EMMIS CORPORATION 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 obtain additional capital or to service our outstanding debt;
• competition from new or different media and technologies;
• 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;
• inability to grow through suitable acquisitions or to consummate
dispositions;
• new or changing technologies, including those that provide additional
competition for our businesses;
• new or changing regulations of the
other governmental agencies;
• war, terrorist acts or political instability; and
• other factors mentioned in 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, 2019 . 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 one-half 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 weekly
for markets measured by the Portable People Meter ™, which includes all of our
radio stations. 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.
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The following table summarizes the sources of our revenues for the three and nine months endedNovember 30, 2019 and 2018. The category "Nontraditional" 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 toDigonex business, network revenues and barter. We sold our four radio stations inSt. Louis onApril 30, 2018 . TheSt. Louis radio stations were being operated pursuant to local marketing agreements fromMarch 1, 2018 through their sale. The Company received$0.7 million of fees related to this arrangement which are included in "LMA Fees" below. The table below excludes the results of our stations inAustin , as well asWQHT-FM andWBLS-FM inNew York , which have been classified as discontinued operations. See Note 1 to the accompanying condensed consolidated financial statements for more discussion of our discontinued operations. Three Months Ended November 30, Nine Months Ended November 30, 2018 % of Total 2019 % of Total 2018 % of Total 2019 % of Total (Dollars in thousands) Net revenues: Local$ 4,368 40.5 %$ 4,242 39.5 %$ 12,175 39.4 %$ 11,540 39.4 % National 549 5.1 % 828 7.7 % 1,632 5.3 % 2,053 7.0 % Political 440 4.1 % 159 1.5 % 858 2.8 % 183 0.6 % Publication Sales 93 0.9 % 91 0.8 % 288 0.9 % 280 1.0 % Nontraditional 1,234 11.4 % 1,037 9.7 % 3,249 10.5 % 2,390 8.2 % LMA Fees 2,582 23.9 % 2,582 24.0 % 8,467 27.4 % 7,748 26.5 % Digital 330 3.1 % 675 6.3 % 745 2.4 % 1,915 6.5 % Other 1,201 11.0 % 1,123 10.5 % 3,469 11.3 % 3,157 10.8 % Total net revenues$ 10,797 $ 10,737 $ 30,883 $ 29,266 As discussed earlier, we derive approximately one-half of our net revenues from advertising sales, including digital advertising sales. In the nine months endedNovember 30, 2019 , local sales, excluding political revenues, represented approximately 82% 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 two-thirds of our radio division's total advertising net revenues for the nine months endedNovember 30, 2018 and 2019. Home and home-related products was the largest category for our radio division for the nine months endedNovember 30, 2018 and 2019, representing approximately 10% and 12% of our radio advertising net revenues, respectively. A significant portion of our expenses varies in connection with changes in revenue. These variable expenses primarily relate to costs in our sales department, such as salaries, commissions and bad debt. Our costs that do not vary as much in relation to revenue are mostly in our programming and general and administrative departments, such as talent costs, syndicated programming fees, utilities, office expenses and salaries. Lastly, our costs that are highly discretionary are costs in our marketing and promotions department, which we primarily incur to maintain and/or increase our audience and market share.
SIGNIFICANT TRANSACTIONS
OnOctober 1, 2019 , a subsidiary of Emmis sold its 50.1% ownership interest in theAustin Partnership to our minority partner,Sinclair Telecable, Inc. , for$39.3 million . Emmis recognized a gain on sale of$37.3 million . Gross cash proceeds, inclusive of purchase price adjustments, were approximately$40.7 million . Transaction-related expenses were approximately$0.7 million .$9.9 million of these proceeds were used to repay debt outstanding, with the balance held for general corporate purposes, including capital expenditures, working capital, and potential acquisitions and investments.The Austin Partnership has historically been included in our Radio segment. The following table summarizes the operating results of theAustin Partnership for all periods presented. In accordance with ASC 205-20-45-6, Emmis has allocated interest on the debt required to be repaid as a result of this disposal transaction to the results of theAustin Partnership . For the Three Months For the Nine Months Ended November 30, Ended November 30, 2018 2019 2018 2019 Net revenues$ 7,991 $ 2,660 $ 24,456 $ 19,539 Station operating expenses, excluding depreciation and amortization 5,106 2,012 15,848 13,428 Gain on sale of assets, net of disposition costs - 37,292 - 37,292 Depreciation and amortization 115 - 386 120 Interest expense 145 32 423 291 Income before taxes$ 2,625 $ 37,908 $ 7,799 $ 42,992 - 29 -
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OnNovember 25, 2019 , Emmis contributed the assets and liabilities ofWBLS-FM andWQHT-FM to MediaCo Holding Inc., anIndiana corporation ("MediaCo") and in return, Emmis received$91.5 million in cash, a convertible promissory note payable to Emmis in an amount of$5.0 million and 1,666,667 shares of MediaCo Class A common stock (the "MediaCo Transaction"). These shares constitute all of the issued and outstanding MediaCo Class A common stock and represent in the aggregate an approximately 23.72% equity ownership interest and 3.02% of the outstanding voting interests of MediaCo immediately following the transaction. We expect that, onJanuary 17, 2020 , we will make a taxable pro rata distribution of 0.1265 shares of MediaCo Class A common stock for each outstanding share of Emmis' Class A and Class B common stock at the close of business ofJanuary 3, 2020 . The$5.0 million convertible promissory note carries interest at a base rate equal to the interest on MediaCo's senior credit facility (London Interbank Offered Rate with a 2.0% floor plus 7.5%), or if no senior credit facility is outstanding, 6.00%, plus an additional 1.00% on any payment of interest in kind and, without regard to whether MediaCo pays such interest in kind, an additional increase of 1.00% following the second anniversary of the date of issuance and additional increases of 1.00% following each successive anniversary thereafter. The note is convertible, in whole or in part, into MediaCo Class A common stock at the option of Emmis beginning six months after issuance at a strike price equal to the thirty day volume weighted average price of the MediaCo Class A common stock on the date of conversion. The note matures onNovember 25, 2024 . In addition, MediaCo's net working capital as of the closing date must be reimbursed to Emmis within nine months of the MediaCo Transaction. Emmis has recorded an$8.5 million receivable from MediaCo related to this net working capital.SG Broadcasting LLC , an affiliate ofStandard General L.P , aNew York -based investment firm that manages event-driven opportunity funds, purchased all of MediaCo's Class B common stock, representing a 76.28% equity ownership interest. The common stock of MediaCo acquired by Standard General will be entitled to ten votes per share and the common stock acquired by Emmis and distributed to Emmis' shareholders will be entitled to one vote per share. Emmis will continue to provide management services to the Stations under a Management Agreement, subject to the direction of the MediaCo board of directors which initially consists of four directors appointed by Standard General and three directors appointed by Emmis. Emmis will receive an annual management fee of$1.25 million , plus reimbursement of certain expenses directly related to the operation of MediaCo's business. The shares held by Emmis atNovember 30, 2019 , which will be distributed to Emmis' shareholders inJanuary 2020 , constitute an equity investment as discussed in Note 12. Gross cash proceeds at closing, inclusive of purchase price adjustments, were$91.8 million ,$3.5 million of which was used by Emmis to repay Mortgage debt outstanding. Transaction-related expenses were approximately$2.2 million . The remaining cash will be used for general corporate purposes, including capital expenditures, working capital, and potential acquisitions and investments. Upon the closing of the transaction, Emmis deconsolidated these stations, recorded the retained equity investment at fair value, and recognized a gain on sale of$35.6 million . The Stations have historically been included in our Radio segment. The following table summarizes the operating results of the Stations for all periods presented. In accordance with ASC 205-20-45-6, Emmis has allocated interest on the debt required to be repaid as a result of this disposal transaction to the results of the Stations. For the Three Months For the Nine Months Ended November 30, Ended November 30, 2018 2019 2018 2019 Net revenues$ 11,535 $ 9,795 $ 35,046 $ 35,947 Station operating expenses, excluding depreciation and amortization 7,809 7,678 24,711 25,844 Gain on sale of assets, net of disposition costs - 35,616 - 35,616 Depreciation and amortization 346 - 930 417 Interest expense 94 47 273 214 Income before taxes$ 3,286 $ 37,686 $ 9,132 $ 45,088
KNOWN TRENDS AND UNCERTAINTIES
TheU.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. 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 traffic and other 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. - 30 -
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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, streaming our content across a number of platforms, and harnessing the power of digital video on our websites. The results of our continuing radio operations are heavily dependent on the results of our stations in theIndianapolis market, which account for approximately 60% of our continuing radio net revenues. Market revenues inIndianapolis as measured byMiller Kaplan Arase LLP ("Miller Kaplan"), an independent public accounting firm used by the radio industry to compile revenue information, were down 3.4% for the nine months endedNovember 30, 2019 , as compared to the same period of the prior year. During this period, revenues for ourIndianapolis cluster were up 0.4%. As part of our business strategy, we continually evaluate potential acquisitions of businesses that we believe hold promise for long-term appreciation in value and leverage our strengths. 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, over the past three fiscal years, we have sold radio stations inTerre Haute ,Los Angeles andSt. Louis , our controlling partnership interest inAustin , andWQHT-FM andWBLS-FM inNew York . We have also sold all of our publishing assets, except Indianapolis Monthly. We continue to explore the sale ofWLIB-AM inNew York and other assets, including land inIndianapolis . With the closing of the sale of ourAustin Partnership andWQHT-FM andWBLS-FM , we have begun actively exploring additional businesses to acquire, with the goal of investing the proceeds from these sales into businesses with better growth profiles than we have experienced in recent years in our radio and magazine businesses.
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.
Revenue Recognition
The Company generates revenues from the sale of services and products including, but not limited to: (i) on-air commercial broadcast time, (ii) magazine-related display advertising, (iii) magazine circulation and newsstand revenues, (iv) non-traditional revenues including event-related revenues and event sponsorship revenues, (v) revenues generated from LMAs and (vi) digital advertising. Payments received from advertisers before the performance obligation is satisfied are recorded as deferred revenue. Substantially all deferred revenue is recognized within twelve months of the payment date. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Advertising revenues presented in the financial statements are reflected on a net basis, after the deduction of advertising agency fees, usually at a rate of 15% of gross revenues.Digonex provides a dynamic pricing service to 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.
We have made acquisitions in the past for which a significant amount of the
purchase price was allocated to
In the case of our radio stations, we would not be able to operate the properties without the relatedFCC 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 ourFCC licenses have been renewed at the end of their respective periods, and we expect that allFCC licenses will continue to be renewed in the future. We consider ourFCC licenses to be indefinite-lived intangibles. 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 ourFCC 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 ourFCC licenses. - 31 -
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We complete our annual impairment tests as ofDecember 1 of each year and perform additional interim impairment testing whenever triggering events suggest such testing is warranted. Due to market revenue declines in theIndianapolis radio market and a change in our unit of accounting forWLIB-AM inNew York as a result of the pending sale ofWQHT-FM andWBLS-FM , we conducted an interim impairment review during the three months endedAugust 31, 2019 . As a result of that interim impairment review, we determined that the carrying value of ourFCC licenses for ourIndianapolis radio stations andWLIB-AM inNew York exceeded their respective fair values by$4.0 million and recorded this amount as an impairment charge during the three months endedAugust 31, 2019 .
Valuation of Indefinite-lived Broadcasting Licenses
Fair value of ourFCC 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 ourFCC 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 theFCC 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 theFCC 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.
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.
Results of Operations for the Three-Month and Nine-Month Periods Ended
Net revenues:
For the Three Months For the Nine Months
Ended November 30, Ended November 30,
2018 2019 $ Change % Change 2018 2019 $ Change % Change
(As reported, amounts in thousands)
Net revenues:
Radio $ 9,202 $ 9,215 $ 13 0.1 % $ 26,341 $ 25,321 $ (1,020 ) (3.9 )%
Publishing 1,177 1,187 10 0.8 % 3,347 3,083 (264 ) (7.9 )%
All Other 418 335 (83 ) (19.9 )% 1,195 862 (333 ) (27.9 )%
Total net revenues $ 10,797 $ 10,737 $ (60 ) (0.6 )% $ 30,883 $ 29,266 $ (1,617 ) (5.2 )%
We entered into LMAs with the buyers of our St. Louis radio stations in the
prior year. While we did not recognize any advertising revenues during the
period in which the LMAs were in effect through the eventual sale of the
stations in April 2018 , we did recognize approximately $0.7 million of LMA
revenue. Absent this LMA revenue in the prior year, net radio revenues would
have been down approximately $0.3 million or 1.2% for the nine months ended
November 30, 2019 . The decrease in radio revenues for the nine months ended
November 30, 2019 is primarily due to declining revenues at WLIB-AM in New York .
Our radio stations in the Indianapolis radio market account for approximately
60% of our continuing radio net revenues, and we outperformed the Indianapolis
radio market in the three and nine months ended November 30, 2019 . Ratings at
our Indianapolis radio stations have been strong in recent months, which has
enabled us to grow our market share.
We are able to monitor the performance of our stations against the aggregate
performance of the markets in which we operate based on reports for the period
prepared by Miller Kaplan. Miller Kaplan reports are generally prepared on a
gross revenues basis and exclude revenues from barter and syndication
arrangements. Miller Kaplan reported gross revenues for the Indianapolis market
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decreased 3.4% for the nine-month period endedNovember 30, 2019 , as compared to the same period of the prior year. Our gross revenues reported to Miller Kaplan for ourIndianapolis market was up 0.4% for the nine-month period endedNovember 30, 2019 , as compared to the same period of the prior year.
Publishing net revenues were up 0.8% and down 7.9% in the three-month and
nine-month periods ended
All Other represents the results ofDigonex and TagStation. During the quarter endedFebruary 28, 2019 , the Company ceased investing in TagStation and dramatically reduced its operations. While our dynamic pricing company,Digonex , is doubling its revenues year-over-year, net revenues for TagStation decreased$0.2 million and$0.8 million , respectively, for the three-month and nine-month periods endedNovember 30, 2019 as compared to the same periods of the prior year and are expected to be minimal in future periods.
Station operating expenses excluding depreciation and amortization expense:
For the Three Months For the Nine Months
Ended November 30, Ended November 30,
2018 2019 $ Change % Change 2018 2019 $ Change % Change
(As reported, amounts in thousands)
Station operating
expenses excluding
depreciation and
amortization expense:
Radio $ 6,157 $ 5,941 $ (216 ) (3.5 )% $ 18,661 $ 18,258 $ (403 ) (2.2 )%
Publishing 1,176 1,502 326 27.7 % 3,384 3,582 198 5.9 %
All Other 3,476 756 (2,720 ) (78.3 )% 8,449 1,827 (6,622 ) (78.4 )%
Total station operating
expenses excluding
depreciation and
amortization expense $ 10,809 $ 8,199 $ (2,610 ) (24.1 )% $ 30,494 $ 23,667 $ (6,827 ) (22.4 )%
The decrease in station operating expenses excluding depreciation and
amortization expense for our radio division in the nine months ended November
30, 2019 , is due to expenses incurred in the prior year associated with our St.
Louis stations. Our St. Louis stations were sold in April 2018 . Excluding these
expenses in the prior year, radio operating expenses excluding depreciation and
amortization expense would have been flat in the nine-month period ended
November 30, 2019 . The reduction in radio expenses in the third quarter resulted
from the reclassification of transaction fees associated with the Austin
Partnership Transaction and the MediaCo Transaction to the gain on sale shown in
discontinued operations, but was partly offset by new expenses associated with
the launch of our branded podcast company, Sound That Brands.
Our publishing segment experienced abnormally high healthcare costs in the third
quarter, leading to the increase in expense for the three and nine-month periods
ended November 30, 2019 .
All Other represents the results of Digonex and TagStation. During the quarter
ended February 28, 2019 , the Company ceased investing in TagStation and
dramatically reduced its operations. Station operating expenses excluding
depreciation and amortization expense for TagStation decreased $2.9 million and
$6.8 million for the three-month and nine-month periods ended November 30, 2019 ,
respectively, as compared to the same period of the prior year and are expected
to be minimal in future periods.
Corporate expenses excluding depreciation and amortization expense:
For the Three Months For the Nine Months
Ended November 30, Ended November 30,
2018 2019 $ Change % Change 2018 2019 $ Change % Change
(As reported, amounts in thousands)
Corporate expenses
excluding depreciation
and amortization expense $ 2,297 $ 10,437 $ 8,140 354.4 % $ 7,607 $ 15,211 $ 7,604 100.0 %
During the three-month period ended November 30, 2019 , the Compensation
Committee of the Board of Directors approved discretionary bonuses to executive
officers totaling $6.5 million , inclusive of payroll taxes. In addition, the
Compensation Committee approved higher director fees for the current fiscal
year, totaling $1.6 million (an increase of approximately $1.2 million ), and a
pro rata portion of this increase was accrued through November 30, 2019 .
Additionally, a bonus for all remaining corporate employees was approved by
management, resulting in an additional $0.3 million of expense. We also incurred
higher professional fees in the three months ended November 30, 2019 , related to
various corporate projects.
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Impairment loss:
For the Three Months For the Nine Months
Ended November 30, Ended November 30,
2018 2019 $ Change % Change 2018 2019 $ Change % Change
(As reported, amounts in thousands)
Impairment loss $ 304 $ - $ (304 ) N/A
During the three months endedAugust 31, 2019 , the Company performed an interim impairment analysis of itsFCC Licenses. The Company recorded an impairment loss of$4.0 million as a result of the interim impairment analysis, which is reflected in the results of the nine months endedNovember 30, 2019 . During the nine months endedNovember 30, 2018 , the Company recorded an impairment loss of$0.5 million .$0.2 million was due to the carrying value of two radio transmission towers inSt. Louis classified as held for sale exceeding the Company's estimate of their fair value less cost to sell.$0.3 million was due to the Company's decision to dramatically reduce the scale of operations inTagStation, LLC andNextRadio, LLC resulting in impairment of property and equipment of these businesses.
Depreciation and amortization:
For the Three Months For the Nine Months
Ended November 30, Ended November 30,
2018 2019 $ Change % Change 2018 2019 $ Change % Change
(As reported, amounts in thousands)
Depreciation and
amortization:
Radio $ 129 $ 87 $ (42 ) (32.6 )% $ 393 $ 288 $ (105 ) (26.7 )%
Publishing 4 3 (1 ) (25.0 )% 14 10 (4 ) (28.6 )%
All Other 212 173 (39 ) (18.4 )% 661 568 (93 ) (14.1 )%
Total depreciation and
amortization $ 345 $ 263 $ (82 ) (23.8 )% $ 1,068 $ 866 $ (202 ) (18.9 )%
The decrease in depreciation and amortization expense for the three-month and
nine-month periods ended
Gain on sale of assets, net of disposition costs:
For the Three Months For the Nine Months
Ended November 30, Ended November 30,
2018 2019 $ Change % Change 2018 2019 $ Change % Change
(As reported, amounts in thousands)
Gain on sale of assets,
net of disposition
costs:
Radio $ 235 $ - $ (235 ) N/A $ (32,148 ) $ - $ 32,148 N/A
Publishing - - - N/A 331 - (331 ) N/A
All Other - - - N/A - 31 31 N/A
Total gain on sale of
assets, net of
disposition costs $ 235 $ - $ (235 ) N/A $ (31,817 ) $ 31 $ 31,848 N/A
During the nine-month period ended November 30, 2018 , the Company sold its four
radio stations in St. Louis for $60.0 million in cash and recognized a $32.4
million gain on the sale of these stations. During the three-month period ended
November 30, 2018 , the Company revised its cease-use reserve related to its
former St. Louis office facility by $0.2 million . See Note 10 of the
accompanying condensed consolidated financial statements for more discussion.
The loss on sale of publishing assets during the nine-month period ended
November 30, 2018 relates to the settlement of our dispute with Hour Media and
the related legal fees incurred. The gains related to the Austin Partnership
Transaction and MediaCo transaction are recognized in discontinued operations
for the nine-month period ended November 30, 2019 .
Gain on legal matter
For the Three Months For the Nine Months
Ended November 30, Ended November 30,
2018 2019 $ Change % Change 2018 2019 $ Change % Change
(As reported, amounts in thousands)
Gain on legal matter $ - $ (2,153 ) $ (2,153 ) N/A $ - $ (2,153 ) $ (2,153 ) N/A
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As discussed in Note 8, during the three months ended
Operating (loss) income:
For the Three Months For the Nine Months
Ended November 30, Ended November 30,
2018 2019 $ Change % Change 2018 2019 $ Change % Change
(As reported, amounts in thousands)
Operating (loss) income:
Radio $ 2,681 $ 3,187 $ 506 18.9 % $ 39,230 $ 2,753 $ (36,477 ) (93.0 )%
Publishing (3 ) (318 ) (315 ) N/M (382 ) (509 ) (127 ) 33.2 %
All Other (5,871 ) (8,878 ) (3,007 )
51.2 % (15,826 ) (14,622 ) 1,204 (7.6 )%
Total operating (loss) income:
88.2 % $ 23,022 $ (12,378 ) $ (35,400 ) (153.8 )%
Radio operating income decreased in the nine-month period ended November 30,
2019 due to the sale of our radio stations in St. Louis in April 2018 and the
impairment charge in the three-month period ended August, 31, 2019.
Publishing operating loss increased in both the three and nine-month periods
ended
All other operating loss, which includes corporate expenses, increased in the three-month period endedNovember 30, 2019 due to the discretionary bonuses paid to executive officers and corporate employees, and increased director fees described above. This was partly offset by a legal matter settled in the third quarter which resulted in a gain of$2.2 million . Additionally, all other also includes the results of NextRadio and TagStation. We ceased operation of these money-losing businesses in the quarter endedNovember 30, 2018 . During the three and nine months endedNovember 30, 2018 , these entities had operating losses of$3.0 million and$6.7 million , respectively, which, along with the gain on legal matter, offsets the increase in corporate expenses in the nine-month period endedNovember 30, 2019 . Interest expense: For the Three Months For the Nine Months Ended November 30, Ended November 30, 2018 2019 $ Change % Change 2018 2019 $ Change % Change (As reported, amounts in thousands) Interest expense$ 1,307 $ 869 $ (438 ) (33.5 )%$ 5,206 $ 3,040 $ (2,166 ) (41.6 )% Interest expense decreased in the three-month and nine-month periods endedNovember 30, 2019 mostly due to lower debt outstanding as compared to the same period of the prior year. OnApril 30, 2018 , the Company sold radio stations inSt. Louis and repaid approximately$41.5 million of term loans. During the three months endedNovember 30, 2019 the Company repaid approximately$10 million of Mortgage indebtedness and$3.3 million of Term Loans. The weighted-average interest rate of all debt outstanding was 9.9% and 4.3% atNovember 30, 2018 and 2019, respectively. Loss on debt extinguishment: For the Three Months For the Nine Months Ended November 30, Ended November 30, 2018 2019 $ Change % Change 2018 2019 $ Change % Change (As reported, amounts in thousands) Loss on debt extinguishment $ -$ 510 $ 510 N/A$ 771 $ 510 $ (261 ) (33.9 )% In connection with required term loan repayments associated with the sale of our radio stations inSt. Louis in the prior year, the Company wrote-off a pro rata portion of the unamortized debt discount outstanding attributable to the retired term loans. During the three months endedNovember 30, 2019 , pursuant to the terms of the Mortgage, Emmis made prepayments of$10 million , utilizing proceeds from the Austin Partnership Transaction and the MediaCo Transaction, recognizing a loss on extinguishment of debt of$0.1 million . The Company also terminated its Revolving Credit Facility, resulting in a loss on extinguishment of debt of$0.4 million . Additionally, the Barrett Term Loan was fully paid off, resulting in a nominal loss on extinguishment of debt. - 35 -
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Provision for income taxes:
For the Three Months For the Nine Months
Ended November 30, Ended November 30,
2018 2019 $ Change % Change 2018 2019 $ Change % Change
(As reported, amounts in thousands)
Provision for income taxes $ (2,747 ) $ (950 ) $ 1,797 (65.4 )% $ 6,213 $ (1,533 ) $ (7,746 ) (124.7 )%
The Company estimates its effective tax rate for the year, which incorporates
the reversal of a portion of the valuation allowance, and applies that rate to
pre-tax income for the applicable period. This methodology, along with the
effect of permanent differences, such as nondeductible meals and entertainment
expenses and nondeductible compensation expense, is responsible for the
difference between the effective rate and statutory rate. An allocation of this
provision or benefit is applied to continuing operations and discontinued
operations using the with and without methodology.
Discontinued operations, net of tax:
For the Three Months For the Nine Months
Ended November 30, Ended November 30,
2018 2019 $ Change % Change 2018 2019 $ Change % Change
(As reported, amounts in thousands)
Discontinued operations,
net of tax $ 3,262 $ 58,921 $ 55,659 1706.3 %
The results of operations of ourAustin radio stations, as well asWQHT-FM andWBLS-FM inNew York , have been classified as discontinued operations. As both the Austin Partnership Transaction and the MediaCo Transaction closed in the three months endedNovember 30, 2019 the results of discontinued operations include a gain of$37.3 million and$35.6 million relating to the two transactions, respectively. Consolidated net income: For the Three Months For the Nine Months Ended November 30, Ended November 30, 2018 2019 $ Change % Change 2018 2019 $ Change % Change (As
reported, amounts in thousands)
Consolidated net income
Consolidated net income for the nine-month period increased primarily as a result of the gains on sale recognized for the Austin Partnership Transaction and the MediaCo Transaction, offset by the gain on sale of our St. Louis stations in the prior year. Consolidated net income for the three-month period increased mostly due to net income generated by the gains on the current year transactions.
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand and cash provided by operations. Our primary uses of capital during the past few years have been, and are expected to continue to be, capital expenditures, working capital, debt service requirements, repayment of debt and investments in future growth opportunities in new businesses. After the closing of the sale of ourAustin partnership interest andWQHT-FM andWBLS-FM inNew York , we expect to increase the level of investments in new businesses, assuming we are able to identify and execute such new investments. The Company continually projects its anticipated cash needs, which include its operating needs, capital needs, and principal and interest payments on its indebtedness. AtNovember 30, 2019 , we had cash and cash equivalents of$111.3 million and net working capital of$89.5 million . AtFebruary 28, 2019 , we had cash and cash equivalents of$4.3 million and net working capital of$(27.4) million . The increase in net working capital is largely due to the increase in cash as a result of the Austin Partnership Transaction and the MediaCo Transaction.
Operating Activities
Cash provided by operating activities during the nine months endedNovember 30, 2018 was$3.1 million versus$4.5 million of cash used in operating activities for the nine months endedNovember 30, 2019 . The increase in cash used in operating activities is due to working capital changes during the period. - 36 -
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Table of Contents Investing Activities Cash provided by investing activities during the nine months endedNovember 30, 2018 was$60.0 million versus$129.7 million during the nine months endedNovember 30, 2019 . During the nine-month period endedNovember 30, 2018 , we closed on the sale of four radio stations inSt. Louis and received$60.0 million in proceeds. Capital expenditures for the nine-month period endedNovember 30, 2018 , were less than$0.1 million . During the nine-month period endedNovember 30, 2019 , we closed on the Austin Partnership Transaction and the MediaCo Transaction, which generated$40.7 million and$91.8 million of gross cash proceeds, respectively. Capital expenditures for the nine-month period endedNovember 30, 2019 , were less than$0.1 million . We expect capital expenditures related to our continuing operations to be approximately$0.2 million in the current fiscal year, compared to$0.1 million in fiscal 2019. We expect that future requirements for capital expenditures will be limited to capital expenditures incurred during the ordinary course of business. We expect to fund future investing activities with cash on hand and cash generated from operating activities. Financing Activities Cash used in financing activities was$59.2 million and$20.2 million for the nine months endedNovember 30, 2018 and 2019, respectively. During the nine-month period endedNovember 30, 2018 , cash used in financing activities mostly related to net debt repayments of$55.4 million and cash used in discontinued operations of$3.8 million . During the nine-month period endedNovember 30, 2019 , cash used in financing activities mostly related to net debt repayments of$17.6 million , cash used in discontinued operations of$2.2 million and debt-related costs of$0.6 million . As ofNovember 30, 2019 , Emmis had$12.7 million of secured recourse indebtedness under the Mortgage and$52.2 million of non-recourse debt ($42.0 million related to 98.7FM inNew York ,$6.2 million related toDigonex , and$4.0 million related to NextRadio). As ofNovember 30, 2019 , the borrowing rate under our secured recourse indebtedness was 5.5%. The non-recourse debt related to 98.7FM inNew York bears interest at 4.1% per annum, the non-recourse debt related toDigonex bears interest at 5.0% per annum, and the non-recourse debt related to NextRadio bears interest at 2.0% per annum. The debt service requirements of Emmis over the next twelve-month period are expected to be$0.9 million related to our secured indebtedness ($0.2 million of principal repayments and$0.7 million of interest payments) and$9.2 million related to our 98.7FM non-recourse debt ($7.6 million of principal repayments and$1.6 million of interest payments).Digonex non-recourse debt ($6.2 million face amount,$6.1 million carrying amount as ofNovember 30, 2019 ) is due inDecember 2020 and NextRadio non-recourse debt is due inDecember 2021 , but the Company does not anticipate that any Company assets will be used to repay this debt. The Company expects that proceeds from the 98.7FM LMA will be sufficient to pay all debt service related to the 98.7FM non-recourse debt. With respect to the Dignoex debt,Emmis Operating Company , as collateral agent for secured creditors, notifiedDigonex of a default under its notes payable onOctober 1, 2019 , which was not cured by theOctober 6, 2019 deadline. The debt was accelerated onDecember 6, 2019 , andEmmis Operating Company , as collateral agent for the secured creditors, foreclosed onDigonex onDecember 31, 2019 , taking possession of substantially all ofDigonex's assets. OnJanuary 1, 2020 ,Emmis Operating Company conveyed the foreclosed assets to a new legal entity that is expected to ultimately be owned by the holders of theDigonex secured debt pro rata to their share of theDigonex secured debt. This new legal entity will be controlled byEmmis Operating Company and is expected to continue to operate the underlying business ofDigonex , but with a more rational capital structure. The remainingDigonex debt and related accrued interest is expected to be extinguished in connection with a future dissolution ofDignoex Technologies Inc. OnJanuary 8, 2020 ,Emmis Operating Company and Star Financial entered into an amendment to the Mortgage, whereby Emmis placed$8 million into a restricted cash account with Star to serve as additional collateral for the Mortgage, and Star agreed to remove certain operating covenants included in the Mortgage, including the requirement to maintain a fixed charge coverage ratio of at least 1.10:1.00. Additionally,Emmis Indiana Broadcasting, L.P. was removed as a borrower under the Mortgage. The fees incurred in connection with this amendment were immaterial. As part of our business strategy, we continually evaluate potential acquisitions of businesses that we believe hold promise for long-term appreciation in value and leverage our strengths. However, our Credit Agreement substantially limited our ability to make acquisitions and therefore we terminated this agreement during the three-month period endedNovember 30, 2019 . We also regularly review our portfolio of assets and may opportunistically dispose of assets when we believe it is appropriate to do so.
Intangibles
As ofNovember 30, 2019 , approximately 28% of our total assets consisted ofFCC broadcast licenses, the values of which depend significantly upon various factors including, among other things, market revenues, market growth rates and the operational results of our businesses. In the case of our radio stations, we would not be able to operate the properties without the relatedFCC license for each property.FCC licenses are renewed every eight years; consequently, we continually monitor our stations' compliance - 37 -
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with the various regulatory requirements. Historically, all of ourFCC licenses have been renewed at or after the end of their respective periods, and we expect that allFCC licenses will continue to be renewed in the future.
Regulatory, Legal and Other Matters
Emmis is a party to various 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. Emmis filed suit againstIllinois National Insurance Company ("INIC") in 2015 related to INIC's decision to not cover Emmis' defense costs under Emmis' directors and officers insurance policy in a lawsuit related to the Company's preferred stock in which Emmis was the defendant (the "Prior Litigation"). OnMarch 21, 2018 , Emmis was granted summary judgment entitling it to coverage of its defense costs in the Prior Litigation. OnOctober 10, 2018 , Emmis and INIC agreed that Emmis' damages were$3.5 million . OnNovember 7, 2018 , INIC appealed the District Court's summary judgment determination that the insurance policy covers Emmis' defense costs. OnJuly 2, 2019 , theUnited States Court of Appeals for the Seventh Circuit reversed the District Court's decision. OnJuly 16, 2019 , Emmis filed to seek a panel rehearing on the matter. OnAugust 21, 2019 , after considering Emmis' petition for rehearing, theUnited States Court of Appeals for the Seventh Circuit withdrew its opinion issued onJuly 2, 2019 and affirmed the District Court's decision. INIC filed to seek a panel rehearing on the decision, which the Seventh Circuit denied onSeptember 13, 2019 . INIC paid the agreed-upon damages plus accrued interest onOctober 7, 2019 and INIC's right to seek a review of the decision by theSupreme Court of the United States has expired. We recognized a$2.2 million gain related to this matter during the quarter endedNovember 30, 2019 , which is net of$1.4 million of legal fees.
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