10-Q 1 emms10-q2.htm 10-Q EMMS 10-Q2
 
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, 2013
 
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
 
o
 
Accelerated filer
ý
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
 
Smaller reporting company
o
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 3, 2013, was:
37,087,493

  
Shares of Class A Common Stock, $.01 Par Value
4,697,684

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

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



INDEX


Page

 


-2-



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,
 
2012
 
2013
 
2012
 
2013
NET REVENUES
$
52,929

 
$
54,967

 
$
101,897

 
$
105,553

OPERATING EXPENSES:
 
 
 
 
 
 
 
Station operating expenses excluding depreciation and amortization expense of $680, $665, $1,344 and $1,321, respectively
39,778

 
41,938

 
80,350

 
79,650

Corporate expenses excluding depreciation and amortization expense of $489, $548, $950 and $1,068, respectively
4,161

 
5,070

 
9,133

 
9,470

Hungary license litigation and related expenses
210

 
1,043

 
414

 
1,295

Impairment loss on intangible assets

 

 
10,971

 

Depreciation and amortization
1,169

 
1,213

 
2,294

 
2,389

Gain on sale of assets
(6
)
 
(1
)
 
(10,006
)
 
(1
)
Total operating expenses
45,312

 
49,263

 
93,156

 
92,803

OPERATING INCOME
7,617

 
5,704

 
8,741

 
12,750

OTHER EXPENSE:
 
 
 
 

 
 
Interest expense
(6,878
)
 
(1,808
)
 
(12,645
)
 
(3,729
)
Loss on debt extinguishment
(601
)
 

 
(1,085
)
 

Other (expense) income, net
(215
)
 
33

 
(17
)
 
40

Total other expense
(7,694
)
 
(1,775
)
 
(13,747
)
 
(3,689
)
(LOSS) INCOME BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS
(77
)
 
3,929

 
(5,006
)
 
9,061

(BENEFIT) PROVISION FOR INCOME TAXES
(1,509
)
 
4

 
(5,924
)
 
179

INCOME FROM CONTINUING OPERATIONS
1,432

 
3,925

 
918

 
8,882

INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
38,776

 

 
36,417

 

CONSOLIDATED NET INCOME
40,208

 
3,925

 
37,335

 
8,882

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
1,217

 
1,354

 
2,479

 
2,835

NET INCOME ATTRIBUTABLE TO THE COMPANY
38,991

 
2,571

 
34,856

 
6,047

GAIN ON EXTINGUISHMENT OF PREFERRED STOCK

 
76

 

 
325

PREFERRED STOCK DIVIDENDS
(910
)
 

 
(1,806
)
 

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
38,081

 
$
2,647

 
$
33,050

 
$
6,372

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

-3-


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Unaudited)
(In thousands, except per share data)

 
Three Months Ended 
 August 31,
 
Six Months Ended 
 August 31,
 
2012
 
2013
 
2012
 
2013
Amounts attributable to common shareholders for basic earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
(695
)
 
$
2,647

 
$
(3,367
)
 
$
6,372

Discontinued operations
38,776

 

 
36,417

 

Net income attributable to common shareholders
$
38,081

 
$
2,647

 
$
33,050

 
$
6,372

 
 
 
 
 
 
 
 
Amounts attributable to common shareholders for diluted earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
(695
)
 
$
2,571

 
$
(3,367
)
 
$
6,047

Discontinued operations
38,776

 

 
36,417

 

Net income attributable to common shareholders
$
38,081

 
$
2,571

 
$
33,050

 
$
6,047

 
 
 
 
 
 
 
 
Basic net (loss) income per share attributable to common shareholders:
 
 
 
 
 
 
 
Continuing operations
$
(0.02
)
 
$
0.06

 
$
(0.09
)
 
$
0.15

Discontinued operations, net of tax
1.00

 

 
0.94

 

Net income per share attributable to common shareholders
$
0.98

 
$
0.06

 
$
0.85

 
$
0.15

Basic weighted average common shares outstanding
38,859

 
41,451

 
38,819

 
41,313

 
 
 
 
 
 
 
 
Diluted net (loss) income per share attributable to common shareholders:
 
 
 
 
 
 
 
Continuing operations
$
(0.02
)
 
$
0.05

 
$
(0.09
)
 
$
0.13

Discontinued operations, net of tax
1.00

 

 
0.94

 

Net income per share attributable to common shareholders
$
0.98

 
$
0.05

 
$
0.85

 
$
0.13

Diluted weighted average common shares outstanding
38,859

 
46,937

 
38,819

 
46,361

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


-4-



EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
 
Three Months Ended 
 August 31,
 
Six Months Ended 
 August 31,
 
2012
 
2013
 
2012
 
2013
CONSOLIDATED NET INCOME
$
40,208

 
$
3,925

 
$
37,335

 
$
8,882

OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXES:
 
 
 
 
 
 
 
Change in value of derivative instrument and related income tax effects

 
4

 

 
48

Cumulative translation adjustment
(540
)
 
22

 
(311
)
 
(8
)
COMPREHENSIVE INCOME
39,668

 
3,951

 
37,024

 
8,922

LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
1,135

 
1,365

 
2,420

 
2,816

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
38,533

 
$
2,586

 
$
34,604

 
$
6,106


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


-5-


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
 
February 28,
2013
 
August 31,
2013
 
 
(Unaudited)
ASSETS
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
8,735

 
$
6,821

Accounts receivable, net
28,126

 
34,796

Prepaid expenses
7,674

 
8,491

Other current assets
5,411

 
3,803

Current assets — discontinued operations
762

 
465

Total current assets
50,708

 
54,376

PROPERTY AND EQUIPMENT, NET
32,553

 
32,032

INTANGIBLE ASSETS (Note 3):
 
 
 
Indefinite-lived intangibles
150,522

 
150,558

Goodwill
12,639

 
12,639

Other intangibles, net
225

 
214

Total intangible assets
163,386

 
163,411

OTHER ASSETS, NET
14,977

 
16,345

Total assets
$
261,624

 
$
266,164

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

-6-


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share data)
 
 
February 28,
2013
 
August 31,
2013
 
 
(Unaudited)
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued expenses
$
8,301

 
$
8,019

Current maturities of long-term debt (Note 4)
12,126

 
12,331

Accrued salaries and commissions
7,535

 
8,670

Accrued interest
396

 
389

Deferred revenue
10,862

 
12,059

Other current liabilities
3,518

 
5,745

Current liabilities — discontinued operations
2,169

 
90

Total current liabilities
44,907

 
47,303

LONG-TERM DEBT, NET OF CURRENT MATURITIES (NOTE 4)
131,494

 
125,530

OTHER NONCURRENT LIABILITIES
10,052

 
8,566

DEFERRED INCOME TAXES
38,072

 
39,360

Total liabilities
224,525

 
220,759

COMMITMENTS AND CONTINGENCIES

 

EQUITY:
 
 
 
Class A common stock, $.01 par value; authorized 170,000,000 shares; issued and outstanding 35,907,925 shares at February 28, 2013 and 36,794,152 shares at August 31, 2013
359

 
368

Class B common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding 4,722,684 shares at February 28, 2013 and August 31, 2013
47

 
47

Series A non-cumulative convertible preferred stock, $.01 par value; $50.00 liquidation preference per share, aggregate liquidation preference and redemption amount of $46,882 at February 28, 2013 and $46,450 at August 31, 2013; authorized 2,875,000 shares; issued and outstanding 1,337,641 shares at February 28, 2013 and 1,328,991 at August 31, 2013, which includes 400,000 shares in trust
9

 
9

Additional paid-in capital
578,555

 
579,746

Accumulated deficit
(588,836
)
 
(582,789
)
Accumulated other comprehensive loss
(118
)
 
(59
)
Total shareholders’ deficit
(9,984
)
 
(2,678
)
NONCONTROLLING INTERESTS
47,083

 
48,083

Total equity
37,099

 
45,405

Total liabilities and equity
$
261,624

 
$
266,164


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


-7-



EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
(In thousands, except share data)
 
 
Class A
Common Stock
 
Class B
Common Stock
 
Series A
Preferred Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Noncontrolling Interests
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Balance, February 28, 2013
35,907,925

 
$
359

 
4,722,684

 
$
47

 
937,641

 
$
9

 
$
578,555

 
$
(588,836
)
 
$
(118
)
 
$
47,083

 
$
37,099

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,047

 
 
 
2,835

 
8,882

Issuance of Common Stock to employees and officers
711,727

 
7

 
 
 
 
 
 
 
 
 
1,174

 
 
 
 
 
 
 
1,181

Exercise of stock options
174,500

 
2

 
 
 
 
 
 
 
 
 
124

 
 
 
 
 
 
 
126

Payments of dividends and distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,816
)
 
(1,816
)
Purchase of preferred stock
 
 
 
 
 
 
 
 
(8,650
)
 
 
 
(107
)
 
 
 
 
 
 
 
(107
)
Change in value of derivative instrument
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
48

 
 
 
48

Cumulative translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11

 
(19
)
 
(8
)
Balance, August 31, 2013
36,794,152

 
$
368

 
4,722,684

 
$
47

 
928,991

 
$
9

 
$
579,746

 
$
(582,789
)
 
$
(59
)
 
$
48,083

 
$
45,405


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


-8-



EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
 
Six Months Ended August 31,
 
2012
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Consolidated net income
$
37,335

 
$
8,882

Adjustments to reconcile consolidated net income to net cash (used in) provided by operating activities -
 
 
 
Discontinued operations
(36,417
)
 

Impairment loss
10,971

 

Depreciation and amortization
2,294

 
2,389

Noncash accretion of debt instruments to interest expense
8,939

 
450

Loss on debt extinguishment
1,085

 

Provision for bad debts
280

 
338

(Benefit) provision for deferred income taxes
(6,062
)
 
1,288

Noncash compensation
954

 
3,082

Gain on sale of assets
(10,006
)
 
(1
)
Other

 
(75
)
Changes in assets and liabilities -
 
 
 
Accounts receivable
(4,251
)
 
(6,880
)
Prepaid expenses and other current assets
436

 
229

Other assets
(1,334
)
 
(1,167
)
Accounts payable and accrued liabilities
(2,810
)
 
266

Deferred revenue
(1,011
)
 
1,197

Income taxes
(604
)
 
(322
)
Other liabilities
(6,609
)
 
294

Net cash used in operating activities — discontinued operations
(371
)
 
(68
)
Net cash (used in) provided by operating activities
(7,181
)
 
9,902

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(956
)
 
(1,857
)
Cash paid for investments, net of distributions
(3,989
)
 
(220
)
Proceeds from the sale of assets
10,006

 
1

Other
42

 

Net cash provided by (used in) investing activities — discontinued operations
85,463

 
(1,650
)
Net cash provided by (used in) investing activities
90,566

 
(3,726
)
 
The accompanying notes are an integral part of these unaudited condensed consolidated statements.

-9-


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(Dollars in thousands)
 
 
Six Months Ended August 31,
 
2012
 
2013
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payments on long-term debt
(165,951
)
 
(12,015
)
Proceeds from long-term debt
92,198

 
6,000

Debt-related costs
(3,495
)
 
(137
)
Payments of dividends and distributions to noncontrolling interests
(2,158
)
 
(1,816
)
Proceeds from the exercise of stock options
134

 
126

Purchase of preferred stock

 
(107
)
Settlement of tax withholding obligations on stock issued to employees

 
(133
)
Net cash used in financing activities
(79,272
)
 
(8,082
)
Effect of exchange rates on cash and cash equivalents
(200
)
 
(8
)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
3,913

 
(1,914
)
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
5,619

 
8,735

End of period
$
9,532

 
$
6,821

SUPPLEMENTAL DISCLOSURES:
 
 
 
Cash paid for interest
$
15,377

 
$
3,285

Cash paid (refund from) income taxes, net
731

 
(804
)
Noncash financing transactions-
 
 
 
Value of stock issued to employees under stock compensation program and to satisfy accrued incentives
954

 
1,307


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


-10-


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS INDICATED OTHERWISE, EXCEPT SHARE DATA)
August 31, 2013
(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, 2013. 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) necessary to present fairly the consolidated financial position of Emmis at August 31, 2013, and the results of its operations for the three-month and six-month periods ended August 31, 2012 and 2013, and cash flows for the six-month periods ended August 31, 2012 and 2013.

Basic and Diluted Net (Loss) Income Per Common Share
Basic net (loss) income per common share is computed by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net (loss) 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, 2012 and 2013 consisted of stock options, restricted stock awards and the 6.25% Series A convertible preferred stock (the “Preferred Stock”).

The following table sets forth the calculation of basic and diluted net (loss) income per share from continuing operations:
 
 
Six Months Ended
 
August 31, 2012
 
August 31, 2013
 
Net Loss
 
Shares
 
Net Loss
Per Share
 
Net Income
 
Shares
 
Net Income
Per Share
 
(amounts in 000’s, except per share data)
Basic net (loss) income per common share:
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income available to common shareholders from continuing operations
$
(3,367
)
 
38,819

 
$
(0.09
)
 
$
6,372

 
41,313

 
$
0.15

Impact of equity awards

 

 

 

 
2,770

 

Impact of conversion of preferred stock into common stock

 

 

 
(325
)
 
2,278

 

Diluted net (loss) income per common share:
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income available to common shareholders from continuing operations
$
(3,367
)
 
38,819

 
$
(0.09
)
 
$
6,047

 
46,361

 
$
0.13



-11-


 
Three Months Ended
 
August 31, 2012
 
August 31, 2013
 
Net Loss
 
Shares
 
Net Loss
Per Share
 
Net Income
 
Shares
 
Net Income
Per Share
 
(amounts in 000’s, except per share data)
Basic net (loss) income per common share:
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income available to common shareholders from continuing operations
$
(695
)
 
38,859

 
$
(0.02
)
 
$
2,647

 
41,451

 
$
0.06

Impact of equity awards

 

 

 

 
3,217

 

Impact of conversion of preferred stock into common stock

 

 

 
(76
)
 
2,269

 

Diluted net (loss) income per common share:
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income available to common shareholders from continuing operations
$
(695
)
 
38,859

 
$
(0.02
)
 
$
2,571

 
46,937

 
$
0.05


Shares excluded from the calculation as the effect of their conversion into shares of our common stock would be antidilutive were as follows:
 
 
Three Months Ended August 31,
 
Six Months Ended August 31,
 
2012
 
2013
 
2012
 
2013
 
(shares in 000’s )
6.25% Series A convertible preferred stock
2,288

 

 
2,288

 

Stock options and restricted stock awards
7,274

 
1,929

 
6,898

 
1,980

Antidilutive common share equivalents
9,562

 
1,929

 
9,186

 
1,980


Discontinued Operations – Summary of results
The results of operations and related disposal costs, gains and losses for business units that the Company has sold are classified in discontinued operations for all periods presented.

A summary of the income from discontinued operations is presented below:
 
 
Three Months Ended August 31,
 
Six Months Ended August 31,
 
2012
 
2013
 
2012
 
2013
Income (loss) from operations:
 
 
 
 
 
 
 
KXOS-FM (Radio)
$
32,675

 
$

 
$
32,534

 
$

Emmis Interactive Inc. (Radio)
(1,466
)
 

 
(2,193
)
 

Slovakia Radio Network (Radio)
756

 

 
763

 

Bulgaria Radio Network (Radio)
(146
)
 

 
(453
)
 

Sampler Publications (Publishing)
(202
)
 

 
(86
)
 

Total
31,617

 

 
30,565

 

Benefit from income taxes
(7,159
)
 

 
(5,852
)
 

Total income from operations, net of tax
$
38,776

 
$

 
$
36,417

 
$


Discontinued Operation – KXOS-FM
On August 23, 2012, Emmis completed the sale of KXOS-FM in Los Angeles for $85.5 million in cash. In connection with the sale, Emmis recorded a gain on sale of assets of approximately $32.8 million. KXOS-FM had previously been operating pursuant to a local programming and marketing agreement, which is discussed in more detail below.
In accordance with the provisions of Accounting Standards Codification (“ASC”) 205-20-45, the Company allocated interest expense associated with the portion of term loans required to be repaid as a result of the sale of KXOS-FM to its operations for all periods presented.


-12-


The operations of KXOS-FM had historically been included in the radio segment. The following table summarizes certain operating results of KXOS-FM for all periods presented:
 
 
Three Months Ended August 31,
 
Six Months Ended August 31,
 
2012
 
2013
 
2012
 
2013
Net revenues
$
1,581

 
$

 
$
3,331

 
$

Station operating expenses, excluding depreciation and amortization expense
7

 

 
27

 

Depreciation and amortization expense
65

 

 
169

 

Interest expense
1,591

 

 
3,358

 

Gain on sale of station
32,757

 

 
32,757

 

Benefit from income taxes
7,572

 

 
6,476

 


Discontinued Operation — Emmis Interactive
On October 31, 2012, Emmis completed the sale of Emmis Interactive Inc., a subsidiary of Emmis that provided a content management system, data analytic tools and related services, to Marketron Broadcast Solutions, LLC (“Marketron”) for no net proceeds. The sale of Emmis Interactive Inc. allowed Emmis to mitigate expected future operating losses and more clearly focus on core radio and publishing operating strategies. Marketron had assumed operating control of Emmis Interactive, Inc., on October 4, 2012. In connection with the sale, Emmis recorded a loss on sale of assets of approximately $0.7 million, which was primarily related to severance for former employees.
The operations of Emmis Interactive Inc. had historically been included in the radio segment. The following table summarizes certain operating results of Emmis Interactive Inc. for all periods presented:
 
 
Three Months Ended August 31,
 
Six Months Ended August 31,
 
2012
 
2013
 
2012
 
2013
Net revenues
$
1,144

 
$

 
$
2,383

 
$

Station operating expenses, excluding depreciation and amortization expense
1,754

 

 
3,716

 

Depreciation and amortization
120

 

 
257

 

Impairment loss
737

 

 
737

 

Other income
1

 

 
134

 


Discontinued Operation – Country Sampler, Smart Retailer and related publications
On October 1, 2012, Emmis completed the sale of Country Sampler magazine, Smart Retailer magazine, and related publications (altogether the “Sampler Publications”) and certain real estate used in their operations to subsidiaries of DRG Holdings, LLC. Emmis believed the sale of the Sampler Publications, which were niche crafting publications, would enable it to more clearly focus on its core city and regional publications. Emmis received gross proceeds from the sale of $8.7 million, incurred approximately $0.2 million in transaction expenses and tax obligations, and used the remaining $8.5 million to repay term loans under the Company’s 2006 Credit Agreement. In connection with the sale, Emmis recorded a gain on sale of assets of approximately $0.7 million.
In accordance with the provisions of Accounting Standards Codification (“ASC”) 205-20-45, the Company allocated interest expense associated with the estimate of term loans required to be repaid as a result of the sale of the Sampler Publications to its operations for all periods presented.


-13-


The operations of the Sampler Publications had historically been included in the publishing segment. The following table summarizes certain operating results of the Sampler Publications for all periods presented:
 
 
Three Months Ended August 31,
 
Six Months Ended August 31,
 
2012
 
2013
 
2012
 
2013
Net revenues
$
1,620

 
$

 
$
3,939

 
$

Station operating expenses, excluding depreciation and amortization expense
1,612

 

 
3,604

 

Depreciation and amortization
22

 

 
44

 

Interest expense
188

 

 
377

 

Provision for income taxes
130

 

 
259

 


Discontinued Operation –Slovakia Radio
On February 25, 2013, Emmis completed the sale of its Slovakian radio network to Bauer Ausland 1 GMBH for $21.2 million in cash. Emmis believed the sale of its international radio properties would better enable the Company to focus its efforts on its domestic radio stations. In connection with the sale, Emmis recorded a gain on sale of assets of approximately $14.8 million.
The operations of our Slovakian radio network had historically been included in the radio segment. The following table summarizes certain operating results of our Slovakian radio network for all periods presented:
 
 
Three Months Ended August 31,
 
Six Months Ended August 31,
 
2012
 
2013
 
2012
 
2013
Net revenues
$
3,172

 
$

 
$
5,449

 
$

Station operating expenses, excluding depreciation and amortization expense
1,863

 

 
3,528

 

Depreciation and amortization
174

 

 
354

 

Interest expense
399

 

 
799

 

Other (income) expense, net
(20
)
 

 
5

 

Provision for income taxes
283

 

 
365

 


Discontinued Operation – Bulgaria Radio
On January 3, 2013, Emmis completed the sale of its Bulgarian radio network to Reflex Media EEOD for $1.7 million in cash. Emmis believed the sale of its international radio properties would better enable the Company to focus its efforts on its domestic radio stations. In connection with the sale, Emmis recorded a loss on sale of assets of approximately $1.3 million. The loss on disposal primarily resulted from the reclassification of accumulated currency translation adjustments.
The operations of our Bulgarian radio network had historically been included in the radio segment. The following table summarizes certain operating results of our Bulgarian radio network for all periods presented:
 
 
Three Months Ended August 31,
 
Six Months Ended August 31,
 
2012
 
2013
 
2012
 
2013
Net revenues
$
324

 
$

 
$
558

 
$

Station operating expenses, excluding depreciation and amortization expense
442

 

 
871

 

Depreciation and amortization
27

 

 
137

 

Other expense, net
1

 

 
3

 



-14-


Summary of Assets and Liabilities of Discontinued Operations:
 
 
As of
February 28,
2013
 
As of
 August 31,
2013
Current assets:
 
 
 
Cash and cash equivalents
$
579

 
$
465

Accounts receivable, net
128

 

Prepaid expenses
17

 

Other
38

 

Total current assets
$
762

 
$
465

Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
2,169

 
$
90

Total current liabilities
$
2,169

 
$
90


Local Programming and Marketing Agreement Fees
The Company from time to time enters into local programming and marketing agreements (“LMAs”) in connection with acquisitions or dispositions of radio stations, typically pending regulatory approval of transfer of the FCC licenses. In such cases where the Company enters into an LMA in connection with a disposition, the Company generally receives specified periodic payments in exchange for the counterparty receiving the right to program and sell advertising for a specified portion of the station’s inventory of broadcast time. Nevertheless, as the holder of the FCC license, the Company retains control and responsibility for the operation of the station, including responsibility over all programming broadcast on the station.
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. During the three months ended August 31, 2012 and 2013, Emmis recognized $2.6 million and $2.6 million, respectively, of LMA fees, recorded as net revenues in the accompanying condensed consolidated statements of operations, related to the 98.7FM LMA. During the six months ended August 31, 2012 and 2013, Emmis recognized LMA fee revenue of $3.4 million and $5.2 million, respectively.
Grupo Radio Centro, S.A.B. de C.V (“GRC”), a Mexican broadcasting company, provided programming and sold advertising for KXOS-FM in Los Angeles pursuant to an LMA from April 2009 until affiliates of GRC consummated the purchase of KXOS-FM on August 23, 2012. Emmis recognized $1.6 million and $3.3 million of LMA fees, recorded as income from discontinued operations, net of tax, related to the KXOS-FM LMA during the three months and six months ended August 31, 2012, respectively.


Note 2. Share Based Payments
The amounts recorded as share based compensation expense consist of stock option and restricted stock grants, common stock issued to employees and directors in lieu of cash payments, and Preferred Stock contributed to the 2012 Retention Plan.
Stock Option Awards
The Company has granted options to purchase its common stock to employees and directors of the Company under various stock option plans at no less than the fair market value of the underlying stock on the date of grant. These options are granted for a term not exceeding 10 years and are forfeited, except in certain circumstances, in the event the employee or director terminates his or her employment or relationship with the Company. Generally, these options either vest annually over 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.


-15-


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, 2012 and 2013:
 
 
Six Months Ended August 31,
 
2012
 
2013
Risk-Free Interest Rate:
0.7%
 
0.6% – 1.3%
Expected Dividend Yield:
0%
 
0%
Expected Life (Years):
4.2
 
4.3
Expected Volatility:
129.5% – 131.4%
 
108.9% – 115.9%

The following table presents a summary of the Company’s stock options outstanding at August 31, 2013, and stock option activity during the six months ended August 31, 2013 (“Price” reflects the weighted average exercise price per share):
 
 
Options
 
Price
 
Weighted Average
Remaining
Contractual Term
 
Aggregate
Intrinsic
Value
Outstanding, beginning of period
7,132,459

 
$
4.31

 
 
 
 
Granted
381,219

 
1.77

 
 
 
 
Exercised (1)
169,500

 
0.71

 
 
 
 
Forfeited
15,000

 
0.70

 
 
 
 
Expired
551,220

 
10.91

 
 
 
 
Outstanding, end of period
6,777,958

 
3.71

 
6.4
 
$
12,380

Exercisable, end of period
3,658,269

 
6.04

 
4.5
 
$
5,525


(1)
The Company did not record an income tax benefit related to option exercises in the six months ended August 31, 2012 and 2013.
The weighted average grant date fair value of options granted during the six months ended August 31, 2012 and 2013, was $0.71 and $1.36, respectively.
A summary of the Company’s nonvested options at August 31, 2013, and changes during the six months ended August 31, 2013, is presented below:
 
 
Options
 
Weighted Average
Grant Date
Fair Value
Nonvested, beginning of period
3,188,104

 
$
0.76

Granted
381,219

 
1.36

Vested
434,634

 
0.98

Forfeited
15,000

 
0.57

Nonvested, end of period
3,119,689

 
0.80


There were 3.8 million shares available for future grants under the Company’s various equity plans at August 31, 2013. The vesting dates of outstanding options at August 31, 2013 range from September 2013 to March 2017, and expiration dates range from March 2014 to July 2023.

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

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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 2012 Equity Compensation Plan. The Company may also award, out of the Company’s 2012 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, 2013, and restricted stock activity during the six months ended August 31, 2013 (“Price” reflects the weighted average share price at the date of grant):
 
 
Awards
 
Price
Grants outstanding, beginning of period
537,405

 
$
1.72

Granted
802,711

 
1.60

Vested (restriction lapsed)
286,126

 
1.46

Forfeited
181

 
1.73

Grants outstanding, end of period
1,053,809

 
1.70


The total grant date fair value of shares vested during the six months ended August 31, 2012 and 2013, was less than $0.1 million and $0.4 million, respectively.
Preferred Stock and the 2012 Retention Plan
On April 2, 2012, the shareholders of the Company approved the 2012 Retention Plan and Trust Agreement (the “Trust” or the “2012 Retention Plan”) at a special meeting of shareholders. The Company contributed 400,000 shares of its Preferred Stock to the Trust in connection with the approval of the 2012 Retention Plan. Awards granted under the 2012 Retention Plan entitle the participants to receive a distribution two years from the date of shareholder approval of the plan, provided the participant is still an employee and was an employee upon inception of the plan. Distributions may be in the form of Class A common stock if the Company elects to convert the Preferred Stock to common stock at the then-current conversion ratio prior to distribution. The initial Trustee of the plan is Jeffrey H. Smulyan, our Chairman of the Board, President and Chief Executive Officer.
As of the Trust’s inception and August 31, 2013, no preferred shares have been allocated to individual employees, nor is any individual entitled to any minimum number of shares. As a result, the service inception date for these awards precedes the grant date, and the Company is accounting for the 2012 Retention Plan as a liability plan, using variable accounting. Prior to establishment of a grant date, the Company will estimate the fair value of the shares at each reporting period, and will recognize the compensation expense over a two-year period that began on April 2, 2012. Upon the second anniversary of the Trust’s inception, the Trust’s governance will allocate the shares to individual employees, at which point fully vested shares will be distributed to employees. The Trust is consolidated by the Company and both the assets and deferred compensation obligation of the Trust are accounted for within the applicable preferred stock classification in the accompanying condensed consolidated balance sheets. The Company recognized approximately $0.5 million and $1.5 million of compensation expense related to the 2012 Retention Plan during the six months ended August 31, 2012 and 2013, respectively.


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Recognized Non-Cash Compensation Expense
The following table summarizes stock-based compensation expense and related tax benefits recognized by the Company in the three and six months ended August 31, 2012 and 2013:
 
 
Three Months Ended August 31,
 
Six Months Ended August 31,
 
2012
 
2013
 
2012
 
2013
Station operating expenses
$
296

 
$
1,213

 
$
447

 
$
1,466

Corporate expenses
269

 
1,206

 
507

 
1,616

Stock-based compensation expense included in operating expenses
565

 
2,419

 
954

 
3,082

Tax benefit

 

 

 

Recognized stock-based compensation expense, net of tax
$
565

 
$
2,419

 
$
954

 
$
3,082


As of August 31, 2013, there was $3.0 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 1.2 years.


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 $150.5 million as of February 28, 2013 and $150.6 million as of August 31, 2013. 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 by another broadcaster. As of February 29, 2012, our two stations in New York were considered a single unit of accounting. In connection with the execution of the LMA discussed in Note 1, the Company separated the two New York stations into separate units of accounting. The Company performed an interim impairment test of the 98.7FM license as of May 1, 2012 which resulted in an impairment charge of $11.0 million. The carrying value of the 98.7FM license subsequent to the impairment charge is $60.5 million, which approximates its fair value.
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, as was the case with 98.7FM as noted above, the Company will perform an interim impairment test. 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
ASC Topic 350-20-35 requires the Company to test goodwill for impairment at least annually using a two-step process. The first step is a screen for potential impairment, while the second step measures the amount of impairment. The Company conducts the two-step impairment test on December 1 of each fiscal year, unless indications of impairment exist during an

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interim period. During the quarter ended August 31, 2013, no new or additional impairment indicators emerged; hence, no interim impairment testing was warranted. When assessing its goodwill for impairment, the Company uses an enterprise valuation approach to determine the fair value of each of the Company’s reporting units (radio stations grouped by market and magazines on an individual basis). 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. There are no publicly traded publishing companies that are focused predominantly on city and regional magazines as is our publishing segment. Therefore, the market multiple used as a benchmark for our publishing reporting units has been based on recently completed transactions within the city and regional magazine industry or analyst reports that include valuations of magazine divisions within publicly traded media conglomerates. Management believes this methodology for valuing radio and publishing 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 step-one reporting unit 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.
This enterprise valuation is compared to the carrying value of the reporting unit for the first step of the goodwill impairment test. If the reporting unit exhibits impairment, the Company proceeds to the second step of the goodwill impairment test. For its step-two testing, the enterprise value is allocated among the tangible assets, indefinite-lived intangible assets (FCC licenses valued using a direct-method valuation approach) and unrecognized intangible assets, such as customer lists, with the residual amount representing the implied fair value of the goodwill. To the extent the carrying amount of the goodwill exceeds the implied fair value of the goodwill, the difference is recorded as an impairment charge in the statement of operations.
As of February 28, 2013 and August 31, 2013, the carrying amount of the Company’s goodwill was $12.6 million. Approximately $4.6 million of our goodwill was attributable to our radio division as of February 28, 2013 and August 31, 2013. Approximately $8.0 million of our goodwill was attributable to our publishing division as of February 28, 2013 and August 31, 2013.

Definite-lived intangibles
The Company’s definite-lived intangible assets consist of trademarks which are amortized over the period of time the assets are expected to contribute directly or indirectly to the Company’s future cash flows. The trademarks have a weighted average remaining useful life of 11.9 years. Amortization expense related to trademarks is expected to be less than $0.1 million in each of the next five successive fiscal years.


Note 4. Long-term Debt
Long-term debt was comprised of the following at February 28, 2013 and August 31, 2013:

 
As of February 28,
2013
 
As of August 31,
2013
2012 Credit Agreement debt :
 
 
 
Revolver
$
5,000

 
$
5,000

Term Loan
62,000

 
58,000

Total 2012 Credit Agreement debt
67,000

 
63,000

98.7FM nonrecourse debt
79,068

 
77,053

Current maturities
(12,126
)
 
(12,331
)
Unamortized original issue discount
(2,448
)
 
(2,192
)
Total long-term debt
$
131,494

 
$
125,530


2012 Credit Agreement Debt and Related Amendment
On December 28, 2012, Emmis Operating Company (“EOC”), a wholly owned subsidiary of Emmis, entered into a credit facility (the “2012 Credit Agreement”) to provide for total borrowings of up to $100 million, including (i) an $80 million term loan and (ii) a $20 million revolver, of which $5 million may be used for letters of credit.
A portion of the proceeds under the 2012 Credit Agreement were used to repay (i) EOC’s indebtedness under and terminate the 2006 Credit Agreement, for which Bank of America, N.A. acted as administrative agent and (ii) the Notes issued

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under the Note Purchase Agreement dated as of November 11, 2011 between Emmis Communications Corporation, as Issuer, and Zell Credit Opportunities Master Fund, L.P., as Purchaser, as amended, (“Senior Unsecured Notes”).
In addition to repaying in full the 2006 Credit Agreement and the Senior Unsecured Notes, the proceeds of the borrowings under the 2012 Credit Agreement were used for working capital needs and other general corporate purposes of Emmis, and certain other transactions permitted under the 2012 Credit Agreement.
All outstanding amounts under the 2012 Credit Agreement bear interest, at the option of EOC, at a rate equal to the Eurodollar Rate or an alternative base rate (as defined in the 2012 Credit Agreement) plus a margin. The margin over the Eurodollar Rate or the alternative base rate varies (ranging from 2.50% to 5.00%), depending on Emmis’ ratio of consolidated total debt to consolidated EBITDA, as defined in the agreement. Interest is due on a calendar month basis under the alternative base rate and at least every three months under the Eurodollar Rate. Beginning 60 days after closing, the 2012 Credit Agreement required Emmis to maintain fixed interest rates, for at least one year, on a minimum of 50% of its total outstanding debt, as defined. See Note 7 for more discussion of our interest rate swap agreement.
The term loan and revolver both mature on December 28, 2017. Beginning on April 1, 2013, the borrowings under the term loan are payable in quarterly installments equal to 2.50% of the original balance of the term loan, with the remaining balance payable December 28, 2017. Proceeds from raising additional equity, issuing additional subordinated debt or from asset sales, as well as excess cash flow, subject to certain exceptions, are required to be used to repay amounts outstanding under the 2012 Credit Agreement.

Approximately $0.5 million of transaction fees related to the 2012 Credit Agreement were capitalized and are being amortized over the life of the 2012 Credit Agreement. These deferred debt costs are included in other assets, net in the condensed consolidated balance sheets. The 2012 Credit Agreement is carried on our condensed consolidated balance sheets net of an original issue discount. The original issue discount, which was $2.5 million as of the issuance of the debt on December 28, 2012 and $2.2 million as of August 31, 2013, is being amortized as additional interest expense over the life of the 2012 Credit Agreement.
Borrowing under the 2012 Credit Agreement depends upon our continued compliance with certain operating covenants and financial ratios, including leverage and fixed charge coverage as specifically defined. The operating covenants and other restrictions with which we must comply include, among others, restrictions on additional indebtedness, incurrence of liens, engaging in businesses other than our primary business, paying certain dividends, redeeming or repurchasing capital stock of Emmis, acquisitions and asset sales. No default or event of default has occurred or is continuing. The 2012 Credit Agreement provides that an event of default will occur if there is a “change in control” of Emmis, as defined. The payment of principal, premium and interest under the 2012 Credit Agreement is fully and unconditionally guaranteed, jointly and severally, by ECC and most of its existing wholly-owned domestic subsidiaries. Substantially all of Emmis’ assets, including the stock of most of Emmis’ wholly-owned, domestic subsidiaries are pledged to secure the 2012 Credit Agreement.

On August 9, 2013, Emmis entered into the First Amendment to Credit Agreement, Security Agreement and Subsidiary Guarantee (“First Amendment”) which allowed for the formation of NextRadio LLC, a wholly-owned subsidiary of Emmis, as an excluded subsidiary under the Credit Agreement and facilitated the transactions contemplated by the agreement with Sprint dated August 9, 2013 (see Note 5). No financial covenants were impacted by the First Amendment and total costs were less than $0.1 million.

We were in compliance with all financial and non-financial covenants as of August 31, 2013. Our Senior Leverage Ratio, Total Leverage Ratio and Minimum Fixed Charge Coverage Ratio (each as defined in the 2012 Credit Agreement) requirements and actual amounts as of August 31, 2013 were as follows:

 
As of August 31, 2013
 
Covenant Requirement
 
Actual Results
Maximum Senior Leverage Ratio
4.00 : 1.00
 
3.12 : 1.00
Maximum Total Leverage Ratio
4.75 : 1.00
 
3.12 : 1.00
Minimum Fixed Charge Coverage Ratio
1.25 : 1.00
 
1.42 : 1.00

98.7FM Nonrecourse Debt
On May 30, 2012, the Company, through wholly-owned, newly-created subsidiaries, issued $82.2 million of nonrecourse notes. Teachers Insurance and Annuity Association of America (“TIAA”), through a participation agreement with Wells Fargo

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Bank Northwest, National Association (“Wells Fargo”), 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’s 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%.

Based on amounts outstanding at August 31, 2013, mandatory principal payments of long-term debt for the next five years and thereafter are summarized below:

 
2012 Credit Agreement
 
 
 
 
Year Ended
Revolver
 
Term Loan
 
98.7FM Debt
 
Total
February 28 (29),
Amortization
 
Amortization
 
Amortization
 
Amortization
2014
$

 
$
4,000

 
$
2,111

 
$
6,111

2015

 
8,000

 
4,541

 
12,541

2016

 
8,000

 
4,990

 
12,990

2017

 
8,000

 
5,453

 
13,453

2018
5,000

 
30,000

 
6,039

 
41,039

Thereafter

 

 
53,919

 
53,919

Total
$
5,000

 
$
58,000

 
$
77,053

 
$
140,053


Note 5. Significant Events

Next Radio LLC - Sprint Agreement

On August 9, 2013, NextRadio LLC entered into an agreement with Sprint/United Management Company (“Sprint”) whereby Sprint agreed to pre-load the Company's smartphone application, NextRadio, in 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 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 app. 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 app on FM-enabled devices on other wireless networks.

Nearly all of the largest radio broadcasters and many smaller radio broadcasters have expressed support for NextRadio LLC's agreement with Sprint. Accordingly, NextRadio LLC has entered into a number of funding agreements with radio broadcasters and other participants in the radio industry to collect and remit cash to Sprint to fulfill the quarterly payment obligation. As part of some of these funding agreements, Emmis agreed to certain limitations on the operation of its NextRadio and TagStation businesses, including assurances of access to the NextRadio app and to TagStation (the cloud-based engine that provides data to the NextRadio app), and limitations on sale of the businesses to potential competitors of the U.S. radio industry. Emmis also 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 2017 or 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. 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.

NextRadio LLC made the first $3.75 million quarterly payment to Sprint on August 9, 2013. Emmis paid $0.8 million of the first quarterly payment amount, which is being expensed over the three-month period ending November 8, 2013. Emmis has determined that NextRadio LLC is a variable interest entity (VIE) and that Emmis is the primary beneficiary because the Company has the power to direct substantially all of the activities of NextRadio LLC, and because the Company may absorb certain losses and receive certain benefits from the operations of the VIE. Emmis does not record any revenue or expense related to the amounts that are collected and remitted to Sprint except the portion of any payment to Sprint that was actually contributed to NextRadio LLC by Emmis, which is recorded as station operating expenses, excluding depreciation and amortization expense. As of August 31, 2013, the carrying value of assets within NextRadio LLC totaled $0.6 million, which represents the balance of Emmis' prepaid asset.  NextRadio LLC had no liabilities at August 31, 2013.  

Note 6. Liquidity

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The Company continually projects its anticipated cash needs, which include its operating needs, capital needs, and principal and interest payments on its indebtedness. As of the filing of this Form 10-Q, management believes the Company can meet its liquidity needs through the end of fiscal year 2014 with cash and cash equivalents on hand and projected cash flows from operations. Based on these projections, management also believes the Company will be in compliance with its debt covenants through the end of fiscal year 2014.


Note 7. Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage interest rate exposure with the following objectives:

manage current and forecasted interest rate risk while maintaining optimal financial flexibility and solvency
proactively manage the Company’s cost of capital to ensure the Company can effectively manage operations and execute its business strategy, thereby maintaining a competitive advantage and enhancing shareholder value
comply with covenant requirements in the Company’s credit facility

Cash Flow Hedges of Interest Rate Risk
The Company utilizes interest rate derivatives to add stability to cash payments for interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Under the terms of its 2012 Credit Agreement, the Company is required to fix or cap the interest rate on at least 50% of its Term Loan exposure for a two-year period ending December 28, 2014. The requirement to fix or cap interest rates can be reduced to a one-year period provided the Company’s Senior Leverage Ratio (as defined in the 2012 Credit Agreement) is at or under 2.50:1.00 as of May 31, 2014.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company’s interest rate derivatives are used to hedge the interest payment cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company did not record any hedge ineffectiveness in earnings during the three months and six months ended August 31, 2012 and 2013. Amounts reported in accumulated other comprehensive loss related to derivatives are reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During fiscal 2014, the Company estimates that less than $0.1 million will be reclassified as an increase to interest expense.
In February 2013, the Company entered into a two-year interest rate exchange agreement (a “Swap”), whereby the Company pays a fixed rate of 0.42% on $40 million of notional principal to Fifth Third Bank, and Fifth Third Bank pays to the Company a variable rate on the same amount of notional principal based on the one-month London Interbank Offered Rate (“LIBOR”). This agreement was the Company’s only interest rate derivative designated as a cash flow hedge of interest rate risk outstanding as of August 31, 2013.
The Company does not generally use derivatives for trading or speculative purposes.

-22-


The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of February 28, 2013 and August 31, 2013. The accumulated other comprehensive loss balance related to our derivative instruments at August 31, 2013 was less than $0.1 million. The fair value of the derivative instruments was estimated by obtaining quotations from the financial institution that was the counterparty to the instrument. The fair value was an estimate of the net amount that the Company would have been required to pay on August 31, 2013, if the agreement was transferred to another party or canceled by the Company, as further adjusted by a credit adjustment required by ASC Topic 820, Fair Value Measurements and Disclosures, as discussed below. For the three months and six months ended August 31, 2013, this credit adjustment was immaterial.

 
Tabular Disclosure of Fair Values of Derivative Instruments
Liability Derivatives
 
As of February 28, 2013
 
As of August 31, 2013
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest Rate Swap Agreements (Long- Term Portion)
Other Noncurrent Liabilities
 
107

 
Other Noncurrent Liabilities
 
59

Total derivatives designated as hedging instruments
 
 
$
107

 
 
 
$
59


The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the three months and six months ended August 31, 2012 and 2013.

 
For the Six Months Ended August 31,
Derivatives in Cash Flow
Hedging Relationships
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
2012
 
2013
 
 
 
2012
 
2013
 
 
 
2012
 
2013
Interest Rate Swap
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agreements
$

 
$
93

 
Interest expense
 
$

 
$
(45
)
 
N/A
 
$

 
$

Total
$

 
$
93

 
 
 
$

 
$
(45
)
 
 
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended August 31,
Derivatives in Cash Flow
Hedging Relationships
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
2012
 
2013
 
 
 
2012
 
2013
 
 
 
2012
 
2013
Interest Rate Swap
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agreements
$

 
$
27

 
Interest expense
 
$

 
$
(23
)
 
N/A
 
$

 
$

Total
$

 
$
27

 
 
 
$

 
$
(23
)
 
 
 
$

 
$


Credit-risk-related Contingent Features
The Company manages its counterparty risk by entering into derivative instruments with financial institutions where it believes the risk of credit loss resulting from nonperformance by the counterparty is low. As discussed above, the Company’s counterparty to its interest rate swap is Fifth Third Bank.
In accordance with ASC Topic 820, the Company makes a Credit Value Adjustment (CVA) to adjust the valuation of a derivative to account for our own credit risk with respect to all derivative liability positions. The CVA is accounted for as a decrease to the derivative position with the corresponding increase or decrease reflected in other comprehensive income (loss) for derivatives designated as cash flow hedges. The CVA also accounts for nonperformance risk of our counterparties in the fair value measurement of all derivative asset positions, when appropriate. As of August 31, 2013, this CVA was immaterial to the fair value of our derivative instrument.

-23-


The Company’s interest rate swap agreement with Fifth Third Bank incorporates the loan covenant provisions of the Company’s 2012 Credit Agreement. Fifth Third Bank is a lender under the Company’s 2012 Credit Agreement. Failure to comply with the loan covenant provisions of the 2012 Credit Agreement could result in the Company being in default of its obligations under the interest rate swap agreement.
As of August 31, 2013, the Company has not posted any collateral related to the interest rate swap agreement.


Note 8. 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 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, 2013 and August 31, 2013. 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, 2013
 
Level 1
 
Level 2
 
Level 3
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
Available for sale securities
$

 
$

 
$
6,739

 
$
6,739

Total assets measured at fair value on a recurring basis
$

 
$

 
$
6,739

 
$
6,739

Interest rate swap agreement
$

 
$
59

 
$

 
$
59

Total liabilities measured at fair value on a recurring basis
$

 
$
59

 
$

 
$
59

 
 
 
 
 
 
 
 
 
As of February 28, 2013
 
Level 1
 
Level 2
 
Level 3
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
Available for sale securities
$

 
$

 
$
6,489

 
$
6,489

Total assets measured at fair value on a recurring basis
$

 
$

 
$
6,489

 
$
6,489

Interest rate swap agreement
$

 
$
107

 
$

 
$
107

Total liabilities measured at fair value on a recurring basis
$

 
$
107

 
$

 
$
107


Available for sale securities — Emmis’ available for sale securities are investments in preferred stock of companies that are not traded in active markets. The investments are recorded at fair value, which is generally estimated using significant unobservable market parameters, resulting in a level 3 categorization. At February 28, 2013 and August 31, 2013, the investments are carried at their cost basis, which management believes approximates fair value, due to the recent purchase of these investments and recent third party transactions that corroborate Emmis’ carrying value approximates current fair value.

-24-


Interest rate swap agreement — Emmis’ derivative financial instruments consisted solely of an interest rate cash flow hedge in which the Company pays a fixed rate and receives a variable interest rate that was observable based upon a forward interest rate curve and is therefore considered a level 2 measurement.
The following table shows a reconciliation of the beginning and ending balances for fair value measurements using significant unobservable inputs:
 
 
For the Six Months Ended August 31,
 
2012
 
2013
 
Available
For Sale
Securities
 
Available
For Sale
Securities
 
Derivative
Instruments
Beginning Balance
$
160

 
$
6,489

 
$
107

Purchases
3,989

 
250

 

Unrealized gains in other comprehensive income

 

 
(48
)
Ending Balance
$
4,149

 
$
6,739

 
$
59


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
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.
The following methods and assumptions were used to estimate the fair value of financial instruments:
- Cash and cash equivalents, accounts receivable and accounts payable, including accrued liabilities: The carrying amount of these assets and liabilities approximates fair value because of the short maturity of these instruments.
- Long-term debt: The Company’s long-term debt is not actively traded and is considered a level 3 measurement. The Company believes the current carrying value of its long-term debt approximates its fair value.


Note 9. Segment Information
The Company’s operations are aligned into two business segments: (i) Radio and (ii) Publishing. 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 results of operations of various sold businesses have been classified as discontinued operations and have been excluded from the segment disclosures below. See Note 1 for more discussion of our discontinued operations. 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, 2013, and in Note 1 to these condensed consolidated financial statements, are applied consistently across segments.
 

-25-


Three Months Ended August 31, 2013
Radio
 
Publishing
 
Corporate
 
Consolidated
Net revenues
$
41,259

 
$
13,708

 
$

 
$
54,967

Station operating expenses excluding depreciation and amortization expense
28,000

 
13,938

 

 
41,938

Corporate expenses excluding depreciation and amortization expense

 

 
5,070

 
5,070

Hungary license litigation and related expenses
1,043

 

 

 
1,043

Depreciation and amortization
604

 
61

 
548

 
1,213

Gain of sale of fixed assets
(1
)
 

 

 
(1
)
Operating income (loss)
$
11,613

 
$
(291
)
 
$
(5,618
)
 
$
5,704


Three Months Ended August 31, 2012
Radio
 
Publishing
 
Corporate
 
Consolidated
Net revenues
$
39,964

 
$
12,965

 
$

 
$
52,929

Station operating expenses excluding depreciation and amortization expense
25,988

 
13,790

 

 
39,778

Corporate expenses excluding depreciation and amortization expense

 

 
4,161

 
4,161

Hungary license litigation and related expenses
210

 

 

 
210

Depreciation and amortization
598

 
82

 
489

 
1,169

Gain on sale of fixed assets
(3
)
 
(3
)
 

 
(6
)
Operating income (loss)
$
13,171

 
$
(904
)
 
$
(4,650
)
 
$
7,617

Six Months Ended August 31, 2013
Radio
 
Publishing
 
Corporate
 
Consolidated
Net revenues
$
78,185

 
$
27,368

 
$

 
$
105,553

Station operating expenses excluding depreciation and amortization expense
50,911

 
28,739

 

 
79,650

Corporate expenses excluding depreciation and amortization expense

 

 
9,470

 
9,470

Hungary license litigation and related expenses
1,295

 

 

 
1,295

Depreciation and amortization
1,198

 
123

 
1,068

 
2,389

Gain on sale of fixed assets
(1
)
 

 

 
(1
)
Operating income (loss)
$
24,782

 
$
(1,494
)
 
$
(10,538
)
 
$
12,750

 
 
 
 
 
 
 
 
Six Months Ended August 31, 2012
Radio
 
Publishing
 
Corporate
 
Consolidated
Net revenues
$
74,840

 
$
27,057

 
$

 
$
101,897

Station operating expenses excluding depreciation and amortization expense
52,308

 
28,042

 

 
80,350

Corporate expenses excluding depreciation and amortization expense

 

 
9,133

 
9,133

Hungary license litigation and related expenses
414

 

 

 
414

Impairment loss
10,971

 

 

 
10,971

Depreciation and amortization
1,176

 
168

 
950

 
2,294

Gain on sale of fixed assets
(10,003
)
 
(3
)
 

 
(10,006
)
Operating income (loss)
$
19,974

 
$
(1,150
)
 
$
(10,083
)
 
$
8,741



-26-


 
 
 
As of February 28, 2013
 
 
 
Radio
 
Publishing
 
Corporate
 
Consolidated
Assets — continuing operations
$
209,721