQUITY
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued expenses
$
13,398

 
$
4,620

Current maturities of long-term debt (Note 4)
23,600

 
16,367

Accrued salaries and commissions
6,238

 
2,061

Deferred revenue
4,560

 
5,654

Other current liabilities
6,807

 
6,166

Total current liabilities
54,603

 
34,868

LONG-TERM DEBT, NET OF CURRENT MATURITIES (NOTE 4)
190,372

 
125,244

OTHER NONCURRENT LIABILITIES
4,842

 
5,921

DEFERRED INCOME TAXES
43,537

 
44,937

Total liabilities
293,354

 
210,970

COMMITMENTS AND CONTINGENCIES

 

(DEFICIT) EQUITY:
 
 
 
Class A common stock, $.01 par value; authorized 42,500,000 shares; issued and outstanding 11,278,065 shares at February 28, 2017 and 11,568,454 shares at August 31, 2017
113

 
116

Class B common stock, $.01 par value; authorized 7,500,000 shares; issued and outstanding 1,142,366 shares at February 28, 2017 and August 31, 2017
11

 
11

Additional paid-in capital
592,320

 
593,556

Accumulated deficit
(629,381
)
 
(559,691
)
Total shareholders’ (deficit) equity
(36,937
)
 
33,992

NONCONTROLLING INTERESTS
32,921

 
32,314

Total (deficit) equity
(4,016
)
 
66,306

Total liabilities and (deficit) equity
$
289,338

 
$
277,276


The accompanying notes are an integral part of these unaudited condensed consolidated statements.


-6-



EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN (DEFICIT) EQUITY
(Unaudited)
(In thousands, except share data)
 
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Noncontrolling Interests
 
Total (Deficit) Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance, February 28, 2017
11,278,065

 
$
113

 
1,142,366

 
$
11

 
$
592,320

 
$
(629,381
)
 
$
32,921

 
$
(4,016
)
Net income
 
 
 
 
 
 
 
 
 
 
69,690

 
1,647

 
71,337

Issuance of common stock to employees and officers
263,139

 
3

 
 
 
 
 
1,175

 
 
 
 
 
1,178

Exercise of stock options
27,250

 


 
 
 
 
 
61

 
 
 
 
 
61

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
(2,254
)
 
(2,254
)
Balance, August 31, 2017
11,568,454

 
$
116

 
1,142,366

 
$
11

 
$
593,556

 
$
(559,691
)
 
$
32,314

 
$
66,306


The accompanying notes are an integral part of these unaudited condensed consolidated statements.


-7-


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
Six Months Ended August 31,
 
2016
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Consolidated net income
$
2,917

 
$
71,337

Adjustments to reconcile consolidated net income to net cash provided by (used in) operating activities -
 
 
 
Impairment loss on intangible assets
2,988

 

Gain on sale of assets, net of disposition costs

 
(76,706
)
Depreciation and amortization
2,614

 
1,859

Amortization of debt discount
854

 
1,466

Noncash accretion of debt
371

 
371

Loss on debt extinguishment

 
2,523

Provision for bad debts
53

 
636

Provision for deferred income taxes
1,267

 
1,400

Noncash compensation
1,516

 
1,396

Loss on disposal of property and equipment
125

 
12

Changes in assets and liabilities -
 
 
 
Restricted cash
(354
)
 
162

Accounts receivable
(3,458
)
 
394

Prepaid expenses and other current assets
(114
)
 
(96
)
Other assets
(432
)
 
(196
)
Accounts payable and accrued liabilities
(2,208
)
 
(12,955
)
Deferred revenue
172

 
1,161

Income taxes
(82
)
 
(107
)
Other liabilities
(140
)
 
713

Net cash provided by (used in) operating activities
6,089

 
(6,630
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(711
)
 
(838
)
Net proceeds from the sale of assets
283

 
79,968

Distributions from investments, net
61

 

Net cash (used in) provided by investing activities
(367
)
 
79,130


-8-


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
Six Months Ended August 31,
 
2016
 
2017
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payments on long-term debt
(13,165
)
 
(88,774
)
Proceeds from long-term debt
11,000

 
13,690

Debt-related costs

 
(1,636
)
Distributions to noncontrolling interests
(2,074
)
 
(2,254
)
Proceeds from the exercise of stock options
20

 
61

Purchase of Class A common stock
(5
)
 

Settlement of tax withholding obligations on stock issued to employees
(260
)
 
(218
)
Net cash used in financing activities
(4,484
)
 
(79,131
)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1,238

 
(6,631
)
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
4,456

 
11,349

End of period
$
5,694

 
$
4,718

SUPPLEMENTAL DISCLOSURES:
 
 
 
Cash paid for interest
$
7,943

 
$
8,321

Cash paid for (refund from) income taxes, net
112

 
(19
)
Noncash financing transactions-
 
 
 
Stock issued to employees and directors
1,518

 
1,393

 The accompanying notes are an integral part of these unaudited condensed consolidated statements.

-9-


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS INDICATED OTHERWISE, EXCEPT SHARE DATA)
August 31, 2017
(Unaudited)

Note 1. Summary of Significant Accounting Policies
Preparation of Interim Financial Statements
Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), the condensed consolidated interim financial statements included herein have been prepared, without audit, by Emmis Communications Corporation (“ECC”) and its subsidiaries (collectively, “our,” “us,” “we,” “Emmis” or the “Company”). As permitted under the applicable rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, Emmis believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report for Emmis filed on Form 10-K for the year ended February 28, 2017. 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 August 31, 2017, the results of its operations for the three-month and six-month periods ended August 31, 2016 and 2017, and cash flows for the six-month periods ended August 31, 2016 and 2017.
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, 2017 that have had a material impact on our condensed consolidated financial statements and related notes.
Common Stock Reverse Split
On July 8, 2016, the Company effected a one-for-four reverse stock split for its Class A, Class B and Class C common
stock. All share and per share information has been retroactively adjusted to reflect the reverse stock split.
Basic and Diluted Net Income Per Common Share
Basic net income per common share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at August 31, 2016 and 2017 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
 
August 31, 2016
 
August 31, 2017
 
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
$
335

 
12,047

 
$
0.03

 
$
69,957

 
12,292

 
$
5.69

Impact of equity awards

 
252

 

 

 
221

 

Diluted net income per common share:
 
 
 
 
 
 
 
 
 
 
 
Net income available to common shareholders
$
335

 
12,299

 
$
0.03

 
$
69,957

 
12,513

 
$
5.59


-10-


 
For the six months ended
 
August 31, 2016
 
August 31, 2017
 
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
$
3,021

 
11,922

 
$
0.25

 
$
69,690

 
12,287

 
$
5.67

Impact of equity awards

 
121

 

 

 
176

 

  Diluted net income per common share:
 
 
 
 
 
 
 
 
 
 
 
Net income available to common shareholders
$
3,021

 
12,043

 
$
0.25

 
$
69,690

 
12,463

 
$
5.59


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
August 31,
 
For the six months ended
August 31,
 
2016
 
2017
 
2016
 
2017
 
(shares in 000’s )
Equity awards
1,340

 
1,960

 
1,491

 
2,276

Antidilutive common share equivalents
1,340

 
1,960

 
1,491

 
2,276


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 May 8, 2017, Emmis and an affiliate of the Meruelo Group (the "Meruelo Group") entered into an LMA and asset purchase agreement related to KPWR-FM in Los Angeles. This LMA started on July 1, 2017 and terminated with the consummation of the sale of KPWR-FM on August 1, 2017. Emmis recognized $0.4 million of LMA fee revenue as a component of net revenues in our accompanying condensed consolidated statements of operations related to this LMA. See Note 10 for more discussion of our sale of KPWR-FM to the Meruelo Group.
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 August 31,
 
For the six months
ended August 31,
 
2016
 
2017
 
2016
 
2017
 
(amounts in 000's)
Net revenues
$
2,583

 
$
2,583

 
$
5,166

 
$
5,166

Station operating expenses, excluding depreciation and amortization expense
363

 
296

 
614

 
589

Interest expense
715

 
656

 
1,443

 
1,328


-11-


Assets and liabilities of 98.7FM as of February 28, 2017 and August 31, 2017 were as follows:
 
As of February 28,
 
As of August 31,
 
2017
 
2017
 
(amounts in 000's)
Current assets:
 
 
 
Restricted cash
$
1,550

 
$
1,511

Prepaid expenses
445

 
481

Other current assets
7

 
13

Total current assets
2,002


2,005

Noncurrent assets:
 
 
 
     Property and equipment, net
229

 
274

     Indefinite lived intangibles
46,390

 
46,390

     Deposits and other
6,205

 
6,406

Total noncurrent assets
52,824

 
53,070

  Total assets
$
54,826

 
$
55,075

Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
54

 
$
22

Current maturities of long-term debt
6,039

 
6,317

Deferred revenue
807

 
835

Other current liabilities
205

 
195

Total current liabilities
7,105

 
7,369

Noncurrent liabilities:
 
 
 
     Long-term debt, net of current portion and unamortized debt discount
51,954

 
48,859

Total noncurrent liabilities
51,954

 
48,859

  Total liabilities
$
59,059

 
$
56,228


Restricted Cash
As of August 31, 2017, 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 in escrow as part of our sale of four magazines in February 2017. The table below summarizes restricted cash held by the Company as of February 28, 2017 and August 31, 2017:
 
As of February 28,
 
As of August 31,
 
2017
 
2017
98.7FM LMA restricted cash
$
1,550

 
$
1,511

NextRadio LLC restricted cash
123

 

Cash held in escrow from sale of magazines restricted cash
650

 
650

Total restricted cash
$
2,323

 
$
2,161


Noncontrolling Interests
The Company follows Accounting Standards Codification paragraph 810-10-65-1 to report the noncontrolling interests related to our Austin radio partnership and Digonex Technologies Inc., a dynamic pricing business (hereinafter "Digonex"). We have a 50.1% controlling interest in our Austin radio partnership. We do not own any of the common equity of Digonex, but we consolidate the entity because we control its board of directors via rights granted in convertible preferred stock and convertible debt that we own. As of August 31, 2017, Emmis owns rights that are convertible into approximately 82% of Digonex's common equity.

-12-


Noncontrolling interests represent the noncontrolling interest holders' proportionate share of the equity of the Austin radio partnership and Digonex. Noncontrolling interests are adjusted for the noncontrolling interest holders' proportionate share of the earnings or losses of the applicable entity. The noncontrolling interest continues to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance. Below is a summary of the noncontrolling interest activity for the six months ended August 31, 2016 and 2017:
 
 
Austin radio partnership
 
Digonex
 
Total noncontrolling interests
Balance, February 29, 2016
 
$
47,556

 
$
(9,159
)
 
$
38,397

Net income (loss)
 
3,048

 
(3,152
)
 
(104
)
Distributions to noncontrolling interests
 
(2,074
)
 

 
(2,074
)
Balance, August 31, 2016
 
$
48,530

 
$
(12,311
)
 
$
36,219

 
 
 
 
 
 
 
Balance, February 28, 2017
 
$
46,830

 
$
(13,909
)
 
$
32,921

Net income (loss)
 
3,151

 
(1,504
)
 
1,647

Distributions to noncontrolling interests
 
(2,254
)
 

 
(2,254
)
Balance, August 31, 2017
 
$
47,727

 
$
(15,413
)
 
$
32,314


Recent Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU was issued to simplify goodwill impairment by removing the second step of the goodwill impairment test. The Company early adopted this guidance as of March 1, 2017. The adoption of this guidance had no immediate impact on the Company's financial statements, but it could affect future goodwill impairment analysis.
In January 2017, the FASB issued Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU was issued to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance will be effective for the Company as of March 1, 2018. The Company does not expect adoption of this guidance will have a material impact on the Company's consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective for the Company as of March 1, 2018, and requires a retrospective transition method. The Company does not expect adoption of this guidance will have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842). This update requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance will be effective for the Company as of March 1, 2019. A modified retrospective transition method is required. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify the principles used to recognize revenue for all entities. The FASB deferred implementation of this guidance by one year with the issuance of Accounting Standards Update 2015-14. As such, this guidance will be effective for the Company as of March 1, 2018. The Company expects to use the modified retrospective method of adoption. The Company has completed its initial evaluation of potential changes from adopting the new standard on its financial reporting and disclosures, which included a detailed review of contractual terms for all of its significant revenue streams. The Company will complete its implementation plan during in the remainder of fiscal 2018. Based on its initial evaluation, the Company does not expect adoption of this guidance will have a material impact on the Company's consolidated financial statements, but disclosures related to revenue recognition will likely be expanded.



-13-


Note 2. Share Based Payments
The amounts recorded as share based compensation expense consist of stock option grants, restricted stock grants, and common stock issued to employees and directors in lieu of cash payments.
Stock Option Awards
The Company has granted options to purchase its common stock to employees and directors of the Company under various stock option plans at no less than the fair market value of the underlying stock on the date of grant. These options are granted for a term not exceeding 10 years and are forfeited, except in certain circumstances, in the event the employee or director terminates his or her employment or relationship with the Company. Generally, these options either vest annually over 3 years (one-third each year for 3 years), or cliff vest at the end of 3 years. The Company issues new shares upon the exercise of stock options.

The fair value of each option awarded is estimated on the date of grant using a Black-Scholes option-pricing model and expensed on a straight-line basis over the vesting period. Expected volatilities are based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The Company includes estimated forfeitures in its compensation cost and updates the estimated forfeiture rate through the final vesting date of awards. The risk-free interest rate for periods within the life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following assumptions were used to calculate the fair value of the Company’s options on the date of grant during the six months ended August 31, 2016 and 2017:
 
 
Six Months Ended August 31,
 
2016
 
2017
Risk-Free Interest Rate:
0.9% - 1.2%
 
1.7% - 1.9%
Expected Dividend Yield:
0%
 
0%
Expected Life (Years):
4.3
 
4.4
Expected Volatility:
58.6% - 60.0%
 
52.9% - 53.6%

The following table presents a summary of the Company’s stock options outstanding at August 31, 2017, and stock option activity during the six months ended August 31, 2017 (“Price” reflects the weighted average exercise price per share; "Aggregate Intrinsic Value" dollars in thousands):
 
 
Options
 
Price
 
Weighted Average
Remaining
Contractual Term
 
Aggregate
Intrinsic
Value
Outstanding, beginning of period
2,559,643

 
$
5.17

 
 
 
 
Granted
331,250

 
2.77

 
 
 
 
Exercised
27,250

 
2.25

 
 
 
 
Forfeited
8,331

 
2.29

 
 
 
 
Expired
74,815

 
14.15

 
 
 
 
Outstanding, end of period
2,780,497

 
4.68

 
6.9
 
$
277

Exercisable, end of period
1,512,093

 
5.47

 
5.1
 
$
215


Cash received from option exercises for the six months ended August 31, 2016 and 2017 was less than $0.1 million in both periods. The Company did not record an income tax benefit relating to the options exercised during the six months ended August 31, 2016 or 2017.
The weighted average per share grant date fair value of options granted during the six months ended August 31, 2016 and 2017, was $1.13 and $1.24, respectively.
A summary of the Company’s nonvested options at August 31, 2017, and changes during the six months ended August 31, 2017, is presented below:
 

-14-


 
Options
 
Weighted Average
Grant Date
Fair Value
Nonvested, beginning of period
1,090,375

 
$
2.26

Granted
331,250

 
1.24

Vested
144,890

 
4.26

Forfeited
8,331

 
1.10

Nonvested, end of period
1,268,404

 
1.77

There were 2.3 million shares available for future grants under the Company’s various equity plans (2.0 million shares under the 2017 Equity Compensation Plan and 0.3 million shares under other plans) at August 31, 2017, not including shares that may become available for future grants upon forfeiture, lapse or surrender for taxes.
The vesting dates of outstanding options at August 31, 2017 range from September 2017 to July 2020, and expiration dates range from March 2018 to August 2027.

Restricted Stock Awards
The Company grants restricted stock awards to directors annually, and periodically grants restricted stock to employees in connection with employment agreements. Awards to directors are granted on the date of our annual meeting of shareholders and vest on the earlier of (i) the completion of the director’s 3-year term or (ii) the third anniversary of the date of grant. Restricted stock award grants are granted out of the Company’s 2017 Equity Compensation Plan. The Company may also award, out of the Company’s 2017 Equity Compensation Plan, stock to settle certain bonuses and other compensation that otherwise would be paid in cash. Any restrictions on these shares may be immediately lapsed on the grant date.
The following table presents a summary of the Company’s restricted stock grants outstanding at August 31, 2017, and restricted stock activity during the six months ended August 31, 2017 (“Price” reflects the weighted average share price at the date of grant):
 
 
Awards
 
Price
Grants outstanding, beginning of period
196,706

 
$
4.64

Granted
346,462

 
2.87

Vested (restriction lapsed)
163,802

 
3.65

Grants outstanding, end of period
379,366

 
3.45


The total grant date fair value of shares vested during the six months ended August 31, 2016 and 2017, was $1.0 million and $0.6 million, respectively.

Recognized Non-Cash Compensation Expense
The following table summarizes stock-based compensation expense recognized by the Company during the three months and six months ended August 31, 2016 and 2017. The Company did not recognize any tax benefits related to stock-based compensation during the periods presented below. 
 
Three Months Ended August 31,
 
Six Months Ended August 31,
 
2016
 
2017
 
2016
 
2017
Station operating expenses
$
197

 
$
177

 
$
534

 
$
326

Corporate expenses
463

 
530

 
982

 
1,070

Stock-based compensation expense included in operating expenses
$
660

 
$
707

 
$
1,516

 
$
1,396


As of August 31, 2017, there was $1.8 million of unrecognized compensation cost, net of estimated forfeitures, related to nonvested share-based compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately 1.3 years.


-15-


Note 3. Intangible Assets and Goodwill
Valuation of Indefinite-lived Broadcasting Licenses
In accordance with ASC Topic 350, Intangibles—Goodwill and Other, the Company’s Federal Communications Commission (“FCC”) licenses are considered indefinite-lived intangibles. These assets, which the Company determined were its only indefinite-lived intangibles, are not subject to amortization, but are tested for impairment at least annually as discussed below.
The carrying amounts of the Company’s FCC licenses were $197.7 million and $195.6 million as of February 28, 2017 and August 31, 2017, respectively. The decrease in the carrying amount of FCC licenses relates to our sale of KPWR-FM (see Note 10 for more discussion). Pursuant to Emmis’ accounting policy, stations in a geographic market cluster are considered a single unit of accounting, provided that they are not being operated under an LMA with another broadcaster. The Company generally performs its annual impairment test of indefinite-lived intangibles as of December 1 of each year. When indicators of impairment are present, the Company will perform an interim impairment test. During the six months ended August 31, 2017, no new or additional impairment indicators emerged; hence, no interim impairment testing was warranted. These impairment tests may result in impairment charges in future periods.
Fair value of our FCC licenses is estimated to be the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. To determine the fair value of our FCC licenses, the Company uses an income valuation method when it performs its impairment tests. Under this method, the Company projects cash flows that would be generated by each of its units of accounting assuming the unit of accounting was commencing operations in its respective market at the beginning of the valuation period. This cash flow stream is discounted to arrive at a value for the FCC license. The Company assumes the competitive situation that exists in each market remains unchanged, with the exception that its unit of accounting commenced operations at the beginning of the valuation period. In doing so, the Company extracts the value of going concern and any other assets acquired, and strictly values the FCC license. Major assumptions involved in this analysis include market revenue, market revenue growth rates, unit of accounting audience share, unit of accounting revenue share and discount rate. Each of these assumptions may change in the future based upon changes in general economic conditions, audience behavior, consummated transactions, and numerous other variables that may be beyond our control. When evaluating our radio broadcasting licenses for impairment, the testing is performed at the unit of accounting level as determined by ASC Topic 350-30-35. In our case, radio stations in a geographic market cluster are considered a single unit of accounting, provided that they are not being operated under an LMA.
Valuation of Goodwill
The carrying amounts of the Company's goodwill, all of which were attributable to our radio division, were $4.6 million as of February 28, 2017 and August 31, 2017. ASC Topic 350-20-35 requires the Company to test goodwill for impairment at least annually. The Company conducts its impairment test on December 1 of each fiscal year, unless indications of impairment exist during an interim period. When assessing its goodwill for impairment, the Company generally uses an enterprise valuation approach to determine the fair value of each of the Company’s reporting units, with radio stations grouped by market. Management determines enterprise value for each of its reporting units by multiplying the two-year average station operating income generated by each reporting unit (current year based on actual results and the next year based on budgeted results) by an estimated market multiple. The Company uses a blended station operating income trading multiple of publicly traded radio operators as a benchmark for the multiple it applies to its radio reporting units. Management believes this methodology for valuing radio properties is a common approach and believes that the multiples used in the valuation are reasonable given our peer comparisons and recent market transactions. To corroborate the fair values determined using the market approach described above, management also uses an income approach, which is a discounted cash flow method to determine the fair value of the reporting unit. If the carrying value of a reporting unit's goodwill exceeds its fair value, the Company recognizes an impairment charge equal to the difference in the statement of operations.

-16-


Definite-lived intangibles
As of August 31, 2017, the Company’s definite-lived intangible assets consist of trademarks and a syndicated programming contract, both of which are amortized over the period of time the assets are expected to contribute directly or indirectly to the Company’s future cash flows. Trademarks related to KPWR-FM were sold during the three months ended August 31, 2017. See Note 10 for more discussion of the sale of KPWR-FM. The following table presents the weighted-average useful life, gross carrying amount and accumulated amortization for each major class of definite-lived intangible assets at February 28, 2017 and August 31, 2017:
 
 
 
 
As of February 28, 2017
 
As of August 31, 2017
 
 
 
 
(in 000's)
 
 
Weighted Average Remaining Useful Life (in years)
 
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
 
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Trademarks
 
7.8
 
$
696

$
545

$
151

 
$
397

$
318

$
79

Customer lists
 
N/A
 
315

289

26

 



Programming agreement
 
4.1
 
2,154

808

1,346

 
2,154

955

1,199

  TOTAL
 
 
 
$
3,165

$
1,642

$
1,523


$
2,551

$
1,273

$
1,278

In accordance with Accounting Standards Codification paragraph 360-10, the Company performs an analysis to (i) determine if indicators of impairment of a long-lived asset are present, (ii) test the long-lived asset for recoverability by comparing undiscounted cash flows of the long-lived asset to its carrying value and (iii) measure any potential impairment by comparing the long-lived asset's fair value to its current carrying value.
Total amortization expense from definite-lived intangibles for the six-month periods ended August 31, 2016 and 2017 was $0.5 million and $0.1 million, respectively. The following table presents the Company's estimate of future amortization expense for definite-lived intangibles:
Year ended February 28 (29),
 
Expected Amortization Expense
 
 
(in 000's)
Remainder of 2018
 
$
153

2019
 
304

2020
 
304

2021
 
304

2022
 
181

Thereafter
 
32

Total
 
$
1,278



-17-


Note 4. Long-term Debt
Long-term debt was comprised of the following at February 28, 2017 and August 31, 2017:

 
February 28,
2017
 
August 31,
2017
2014 Credit Agreement debt :
 
 
 
Revolver
$

 
$
5,000

Term Loan
152,245

 
74,421

Total 2014 Credit Agreement debt
152,245

 
79,421

 
 
 
 
98.7FM non-recourse debt
59,958

 
57,008

Other non-recourse debt (1)
8,807

 
9,868

Less: Current maturities
(23,600
)
 
(16,367
)
Less: Unamortized original issue discount
(7,038
)
 
(4,686
)
Total long-term debt
$
190,372

 
$
125,244


(1) The face value of other non-recourse debt was $9.5 million and $10.2 million at February 28, 2017 and August 31, 2017, respectively

2014 Credit Agreement
On June 10, 2014, Emmis entered into the 2014 Credit Agreement, by and among the Company, EOC, as borrower (the “Borrower”), certain other subsidiaries of the Company, as guarantors (the “Subsidiary Guarantors”), the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and Fifth Third Bank, as syndication agent. Capitalized terms in this section not defined elsewhere in this 10-Q are defined in the 2014 Credit Agreement and related amendments.
The 2014 Credit Agreement includes a senior secured term loan facility (the “Term Loan”) of $185.0 million and a senior secured revolving credit facility of $20.0 million, and contains provisions for an uncommitted increase of up to $20.0 million principal amount (plus additional amounts so long as a pro forma total net senior secured leverage ratio condition is met) of the revolving credit facility and/or the Term Loan subject to the satisfaction of certain conditions. The revolving credit facility includes a sub-facility for the issuance of up to $5.0 million of letters of credit. Pursuant to the 2014 Credit Agreement, the Borrower borrowed $185.0 million of the Term Loan on June 10, 2014.
As a result of the Fourth Amendment to the 2014 Credit Agreement discussed below, the Term Loan is due not later than April 18, 2019 and the revolving credit facility expires on August 31, 2018. The Company no longer makes quarterly amortization payments related to the Term Loan as a result of repayments made in connection with the Company's sale of KPWR-FM. Subsequent to the Fourth Amendment to the 2014 Credit Agreement, 75 basis points per annum is payable quarterly on the average unused amount of the revolving credit facility. Prior to the amendments to the 2014 Credit Agreement discussed below, the Term Loan and amounts borrowed under the revolving credit facility bore interest, at the Borrower’s option, at either (i) the Alternate Base Rate (as defined in the 2014 Credit Agreement) (but not less than 2.00%) plus 3.75% or (ii) the Adjusted LIBO Rate (as defined in the 2014 Credit Agreement) (but not less than 1.00%) plus 4.75%.
The 2014 Credit Agreement is carried on our condensed consolidated balance sheets net of an original issue discount. The original issue discount, which was $5.1 million and $2.9 million as of February 28, 2017 and August 31, 2017, respectively, is being amortized as additional interest expense over the life of the 2014 Credit Agreement. In connection with the Term Loan repayment made during the three months ended August 31, 2017 as a result of the KPWR-FM sale, the Company wrote-off $2.5 million of the original issue discount which is recorded as loss on debt extinguishment in the accompanying condensed consolidated financial statements.
The obligations under the 2014 Credit Agreement are secured by a perfected first priority security interest in substantially all of the assets of the Company, the Borrower and the Subsidiary Guarantors.
On November 7, 2014, Emmis entered into the First Amendment to the 2014 Credit Agreement. The First Amendment (i) increased the maximum Total Leverage Ratio to 6.00:1.00 for the period February 28, 2015 through February 29, 2016, (ii) adjusted the definition of Consolidated EBITDA to exclude during the term of the 2014 Credit Agreement up to $5 million in severance and/or contract termination expenses and up to $2.5 million in losses attributable to the reformatting of the Company’s radio stations, (iii) extended the requirement for the Borrower to pay a 1.00% fee on certain prepayments of the Term Loan to November 7, 2015, (iv) increased the Applicable Margin by 0.25% for at least six months from the date of the First Amendment and until the Total Leverage Ratio is less than 5.00:1.00, and (v) made certain technical adjustments to the

-18-


definition of Consolidated Excess Cash Flow and to address the Foreign Account Tax Compliance Act. Emmis paid a total of approximately $1.0 million of transaction fees to the Lenders that consented to the First Amendment, which were recorded as original issue discount and are being amortized over the remaining life of the 2014 Credit Agreement.
On April 30, 2015, Emmis entered into the Second Amendment to the 2014 Credit Agreement. The Second Amendment (i) increased the maximum Total Leverage Ratio to (A) 6.75:1.00 during the period from May 31, 2015 through February 29, 2016, (B) 6.50:1.00 for the quarter ended May 31, 2016, (C) 6.25:1.00 for the quarter ended August 31, 2016, (D) 6.00:1.00 for the quarter ended November 30, 2016, and (E) 5.75:1.00 for the quarter ended February 28, 2017, after which it reverted to the original ratio of 4.00:1.00 for the quarters ended May 31, 2017 and thereafter, (ii) required Emmis to pay a 2.00% fee on certain prepayments of the Term Loan prior to the first anniversary of the Second Amendment and required Emmis to pay a 1.00% fee on certain prepayments of the Term Loan from the first anniversary of the Second Amendment until the second anniversary of the Second Amendment, (iii) increased the Applicable Margin throughout the remainder of the term of the Credit Agreement to 5.00% for ABR Loans (as defined in the Credit Agreement) and 6.00% for Eurodollar Loans (as defined in the 2014 Credit Agreement), and (iv) increased the amortization to 0.50% per calendar quarter through January 1, 2016 and to 1.25% per calendar quarter thereafter commencing April 1, 2016. Emmis paid a total of approximately $1.1 million of transaction fees to the Lenders that consented to the Second Amendment, which were recorded as original issue discount and are being amortized over the remaining life of the 2014 Credit Agreement.
On August 22, 2016, Emmis entered into the Third Amendment to the 2014 Credit Agreement. The Third Amendment made certain changes to the Credit Agreement to facilitate the Company's consideration of and, if approved by the Company's Board of Directors and shareholders, entry into a transaction that would have resulted in the Class A common stock of the Company ceasing to be registered under the Securities Act of 1934 (such potential transaction, a "Going Private Transaction"). Specifically, the Third Amendment added an exception to the covenant restricting transactions with affiliates that (i) permitted the Company to enter into a Going Private Transaction with an affiliate of the Company and (ii) permitted the Borrower to pay any costs incurred or reimbursed by an affiliate of the Company in connection with a Going Private Transaction, whether or not the transaction was consummated. The Third Amendment also allowed the Company to add certain costs and expenses incurred in connection with a Going Private Transaction to Consolidated EBITDA, as defined in the Credit Agreement, for purposes of determining compliance with the financial covenants in the Credit Agreement, subject to caps of (i) $2.5 million if a Going Private Transaction was not recommended by a special committee of the Company’s Board of Directors and (ii) $8.0 million if a Going Private Transaction was recommended by a special committee of the Company’s Board of Directors but not consummated. Finally, the Third Amendment made certain changes to the Credit Agreement that would have been effective only if a Going Private Transaction was consummated. The Third Amendment also required the Borrower to pay a 50 basis point fee to the lenders that consented to it either if a Going Private Transaction was consummated or if such a transaction was recommended by a special committee of the board of directors of the Company but not consummated. The special committee of the board of directors did not recommend the Going Private Transaction and no such transaction was consummated.
On April 18, 2017, Emmis entered into a Fourth Amendment to our 2014 Credit Agreement. The Fourth Amendment (i) eliminated the maximum Total Leverage Ratio covenant through May 31, 2018 and replaced it with a minimum Consolidated EBITDA covenant, after which it reverts to a Total Leverage Ratio of 4.00:1.00 for the quarters ended August 31, 2018 and thereafter, (ii) reduced the Interest Coverage Ratio from 2.00:1.00 to 1.60:1.00, (iii) required Emmis to enter into definitive agreements by January 18, 2018 to sell assets that generate at least $80 million of sale proceeds and close such transactions no later than July 18, 2018, (iv) increased the Applicable Margin throughout the remainder of the term of the Credit Agreement to 6.00% for ABR Loans (as defined in the 2014 Credit Agreement) and 7.00% for Eurodollar Loans (as defined in the 2014 Credit Agreement) and increased the unused commitment fee on the revolving credit facility to 75 basis points, and (v) accelerated the maturity of the Term Loans to April 18, 2019 and the Revolving Loans to August 31, 2018. In addition to tightening or eliminating baskets and other credit enhancements for lenders, the Fourth Amendment contains ratcheting fees and premiums if the existing credit facility is not refinanced by July 18, 2018. The Fourth Amendment also required Emmis to pay a fee of 1.0% of the Term Loan holdings and Revolving Commitment of each Lender that consented to the Fourth Amendment. This fee totaled $1.5 million and was recorded as additional original issue discount and is being amortized as interest expense over the remaining life of the 2014 Credit Agreement, beginning in the three-month period ending May 31, 2017.
In connection with the closing of the sale of Texas Monthly on November 1, 2016, Emmis repaid $15.0 million of Term Loans and $8.5 million of Revolver borrowings. Under the terms of the 2014 Credit Agreement, Emmis was required to use all Net Available Proceeds (as defined in the 2014 Credit Agreement) from the sale of Texas Monthly to repay Term Loans unless it exercised its right under the 2014 Credit Agreement to reinvest a portion of the Net Available Proceeds in new long-term assets of the Company. On November 1, 2016, Emmis exercised this reinvestment right for up to $10.0 million of Net Available Proceeds. This election allows the Company to reduce the amount of Net Available Proceeds by amounts used to purchase assets within 365 days of the election, or 545 days of the election so long as the asset purchase is under contract within 365 days. Routine capital expenditures qualify as a reinvestment under the terms of the 2014 Credit Agreement. Future changes in

-19-


these estimates will impact the calculation of Net Available Proceeds. The current calculation of Net Available Proceeds, reinvestments and Term Loan repayments related to the sale of Texas Monthly is as follows:
 
Term Loan Repayments
Texas Monthly Sale
Gross proceeds from the sale of Texas Monthly
$
25,000

Working capital and other closing adjustments
(747
)
Transaction costs, including severance
(1,378
)
  Subtotal
22,875

Less: Reinvestments (estimated)
(3,475
)
Less: Term Loan repayment on November 1, 2016
(15,000
)
  Remaining Net Available Proceeds, subject to finalization of reinvestments
$
4,400

The current estimate of $4.4 million of remaining net available proceeds is included as a current maturity of long-term debt in the accompanying condensed consolidated balance sheets as of August 31, 2017. The amount is not yet final as reinvestments are estimated and could change prior to the conclusion of the reinvestment period as described above.
We were in compliance with all financial and non-financial covenants as of August 31, 2017. Our Minimum Consolidated EBITDA and Interest Coverage Ratio (each as defined in the 2014 Credit Agreement and related amendments) requirements and actual amounts as of August 31, 2017 were as follows:
 
As of August 31, 2017
 
Covenant Requirement
 
Actual Results
Minimum Consolidated EBITDA
$
13.6
 million
 
$
17.5
 million
Minimum Interest Coverage Ratio
1.60 : 1.00

 
2.59 : 1.00

98.7FM Non-recourse Debt
On May 30, 2012, the Company, through wholly-owned, newly-created subsidiaries, issued $82.2 million of non-recourse notes. Teachers Insurance and Annuity Association of America, through a participation agreement with Wells Fargo Bank Northwest, National Association, is entitled to receive payments made on the notes. The notes are obligations only of the newly-created subsidiaries, are non-recourse to the rest of the Company and its subsidiaries, and are secured by the assets of the newly-created subsidiaries, including the payments made to the newly-created subsidiary related to the 98.7FM LMA, which are guaranteed by Disney Enterprises, Inc. The notes bear interest at 4.1%. The 98.7FM non-recourse notes are carried on our condensed consolidated balance sheets net of an original issue discount. The original issue discount, which was $2.0 million and $1.8 million as of February 28, 2017 and August 31, 2017, respectively, is being amortized as additional interest expense over the life of the notes.
Other Non-recourse Debt
Digonex non-recourse notes payable consist of notes payable issued by Digonex, which were recorded at fair value on June 16, 2014, the date that Emmis acquired a controlling interest in Digonex. The notes payable, some of which are secured by the assets of Digonex, are non-recourse to the rest of the Company and its subsidiaries. During the quarter ended August 31, 2017, Digonex noteholders agreed to extend the maturity date of the notes from December 31, 2017 to December 31, 2020. The notes accrue interest at 5.0% per annum with interest due at maturity. The face value of the notes payable is $6.2 million. The Company is accreting the difference between this face value and the original $3.6 million fair value of the notes payable recorded in the acquisition of its controlling interest of the business as interest expense over the remaining term of the notes payable.
During the quarter ended May 31, 2017, NextRadio, LLC issued $0.7 million of notes payable, bringing the cumulative total of notes payable issued by NextRadio, LLC to $4.0 million. The notes initially bear interest at 4.0% with interest due quarterly beginning in August 2018. The notes mature on December 23, 2021 and are to be repaid through revenues generated by enhanced advertisement revenues earned by NextRadio, LLC. If any portion of the notes remain unpaid at maturity, the lender has the option to exchange the notes for senior preferred equity of NextRadio, LLC's parent entity, TagStation, LLC. These notes are obligations of NextRadio, LLC and TagStation, LLC and are non-recourse to the rest of Emmis' subsidiaries.

-20-


Based on amounts outstanding at August 31, 2017, mandatory principal payments of long-term debt for the next five years and thereafter are summarized below:
 
 
2014 Credit Agreement
 
98.7FM
Non-recourse
 
Other
Non-recourse
 
 
Year ended February 28 (29),
 
Revolver
 
Term Loan
 
Debt
 
Debt
 
Total Payments
Remainder of 2018
 
$

 
$
4,400

 
$
3,089

 
$

 
$
7,489

2019
 
5,000

 

 
6,587

 

 
11,587

2020
 

 
70,021

 
7,150

 

 
77,171

2021
 

 

 
7,755

 
6,239

 
13,994

2022
 

 

 
8,394

 
4,000

 
12,394

Thereafter
 

 

 
24,033

 

 
24,033

Total
 
$
5,000

 
$
74,421

 
$
57,008

 
$
10,239

 
$
146,668


Note 5. Liquidity and Going Concern

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The Company adopted ASU 2014-15 during the year ended February 28, 2017. Subsequent to adoption, the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern each reporting period, including interim periods.
In evaluating the Company’s ability to continue as a going concern, management evaluated the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the interim financial statements were issued (October 12, 2017). Management considered the Company’s current projections of future cash flows, current financial condition, sources of liquidity and debt obligations due on or before October 12, 2018.
As of August 31, 2017, the Company classified its $5.0 million revolver debt as current because the revolver expires on August 31, 2018. The Company also classified $4.4 million of Term Loan debt associated with the proceeds received from the sale of Texas Monthly as current because it is due during the quarter ending November 30, 2017. The Company also expects to pay approximately $6.5 million of cash interest obligations related to our 2014 Credit Agreement and $3.2 million of income taxes to various tax jurisdictions prior to October 12, 2018. The Company’s current projections indicate that forecasted cash flows may be insufficient for the Company to settle all of these obligations in full and continue without a revolver subsequent to August 31, 2018.
Management is currently exploring a number of options that would allow the Company to meet all of the aforementioned obligations. Management believes that it is probable that it will refinance the debt outstanding under the 2014 Credit Agreement prior to August 31, 2018. The Company has successfully refinanced its credit agreement debt many times in the past. Recent asset sales and associated term loan repayments have significantly reduced the Company’s leverage ratio, which management believes will enhance its ability to refinance the debt. Management is also exploring several alternatives that would further reduce our leverage ratio, including the sale of WLIB-AM in New York City. While management does not believe the sale of this or any other asset is required to complete a refinancing, management believes it would likely improve the economics of a refinancing for the Company.
Management's intention and belief that the credit agreement debt will be refinanced during the next twelve months assumes, among other things, that the Company will continue to be successful in implementing its business strategy and that there will be no material adverse developments in its business, liquidity or capital requirements. If one or more of these factors do not occur as expected, it could cause a default under the Company's credit agreement.

Note 6. Fair Value Measurements
As defined in ASC Topic 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The

-21-


hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
Recurring Fair Value Measurements
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of February 28, 2017 and August 31, 2017. The financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

 
As of August 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(in 000's)
Available for sale securities
$

 
$

 
$
800

 
$
800

Total assets measured at fair value on a recurring basis
$

 
$

 
$
800

 
$
800

 
 
 
 
 
 
 
 
 
As of February 28, 2017
 
Level 1
 
Level 2
 
Level 3
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(in 000's)
Available for sale securities
$

 
$

 
$
800

 
$
800

Total assets measured at fair value on a recurring basis
$

 
$

 
$
800

 
$
800


Available for sale securities — Emmis’ available for sale securities are comprised of preferred stock of a private company that is not traded in active markets and is included in other assets, net in the accompanying condensed consolidated balance sheets. The investment is recorded at fair value, which was generally estimated using significant unobservable market parameters, resulting in a level 3 categorization. The carrying value of our preferred stock investment was determined by using implied valuations of recent rounds of financing and by other corroborating evidence, which may include the application of various valuation methodologies including option-pricing and discounted cash flow based models.
 
 
 
 
Non-Recurring Fair Value Measurements
The Company has certain assets that are measured at fair value on a non-recurring basis under circumstances and events that include those described in Note 3, Intangible Assets and Goodwill, and are adjusted to fair value only when the carrying values are more than the fair values. The categorization of the framework used to price the assets is considered a Level 3 measurement due to the subjective nature of the unobservable inputs used to determine the fair value (see Note 3 for more discussion).
Fair Value of Other Financial Instruments
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. Assets and liabilities acquired in business combinations are recorded at their fair value as of the date of acquisition.
The estimated fair value of financial instruments is determined using the best available market information and appropriate valuation methodologies. Considerable judgment is necessary, however, in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange, or the value that ultimately will be realized upon maturity or disposition. The use of different market assumptions may have a material effect on the estimated fair value amounts.

-22-


The following methods and assumptions were used to estimate the fair value of financial instruments:
- Cash and cash equivalents: The carrying amount of these assets approximates fair value because of the short maturity of these instruments.
- 2014 Credit Agreement debt: As of August 31, 2017, the fair value and carrying value, excluding original issue discount, of the Company's 2014 Credit Agreement debt was $76.8 million and $79.4 million, respectively. The Company's estimate of fair value was based on quoted prices of this instrument and is considered a Level 2 measurement.
- Other long-term debt: The Company’s 98.7FM non-recourse debt and other non-recourse debt is not actively traded and is considered a level 3 measurement. The Company believes the current carrying value of its other long-term debt approximates its fair value.

Note 7. Segment Information
The Company’s operations have historically been aligned into three business segments: (i) Radio, (ii) Publishing and (iii) Corporate & Emerging Technologies. Emerging Technologies includes our TagStation, NextRadio and Digonex businesses. These business segments are consistent with the Company’s management of these businesses and its financial reporting structure. Corporate expenses are not allocated to reportable segments. The Company’s segments operate exclusively in the United States.
The accounting policies as described in the summary of significant accounting policies included in the Company’s Annual Report filed on Form 10-K for the year ended February 28, 2017, and in Note 1 to these condensed consolidated financial statements, are applied consistently across segments.
 
 
 
 
 
 
 
 
Three Months Ended August 31, 2017
Radio
 
Publishing
 
Corporate & Emerging Technologies
 
Consolidated
Net revenues
$
41,764

 
$
846

 
$
238

 
$
42,848

Station operating expenses excluding and depreciation and amortization expense
29,881

 
1,104

 
2,919

 
33,904

Corporate expenses excluding depreciation and amortization expense

 

 
2,538

 
2,538

Depreciation and amortization
676

 
5

 
200

 
881

Gain on sale of assets, net of disposition costs
(76,745
)
 
39

 

 
(76,706
)
Loss on disposal of property and equipment

 
12

 

 
12

Operating income (loss)
$
87,952

 
$
(314
)
 
$
(5,419
)
 
$
82,219

 
 
 
 
 
 
 
 
Three Months Ended August 31, 2016
Radio
 
Publishing
 
Corporate & Emerging Technologies
 
Consolidated
Net revenues
$
45,972

 
$
12,619

 
$
183

 
$
58,774

Station operating expenses excluding LMA fees and depreciation and amortization expense
31,661

 
12,959

 
2,371

 
46,991

Corporate expenses excluding depreciation and amortization expense

 

 
2,453

 
2,453

Impairment loss on intangible assets

 

 
2,988

 
2,988

Depreciation and amortization
881

 
69

 
332

 
1,282

Loss on disposal of fixed assets
125

 

 

 
125

Operating income (loss)
$
13,305

 
$
(409
)
 
$
(7,961
)
 
$
4,935


-23-


Six Months Ended August 31, 2017
Radio
 
Publishing
 
Corporate & Emerging Technologies
 
Consolidated
Net revenues
$
80,470

 
$
1,990

 
$
552

 
$
83,012

Station operating expenses excluding depreciation and amortization expense
56,015

 
2,459

 
6,660

 
65,134

Corporate expenses excluding depreciation and amortization expense

 

 
5,281

 
5,281

Depreciation and amortization
1,444

 
10

 
405

 
1,859

Gain on sale of assets, net of disposition costs
(76,745
)
 
39

 

 
(76,706
)
Loss on disposal of property and equipment

 
12

 

 
12

Operating income (loss)
$
99,756

 
$
(530
)
 
$
(11,794
)
 
$
87,432

 
 
 
 
 
 
 
 
Six Months Ended August 31, 2016
Radio
 
Publishing
 
Corporate & Emerging Technologies
 
Consolidated
Net revenues
$
88,671

 
$
25,711

 
$
394

 
$
114,776

Station operating expenses excluding depreciation and amortization expense
58,936

 
26,437

 
4,607

 
89,980

Corporate expenses excluding depreciation and amortization expense

 

 
5,497

 
5,497

Impairment loss

 

 
2,988

 
2,988

Depreciation and amortization
1,788

 
142

 
684

 
2,614

Loss on disposal of property and equipment
125

 

 

 
125

Operating income (loss)
$
27,822

 
$
(868
)
 
$
(13,382
)
 
$
13,572

Total Assets
Radio
 
Publishing
 
Corporate & Emerging Technologies
 
Consolidated
As of February 28, 2017
$
260,228

 
$
1,746

 
$
27,364

 
$
289,338

As of August 31, 2017
$
258,162

 
$
697

 
$
18,417

 
$
277,276


Note 8. Regulatory, Legal and Other Matters
During the quarter ended August 31, 2017, Emmis filed suit against Hour Media Group, LLC ("Hour") for breach of the asset purchase agreement related to the February 28, 2017 sale of Los Angeles Magazine, Atlanta Magazine, Cincinnati Magazine and Orange Coast Magazine. Hour filed a counterclaim against Emmis alleging that Emmis engaged in a series of actions that constitute a breach of the asset purchase agreement. Emmis believes that Hour's claims are without merit and is vigorously defending this lawsuit. Approximately $0.65 million of the purchase price related to this sale remains in escrow and is likely to remain in escrow until this matter is resolved. This cash is included in restricted cash on our condensed consolidated balance sheets as of August 31, 2017.
Emmis is a party to various other legal proceedings arising in the ordinary course of business. In the opinion of management of the company, however, there are no legal proceedings pending against the Company that we believe are likely to have a material adverse effect on the Company.

Note 9. Income Taxes
Our effective income tax rate was 31% and 6% for the six-month periods ended August 31, 2016 and 2017, respectively. In the prior year, the Company recorded a valuation allowance for its net deferred tax assets generated during the period, including its net operating loss carryforwards, but excluding deferred tax liabilities related to indefinite-lived intangibles. Given the sale of KPWR-FM as discussed in Note 10 and the gain that resulted from the transaction, the Company is estimating its effective tax rate for the fiscal year, which incorporates the reversal of a portion of the valuation allowance, and applying that rate to the pre-tax income for the applicable period, which is primarily responsible for the difference between the statutory rate and the effective tax rate.


-24-


Note 10. Other Significant Events
Sale of KPWR-FM
On August 1, 2017, Emmis closed on its sale of KPWR-FM for gross proceeds of approximately $80.1 million in cash to affiliates of the Meruelo Group. After payment of transaction costs and withholding for estimated tax obligations, net proceeds as defined in the 2014 Credit Agreement totaled approximately $73.6 million and were used to repay term loan indebtedness. As discussed in Note 4, under the terms of the Fourth Amendment to the 2014 Credit Facility, Emmis was required to enter into definitive agreements to sell assets that generated at least $80 million of proceeds by January 18, 2018 and to close on such transactions following receipt of required regulatory approvals. The sale of KPWR-FM satisfied these requirements. Emmis found it more advantageous to sell its standalone radio station in Los Angeles than to sell other assets to meet this requirement.
KPWR-FM was operated pursuant to an LMA from July 1, 2017 through the closing of the sale on August 1, 2017. Affiliates of the Meruelo Group paid an LMA fee to Emmis totaling $0.4 million during this period, which is included in net revenues in the accompanying condensed consolidated statements of operations and in the summary of KPWR-FM results included below.
KPWR-FM had historically been included in our Radio segment. The following table summarizes certain operating results of KPWR-FM for all periods presented. Pursuant to Accounting Standards Codification 205-20-45-6, interest expense associated with the required Term Loan repayment associated with the sale of KPWR-FM is included in the results below. The sale of KPWR-FM did not qualify for reporting as a discontinued operation as it did not represent a strategic shift for the Company as described in Accounting Standards Codification 205-20-45.
 
For the three months ended August 31,
 
For the six months ended August 31,
 
2016
 
2017
 
2016
 
2017
Net revenues
$
6,709

 
$
2,399

 
$
13,385

 
$
7,818

Station operating expenses, excluding depreciation and amortization expense
4,356

 
2,590

 
8,729

 
6,928

Depreciation and amortization
103

 

 
207

 
63

Gain on sale of assets, net of disposition costs

 
(76,745
)
 

 
(76,745
)
Operating income
2,250

 
76,554

 
4,449

 
77,572

Interest expense
1,317

 
1,055

 
2,633

 
2,494

Income before income taxes
933

 
75,499

 
1,816

 
75,078

Unaudited pro forma summary information is presented below for the three-month and six-month periods ended August 31, 2016 and 2017, assuming the November 1, 2016 sale of Texas Monthly, the January 30, 2017 sale of our radio stations in Terre Haute, the February 28, 2017 sale of Los Angeles Magazine, Atlanta Magazine, Cincinnati Magazine and Orange Coast Magazine, the August 1, 2017 sale of KPWR-FM, and the related mandatory debt repayments of these sales had occurred on the first day of the proforma periods presented below. See Note 7 of our 10-K for the year ending February 28, 2017 for more discussion of the various sales completed during our prior fiscal year.
 
For the three months ended August 31,
(unaudited)
 
For the six months ended August 31,
(unaudited)
 
2016
 
2017
 
2016
 
2017
Net revenues
$
39,856

 
$
40,451

 
$
76,686

 
$
75,201

Station operating expenses, excluding depreciation and amortization expense
30,316

 
31,275

 
56,348

 
58,113

Consolidated net (loss) income
(41
)
 
1,335

 
2,119

 
1,948

Net income attributable to the Company
692

 
527

 
2,223

 
301

Net income per share - basic
$
0.06

 
$
0.04

 
$
0.19

 
$
0.02

Net income per share - diluted
$
0.06

 
$
0.04

 
$
0.18

 
$
0.02





-25-


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note: Certain statements included in this report or in the financial statements contained herein which are not statements of historical fact, including but not limited to those identified with the words “expect,” “should,” “will” or “look” are intended to be, and are, by this Note, identified as “forward-looking statements,” as defined in the Securities and Exchange Act of 1934, as amended. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future result, performance or achievement expressed or implied by such forward-looking statement. Such factors include, among others:
general economic and business conditions;
fluctuations in the demand for advertising and demand for different types of advertising media;
our ability to service our outstanding debt;
competition from new or different media and technologies;
loss of key personnel;
increased competition in our markets and the broadcasting industry, including our competitors changing the format of a station they operate to more directly compete with a station we operate in the same market;
our ability to attract and secure programming, on-air talent, writers and photographers;
inability to obtain (or to obtain timely) necessary approvals for purchase or sale transactions or to complete the transactions for other reasons generally beyond our control;
increases in the costs of programming, including on-air talent;
fluctuations in the market price of publicly traded and other securities;
new or changing regulations of the Federal Communications Commission or other governmental agencies;
changes in radio audience measurement methodologies;
war, terrorist acts or political instability; and other factors mentioned in other documents filed by the Company with the Securities and Exchange Commission.
For a more detailed discussion of these and other risk factors, see the Risk Factors section of our Annual Report on Form 10-K, for the year ended February 28, 2017. Emmis does not undertake any obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise.


GENERAL
We principally own and operate radio properties located in the United States. Our revenues are mostly affected by the advertising rates our entities charge, as advertising sales represent approximately 65% of our consolidated revenues. These rates are in large part based on our entities’ ability to attract audiences/subscribers in demographic groups targeted by their advertisers. The Nielsen Company generally measures radio station ratings in our domestic markets on a weekly basis using a passive digital system of measuring listening (the Portable People Meter). Because audience ratings in a station’s local market are critical to the station’s financial success, our strategy is to use market research and advertising and promotion to attract and retain audiences in each station’s chosen demographic target group.
Our revenues vary throughout the year. As is typical in the broadcasting industry, our revenues and operating income are usually lowest in our fourth fiscal quarter.
In addition to the sale of advertising time for cash, stations typically exchange advertising time for goods or services, which can be used by the station in its business operations. These barter transactions are recorded at the estimated fair value of the product or service received. We generally confine the use of such trade transactions to promotional items or services for which we would otherwise have paid cash. In addition, it is our general policy not to preempt advertising spots paid for in cash with advertising spots paid for in trade.
The following table summarizes the sources of our revenues for the three-month and six-month periods ended August 31, 2016 and 2017. The category “Non Traditional” principally consists of ticket sales and sponsorships of events our stations and magazines conduct in their local markets. The category “Other” includes, among other items, revenues related to our TagStation and Digonex businesses, network revenues and barter. In the year ended February 28, 2017, we sold Texas Monthly, our radio stations in Terre Haute, Indiana, and Los Angeles Magazine, Atlanta Magazine, Cincinnati Magazine and Orange Coast Magazine. We sold KPWR-FM on August 1, 2017. These sales impact the comparability of the three-month and six-month periods ended August 31, 2016 to the three-month and six-month periods ended August 31, 2017.

-26-


 
Three Months Ended August 31,
 
Six Months Ended August 31,
 
2016
 
% of Total
 
2017
 
% of Total
 
2016
 
% of Total
 
2017
 
% of Total
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Local
$
31,499

 
53.6
%
 
$
21,263

 
49.6
%
 
$
64,517

 
56.2
%
 
$
45,483

 
54.8
%
National
5,788

 
9.8
%
 
4,179

 
9.8
%
 
11,507

 
10.0
%
 
8,787

 
10.6
%
Political
304

 
0.5
%
 
40

 
0.1
%
 
1,164

 
1.0
%
 
169

 
0.2
%
Publication Sales
1,311

 
2.2
%
 
99

 
0.2
%
 
2,694

 
2.3
%
 
209

 
0.3
%
Non Traditional
9,450

 
16.1
%
 
8,763

 
20.5
%
 
13,564

 
11.8
%
 
11,251

 
13.6
%
LMA Fees
2,583

 
4.4
%
 
3,004

 
7.0
%
 
5,166

 
4.5
%
 
5,587

 
6.7
%
Digital
4,058

 
6.9
%
 
2,772

 
6.5
%
 
8,115

 
7.1
%
 
5,800

 
7.0
%
Other
3,781

 
6.5
%
 
2,728

 
6.3
%
 
8,049

 
7.1
%
 
5,726

 
6.8
%
Total net revenues
$
58,774

 
 
 
$
42,848

 
 
 
$
114,776

 
 
 
$
83,012

 
 

As previously mentioned, we derive approximately 65% of our net revenues from advertising sales. In the six-month period ended August 31, 2017, local sales, excluding political revenues, represented approximately 83% of the advertising revenues for our radio division.
No customer represents more than 10% of our consolidated net revenues. Our top ten categories for radio represent approximately 61% of our radio division’s total advertising net revenues for the six-month periods ended August 31, 2016 and 2017. The automotive industry was the largest category for our radio division for the six-month periods ended August 31, 2016 and 2017, representing approximately 11% and 10% of our radio net revenues, respectively.
The majority of our expenses are fixed in nature, principally consisting of salaries and related employee benefit costs, office and tower rent, utilities, property and casualty insurance and programming-related expenses. However, approximately 20% of our expenses vary in connection with changes in revenues. These variable expenses primarily relate to sales commissions, music license fees and bad debt reserves. In addition, costs related to our marketing and promotions department are highly discretionary and incurred primarily to maintain and/or increase our audience and market share.
SIGNIFICANT TRANSACTIONS
Emmis consummated the following asset sales in the prior fiscal year: (i) the November 1, 2016 sale of Texas Monthly, (ii) the January 30, 2017 sale of our radio stations in Terre Haute, and (iii) the February 28, 2017 sale of Los Angeles Magazine, Atlanta Magazine, Cincinnati Magazine and Orange Coast Magazine. On August 1, 2017, Emmis sold KPWR-FM in Los Angeles. Unaudited pro forma summary information is presented below for the three-month and six-month periods ended August 31, 2016 and 2017, assuming these sales and the related mandatory debt repayments of these sales had occurred on the first day of the proforma periods presented below. See Note 7 of our 10-K for the year ending February 28, 2017 for more discussion of the various sales completed during our prior fiscal year and see Note 10 of this report for more discussion of our sale of KPWR-FM.
 
For the three months ended August 31,
(unaudited)
 
For the six months ended August 31,
(unaudited)
 
2016
 
2017
 
2016
 
2017
Net revenues
$
39,856

 
$
40,451

 
$
76,686

 
$
75,201

Station operating expenses, excluding depreciation and amortization expense
30,316

 
31,275

 
56,348

 
58,113

Consolidated net (loss) income
(41
)
 
1,335

 
2,119

 
1,948

Net income attributable to the Company
692

 
527

 
2,223

 
301

Net income per share - basic
$
0.06

 
$
0.04

 
$
0.19

 
$
0.02

Net income per share - diluted
$
0.06

 
$
0.04

 
$
0.18

 
$
0.02


-27-



KNOWN TRENDS AND UNCERTAINTIES
The U.S. radio industry is a mature industry and its growth rate has stalled. Management believes this is principally the result of two factors: (1) new media, such as various media distributed via the Internet, telecommunication companies and cable interconnects, as well as social networks, have gained advertising share against radio and other traditional media and created a proliferation of advertising inventory and (2) the fragmentation of the radio audience and time spent listening caused by satellite radio, audio streaming services and podcasts has led some investors and advertisers to conclude that the effectiveness of radio advertising has diminished.

The Company and the radio industry are leading several initiatives to address these issues. The radio industry is working aggressively to increase the number of smartphones and other wireless devices that contain an enabled FM tuner. Most smartphones currently sold in the United States contain an FM tuner. However, most wireless carriers in the United States have not historically permitted the FM tuner to receive the free over-the-air local radio stations it was designed to receive. Furthermore, in many countries outside the United States, enabled FM tuners are made available to smartphone consumers; consequently, radio listening increases. Activating FM as a feature on smartphones sold in the United States has the potential to increase radio listening and improve the perception of the radio industry while offering wireless network providers the benefits of a proven emergency notification system, reduced network congestion from audio streaming services, and a host of new revenue generating applications. Emmis is at the leading edge of this initiative and has developed TagStation®, a cloud-based software platform that allows a broadcaster to manage album art, meta data and enhanced advertising on its various broadcasts, and NextRadio®, a smartphone application that marries over-the-air FM radio broadcasts with visual and interactive features, as an industry solution to enrich the user experience of listening to free over-the-air radio broadcasts on their FM-enabled smartphones and other wireless devices. Recently, we introduced the Dial ReportTM, an online data portal that enables advertisers and other interested parties to access rich data about the usage and consumption of radio and the behavior of radio listeners.
On August 9, 2013, NextRadio LLC, a wholly-owned subsidiary of Emmis, entered into an agreement with Sprint whereby Sprint agreed to pre-load the Company's NextRadio smartphone application on a minimum of 30 million FM-enabled wireless devices on the Sprint wireless network over a three-year period. In return, NextRadio LLC agreed to serve as a conduit for the radio industry to pay Sprint $15 million per year in equal quarterly installments over the three year term and to share with Sprint certain revenue generated by the NextRadio application. NextRadio LLC collected money from the radio industry and forwarded it to Sprint. Emmis has not guaranteed NextRadio LLC's performance under this agreement and Sprint does not have recourse to any Emmis related entity other than NextRadio LLC. Additionally, the agreement does not limit the ability of NextRadio LLC to place the NextRadio application on FM-enabled devices on other wireless networks. Through August 31, 2017, the NextRadio application had not generated a material amount of revenue.
Since the inception of NextRadio LLC's agreement with Sprint through December 7, 2016, NextRadio LLC had remitted to Sprint approximately $33.2 million. Effective December 8, 2016, NextRadio LLC and Sprint entered into an amendment of their original agreement. The amendment called for NextRadio LLC to make installment payments totaling $6.0 million through March 15, 2017, which have been paid. In exchange, Sprint agreed to forgive the remaining $5.8 million that it was due under the original agreement, and in return receive a higher share of certain revenue generated by the NextRadio application. NextRadio LLC received a loan of $4.0 million for the sole purpose of fulfilling the payment obligations to Sprint under the amendment. The loan will be repaid out of proceeds from sales of enhanced advertising through the NextRadio application. During the six months ended August 31, 2017, NextRadio LLC received $0.65 million under the loan, which was promptly remitted to Sprint and included in station operating expenses in the accompanying condensed consolidated statement of operations. In addition, during the six months ended August 31, 2017, Emmis funded $0.3 million of the final payment to Sprint. This amount is also included in station operating expenses in the accompanying condensed consolidated statement of operations.
On July 27, 2015, NextRadio LLC entered into an agreement with AT&T whereby AT&T agreed to include FM chip activation in its Android device specifications to wireless device manufacturers. In exchange, AT&T will receive a share of certain revenue generated by the NextRadio application. This agreement was subsequently assigned to TagStation LLC (the parent entity of NextRadio LLC and owner of the TagStation and NextRadio applications). In August 2015, T-Mobile expressed its intent to include FM chip activation in its device specifications. On September 9, 2016, TagStation LLC entered into an agreement with T-Mobile whereby T-Mobile agreed to include FM chip activation in its Android device specifications to wireless device manufacturers. In exchange, T-Mobile will receive a share of certain revenue generated by the NextRadio application. TagStation LLC has been working directly with numerous device manufacturers to accelerate the availability of NextRadio to consumers. BLU Products, an American mobile phone manufacturer, has chosen to make NextRadio the native FM tuner on its Android smartphones. Alcatel and LG entered into similar arrangements for NextRadio. The Samsung S7 and

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S8 family of smartphones are FM-enabled and NextRadio-compatible across all major U.S. wireless networks. TagStation LLC and the radio industry continue to work with other leading United States wireless network providers, device manufacturers, regulators and legislators to cause FM tuners to be enabled in all smartphones. In addition, NextRadio recently incorporated streaming capabilities into its application so listeners can enjoy NextRadio regardless of whether or not the FM chip in their phone has been enabled.
Emmis granted the U.S. radio industry (as defined in the funding agreements) a call option on substantially all of the assets used in the NextRadio and TagStation businesses in the United States. The call option may be exercised in August 2019 by paying Emmis a purchase price equal to the greater of (i) the appraised fair market value of the NextRadio and TagStation businesses, or (ii) two times Emmis' cumulative investments in the development of the businesses through August 2015. If the call option is exercised, the businesses will continue to be subject to the operating limitations applicable today, and no radio operator will be permitted to own more than 30% of the NextRadio and TagStation businesses.
Along with the rest of the radio industry, the majority of our stations have deployed HD Radio®. HD Radio offers listeners advantages over standard analog broadcasts, including improved sound quality and additional digital channels. In addition to offering secondary channels, the HD Radio spectrum allows broadcasters to transmit other forms of data. We are participating in a joint venture with other broadcasters to provide the bandwidth that a third party uses to transmit location-based data to hand-held and in-car navigation devices. The number of radio receivers incorporating HD Radio has increased in the past year, particularly in new automobiles. It is unclear what impact HD Radio will have on the markets in which we operate.
The Company has also aggressively worked to harness the power of broadband and mobile media distribution in the development of emerging business opportunities by developing highly interactive websites with content that engages our listeners, deploying mobile applications and streaming our content, harnessing the power of digital video on our websites and YouTube channels, and delivering real-time traffic to navigation devices.
The results of our radio operations are heavily dependent on the results of our stations in the New York market. Following the sale of KPWR-FM in Los Angeles in August 2017, we expect our radio operations in New York to account for approximately 45% of our radio net revenues. Our acquisition of WBLS-FM and WLIB-AM in New York in fiscal 2015 enhanced our ability to adapt to competitive environment shifts in that market, but some of our competitors that operate larger station clusters are able to leverage their market share to extract a greater percentage of available advertising revenue through packaging a variety of advertising inventory at discounted unit rates. Market revenues in New York as measured by Miller Kaplan Arase LLP ("Miller Kaplan"), an independent public accounting firm used by the radio industry to compile revenue information, were up 1.7% for the six months ended August 31, 2017, as compared to the same period of the prior year. During this period, revenues for our New York cluster were down 1.8%. Our New York operations were negatively impacted by intensifying competition for transactional business in the local market. We have made changes in our local sales organization in New York to derive more local, direct business and reduce our reliance on transactional, agency business.
As part of our business strategy, we continually evaluate potential acquisitions of radio stations and other businesses that we believe hold promise for long-term appreciation in value and leverage our strengths. However, Emmis' 2014 Credit Agreement substantially limits our ability to make acquisitions. We also regularly review our portfolio of assets and may opportunistically dispose of assets when we believe it is appropriate to do so. In that respect, on August 19, 2016, we announced that we were exploring strategic alternatives for our publishing division (except Indianapolis Monthly), our radio stations in Terre Haute, Indiana, and WLIB-AM in New York. We completed our sale of Texas Monthly on November 1, 2016, our sale of radio stations in Terre Haute, Indiana on January 30, 2017, and the sale of the remainder of our publishing division (except Indianapolis Monthly) on February 28, 2017. On May 8, 2017, we entered into an agreement to sell our radio station in Los Angeles and completed that sale on August 1, 2017. We continue to explore our options with WLIB-AM in New York.

CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that encompass significant judgments and uncertainties, and potentially lead to materially different results under different assumptions and conditions. We believe that our critical accounting policies are those described below.

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Revenue Recognition
Broadcasting revenue is recognized as advertisements are aired. Publication revenue is recognized in the month of delivery of the publication. Both broadcasting revenue and publication revenue recognition is subject to meeting certain conditions such as persuasive evidence that an arrangement exists and collection is reasonably assured. These criteria are generally met at the time the advertisement is aired for broadcasting revenue and upon delivery of the publication for publication revenue. Advertising revenues presented in the financial statements are reflected on a net basis, after the deduction of advertising agency fees, usually at a rate of 15% of gross revenues. LMA fee revenue is recognized on a straight-line basis over the term of the LMA.
Digonex provides a dynamic pricing service to online retailers, attractions, live event producers and other customers. Revenue is recognized as recommended prices are delivered to customers. In some cases, this is upon initial delivery of prices, such as for implementations, or over the period of the services agreement for fee-based pricing. Revenue pursuant to some service agreements is not earned until tickets or merchandise are sold and, therefore, revenue is recognized as tickets are sold for the related events or as merchandise is sold.
FCC Licenses and Goodwill
We have made acquisitions in the past for which a significant amount of the purchase price was allocated to FCC licenses and goodwill assets. As of August 31, 2017, we have recorded approximately $200.3 million in goodwill and FCC licenses, which represents approximately 72% of our total assets.
In the case of our radio stations, we would not be able to operate the properties without the related FCC license for each property. FCC licenses are renewed every eight years; consequently, we continually monitor our stations’ compliance with the various regulatory requirements. Historically, all of our FCC licenses have been renewed at the end of their respective periods, and we expect that all FCC licenses will continue to be renewed in the future. We consider our FCC licenses to be indefinite-lived intangibles.
We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment at least annually or more frequently if events or circumstances indicate that an asset may be impaired. When evaluating our radio broadcasting licenses for impairment, the testing is performed at the unit of accounting level as determined by Accounting Standards Codification (“ASC”) Topic 350-30-35. In our case, radio stations in a geographic market cluster are considered a single unit of accounting, provided that they are not being operated under an LMA by another broadcaster. Major assumptions involved in the valuation of our FCC licenses include market revenue, market revenue growth rates, unit of accounting audience share, unit of accounting revenue share and discount rate. Each of these assumptions may change in the future based upon changes in general economic conditions, audience behavior, consummated transactions, and numerous other variables that may be beyond our control. A change in one or more of our major assumptions could result in an impairment charge related to our FCC licenses.
We complete our annual impairment tests as of December 1 of each year and perform additional interim impairment testing whenever triggering events suggest such testing is warranted.
Valuation of Indefinite-lived Broadcasting Licenses
Fair value of our FCC licenses is estimated to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine the fair value of our FCC licenses, the Company uses an income valuation method when it performs its impairment tests. Under this method, the Company projects cash flows that would be generated by each of its units of accounting assuming the unit of accounting was commencing operations in its respective market at the beginning of the valuation period. This cash flow stream is discounted to arrive at a value for the FCC license. The Company assumes the competitive situation that exists in each market remains unchanged, with the exception that its unit of accounting commenced operations at the beginning of the valuation period. In doing so, the Company extracts the value of going concern and any other assets acquired, and strictly values the FCC license. Major assumptions involved in this analysis include market revenue, market revenue growth rates, unit of accounting audience share, unit of accounting revenue share and discount rate. Each of these assumptions may change in the future based upon changes in general economic conditions, audience behavior, consummated transactions, and numerous other variables that may be beyond our control. The projections incorporated into our license valuations take current economic conditions into consideration.

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Valuation of Goodwill
ASC Topic 350-20-35 requires the Company to test goodwill for impairment at least annually. The Company conducts its impairment test on December 1 of each fiscal year, unless indications of impairment exist during an interim period. When assessing its goodwill for impairment, the Company generally uses an enterprise valuation approach to determine the fair value of each of the Company’s reporting units, with radio stations grouped by market. Management determines enterprise value for each of its reporting units by multiplying the two-year average station operating income generated by each reporting unit (current year based on actual results and the next year based on budgeted results) by an estimated market multiple. The Company uses a blended station operating income trading multiple of publicly traded radio operators as a benchmark for the multiple it applies to its radio reporting units. Management believes this methodology for valuing radio properties is a common approach and believes that the multiples used in the valuation are reasonable given our peer comparisons and recent market transactions. To corroborate the fair values determined using the market approach described above, management also uses an income approach, which is a discounted cash flow method to determine the fair value of the reporting unit. If the carrying value of a reporting unit's goodwill exceeds its fair value, the Company recognizes an impairment charge equal to the difference in the statement of operations.
Deferred Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequence of events that have been recognized in the Company’s financial statements or income tax returns. Income taxes are recognized during the year in which the underlying transactions are reflected in the consolidated statements of operations. Deferred taxes are provided for temporary differences between amounts of assets and liabilities as recorded for financial reporting purposes and amounts recorded for income tax purposes. After determining the total amount of deferred tax assets, the Company determines whether it is more likely than not that some portion of the deferred tax assets will not be realized. If the Company determines that a deferred tax asset is not likely to be realized, a valuation allowance will be established against that asset to record it at its expected realizable value.
Insurance Claims and Loss Reserves
The Company is self-insured for most healthcare claims, subject to stop-loss limits. Claims incurred but not reported are recorded based on historical experience and industry trends, and accruals are adjusted when warranted by changes in facts and circumstances. The Company had $0.8 million and $0.5 million for employee healthcare claims as of February 28, 2017 and August 31, 2017, respectively. The Company also maintains large deductible programs (ranging from $10 thousand to $2 million per occurrence) for general liability, property, director and officer liability, crime, fiduciary liability, workers’ compensation, employment liability, automotive liability and media liability claims.


Results of Operations for the Three-Month and Six-Month Periods Ended August 31, 2017, Compared to August 31, 2016
Net revenues:
 
For the Three Months Ended August 31,
 
 
 
 
 
For the Six Months Ended August 31,
 
 
 
 
 
2016
 
2017
 
$ Change
 
% Change
 
2016
 
2017