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, 2015. 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 November 30, 2015, and the results of its operations for the three-month and nine-month periods ended November 30, 2014 and 2015, and cash flows for the nine-month periods ended November 30, 2014 and 2015.

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, 2015 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 November 30, 2014 and 2015 consisted of stock options, restricted stock awards and the 6.25% Series A non-cumulative convertible preferred stock (the “Preferred Stock”). The following table sets forth the calculation of basic and diluted net income per share:




	For the three months ended
	November 30, 2014					November 30, 2015
	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	$	2,823	42,702	$	0.07	$	5,548	44,400	$	0.12
Impact of equity awards	—		2,408			—		990
Impact of conversion of preferred stock into common stock	—		2,266			—		2,114
Diluted net income per common share:
Net income available to common shareholders	$	2,823	47,376	$	0.06	$	5,548	47,504	$	0.12



	For the nine months ended
	November 30, 2014					November 30, 2015
	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	$	6,539	42,451	$	0.15	$	11,467	43,844	$	0.26
Impact of equity awards	—		2,738	—		—		1,408	—
Impact of conversion of preferred stock into common stock	—		2,266	—		—		2,199	—
Diluted net income per common share:
Net income available to common shareholders	$	6,539	47,455	$	0.14	$	11,467	47,451	$	0.24

Shares excluded from the calculation as the effect of their conversion into shares of our common stock would be antidilutive were as follows:



	For the three months ended		For the nine months ended
	November 30		November 30
	2014	2015	2014	2015
	(shares in 000’s )
Equity awards	2,162	5,383	1,627	3,948
Antidilutive common share equivalents	2,162	5,383	1,627	3,948

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 continued in effect until the second and final closing of the transaction, which occurred on February 13, 2015 at a reduced monthly fee of approximately $0.7 million. During the nine-month period ended November 30, 2014, Emmis recorded $4.2 million of LMA fee expense.

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

The following table summarizes certain operating results of 98.7FM for all periods presented. Net revenues for 98.7FM are solely related to LMA fees. 98.7FM is a part of our radio segment.



	For the three months ended November 30,				For the nine months ended November 30,
	2014		2015		2014		2015
	(amounts in 000's)
Net revenues	$	2,582	$	2,582	$	7,748	$	7,748
Station operating expenses, excluding LMA Fees and depreciation and amortization expense	270		232		754		748
Interest expense	804		754		2,447		2,302

Assets and liabilities of 98.7FM as of February 28, 2015 and November 30, 2015 were as follows:



	As of February 28,		As of November 30,
	2015		2015
	(amounts in 000's)
Current assets:
Restricted cash	$	1,467	$	1,552
Prepaid expenses	603		553
Total current assets	2,070		2,105
Noncurrent assets:
Property and equipment, net	—		259
Indefinite lived intangibles	51,063		51,063
Deferred debt issuance costs, net	2,495		2,295
Deposits and other	4,428		5,215
Total noncurrent assets	57,986		58,832
Total assets	$	60,056	$	60,937
Current liabilities:
Accounts payable and accrued expenses	$	22	$	14
Current maturities of long-term debt	4,990		5,336
Deferred revenue	753		779
Other current liabilities	241		228
Total current liabilities	6,006		6,357
Noncurrent liabilities:
Long-term debt, net of current portion	65,411		61,356
Other noncurrent liabilities	27		—
Total noncurrent liabilities	65,438		61,356
Total liabilities	$	71,444	$	67,713

Restricted Cash

The Company's restricted cash, included in current assets in the accompanying condensed consolidated balance sheets, totaled $2.7 million and $2.0 million as of February 28, 2015 and November 30, 2015, respectively.

The terms of our 98.7FM non-recourse notes and related agreements discussed in Note 4 restrict a portion of our cash on deposit for specific operating and financing purposes. Restricted cash related to the 98.7FM non-recourse notes and related agreements totaled $1.5 million and $1.6 million as of February 28, 2015 and November 30, 2015, 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, 2015 and November 30, 2015 was $1.3 million and $0.5 million, respectively.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. The FASB deferred implementation of this guidance by one year with the issuance of Accounting Standards Update 2015-14. As such, this guidance will be effective for the Company in the first quarter of its fiscal year ending February 28, 2019. The Company is currently evaluating the method of adoption and impact, if any, the adoption of this guidance will have on its financial position and results of operations.

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the fiscal year ending February 28, 2017, and for annual periods and interim periods thereafter. Early adoption is permitted. The adoption of this update is not expected to have an impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. Entities that have historically presented debt issuance costs as an asset, related to a recognized debt liability, will be required to present those costs as a direct deduction from the carrying amount of that debt liability. This presentation will result in debt issuance costs being presented the same way debt discounts have historically been handled. The ASU does not change the recognition, measurement, or subsequent measurement guidance for debt issuance costs. This guidance is effective for the Company as of March 1, 2016 and may be adopted early. The Company expects this new guidance will reduce total assets and total long-term debt on its consolidated balance sheets by amounts classified as deferred debt issuance costs, but does not expect this update to have any other effect on its consolidated financial statements.

In April 2015, the FASB issued Accounting Standards Update 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance as to when a company using a cloud computing service that includes a software license should capitalize and depreciate the software license. This guidance is effective for the Company as of March 1, 2016. The Company is currently evaluating this guidance, but does not anticipate it will have a material impact on its consolidated financial statements.

In September 2015, the FASB issued Accounting Standards Update 2015-16, Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments. This update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in the provisional amount as if the accounting had been completed at the acquisition date. This guidance is effective for the Company as of March 1, 2016. The Company does not anticipate this guidance will have any impact on its consolidated financial statements as the purchase price allocations of the Company's recent business combinations have been finalized.

In November 2015, the FASB issued Accounting Standards Update 2015-17, Income Taxes - Balance Sheet Classification of Deferred Taxes. This update simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities to be presented as noncurrent in a classified balance sheet. The Company adopted this update as of September 1, 2015. Adoption of this update did not have any effect on the Company's financial position as the Company did not have any deferred tax assets or liabilities classified as current in any period presented in the accompanying condensed consolidated balance sheets.