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 28, 2013. 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 May 31, 2013, and the results of its operations and cash flows for the three-month periods ended May 31, 2012 and 2013.

Basic and Diluted Net (Loss) Income Per Common Share

Basic net (loss) income 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 (loss) 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, 2012 and 2013 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 (loss) income per share from continuing operations:


	Three Months Ended
	May 31, 2012								May 31, 2013
						Net Loss								Net Income
	Net Loss			Shares		Per Share			Net Income			Shares		Per Share
	(amounts in 000’s, except per share data)
Basic net (loss) income per common share:
Net (loss) income available to common shareholders from continuing operations	$	(5,031	)		38,779	$	(0.13	)	$	3,725			41,174	$	0.09
Impact of equity awards		—			—					—			2,043
Impact of conversion of preferred stock into common stock		—			—					(249	)		2,287

Diluted net (loss) income per common share:
Net income available to common shareholders from continuing operations	$	(5,031	)		38,779	$	(0.13	)	$	3,476			45,504	$	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 May 31,
	2012		2013
	(shares in 000’s )
6.25% Series A convertible preferred stock		2,288		—
Stock options and restricted stock awards		9,166		2,399

Antidilutive common share equivalents		11,454		2,399

Discontinued Operations – Summary of results

The results of operations and related disposal costs, gains and losses for business units that the Company has sold or expects to sell are classified in discontinued operations for all periods presented.

A summary of the income from discontinued operations is presented below:


	Three months ended May 31,
	2012			2013
Income (loss) from operations:
KXOS-FM (Radio)		(141	)		—
Emmis Interactive Inc. (Radio)		(727	)		—
Slovakia Radio Network (Radio)		7			—
Bulgaria Radio Network (Radio)		(307	)		—
Sampler Publications (Publishing)		116			—

Total		(1,052	)		—
Provision for income taxes		1,307			—

Total loss from operations, net of tax		(2,359	)		—

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. 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 term loans 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 May 31,
	2012		2013
Net revenues	$	1,750	$	—
Station operating expenses, excluding depreciation and amortization expense		20		—
Depreciation and amortization expense		104		—
Interest expense		1,767		—
Provision for income taxes		1,096		—

Discontinued Operation — Emmis Interactive

On October 31, 2012, Emmis completed the sale of Emmis Interactive Inc., a subsidiary of Emmis that provided a content management system, data analytic tools and related services, to Marketron Broadcast Solutions, LLC (“Marketron”) for no net proceeds. The sale of Emmis Interactive Inc. allows Emmis to mitigate expected future operating losses and more clearly focus on core radio and publishing operating strategies. Marketron had assumed operating control of Emmis Interactive, Inc., on October 4, 2012. In connection with the sale, Emmis recorded a loss on sale of assets of approximately $0.7 million, which was primarily related to severance for former employees.

The operations of Emmis Interactive Inc. had historically been included in the radio segment. The following table summarizes certain operating results of the Emmis Interactive Inc. for all periods presented:


	Three months ended May 31,
	2012		2013
Net revenues	$	1,239	$	—
Station operating expenses, excluding depreciation and amortization expense		1,962		—
Depreciation and amortization		137		—
Other income		133		—

Discontinued Operation – Country Sampler, Smart Retailer and related publications

On October 1, 2012, Emmis completed the sale of Country Sampler magazine, Smart Retailer magazine, and related publications (altogether the “Sampler Publications”) and certain real estate used in their operations to subsidiaries of DRG Holdings, LLC. Emmis believed the sale of the Sampler Publications, which were niche crafting publications, would enable it to more clearly focus on its core city and regional publications. Emmis received gross proceeds from the sale of $8.7 million, incurred approximately $0.2 million in transaction expenses and tax obligations, and used the remaining $8.5 million to repay term loans under the Company’s 2006 Credit Agreement. In connection with the sale, Emmis recorded a gain on sale of assets of approximately $0.7 million.

In accordance with the provisions of Accounting Standards Codification (“ASC”) 205-20-45, the Company allocated interest expense associated with the estimate of term loans 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 May 31,
	2012		2013
Net revenues	$	2,319	$	—
Station operating expenses, excluding depreciation and amortization expense		1,992		—
Depreciation and amortization		22		—
Interest expense		189		—
Provision for income taxes		129		—

Discontinued Operation –Slovakia Radio

On February 25, 2013, Emmis completed the sale of its Slovakian radio network to Bauer Ausland 1 GMBH for $21.2 million in cash. Emmis believed the sale of its international radio properties would better enable the Company to focus its efforts on its domestic radio stations. In connection with the sale, Emmis recorded a gain on sale of assets of approximately $14.8 million.

The operations of our Slovakian radio network had historically been included in the radio segment. The following table summarizes certain operating results of our Slovakian radio network for all periods presented:


	For the three months ended May 31,
	2012		2013
Net revenues	$	2,277	$	—
Station operating expenses, excluding depreciation and amortization expense		1,665		—
Depreciation and amortization		180		—
Interest expense		400		—
Other expense, net		25		—
Provision for income taxes		82		—

Discontinued Operation – Bulgaria Radio

On January 3, 2013, Emmis completed the sale of its Bulgarian radio network to Reflex Media EEOD for $1.7 million in cash. Emmis believed the sale of its international radio properties would better enable the Company to focus its efforts on its domestic radio stations. In connection with the sale, Emmis recorded a loss on sale of assets of approximately $1.3 million. The loss on disposal primarily resulted from the reclassification of accumulated currency translation adjustments.

The operations of our Bulgarian radio network had historically been included in the radio segment. The following table summarizes certain operating results of our Bulgarian radio network for all periods presented:


	For the three months ended May 31,
	2012		2013
Net revenues	$	234	$	—
Station operating expenses, excluding depreciation and amortization expense		429		—
Depreciation and amortization		110		—
Other expense, net		2		—

Summary of Assets and Liabilities of Discontinued Operations:


	As of February 28, 2013		As of May 31, 2013
Current assets:
Cash and cash equivalents	$	579	$	528
Accounts receivable, net		128		—
Prepaid expenses		17		—
Other		38		—

Total current assets	$	762	$	528

Current liabilities:
Accounts payable and accrued expenses	$	2,169	$	1,126

Total current liabilities	$	2,169	$	1,126

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 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. Emmis recognized $0.9 million and $2.6 million of LMA fees, recorded as net revenues in the accompanying condensed consolidated statements of operations, related to the 98.8FM LMA during the three months ended May 31, 2012 and 2013, respectively.

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 affiliates of GRC consummated the purchase of KXOS-FM on August 23, 2012. Emmis recognized $1.8 million of LMA fees, recorded as income from discontinued operations, net of tax, related to the KXOS-FM LMA during the three months ended May 31, 2012.