Summary of Significant Accounting Policies

6 Months Ended

Aug. 31, 2012

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

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 29, 2012. 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, 2012, the results of its operations for the three-month and six-month periods ended August 31, 2011 and 2012, and cash flows for the six-month periods ended August 31, 2011 and 2012.

Basic and Diluted Net Income (Loss) Per Common Share

Basic net income (loss) 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 income (loss) 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, 2011 and 2012 consisted of stock options, restricted stock awards and the 6.25% Series A cumulative convertible preferred stock (the “Preferred Stock”). Each share of our outstanding Preferred Stock in which the Company has not obtained rights may, at the election of the preferred holder, convert into 2.44 shares of common stock. Conversion of these shares of Preferred Stock into common stock would be antidilutive for the three-month and six-month periods ended August 31, 2011 and 2012. 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,
	2011		2012		2011		2012
	(shares in 000’s)
6.25% Series A cumulative convertible preferred stock		6,854		2,288		6,854		2,288
Stock options and restricted stock awards		7,565		7,274		7,522		6,898
Antidilutive common share equivalents		14,419		9,562		14,376		9,186

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, which is included in gain from discontinued operations in the accompanying condensed consolidated statements of operations. 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 Credit Agreement debt required to be repaid as a result of the sale of KXOS-FM to its operations for all periods presented.

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,
	2011		2012			2011		2012
Net revenues	$	1,750	$	1,581		$	3,500	$	3,331
Station operating expenses, excluding depreciation and amortization expense		25		7			89		27
Depreciation and amortization expense		116		65			239		169
Gain on sale of station		—		32,757			—		32,757
Interest expense		1,746		1,591			3,226		3,358
Provision (benefit) for income taxes		2,139		(8,865	)		2,170		(7,769	)

Discontinued Operation – Country Sampler, Smart Retailer and related publications

On August 10, 2012, Emmis entered into a non-binding letter of intent to sell the assets of Country Sampler magazine, Smart Retailer magazine, and related publications (altogether the “Sampler Publications”). Emmis and subsidiaries of DRG Holdings, LLC closed on the sale of the Sampler Publications on October 1, 2012. See Note 13 for more discussion.

In accordance with the provisions of Accounting Standards Codification (“ASC”) 205-20-45, the Company allocated interest expense associated with the estimate of Credit Agreement debt required to be repaid as a result of the sale of the Sampler Publications to its operations for all periods presented.

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,
	2011		2012		2011		2012
Net revenues	$	1,527	$	1,620	$	3,797	$	3,939
Station operating expenses, excluding depreciation and amortization expense		1,468		1,612		3,333		3,604
Depreciation and amortization		20		22		38		44
Loss on sale of assets		23		—		23		—
Interest expense		187		188		345		377
Provision for income taxes		197		130		283		259

Discontinued Operation – Slager

On October 28, 2009, the Hungarian National Radio and Television Board (ORTT) announced that it was awarding to another bidder the national radio license then held by our majority-owned subsidiary, Slager. Slager ceased broadcasting effective November 19, 2009. The Company believes that the awarding of the license to another bidder was unlawful. In October 2011, Emmis filed for arbitration with the International Centre for Settlement of Investment Disputes seeking resolution of its claim.

Slager had historically been included in the radio segment. The following table summarizes certain operating results for Slager for all periods presented:

	Three months ended August 31,				Six months ended August 31,
	2011		2012		2011		2012
Net revenues	$	—	$	—	$	7	$	—
Station operating expenses, excluding depreciation and amortization expense		155		—		245		—
Other income		53		—		148		—
Loss before income taxes		102		—		90		—
Loss attributable to minority interests		28		—		49		—

Discontinued Operation – Flint Peak Tower Site

On April 6, 2011, Emmis sold land, towers and other equipment at its Glendale, CA tower site (the “Flint Peak Tower Site”) to Richland Towers Management Flint, Inc. for $6.0 million in cash. In connection with the sale, Emmis recorded a gain on sale of assets of approximately $4.9 million, which is included in gain from discontinued operations in the accompanying condensed consolidated statements of operations. Net proceeds from the sale were used to repay amounts outstanding under the credit facility.

The operations of the Flint Peak Tower Site had historically been included in the radio segment. The following table summarizes certain operating results for the Flint Peak Tower Site for all periods presented:

	Three months ended August 31,					Six months ended August 31,
	2011			2012		2011		2012
Net revenues	$	—		$	—	$	59	$	—
Station operating expenses, excluding depreciation and amortization expense		2			—		51		—
Depreciation and amortization		—			—		7		—
Gain on sale of assets		—			—		4,882		—
Income before income taxes		(2	)		—		4,883		—
Provision for income taxes		—			—		2,003		—

Summary of Assets and Liabilities of Discontinued Operations:

	As of February 29, 2012				As of August 31, 2012
			Slager, Flint Peak
	KXOS-FM		and Other		Slager
Current assets:
Cash and cash equivalents	$	—	$	914	$	695
Other		—		77		59
Total current assets		—		991		754
Noncurrent assets:
Property and equipment, net		578		—
Indefinite-lived intangibles		52,333		—		—
Other noncurrent assets		—		8		—
Total noncurrent assets		52,911		8		—
Total assets	$	52,911	$	999	$	754
Current liabilities:
Accounts payable and accrued expenses	$	—	$	551	$	493
Total current liabilities	$	—	$	551	$	493

Summary of Sampler Publications Assets and Liabilities Held-For-Sale:

	As of February 29, 2012		As of August 31, 2012
Current assets:
Prepaid expenses	$	579		746
Total current assets held-for-sale		579		746
Noncurrent assets:
Property and equipment, net		1,486		1,455
Goodwill		9,384		9,384
Total noncurrent assets held-for-sale		10,870		10,839
Total assets	$	11,449	$	11,585
Current liabilities:
Deferred income	$	3,544	$	3,401
Total current liabilities held-for-sale	$	3,544	$	3,401

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, 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 (see Note 8 for more discussion of this LMA and related transactions).

On June 20, 2011, Emmis entered into an LMA with LMA Merlin Media LLC for WRXP-FM in New York,WKQX-FM in Chicago and WLUP-FM in Chicago (the “Merlin Media LMA”). The LMA for these stations started on July 15, 2011 and terminated upon their sale on September 1, 2011.

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 GRC consummated its purchase of KXOS-FM on August 23, 2012. See Note 11 for more discussion of the sale of KXOS-FM.

LMA fees, recorded as net revenues in the accompanying condensed consolidated statements of operations, for the three-month and six-month periods ended August 31, 2011 and 2012 were as follows:

	Three months ended August 31,				Six months ended August 31,
	2011		2012		2011		2012
Continuing operations:
98.7FM, New York	$	—	$	2,582	$	—	$	3,443
Merlin Media LMA		310		—		310		—
Total	$	310	$	2,582	$	310	$	3,443
Discontinued operations:
KXOS-FM, Los Angeles	$	1,750	$	1,581	$	3,500	$	3,331
Total	$	1,750	$	1,581	$	3,500	$	3,331

Impairment Losses

Impairment losses for the three-month and six-month periods ended August 31, 2011 and 2012 were as follows:

	Three months ended August 31,				Six months ended August 31,
	2011		2012		2011		2012
Indefinite-lived intangible assets	$	—	$	—	$	—	$	10,971
Long-lived tangible assets		—		737		—		737
Total impairment loss	$	—	$	737	$	—	$	11,708

The Company periodically considers whether indicators of impairment of long-lived tangible assets are present. If such indicators are present, the Company determines whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying value. If less, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values.

During the three months ended August 31, 2012, the Company determined that a deceleration of market penetration and revenue growth of a non-core business in its radio segment indicated that this business’ long-lived tangible assets may be impaired. As the carrying value of these assets exceeded the undiscounted cash flows attributable to the business, the Company measured the amount of the impairment loss by comparing the assets’ fair value to their carrying value. The Company determined that the carrying value of the long-lived tangible assets exceeded their fair value, as determined by a discounted cash flow analysis, by $0.7 million, which is included in impairment loss in the accompanying condensed consolidated statements of operations.

The impairment loss related to indefinite-lived intangibles related to the LMA of 98.7FM. The impairment loss on this transaction is discussed in Note 3 below.