UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission File No. 0-25969

 

RADIO ONE, INC.

(Exact name of registrant as specified in its charter)

 

 

5900 Princess Garden Parkway

7th Floor

Lanham, Maryland 20706

(Address of principal executive offices)

 

Registrant’s telephone number, including area code

(301) 306-1111

 

Securities registered pursuant to Section 12(b) of the Act:

None

 

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, $.001 par value

Class D Common Stock, $.001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o     No þ

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Yes o     No þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.  Yes o     No þ

 

The number of shares outstanding of each of the issuer’s classes of common stock is as follows:

 

 

The aggregate market value of common stock held by non-affiliates of the Registrant, based upon the closing price of the Registrant’s Class A and Class D common stock on June 30, 2006, was approximately $577.4 million.

 

 

Previously filed annual reports on Form 10-K and 10-K/A and quarterly reports on Form 10-Q, for fiscal periods commencing on or after January 1, 1999, affected by the restatements contained in this Form 10-K have not been amended and should no longer be relied upon.

 

In this Form 10-K, we are restating, for reasons described below, the consolidated balance sheet as of December 31, 2005 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2005 and 2004. This Form 10-K reflects the restatement of Selected Consolidated Financial Data for the years ended December 31, 2005, 2004, 2003 and 2002 in Item 6, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 for the years ended December 31, 2005 and 2004. In addition, we are restating the unaudited quarterly financial information and financial statements for the interim periods of 2005. The unaudited quarterly financial information and financial statements for the interim periods of 2006 are not restated, and the impact from the restatement was recorded in the three months ended December 31, 2006, as it did not have a material impact on 2006 annual or interim operating results.

 

The restatements do not result in a change to our previously reported revenue, cash flow from operations or total cash and cash equivalents shown in our historical consolidated financial statements. The stock-based compensation charges, including the tax effect and other adjustments, decreased net income by approximately $9.0 million for the years ended December 31, 1999 through December 31, 2005. For the year ended December 31, 2006, the stock-based compensation charges, including the tax effect and other adjustments related to the restatement increased the net loss by $246,000.

 

We have not amended any of our previously filed annual or quarterly reports on Form 10-K or 10-K/A for the periods affected by the restatement. For this reason, the consolidated financial statements and related financial information contained in such previously filed reports for the period from January 1, 1999 through December 31, 2005 should no longer be relied upon.

 

Audit committee review

 

Prompted by numerous headlines regarding the Securities and Exchange Commission’s (“SEC”) investigation of options practices by public companies, we conducted a voluntary, internal review of our historical stock option grant practices and related accounting. The review covered options granted during the period from May 1999 (the date of our initial public offering) through December 2006. Based on our preliminary findings, the Company’s audit committee retained the law firm of Covington & Burling LLP (“Covington”) to assist them in conducting a full investigation of our past option grant practices. Covington retained three information technology vendors to facilitate the search and retrieval of electronic data from our computer and backup storage systems, interviewed 27 current and former employees, board members, executive officers and outside counsel and reviewed over a million pages of documents. The documents reviewed included compensation committee and board meeting minutes, written consents, electronic data, employment and payroll records, employment agreements and offer letters, grant agreements and notices, SEC filings, recipient lists, stock option database information, and other relevant documents. Based on Covington’s investigation, the audit committee found no fraud or intentional wrongdoing. As a result of the internal review and investigation by Covington, the audit committee found that the original measurement dates of certain stock option grants, for financial accounting purposes, did not meet the requirements of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Consequently, for financial accounting purposes, we made the decision to revise the measurement dates for nine of the large grants awarded, and six individual grants, consistent with the standards of APB Opinion No. 25. With the exception of one grant, the closing price of our stock at the original stated grant date was lower than the closing price on the revised measurement date, which resulted in additional stock-based compensation expense in each of the years from 1999 through 2006. The additional stock-based compensation expense in some years was not material; the adjustment to 2006 was not material and was recorded in the fourth quarter of 2006.

 

Stock options grant summary

 

From May 1999 through December 31, 2006, we awarded stock options covering approximately 9.5 million shares of common stock. As shown in the table below, there were six annual company-wide grants to eligible employees as well as grants to executive officers, non-employee board members and individual employees. There was no annual grant to employees in 2004 and no annual grant to employees, executive officers or non-employee board members in 2006. Other than non-employee board members and one contractor, we did not award stock options to non-employees.

 

 

 

 

Adjustments to measurement dates

 

The requirement to revise the measurement dates of certain stock option grants, for financial accounting purposes, to meet the measurement date criteria of APB Opinion No. 25, is attributed to a number of different circumstances, described in the following paragraphs. Although measurement dates were adjusted in nine of the 11 large grants, 93% of the additional pre-tax stock-based compensation expense recorded is attributable to the April 2001 and the October 2000 grants. All remaining non-forfeited options awarded as part of the April 2001 grant were cancelled in May 2007. Of the nine large grants where measurement dates were revised, five involved grants to executive officers and/or non-employee directors, and the resulting additional pre-tax stock-based compensation expense was approximately $7.8 million.

 

No contemporaneous documentation of approval.  In the December 2002 and December 2003 company-wide grants, one of which also included executive officers, there was no contemporaneous documentation to confirm that compensation committee or board approval had occurred on the indicated grant date. Grant approval in each case was documented by unanimous written consent (“UWC”), using the “as of” date in the signed consent as the approval date. The measurement dates were adjusted to conform to the date on which the last consent was received, as evidenced by the header on the return telecopy, since the required granting actions, including approval, were not complete until the signed consents were returned to us. In the August 2003, June 2004 and May 2005 grants to non-employee board members, there was no contemporaneous documentation to confirm that approval had occurred on the original grant date. The August 2003 and June 2004 measurement dates were revised to the date that the Form 4 was filed with the SEC, which were two days after the originally assigned measurement dates for both grants. The May 2005 measurement date was revised to the date approval occurred, which was several weeks later.

 

Selection of grant date prior to approval.  In the December 2001 company-wide grant, the grant date selected was prior to the date on which the compensation committee approved the grant and the schedule of option recipients. The measurement date was adjusted to the date of the compensation committee meeting during which the related final granting action of approval occurred. In the April 2001 grant to executive officers and non-employee board members, the grant was ratified at a meeting of the board of directors, at which the board specified a designated grant date and corresponding exercise price that preceded the date of the board meeting by several weeks. The measurement date was adjusted to the date that the board of directors ratified the grant, as reflected in the board minutes. That grant accounted for 84% of the additional pre-tax stock-based compensation expense recorded. None of these options was exercised and no individual received a financial benefit from this grant. All remaining non-forfeited options awarded with this grant were cancelled in May 2007.

 

Lack of finality of recipient list on company-wide grants.  In the October 2000 and May 2005 company-wide grants, the list of grant recipients and the number of options awarded to each recipient was not documented or determined with finality until a date subsequent to the original measurement date. Because there was either no date on the final recipient lists, or because the recipient list was not final until after the original grant date, we determined the revised measurement date for the company-wide grant based on e-mail, option database record add date, employee communications, and other available documentation.

 

Improper measurement date selection.  In each of the six company-wide grants, certain recipients, including a contractor in one case, were added or option amounts were increased or decreased after the revised measurement date. In each of these cases, the best available evidence was used to determine the appropriate measurement date for the affected individual grant. The documentation that was relied on included the date of the letter communicating the terms of the award to the employee, the option database record add date and e-mail.

 

Incorrect measurement dates for new hire and other grants.  In three instances, the grant date for options offered to new employees as an incentive to accept the offer preceded the actual start date for the employee. This occurred either because the grant date used was the date of the offer letter rather than the start date or the employee’s start date was delayed but the grant date was not changed accordingly. In addition, there were three individual grants related to an employment agreement or status which were incorrectly recorded and adjusted to the appropriate grant measurement date. As a result, we recognized $11,000 of additional pre-tax stock-based compensation expense for the period from January 1, 1999 through December 31, 2005, relating to six individual grants.

 

The following table summarizes the above reasons for measurement date changes and the additional pre-tax stock-based compensation expense recognized, on a grant by grant basis:

 

 

 

Accounting impact

 

As a result of the investigation, we recorded additional stock-based compensation expense, after tax, of approximately $9.2 million, spread over the eight-year period from 1999 through 2006. The impact on our consolidated balance sheet at December 31, 2006 was an increase in additional paid-in capital of $9.3 million and an increase in accumulated deficit of $9.2 million, and at December 31, 2005, the impact was an increase in additional paid-in capital of $9.2 million and an increase in accumulated deficit of $9.0 million. There was no impact on revenue.

 

The following table shows the incremental impact for each year of the restatement period 1999 through 2005 from the stock-based compensation adjustments and related income tax effects (in thousands):

 

 

Taxes

 

The tax consequences of the incorrect measurement dates have been computed and attributed to the years in which the errors arose. In the aggregate, the financial impact of these tax adjustments is a liability of $503,000 as of December 31, 2006. As a result of the change in measurement dates described above, certain stock options granted from May 1999 to December 2005 were issued at prices below fair market value on the revised measurement date and should have been classified as Non-Qualified Stock Options (“NQs”), rather than Incentive Stock Options (“ISOs”). Due to the differences in the tax treatment between ISOs and NQs, we underreported or under-withheld certain payroll taxes for those NQ options. The tax liabilities, including interest and penalties, that we have recorded include the impact of the reclassification of these options for tax purposes as depicted in the pre-tax adjustments column of the table included in Accounting Impact above. There were no options exercised in 1999 and 2000 for any grants that included revised measurement dates; hence, there was no resulting pre-tax adjustment impact. The income tax benefit of the additional stock-based compensation expense is significantly offset by the impact of Internal Revenue Code Section 162(m) limitations for three executive officers awarded options for the April 2001 grant. As a result of Section 162(m), approximately $2.4 million of the tax benefit lost was because of the maximum $1.0 million of deductible compensation allowed for federal income tax purposes.

 

Judgment and interpretation

 

The revised measurement dates were based on management’s assessment of the date on which all of the required actions for a specific grant were final. However, the lack of conclusive evidence for certain grants required management to exercise judgment in determining the revised measurement dates in those cases. We believe that we have used the best date that met all the conditions that constitute a measurement date under APB Opinion No. 25 in this restatement, taking into consideration all of the available evidence. We also believe our approach is the most appropriate way to establish the measurement date, consistent with the SEC’s guidance that the appropriate accounting will depend on the particular facts and circumstances, and that the issuer must use all available relevant information to form a reasonable conclusion. Alternative approaches to those used by us could have resulted in different compensation expense than those recorded by us in this restatement. Solely for the purpose of assessing the

possible effect on compensation expense that using different measurement dates could have had, we selected alternative measurement dates, if any, that had any reasonable support, and calculated the resulting additional compensation expense. Based on this assessment, the resulting additional stock-based compensation could have been as high as approximately $12.3 million on a pre-tax basis, instead of approximately $9.3 million included in this restatement. The possible additional $3.0 million pre-tax compensation expense resulting from the selection of alternate measurement dates does not materially impact the affected interim or annual results of operations for the seven-year period covering the restatement.

 

Regulatory matters

 

We have received a letter of informal inquiry from the SEC requesting information related to our stock option grant practices review. The SEC letter states that the informal inquiry should not be construed as an indication by the SEC or its staff that any violation of law has occurred, or has an adverse reflection upon any person, entity or security. We intend to cooperate fully with the SEC in this matter.

 

We have received NASDAQ Staff Determination notices that we are not in compliance with NASDAQ Marketplace Rules for continued listing because we have not timely filed our Annual Report on Form 10-K for the year ended December 31, 2006 or our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007. These delisting notifications are routine procedure when a NASDAQ listed company fails to complete a required filing in a timely manner. We have requested an extension to file and believe that with the filing of this Form 10-K and our subsequent filing of our Form 10-Q for the quarter ended March 31, 2007, we will have returned to compliance with the rules.

 

Other restatement item

 

In addition to the adjustments related to the stock option review, the restated consolidated financial statements presented in this Form 10-K include an adjustment to correct an accounting error for the year ended December 31, 2005. This correction relates to a change in methodology in determining the carry forward of prior year net operating losses (“NOLs”) for state tax purposes. In connection with the change in methodology, an error was made in calculating the NOLs for certain states for 2005. The impact on the financial statements for the year ended December 31, 2005 is an additional deferred tax expense of approximately $1.1 million. The correction pertained to and is recorded in the three months ended December 31, 2005, and did not have a material impact on 2005 interim or annual results. The combined impact of the state tax NOL correction and the stock-based compensation adjustments described above reduced net income by approximately $1.9 million and $10.1 million for the year ended December 31, 2005 and the seven-year restatement periods from 1999 through 2005, respectively.

 

Financial Statements

 

See Note 2 to Consolidated Financial Statements for the impact of these adjustments on the consolidated financial statements and footnotes.

 

RADIO ONE, INC. AND SUBSIDIARIES

 

Form 10-K
For the Year Ended December 31, 2006

TABLE OF CONTENTS

 

CERTAIN DEFINITIONS

 

Unless otherwise noted, the terms “Radio One,” “the Company,” “we,” “our” and “us” refer to Radio One, Inc. and its subsidiaries.

 

Cautionary Note Regarding Forward-Looking Statements

 

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are not historical facts, but rather reflect our current expectations concerning future results and events. All statements other than statements of historical fact are “forward-looking statements” including any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. You can identify some of these forward-looking statements by our use of words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “likely,” “may,” “estimates” and similar expressions. We cannot guarantee that we will achieve these plans, intentions or expectations. Because these statements apply to future events, they are subject to risks and uncertainties, some of which are beyond our control, that could cause actual results to differ materially from those forecast or anticipated in the forward-looking statements. These risks, uncertainties and factors include, but are not limited to the factors described under the heading “Risk Factors” contained in this report.

 

You should not place undue reliance on these forward-looking statements, which reflect our view as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise.

 

Overview

 

Radio One is one of the largest radio broadcasting companies in the United States and the leading radio broadcasting company primarily targeting African-Americans. We own or operate 71 radio stations in 22 markets; 43 of these stations (34 FM and 9 AM) are in 14 of the top 20 African-American markets. We reach approximately 14 million listeners every week. Our primary source of revenue is the sale of local and national advertising for broadcast on our radio stations.

 

Our Chairperson, Catherine L. Hughes, was a co-founder of Radio One in 1980. She and her son, Alfred C. Liggins, III, our Chief Executive Officer and President, together have more than 50 years of operating experience in the radio broadcasting industry. Ms. Hughes, Mr. Liggins and our strong management team have successfully implemented a strategy of acquiring and turning around underperforming radio stations.

 

We believe radio broadcasting primarily targeting African-Americans continues to have growth potential and that we have a competitive advantage in the African-American market and the radio industry in general due to our focus on urban formats and our skill in programming and marketing these formats. To maintain or improve our competitive position, we have made and continue to make acquisitions of, and investments in, radio stations and other complementary media properties. We continually explore opportunities in other forms of media that are complementary to our core radio business, which we believe will allow us to leverage our expertise in the African-American market and our significant listener base. Over the past several years, we launched TV One, LLC (“TV One”), an African-American targeted cable television network, with an affiliate of Comcast Corporation and other investors; we acquired 51% of Reach Media, Inc. (“Reach Media”), which operates the Tom Joyner Morning Show; we launched a new nationally syndicated African-American news/talk radio network; and we acquired certain assets of Giant Magazine, LLC (“Giant Magazine”), an urban-themed lifestyle and entertainment magazine.

 

Significant 2006 and Recent Events

 

Minneapolis Station Disposition.  In June 2007, the Company entered into an agreement to sell its radio station in the Minneapolis metropolitan area to Northern Lights Broadcasting, LLC for approximately $28.0 million in cash. Subject to the necessary regulatory approvals, the transaction is expected to close during the second half of 2007.

 

Dayton and Louisville Stations Disposition.  In May 2007, the Company entered into an agreement to sell all of its radio stations in the Dayton metropolitan area and five of its six radio stations in the Louisville metropolitan area to Main Line Broadcasting, LLC for approximately $76.0 million in cash. Subject to the necessary regulatory approvals, the transaction is expected to close during the second half of 2007.

 

WPRS-FM Acquisition.  In April 2007, we entered into an agreement to acquire the assets of WPRS-FM (formerly WXGG-FM), a radio station located in the Washington DC metropolitan area, and a local marketing agreement (“LMA”) with Bonneville International Corporation to operate the radio station pending the completion of the acquisition. We began broadcasting with an inspirational format to complement our existing presence in the Washington, DC market. We expect to complete this acquisition during the first half of 2008.

 

WDBZ-AM Acquisition.  In March 2007, we signed an agreement to acquire the assets of WDBZ-AM, a radio station located in the Cincinnati metropolitan area, for approximately $2.6 million in seller financing. We have been operating WDBZ-AM pursuant to a LMA since August 2001. We expect to complete this acquisition during the second half of 2007.

 

Giant Magazine Acquisition.  In December 2006, we acquired certain assets of Giant Magazine for $270,000. Giant Magazine is an urban-themed lifestyle and entertainment magazine. The publication will continue to be based in New York, while certain back-office functions will be consolidated into Radio One’s corporate offices.

 

Sale of WILD-FM.  In December 2006, we completed the sale of the assets of radio station WILD-FM, located in the Boston metropolitan area, for approximately $30.0 million in cash.

 

Re-branding of KKBT-FM.  In December 2006, we re-branded our Los Angeles radio station from KKBT-FM, “the Beat” to KRBV-FM, “V100, the Best Variety of R&B”. We brought in a new morning drive show host and a new line-up of radio talent. We believe that these changes will enhance V100’s performance in the challenging Los Angeles radio market.

 

WMOJ-FM Acquisition.  In September 2006, we acquired the assets of radio station WIFE-FM, located in the Cincinnati metropolitan area, for approximately $18.0 million in cash. In connection with the transaction, we acquired the intellectual property of Cincinnati radio station WMOJ-FM, also in the Cincinnati market, for approximately $5.0 million in cash. The newly acquired station was consolidated with our existing Cincinnati operations, and we began broadcasting with an urban adult contemporary format under the call sign of WMOJ-FM.

 

WHHL-FM Acquisition.  In May 2006, we acquired the assets of WHHL-FM (formerly WRDA-FM), a radio station located in the St. Louis metropolitan area, for approximately $20.0 million in cash. We began operating the station under a LMA in October 2005. The station has been reformatted and has been consolidated with our existing St. Louis operations.

 

African-American Talk Radio Network.  In January 2006, through a joint venture with Reach Media, we launched a new nationally syndicated African-American news/talk radio network. The network features leading African-American personalities who discuss ideas, issues, analysis and information targeted to the African-American audience. To date, 29 stations have committed to carrying all or a portion of the network’s programming.

 

Our Stations and Markets

 

The table below provides information about our radio stations and the markets in which we operate.

 

 

 

The African-American Market Opportunity

 

We believe that urban-formatted radio stations and urban-oriented media primarily targeting African-Americans continues to have growth potential for the following reasons:

 

Rapid African-American Population Growth.  From 2000 to 2005, the African-American population grew 4.8%, compared to a 4.3% overall population growth rate, and accounted for 12.1% of total population growth. The African-American population is expected to increase by approximately 2.4 million between 2005 and 2010 to approximately 40.0 million, a 9.9% increase from 2000, compared to an expected increase during the same period of 6.0% for the non-African-American population. African-Americans are expected to make up 17.9% of total population growth during this period. (Source: U.S. Census Bureau, 2004, “U.S. Interim Projections by Age, Sex, Race, and Hispanic Origin.”) According to the U.S. Census, the African-American population is nearly five years younger than the total U.S. population. As a result, urban formats, in general, tend to skew younger than formats targeted to the general market population. Over the next 30 years the African-American population is expected to exceed 50 million people and will represent more than 14% of the total U.S. population. The African-American consumer market is widespread geographically and represents an attractive customer segment in many states. (Source: The Multicultural Economy, the University of Georgia’s Selig Center for Economic Growth, 2006 Edition).

 

Higher African-American Income Growth.  The economic status of African-Americans improved at an above-average rate over the past two decades. The per capita income of African-Americans is expected to increase 21.1% between 2005 and 2010 (Source: U.S. Census Bureau, Historical Income Data). African-American buying power was estimated at $762.0 billion in 2005, up from $723.0 billion in 2004. African-American buying power is expected to increase to $981.0 billion by 2010, with cumulative growth of 28.8% between 2005 and 2010. In addition, the African-American consumer tends to have a different consumption profile than non-African-Americans. An annual report published by Target Market News provides a list of products and services for which African-American households spent more than non-African-Americans. In the most recent report, there were dozens of products and services listed in categories such as apparel and accessories, appliances, consumer electronics, food, personal care products, telephone service and transportation. (Source: The U.S. African-American Market, 6th Edition, Packaged Facts, January 2006).

 

Growth in Advertising Targeting the African-American Market.  We continue to believe that large corporate advertisers are becoming more focused on reaching minority consumers in the United States. The African-American community is considered an emerging growth market within the mature domestic market. It is estimated that major national advertisers spent over $2.5 billion on advertising that targets African-American consumers in 2004, up from $1.8 billion in 2000. (Source: Target Market News). We believe many large corporations are expanding their commitment to ethnic advertising. The companies that successfully market to the African-American audience have focused on building brand relationships. Advertisers are making an effort to fully understand the African-American consumer, and speak to them with messages that are relevant to their community, engaging the African-American consumer visibly and consistently, involving themselves with the interests of the African-American consumer and increasing African-American brand loyalty.

 

Growing Influence of African-American Culture.  We believe that there continues to be an ongoing “urbanization” of many facets of American society as evidenced by the influence of African-American culture in the areas of music, film, fashion, sports and urban-oriented television shows and networks. We believe that many companies from a broad range of industries and prominent fashion designers have embraced this urbanization trend in their products as well as their advertising messages.

 

Significant and Growing Internet Usage among African-Americans with Limited Targeted Online Content Offerings.  African-Americans are becoming significant users of the Internet. In one of the more recent studies available that tracks Internet usage patterns, African-Americans were found to use the Internet more hours per day than the general online population. Additionally, the growth of Internet penetration and high-speed Internet penetration in African-American households is expected to remain above that of the general population. Furthermore, the overwhelming number of African-Americans say there is not enough online content that is targeted towards them as a distinct culture with its own needs and values. (Source: 2005 AOL African-American Cyberstudy, conducted for America Online by Images Market Research). In fact, we believe that there is no one company that dominates the African-American market online and the lack of any strong competitive presence presents a significant opportunity for us to build an online business that is highly scalable.

 

Business Strategy

 

Radio Station Portfolio Optimization.  Our strategy is to make select acquisitions of radio stations, primarily in markets where we already have a presence, and to divest stations which are no longer strategic in nature. We may divest stations that do not have an urban format or stations located in smaller markets or markets where the African-American population is smaller, on a relative basis, than other markets in which we operate. In addition, we are continually looking for opportunities to upgrade existing radio stations by strengthening their signals to reach a larger number of potential listeners.

 

Investment in Complementary Businesses.  We intend to continue to invest in complementary businesses in the media and entertainment industry. The primary focus of these investments will be on businesses that provide entertainment and information content to African-American consumers. Such investments may include the Internet, publishing, and home video distribution. We believe that our existing asset base and audience coverage provide us with a competitive advantage in entering into these new businesses.

 

Top 60 African-American Radio Markets in the United States

 

In the table below, boxes and bold text indicate markets where we own and/or operate radio stations. Population estimates are for 2006 and are based upon data provided by Arbitron.

 

 

Operating Strategy

 

To maximize net broadcast revenue and station operating income at our radio stations, we strive to achieve the largest audience share of African-American listeners in each market, convert these audience share ratings to advertising revenue, and control operating expenses. Through our national presence we also provide advertisers with a radio station advertising platform that is a unique and powerful delivery mechanism to African-Americans. The success of our strategy relies on the following:

 

 

Market Research, Targeted Programming and Marketing

 

We use market research to tailor the programming, marketing and promotion of our radio stations to maximize audience share. We also use our research to reinforce our current programming and to identify unserved or

underserved markets or segments of the African-American population and to determine whether to acquire a new radio station or reprogram one of our existing radio stations to target those markets or segments.

 

We also seek to reinforce our targeted programming by creating a distinct and marketable identity for each of our radio stations. To achieve this objective, in addition to our significant community involvement discussed below, we employ and promote distinct, high-profile on-air personalities at many of our radio stations, many of whom have strong ties to the African-American community.

 

Ownership and Syndication of Programming Content

 

To diversify our revenue base, we seek to develop or acquire proprietary African-American targeted content. We distribute this content in a variety of ways, utilizing our own network of distribution assets or through distribution assets owned by others. If we distribute content through others, we will be paid for providing this content or receive advertising inventory in exchange. To date, our programming content efforts have included our investment in TV One and its related programming, our acquisition of 51% of the common stock of Reach Media, the creation of an African-American news/talk network, the acquisition of Giant Magazine and the recent development of syndicated radio shows targeting the Gospel radio market.

 

Radio Station Clustering, Programming Segmentation and Sales Bundling

 

We strive to build clusters of radio stations in our markets, with each radio station targeting different demographic segments of the African-American population. This clustering and programming segmentation strategy allows us to achieve greater penetration into each segment of our target market. We are then able to offer advertisers multiple audiences and to bundle the radio stations for advertising sales purposes when advantageous.

 

We believe there are several potential benefits that result from operating multiple radio stations in the same market. First, each additional radio station in a market provides us with a larger percentage of the prime advertising time available for sale within that market. Second, the more stations we program, the greater the market share we can achieve in our target demographic groups through the use of segmented programming. Third, we are often able to consolidate sales, promotional, technical support and business functions to produce substantial cost savings. Finally, the purchase of additional radio stations in an existing market allows us to take advantage of our market expertise and existing relationships with advertisers.

 

Sales, Marketing and Special Events

 

We have assembled an effective, highly trained sales staff responsible for converting audience share into revenue. We operate with a focused, sales-oriented culture, which rewards aggressive selling efforts through a commission and bonus compensation structure. We hire and deploy large teams of sales professionals for each of our stations or station clusters, and we provide these teams with the resources necessary to compete effectively in the markets in which we operate. We utilize various sales strategies to sell and market our stations as stand-alones, in combination with other stations within a given market, and across markets, where appropriate.

 

We have created a national platform of radio stations in some of the largest African-American markets. This platform reaches approximately 14 million listeners weekly, more than that of any other radio broadcaster primarily targeting African-Americans. National advertisers find advertising on all our radio stations an efficient and cost-effective way to reach this target audience. Through our corporate sales department, we bundle and sell our platform of radio stations to national advertisers, thereby enhancing our revenue generating opportunities, expanding our base of advertisers, creating greater demand for our advertising time inventory and increasing the capacity utilization of our inventory and making our sales efforts more efficient.

 

We engage in joint promotional activities with TV One, Reach Media and our news/talk joint venture with Reach Media in order to provide additional value to our advertisers by creating a more efficient medium to reach African-American consumers.

 

In order to create advertising loyalty, we strive to be the recognized expert in marketing to the African-American consumer in the markets in which we operate. We believe that we have achieved this recognition by focusing on serving the African-American consumer and by creating innovative advertising campaigns and promotional tie-ins

with our advertising clients and sponsoring numerous entertainment events each year. In these events, advertisers buy signage, booth space and broadcast promotions to sell a variety of goods and services to African-American consumers. As we expand our presence in our existing markets and into new markets, we may increase the number of events and the number of markets in which we host events based upon our evaluation of the financial viability and economic benefits of the events.

 

Strong Management and Performance-Based Incentives

 

We focus on hiring and retaining highly motivated and talented individuals in each functional area of our organization who can effectively help us implement our growth and operating strategies. Our management team is comprised of a diverse group of individuals who bring significant expertise to their functional areas. To enhance the quality of our management in the areas of sales and programming, general managers, sales managers and program directors have significant portions of their compensation tied to the achievement of certain performance goals. General managers’ compensation is based partially on achieving station operating income benchmarks, which creates an incentive for management to focus on both sales growth and expense control. Additionally, sales managers and sales personnel have incentive packages based on sales goals, and program directors and on-air talent have incentive packages focused on maximizing ratings in specific target segments.

 

Significant Community Involvement

 

We believe our active involvement and significant relationships in the African-American community in each of our markets provide a competitive advantage in targeting African-American audiences and significantly improve the marketability of our radio broadcast time to advertisers who are targeting such communities. We believe that a radio station’s image should reflect the lifestyle and viewpoints of the target demographic group it serves. Due to our fundamental understanding of the African-American community, we are well positioned to identify music and musical styles, as well as political and social trends and issues, early in their evolution. This understanding is then integrated into significant aspects of our operations and enables us to create enhanced awareness and name recognition in the marketplace. In addition, we believe our approach to community involvement leads to increased effectiveness in developing and updating our programming formats. We believe our enhanced awareness and more effective programming formats lead to greater listenership and higher ratings over the long-term.

 

Our Station Portfolio

 

The following table sets forth selected information about our portfolio of radio stations. Market population data and revenue rank data are from BIA Financials Investing in Radio Market Report, 2006 Fourth Edition. Audience share and audience rank data are based on Arbitron Survey four book averages ending with the Fall 2006 Arbitron Survey unless otherwise noted. As used in this table, “n/a” means not applicable or not available and “t” means tied with one or more radio stations.