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, 2017. 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, 2017, the results of its operations for the three-month and six-month periods ended August 31, 2016 and 2017, and cash flows for the six-month periods ended August 31, 2016 and 2017.

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, 2017 that have had a material impact on our condensed consolidated financial statements and related notes.

Common Stock Reverse Split

On July 8, 2016, the Company effected a one-for-four reverse stock split for its Class A, Class B and Class C common

stock. All share and per share information has been retroactively adjusted to reflect the reverse stock split.

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, 2016 and 2017 consisted of stock options and restricted stock awards. The following table sets forth the calculation of basic and diluted net income per share:




	For the three months ended
	August 31, 2016					August 31, 2017
	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	$	335	12,047	$	0.03	$	69,957	12,292	$	5.69
Impact of equity awards	—		252			—		221
Diluted net income per common share:
Net income available to common shareholders	$	335	12,299	$	0.03	$	69,957	12,513	$	5.59



	For the six months ended
	August 31, 2016					August 31, 2017
	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	$	3,021	11,922	$	0.25	$	69,690	12,287	$	5.67
Impact of equity awards	—		121	—		—		176	—
Diluted net income per common share:
Net income available to common shareholders	$	3,021	12,043	$	0.25	$	69,690	12,463	$	5.59

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 August 31,		For the six months ended August 31,
	2016	2017	2016	2017
	(shares in 000’s )
Equity awards	1,340	1,960	1,491	2,276
Antidilutive common share equivalents	1,340	1,960	1,491	2,276

Local Programming and Marketing Agreement Fees

The Company from time to time enters into local programming and marketing agreements (“LMAs”), often pending regulatory approval of transfer of the Federal Communications Commission ("FCC") licenses in connection with acquisitions or dispositions of radio stations. 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 May 8, 2017, Emmis and an affiliate of the Meruelo Group (the "Meruelo Group") entered into an LMA and asset purchase agreement related to KPWR-FM in Los Angeles. This LMA started on July 1, 2017 and terminated with the consummation of the sale of KPWR-FM on August 1, 2017. Emmis recognized $0.4 million of LMA fee revenue as a component of net revenues in our accompanying condensed consolidated statements of operations related to this LMA. See Note 10 for more discussion of our sale of KPWR-FM to the Meruelo Group.

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 August 31,				For the six months ended August 31,
	2016		2017		2016		2017
	(amounts in 000's)
Net revenues	$	2,583	$	2,583	$	5,166	$	5,166
Station operating expenses, excluding depreciation and amortization expense	363		296		614		589
Interest expense	715		656		1,443		1,328

Assets and liabilities of 98.7FM as of February 28, 2017 and August 31, 2017 were as follows:



	As of February 28,		As of August 31,
	2017		2017
	(amounts in 000's)
Current assets:
Restricted cash	$	1,550	$	1,511
Prepaid expenses	445		481
Other current assets	7		13
Total current assets	2,002		2,005
Noncurrent assets:
Property and equipment, net	229		274
Indefinite lived intangibles	46,390		46,390
Deposits and other	6,205		6,406
Total noncurrent assets	52,824		53,070
Total assets	$	54,826	$	55,075
Current liabilities:
Accounts payable and accrued expenses	$	54	$	22
Current maturities of long-term debt	6,039		6,317
Deferred revenue	807		835
Other current liabilities	205		195
Total current liabilities	7,105		7,369
Noncurrent liabilities:
Long-term debt, net of current portion and unamortized debt discount	51,954		48,859
Total noncurrent liabilities	51,954		48,859
Total liabilities	$	59,059	$	56,228

Restricted Cash

As of August 31, 2017, restricted cash relates to cash on deposit in trust accounts related to our 98.7FM LMA in New York City that services long-term debt and cash held in escrow as part of our sale of four magazines in February 2017. The table below summarizes restricted cash held by the Company as of February 28, 2017 and August 31, 2017:



	As of February 28,		As of August 31,
	2017		2017
98.7FM LMA restricted cash	$	1,550	$	1,511
NextRadio LLC restricted cash	123		—
Cash held in escrow from sale of magazines restricted cash	650		650
Total restricted cash	$	2,323	$	2,161

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 Technologies Inc., a dynamic pricing business (hereinafter "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. As of August 31, 2017, Emmis owns rights that are convertible into approximately 82% of Digonex's common equity.

Noncontrolling interests represent 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 six months ended August 31, 2016 and 2017:



	Austin radio partnership			Digonex			Total noncontrolling interests
Balance, February 29, 2016	$	47,556		$	(9,159	)	$	38,397
Net income (loss)	3,048			(3,152		)	(104		)
Distributions to noncontrolling interests	(2,074		)	—			(2,074		)
Balance, August 31, 2016	$	48,530		$	(12,311	)	$	36,219

Balance, February 28, 2017	$	46,830		$	(13,909	)	$	32,921
Net income (loss)	3,151			(1,504		)	1,647
Distributions to noncontrolling interests	(2,254		)	—			(2,254		)
Balance, August 31, 2017	$	47,727		$	(15,413	)	$	32,314

Recent Accounting Pronouncements

In January 2017, the FASB issued Accounting Standards Update 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU was issued to simplify goodwill impairment by removing the second step of the goodwill impairment test. The Company early adopted this guidance as of March 1, 2017. The adoption of this guidance had no immediate impact on the Company's financial statements, but it could affect future goodwill impairment analysis.

In January 2017, the FASB issued Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU was issued to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance will be effective for the Company as of March 1, 2018. The Company does not expect adoption of this guidance will have a material impact on the Company's consolidated financial statements.

In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective for the Company as of March 1, 2018, and requires a retrospective transition method. The Company does not expect adoption of this guidance will have a material impact on the Company's consolidated financial statements.

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 May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), 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 as of March 1, 2018. The Company expects to use the modified retrospective method of adoption. The Company has completed its initial evaluation of potential changes from adopting the new standard on its financial reporting and disclosures, which included a detailed review of contractual terms for all of its significant revenue streams. The Company will complete its implementation plan during in the remainder of fiscal 2018. Based on its initial evaluation, the Company does not expect adoption of this guidance will have a material impact on the Company's consolidated financial statements, but disclosures related to revenue recognition will likely be expanded.