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 29, 2016. 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 May 31, 2016, and the results of its operations and cash flows for the three-month periods ended May 31, 2015 and 2016.

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 29, 2016 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 May 31, 2015 and 2016 consisted of stock options and restricted stock awards. Potentially dilutive securities at May 31, 2015 also included Series A non-cumulative convertible preferred stock (the “Preferred Stock”). All shares of Preferred Stock were converted into Class A common stock during the three months ended May 31, 2016. See Note 10 for more discussion of the conversion of Preferred Stock. The following table sets forth the calculation of basic and diluted net income per share:



	For the three months ended
	May 31, 2015					May 31, 2016
	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	$	1,525	43,217	$	0.04	$	2,686	47,070	$	0.06
Impact of equity awards	—		1,890	—		—		225	—
Impact of conversion of preferred stock into common stock	—		2,266	—		—		—	—
Diluted net income per common share:
Net income available to common shareholders	$	1,525	47,373	$	0.03	$	2,686	47,295	$	0.06

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 May 31,
	2015	2016
	(shares in 000’s )
Equity awards	3,592	8,208
Antidilutive common share equivalents	3,592	8,208

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, often 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 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 May 31,
	2015		2016
	(amounts in 000's)
Net revenues	$	2,583	$	2,583
Station operating expenses, excluding depreciation and amortization expense	257		251
Interest expense	780		728

Assets and liabilities of 98.7FM as of February 29, 2016 and May 31, 2016 were as follows:



	As of February 29,		As of May 31,
	2016		2016
	(amounts in 000's)
Current assets:
Restricted cash	$	1,464	$	1,022
Prepaid expenses	545		530
Total current assets	2,009		1,552
Noncurrent assets:
Property and equipment, net	253		244
Indefinite lived intangibles	49,297		49,297
Deposits and other	5,460		5,678
Total noncurrent assets	55,010		55,219
Total assets	$	57,019	$	56,771
Current liabilities:
Accounts payable and accrued expenses	$	14	$	17
Current maturities of long-term debt	5,453		5,582
Deferred revenue	779		807
Other current liabilities	223		219
Total current liabilities	6,469		6,625
Noncurrent liabilities:
Long-term debt, net of current portion and unamortized debt discount	57,728		56,359
Total noncurrent liabilities	57,728		56,359
Total liabilities	$	64,197	$	62,984

Restricted Cash

The Company's restricted cash, included in current assets in the accompanying condensed consolidated balance sheets, totaled $1.5 million and $1.7 million as of February 29, 2016 and May 31, 2016, 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 $1.0 million as of February 29, 2016 and May 31, 2016, 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 May 31, 2016 was $0.7 million. The Company had remitted to Sprint all collected cash related to its agreement as of February 29, 2016.

Noncontrolling Interests

The Company follows Accounting Standards Codification paragraph 810-10-65-1 to report the noncontrolling interests related to our Austin radio partnership and Digonex. We have a 50.1% controlling interest in our Austin radio partnership. We do not own any of the common equity of Digonex, but we consolidate the entity because we control its board of directors via rights granted in convertible preferred stock and convertible debt that we own.

Noncontrolling interests represents the noncontrolling interest holders' proportionate share of the equity of the Austin radio partnership and Digonex. Noncontrolling interests are adjusted for the noncontrolling interest holders' proportionate share of the earnings or losses of the applicable entity. The noncontrolling interest continues to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance. Below is a summary of the noncontrolling interest activity for the three months ended May 31, 2015 and 2016:



	Austin radio partnership			Digonex			Total noncontrolling interests
Balance, February 28, 2015	$	47,883		$	(1,222	)	$	46,661
Net income (loss)	1,614			(981		)	633
Distributions to noncontrolling interests	(1,636		)	—			(1,636		)
Balance, May 31, 2015	$	47,861		$	(2,203	)	$	45,658

Balance, February 29, 2016	$	47,556		$	(9,159	)	$	38,397
Net income (loss)	1,527			(898		)	629
Distributions to noncontrolling interests	(1,187		)	—			(1,187		)
Balance, May 31, 2016	$	47,896		$	(10,057	)	$	37,839

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 2015-05, 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 was effective for the Company as of March 1, 2016. The adoption of this guidance did not have any effect on the Company's financial position, results of operations, or cash flows.

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 was effective for the Company as of March 1, 2016. The adoption of this guidance did not have any effect on the Company's financial position, results of operations, or cash flows.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842). This update requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance will be effective for the Company as of March 1, 2019. A modified retrospective transition method is required. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting (ASU 2016-09) to simplify the accounting for share-based payment transactions, including the income tax consequences, and standardize certain classifications on the statement of cash flows. As permitted by ASU 2016-09, the Company chose to early adopt the provisions of this update as of March 1, 2016. The adoption of this guidance did not have any effect on the Company's financial position, results of operations, or cash flows.