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, 2014. The Company’s results are subject to seasonal fluctuations. Therefore, results shown on an interim basis are not necessarily indicative of results for a full year.

In the opinion of Emmis, the accompanying condensed consolidated interim financial statements contain all material adjustments (consisting only of normal recurring adjustments, except as otherwise noted) necessary to present fairly the consolidated financial position of Emmis at August 31, 2014, and the results of its operations for the three-month and six-month periods ended August 31, 2013 and 2014, and cash flows for the six-month periods ended August 31, 2013 and 2014.

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended February 28, 2014 that have had a material impact on our condensed consolidated financial statements and related notes.

Basic and Diluted Net Income Per Common Share

Basic net income per common share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at August 31, 2013 and 2014 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 income per share:




	Three Months Ended
	August 31, 2013						August 31, 2014
	Net Income			Shares	Net Income Per Share		Net Income		Shares	Net Income Per Share
	(amounts in 000’s, except per share data)
Basic net income per common share:
Net income available to common shareholders from continuing operations	$	2,647		41,451	$	0.06	$	2,760	42,525	$	0.06
Impact of equity awards	—			3,217			—		2,753
Impact of conversion of preferred stock into common stock	(76		)	2,269			—		2,266
Diluted net income per common share:
Net income available to common shareholders from continuing operations	$	2,571		46,937	$	0.05	$	2,760	47,544	$	0.06



	Six Months Ended
	August 31, 2013						August 31, 2014
	Net Income			Shares	Net Income Per Share		Net Income		Shares	Net Income Per Share
	(amounts in 000’s, except per share data)
Basic net income per common share:
Net income available to common shareholders	$	6,372		41,313	$	0.15	$	3,716	42,337	$	0.09
Impact of equity awards	—			2,770	—		—		2,876	—
Impact of conversion of preferred stock into common stock	(325		)	2,278	—		—		2,266	—
Diluted net income per common share:
Net income available to common shareholders	$	6,047		46,361	$	0.13	$	3,716	47,479	$	0.08

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,
	2013	2014	2013	2014
	(shares in 000’s )
Equity awards	1,929	1,730	1,980	1,385
Antidilutive common share equivalents	1,929	1,730	1,980	1,385

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 Federal Communications Commission ("FCC") licenses. Under the terms of these agreements, the acquiring company makes specified periodic payments to the holder of the FCC license in exchange for the right to program and sell advertising for a specified portion of the station’s inventory of broadcast time. The acquiring company records revenues and expenses associated with the portion of the station’s inventory of broadcast time it manages. Nevertheless, as the holder of the FCC license, the owner-operator retains control and responsibility for the operation of the station, including responsibility over all programming broadcast on the station.

On February 11, 2014, the Company entered into an LMA in connection with its agreement to purchase WBLS-FM and WLIB-AM in New York City from YMF Media New York LLC and YMF Media New York License LLC (collectively, "YMF"). The LMA, which commenced on March 1, 2014, gave Emmis the right to program and sell advertising for the two New York stations. Emmis paid YMF $1.3 million per month and reimbursed YMF for certain monthly expenses through the first closing of the acquisition, which occurred on June 10, 2014. After the first closing, the LMA continues in effect until the second closing at a reduced monthly fee of approximately $0.7 million. During the three-month and six-month periods ended ended August 31, 2014, Emmis recorded $0.4 million and $4.2 million of LMA fee expense. See Note 2 for more discussion of the Company's purchase of WBLS-FM and WLIB-AM from YMF.

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

The following table summarizes certain operating results of 98.7FM for all periods presented. 98.7FM is a part of our radio segment.



	For the three months ended August 31,				For the six months ended August 31,
	2013		2014		2013		2014
	(amounts in 000's)
Net revenues	$	2,583	$	2,583	$	5,166	$	5,166
Station operating expenses, excluding depreciation and amortization expense	251		260		507		484
Interest expense	861		815		1,731		1,643

Assets and liabilities of 98.7FM as of February 28, 2014 and August 31, 2014 were as follows:



	As of February 28,		As of August 31,
	2014		2014
	(amounts in 000's)
Current assets:
Restricted cash	$	1,407	$	1,326
Prepaid expenses	614		630
Total current assets	2,021		1,956
Noncurrent assets:
Indefinite lived intangibles	60,525		60,525
Deferred debt issuance costs, net	2,759		2,626
Deposits and other	3,082		3,781
Total noncurrent assets	66,366		66,932
Total assets	$	68,387	$	68,888
Current liabilities:
Accounts payable and accrued expenses	$	56	$	26
Current maturities of long-term debt	4,541		4,762
Deferred revenue	728		753
Other current liabilities	256		248
Total current liabilities	5,581		5,789
Noncurrent liabilities:
Long-term debt, net of current portion	70,401		67,960
Other noncurrent liabilities	24		27
Total noncurrent liabilities	70,425		67,987
Total liabilities	$	76,006	$	73,776

Restricted Cash

The Company's restricted cash, included in current assets in the accompanying condensed consolidated balance sheets, totaled $2.2 million and $77.9 million as of February 28, 2014 and August 31, 2014, respectively.

As further discussed in Note 2, $76.0 million of the proceeds of the 2014 Credit Agreement will be used to fund the second closing of the Company's purchase of WBLS-FM and WLIB-AM. Because of the designated use for this cash, management has classified the $76.0 million as restricted as of August 31, 2014. If the second closing of the transaction does not occur on or before February 17, 2015, the $76.0 million will be used to repay 2014 Credit Agreement term loans.

The terms of our non-recourse notes and related agreements discussed in Note 5 restrict a portion of our cash on deposit for specific operating and financing purposes. Restricted cash related to the non-recourse notes and related agreements totaled $1.4 million and $1.3 million as of February 28, 2014 and August 31, 2014, respectively.

In connection with the Company's agreement with Sprint/United Management Company (“Sprint”), the Company collects cash from other participating companies in the radio industry and remits cash collected to Sprint. The entirety of cash collected but not yet remitted to Sprint classified as restricted cash as of February 28, 2014 and August 31, 2014 was $0.8 million and $0.6 million, respectively.

Recent Accounting Pronouncements

In June 2013, the FASB issued a new accounting standard that requires the presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the consolidated balance sheets when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance was effective for the Company beginning March 1, 2014. The adoption of this guidance did not have any effect on the presentation of the Company’s condensed consolidated financial statements.

In April 2014, the FASB issued Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, to update the criteria for reporting discontinued operations and enhance related disclosures. Under the new guidance, only disposals that have a major effect through a strategic shift on an organization’s operations and financial results should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The guidance is effective for the Company as of March 1, 2015. The Company expects that this new guidance will reduce the number of transactions that will qualify for reporting discontinued operations.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. This guidance will be effective for the Company in the first quarter of its fiscal year ending February 28, 2018. The Company is currently evaluating the impact, if any, the adoption of this guidance will have on its financial position, results of operations or cash flows.

Reclassifications

Certain reclassifications have been made to the prior year’s financial statements to be consistent with the August 31, 2014 presentation. The reclassifications have no impact on net income previously reported.