e10vq
 

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2007
 
Commission File No. 0-25969
 
 
 
 
RADIO ONE, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
         
Delaware     52-1166660  
(State or other jurisdiction of     (I.R.S. Employer  
incorporation or organization)
    Identification No. )
 
5900 Princess Garden Parkway,
7th Floor
Lanham, Maryland 20706
(Address of principal executive offices)
 
(301) 306-1111
Registrant’s telephone number, including area code
 
 
 
 
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 þ     No o
 
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
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
             
Class
      Outstanding at October 31, 2007
 
Class A Common Stock, $.001 Par Value
        4,415,694  
Class B Common Stock, $.001 Par Value
        2,861,843  
Class C Common Stock, $.001 Par Value
        3,121,048  
Class D Common Stock, $.001 Par Value
        88,544,261  
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
        PART I. FINANCIAL INFORMATION        
      Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2007 and 2006 (Unaudited)     4  
        Consolidated Balance Sheets as of September 30, 2007 (Unaudited) and December 31, 2006 (As Adjusted)     5  
        Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2007 (Unaudited)     6  
        Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (Unaudited)     7  
        Notes to Consolidated Financial Statements (Unaudited)     8  
        Consolidating Financial Statements     19  
        Consolidating Statement of Operations for the Three Months Ended September 30, 2007 (Unaudited)     20  
        Consolidating Statement of Operations for the Three Months Ended September 30, 2006 (Unaudited)     21  
        Consolidating Statement of Operations for the Nine Months Ended September 30, 2007 (Unaudited)     22  
        Consolidating Statement of Operations for the Nine Months Ended September 30, 2006 (Unaudited)     23  
        Consolidating Balance Sheet as of September 30, 2007 (Unaudited)     24  
        Consolidating Balance Sheet as of December 31, 2006 (Unaudited)     25  
        Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2007 (Unaudited)     26  
        Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2006 (Unaudited)     27  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     28  
      Quantitative and Qualitative Disclosures About Market Risk     45  
      Controls and Procedures     45  
 
      Legal Proceedings     46  
      Risk Factors     46  
      Unregistered Sales of Equity Securities and Use of Proceeds     47  
      Defaults Upon Senior Securities     47  
      Submission of Matters to a Vote of Security Holders     47  
      Other Information     47  
      Exhibits     48  
        SIGNATURES     49  


2


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements do not relay historical facts, but rather reflect our current expectations concerning future operations, results and events. 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 or our discussion of matters in a manner that anticipates operations, results or events in future periods. 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 that could cause actual results to differ materially from those forecasts or anticipated in the forward-looking statements. These risks, uncertainties and factors include, but are not limited to:
 
  •  economic conditions, both generally and relative to the radio broadcasting and media industries;
 
  •  fluctuations in the demand for advertising across our various media;
 
  •  risks associated with the implementation and execution of our business diversification strategy;
 
  •  increased competition in our markets and in the radio broadcasting and media industries;
 
  •  changes in media audience measurement methodologies;
 
  •  changes in our key personnel and on-air talent;
 
  •  increases in the costs of our programming, including on-air talent;
 
  •  increased competition from new technologies;
 
  •  the impact of our acquisitions, dispositions and similar transactions;
 
  •  our high degree of leverage; and
 
  •  other factors mentioned in our filings with the Securities and Exchange Commission including the factors discussed in detail in Item 1A, “Risk Factors,” in our 2006 report on Form 10-K.
 
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.


3


 

RADIO ONE, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2007     2006     2007     2006  
    (Unaudited)              
          (As Adjusted-
             
          See Note 1)              
    (In thousands, except share data)     (Unaudited)  
                      (As Adjusted-
 
                      See Note 1)  
                (In thousands, except share data)  
 
NET REVENUE
  $ 90,389     $ 91,932     $ 252,080     $ 258,813  
OPERATING EXPENSES:
                               
Programming and technical
    19,814       18,955       58,301       55,700  
Selling, general and administrative
    30,173       27,389       83,565       79,796  
Corporate selling, general and administrative
    5,027       7,936       21,247       22,761  
Depreciation and amortization
    3,773       3,376       11,413       10,629  
Impairment of long-lived assets
                5,506        
                                 
Total operating expenses
    58,787       57,656       180,032       168,886  
                                 
Operating income
    31,602       34,276       72,048       89,927  
INTEREST INCOME
    292       493       852       1,034  
INTEREST EXPENSE
    18,400       18,733       55,047       54,079  
EQUITY IN LOSS OF AFFILIATED COMPANY
    2,793       635       7,551       1,569  
OTHER (EXPENSE) INCOME, net
    (15 )     11       (22 )     (269 )
                                 
Income before provision for income taxes, minority interest in income of subsidiaries and income (loss) from discontinued operations
    10,686       15,412       10,280       35,044  
PROVISION FOR INCOME TAXES
    5,892       7,418       4,691       16,393  
MINORITY INTEREST IN INCOME OF SUBSIDIARIES
    1,274       882       3,099       1,920  
                                 
Net income from continuing operations
    3,520       7,112       2,490       16,731  
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
    1,281       922       (3,196 )     2,000  
                                 
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
  $ 4,801     $ 8,034     $ (706 )   $ 18,731  
                                 
BASIC AND DILUTED INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE
  $ 0.04     $ 0.07     $ 0.02     $ 0.17  
                                 
BASIC AND DILUTED NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS PER COMMON SHARE
  $ 0.01     $ 0.01     $ (0.03 )   $ 0.02  
                                 
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
  $ 0.05     $ 0.08     $ (0.01 )   $ 0.19  
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING:
                               
Basic
    98,710,633       98,710,633       98,710,633       98,708,819  
                                 
Diluted
    98,725,387       98,710,633       98,710,633       98,712,378  
                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


4


 

RADIO ONE, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
                 
    September 30,
    December 31,
 
    2007     2006  
    (Unaudited)     (As Adjusted-
 
          See Note 1)  
    (In thousands, except
 
    share data)  
 
ASSETS
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 21,540     $ 32,406  
Trade accounts receivable, net of allowance for doubtful accounts of $3,801 and $3,765, respectively
    61,179       57,148  
Prepaid expenses and other current assets
    6,460       5,377  
Income tax receivable
          1,296  
Deferred income tax asset
    2,842       2,856  
Current assets from discontinued operations
    4,449       4,829  
                 
Total current assets
    96,470       103,912  
PROPERTY AND EQUIPMENT, net
    43,653       46,356  
GOODWILL
    146,167       148,107  
RADIO BROADCASTING LICENSES
    1,662,634       1,663,591  
OTHER INTANGIBLE ASSETS, net
    46,862       49,091  
INVESTMENT IN AFFILIATED COMPANY
    55,979       51,711  
OTHER ASSETS
    10,316       6,073  
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS
    14,801       126,369  
                 
Total assets
  $ 2,076,882     $ 2,195,210  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
               
Accounts payable
  $ 4,199     $ 9,946  
Accrued interest
    8,582       19,273  
Accrued compensation and related benefits
    17,642       18,111  
Income taxes payable
    3,497       2,465  
Other current liabilities
    12,368       13,687  
Current portion of long-term debt
    18,910       7,513  
Current liabilities from discontinued operations
    1,070       1,312  
                 
Total current liabilities
    66,268       72,307  
LONG-TERM DEBT, net of current portion
    817,500       930,014  
OTHER LONG-TERM LIABILITIES
    6,161       8,201  
DEFERRED INCOME TAX LIABILITY
    164,802       165,616  
NON-CURRENT LIABILITIES FROM DISCONTINUED OPERATIONS
    467       825  
                 
Total liabilities
    1,055,198       1,176,963  
                 
MINORITY INTEREST IN SUBSIDIARIES
    3,079       (20 )
STOCKHOLDERS’ EQUITY:
               
Convertible preferred stock, $.001 par value, 1,000,000 shares authorized; no shares outstanding at September 30, 2007 and December 31, 2006
           
Common stock — Class A, $.001 par value, 30,000,000 shares authorized; 4,497,989 and 6,319,660 shares issued and outstanding as of September 30, 2007 and December 31, 2006, respectively
    4       6  
Common stock — Class B, $.001 par value, 150,000,000 shares authorized; 2,861,843 and 2,867,463 shares issued and outstanding as of September 30, 2007 and December 31, 2006, respectively
    3       3  
Common stock — Class C, $.001 par value, 150,000,000 shares authorized; 3,121,048 and 3,132,458 shares issued and outstanding as of September 30, 2007 and December 31, 2006, respectively
    3       3  
Common stock — Class D, $.001 par value, 150,000,000 shares authorized; 88,461,966 and 86,391,052 shares issued and outstanding as of September 30, 2007 and December 31, 2006, respectively
    89       87  
Accumulated other comprehensive income
    323       967  
Stock subscriptions receivable
    (1,701 )     (1,642 )
Additional paid-in capital
    1,043,699       1,041,029  
Accumulated deficit
    (23,815 )     (22,186 )
                 
Total stockholders’ equity
    1,018,605       1,018,267  
                 
Total liabilities and stockholders’ equity
  $ 2,076,882     $ 2,195,210  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


5


 

RADIO ONE, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)
 
                                                                                         
                                        Accumulated
                         
    Convertible
    Common
    Common
    Common
    Common
          Other
    Stock
    Additional
          Total
 
    Preferred
    Stock
    Stock
    Stock
    Stock
    Comprehensive
    Comprehensive
    Subscriptions
    Paid-In
    Accumulated
    Stockholders’
 
    Stock     Class A     Class B     Class C     Class D     Loss     Income     Receivable     Capital     Deficit     Equity  
    (In thousands, except share data)  
 
BALANCE, as of December 31, 2006
  $     $ 6     $ 3     $ 3     $ 87             $ 967     $ (1,642 )   $ 1,041,029     $ (22,186 )   $ 1,018,267  
Comprehensive loss:
                                                                                       
Net loss
                                $ (706 )                       (706 )     (706 )
Change in unrealized income on derivative and hedging activities, net of taxes
                                  (644 )     (644 )                       (644 )
                                                                                         
Comprehensive loss
                                          $ (1,350 )                                        
                                                                                         
Conversion of 1,821,671 shares of common stock
          (2 )                 2                                        
Vesting of non-employee restricted stock
                                                      (63 )           (63 )
Cumulative impact of change in accounting for uncertainties in income taxes
                                                            (923 )     (923 )
Stock-based compensation expense
                                                      2,733             2,733  
Interest income on stock subscriptions receivable
                                                (59 )                 (59 )
                                                                                         
BALANCE, as of September 30, 2007
  $     $ 4     $ 3     $ 3     $ 89             $ 323     $ (1,701 )   $ 1,043,699     $ (23,815 )   $ 1,018,605  
                                                                                         
 
The accompanying notes are an integral part of these consolidated financial statements.


6


 

RADIO ONE, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                 
    Nine Months Ended
 
    September 30,  
    2007     2006  
    (Unaudited)     (As Adjusted-
 
          See Note 1)  
    (In thousands)  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net (loss) income
  $ (706 )   $ 18,731  
Adjustments to reconcile net (loss) income to net cash from operating activities:
               
Depreciation and amortization
    11,413       10,629  
Amortization of debt financing costs
    1,630       1,580  
Amortization of production content
    332       2,518  
Deferred income taxes
    (912 )     13,918  
Write-down of investment
          270  
Long-lived asset impairment
    5,506        
Equity in loss of affiliated company
    7,551       1,569  
Minority interest in income of subsidiaries
    3,099       1,920  
Stock-based and other compensation
    782       4,874  
Amortization of contract inducement and termination fee
    (1,545 )     (1,546 )
Effect of change in operating assets and liabilities, net of assets acquired:
               
Trade accounts receivable
    (4,031 )     (5,426 )
Prepaid expenses and other assets
    77       (694 )
Income tax receivable
    1,296       2,655  
Other assets
    (591 )      
Accounts payable
    (5,747 )     1,951  
Accrued interest
    (10,691 )     (9,785 )
Accrued compensation and related benefits
    1,285       (1,984 )
Income taxes payable
    1,032       (358 )
Other liabilities
    (883 )     3,050  
Net cash flows from operating activities of discontinued operations
    7,576       528  
                 
Net cash flows from operating activities
    16,473       44,400  
                 
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
               
Purchases of property and equipment
    (5,823 )     (10,214 )
Equity investments
    (11,886 )     (9,743 )
Acquisitions
          (43,954 )
Purchase of other intangible assets
          (683 )
Deposits for station equipment and purchases
    (5,100 )      
Proceeds from sale of assets
    104,000        
                 
Net cash flows from (used in) investing activities
    81,191       (64,594 )
                 
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
               
Repayment of debt
    (27 )     (20 )
Proceeds from exercise of stock options
          52  
Change in interest due on stock subscriptions receivable
    (59 )     (56 )
Proceeds from credit facility
          33,000  
Repayment of credit facility
    (102,500 )     (12,000 )
Debt refinancing costs
    (3,004 )      
Payment of minority interest shareholders
    (2,940 )     (2,940 )
                 
Net cash flows (used in) from financing activities
    (108,530 )     18,036  
                 
DECREASE IN CASH AND CASH EQUIVALENTS
    (10,866 )     (2,158 )
CASH AND CASH EQUIVALENTS, beginning of period
    32,406       19,081  
                 
CASH AND CASH EQUIVALENTS, end of period
  $ 21,540     $ 16,923  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for:
               
Interest
  $ 64,754     $ 63,103  
                 
Income taxes
  $ 4,574     $ 4,821  
                 
 
A seller financed loan of $2,600 was incurred when the Company acquired the assets of WDBZ-AM, a radio station located in the Cincinnati metropolitan area.
 
The accompanying notes are an integral part of these consolidated financial statements.


7


 

RADIO ONE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
(a)   Organization
 
Radio One, Inc. (a Delaware corporation referred to as “Radio One”) and subsidiaries (collectively the “Company”) is one of the nation’s largest radio broadcasting companies and the largest broadcasting company that primarily targets African-American and urban listeners. While our primary source of revenue is the sale of local and national advertising for broadcast on our radio stations, as noted in previous filings, we have made acquisitions and investments in other complementary media properties. We also have recently embarked upon a non-strategic radio assets disposition plan. Pro forma for recently announced sale transactions, we own and or operate 54 radio stations located in 17 urban markets in the United States. Our other media acquisitions and investments include our approximate 36% ownership interest in TV One, LLC (“TV One”), an African-American targeted cable television network that we invested in with an affiliate of Comcast Corporation and other investors; our 51% ownership interest in Reach Media, Inc. (“Reach Media”), which operates the Tom Joyner Morning Show; our launch of a nationally syndicated African-American news/talk radio network, and our acquisition of certain assets of Giant Magazine, LLC (“Giant Magazine”), an urban-themed lifestyle and entertainment magazine. Given the diversity of our business, we have changed the reference of Net Broadcast Revenue to Net Revenue in the accompanying consolidated financial statements.
 
(b)   Interim Financial Statements
 
The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In management’s opinion, the interim financial data presented herein include all adjustments (which include only normal recurring adjustments) necessary for a fair presentation. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.
 
Results for interim periods are not necessarily indicative of results to be expected for the full year. This Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s 2006 Annual Report on Form 10-K.
 
Certain reclassifications associated with accounting for discontinued operations have been made to the accompanying prior period financial statements to conform to the current period presentation. Where applicable, these financial statements have been identified as “As Adjusted”. These reclassifications had no effect on previously reported net income or loss, or any other previously reported statements of operations, balance sheet or cash flow amounts. (See Note 3 — Discontinued Operations, for further discussion).
 
(c)   Financial Instruments
 
Financial instruments as of September 30, 2007 and December 31, 2006 consisted of cash and cash equivalents, trade accounts receivable, accounts payable, accrued expenses, long-term debt and subscriptions receivable. The carrying amounts approximated fair value for each of these financial instruments as of September 30, 2007 and December 31, 2006, except for the Company’s outstanding senior subordinated notes. The 87/8% senior subordinated notes had a fair value of approximately $297.0 million and $309.8 million as of September 30, 2007 and December 31, 2006, respectively. The 63/8% senior subordinated notes had a fair value of approximately $177.0 million and $187.0 million as of September 30, 2007 and December 31, 2006, respectively. The fair values were determined based on the fair market value of similar instruments.
 
(d)   Revenue Recognition
 
The Company recognizes revenue for broadcast advertising when the commercial is broadcast and is reported, net of agency and outside sales representative commissions, in accordance with Staff Accounting Bulletin (“SAB”)


8


 

 
RADIO ONE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
No. 104, Topic 13, “Revenue Recognition, Revised and Updated.” Agency and outside sales representative commissions are calculated based on a stated percentage applied to gross billing. Generally, clients remit the gross billing amount to the agency or outside sales representative, and the agency or outside sales representative remits the gross billing, less their commission, to the Company. Agency and outside sales representative commissions were approximately $10.3 million and $11.1 million during the three months ended September 30, 2007 and 2006, respectively. Agency and outside sales representative commissions were approximately $29.1 million and $31.4 million during the nine months ended September 30, 2007 and 2006, respectively.
 
(e)   Barter Transactions
 
The Company provides broadcast advertising time in exchange for programming content and certain services. The terms of the exchanges generally permit the Company to preempt such broadcast time in favor of advertisers who purchase time in exchange for cash. The Company includes the value of such exchanges in both net revenue and station operating expenses. The valuation of barter time is based upon the fair value of the network advertising time provided for the programming content and services received. For the three months ended September 30, 2007 and 2006, barter transactions reflected in net revenue were $779,000 and approximately $1.1 million, respectively. For the nine months ended September 30, 2007 and 2006, barter transactions reflected in net revenue were approximately $2.1 million and $1.2 million, respectively. Additionally, barter transaction costs reflected in programming and technical expenses and selling, general and administrative expenses were $798,000 and approximately $1.1 million and $0 and $0 in the respective three months ended September 30, 2007 and 2006. Barter transaction costs reflected in programming and technical expenses and selling, general and administrative expenses were approximately $2.1 million and $1.2 million and $127,000 and $0 in the respective nine months ended September 30, 2007 and 2006.
 
(f)   Comprehensive Income (Loss)
 
The Company’s comprehensive income (loss) consists of net income (loss) and other items recorded directly to the equity accounts. The objective is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events during the period, other than transactions with owners. The Company’s other comprehensive income (loss) consists of gains and losses on derivative instruments that qualify for cash flow hedge treatment.
 
The following table sets forth the components of comprehensive income (loss):
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2007     2006     2007     2006  
    (In thousands)     (In thousands)  
 
Net income (loss)
  $ 4,801     $ 8,034     $ (706 )   $ 18,731  
Other comprehensive (loss) income (net of tax benefit of $461, tax benefit of $721, tax benefit of $390 and tax provision of $214, respectively):
                               
Derivative and hedging activities
    (810 )     (913 )     (644 )     87  
                                 
Comprehensive income (loss)
  $ 3,991     $ 7,121     $ (1,350 )   $ 18,818  
                                 
 
(g)   Impact of Recently Issued Accounting Pronouncements
 
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — Interpretation of SFAS No. 109,” which clarifies the accounting for uncertainty in income taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position


9


 

 
RADIO ONE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
taken or expected to be taken in a tax return. FIN No. 48 requires that the Company recognize the impact of a tax position in the financial statements, if it is more likely than not that the position would be sustained on audit, based on the technical merits of the position. FIN No. 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN No. 48 were effective beginning January 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The impact to the Company of adopting FIN No. 48 on its financial statements was a $923,000 increase to accumulated deficit and a corresponding increase to income tax reserve as of January 1, 2007.
 
2.   ACQUISITIONS:
 
In July 2007, the Company purchased the assets of WDBZ-AM, a radio station located in the Cincinnati metropolitan area for approximately $2.6 million financed by the seller. Since August 2001 and up until closing, the station had been operated under a local marketing agreement (“LMA”), and the results of its operations had been included in the Company’s consolidated financials statements since the LMA. The station was consolidated with the Company’s existing Cincinnati operations in 2001. (See Note 11 — Related Party Transaction).
 
In April 2007, the Company signed an agreement and made a deposit of $3.0 million to acquire the assets of WPRS-FM (formerly WXGG-FM), a radio station located in the Washington, DC metropolitan area for approximately $38.0 million in cash. The Company began operating the station under an LMA in April 2007 and the financial results since inception of the LMA have been included in the Company’s consolidated financial statements. The station has been consolidated with the existing Washington, DC operations. Subject to the necessary regulatory approvals, the Company expects to complete this acquisition in the first quarter of 2008.
 
3.   DISCONTINUED OPERATIONS:
 
The Company has closed on the sale of assets or has entered into agreements to sell the assets of several of its radio stations as outlined below. The assets and liabilities of these stations have been reflected as discontinued operations as of September 30, 2007 and December 31, 2006, and the stations’ results of operations for the three and nine months ended September 30, 2007 and 2006 have been reflected as discontinued operations in the accompanying consolidated financial statements. The Company has received $134.0 million in proceeds from completing the sales of certain radio stations as of September 30, 2007, and has used $128.5 million of the proceeds to pay down debt, of which $26.0 million was paid down in 2006 and $102.5 million was paid down in 2007. The Company anticipates receiving approximately $16.4 million from the sale of assets under agreements yet to be closed. (See Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources).
 
Miami Station:  In October 2007, the Company entered into an agreement to sell the assets of its radio station WMCU-AM (formerly WTPS-AM), located in the Miami metropolitan area, to Salem Communications Holding Corporation (“Salem”) for approximately $12.3 million in cash. Salem began operating the station under an LMA effective October 18, 2007. The Company’s board of directors approved the sale of WTPS-AM in September 2007. Subject to the necessary regulatory approvals, the transaction is expected to close in the first quarter of 2008.
 
Dayton and Louisville Stations:  In September 2007, the Company closed on the sale of 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.
 
Minneapolis Station:  In August 2007, the Company closed on the sale of the assets of radio station KTTB-FM in the Minneapolis metropolitan area to Northern Lights Broadcasting, LLC for approximately $28.0 million in cash.
 
Louisville Station:  In August 2007, the Company entered into an agreement to sell the assets of WLRX-FM, its remaining radio station in the Louisville metropolitan area to WAY FM Media Group, Inc. for approximately


10


 

 
RADIO ONE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
$1.0 million in cash. Subject to the necessary regulatory approvals, the Company expects to complete this transaction during the fourth quarter of 2007.
 
Augusta Stations:  In August 2007, the Company entered into an agreement to sell the assets of all of its radio stations in the Augusta metropolitan area to Perry Broadcasting Company for approximately $3.1 million in cash. Subject to the necessary regulatory approvals, the transaction is expected to close in the fourth quarter of 2007.
 
Boston Station:  In December 2006, the Company closed on the sale of the assets of its radio station WILD-FM in the Boston metropolitan area to Entercom Boston, LLC (“Entercom”) for approximately $30.0 million in cash. Entercom began operating the station under an LMA effective August 18, 2006.
 
The following table summarizes the operating results for all of the stations sold or to be sold and classified as discontinued operations for the three and nine months ended September 30, 2007 and 2006:
 
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2007     2006     2007     2006  
    (In thousands)     (In thousands)  
 
Net revenue
  $ 5,335     $ 7,496     $ 18,628     $ 20,530  
Station operating expenses
    4,089       5,526       13,969       15,836  
Depreciation and amortization
    272       455       1,020       1,409  
Impairment of long-lived assets
                10,395        
Gain on sale of assets
    2,641             2,517        
                                 
Income (loss) before income taxes
    3,615       1,515       (4,239 )     3,285  
Provision (benefit) for income taxes
    2,334       593       (1,043 )     1,285  
                                 
Income (loss) from discontinued operations, net of tax
  $ 1,281     $ 922     $ (3,196 )   $ 2,000  
                                 
 
The assets and liabilities of the stations sold or to be sold and classified as discontinued operations in the accompanying consolidated balance sheets consisted of the following:
 
                 
    September 30,
    December 31,
 
    2007     2006  
    (In thousands)  
 
Currents assets:
               
Accounts receivable, net of allowance for doubtful accounts
  $ 3,959     $ 3,953  
Prepaid expenses and other current assets
    490       876  
                 
Total current assets
    4,449       4,829  
Property and equipment, net
    2,787       7,590  
Intangible assets, net
    11,546       117,469  
Other assets
    468       1,310  
                 
Total assets
  $ 19,250     $ 131,198  
                 
Current liabilities:
               
Other current liabilities
  $ 1,070     $ 1,312  
                 
Total current liabilities
    1,070       1,312  
Other long-term liabilities
    467       825  
                 
Total liabilities
  $ 1,537     $ 2,137  
                 


11


 

 
RADIO ONE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.   GOODWILL, RADIO BROADCASTING LICENSES AND OTHER INTANGIBLE ASSETS:
 
The fair value of goodwill and radio broadcasting licenses is determined on a market basis using a discounted cash flow model considering the market’s revenue, the number of stations, the performance of the stations, the Company’s performance and estimated multiples for the sale of stations in the market. Because the assumptions used in estimating the fair value of goodwill and radio broadcasting licenses are based on current conditions, a change in market conditions or in the discount rate could have a significant effect on the estimated value of goodwill or radio broadcasting licenses. A significant decrease in the fair value of goodwill or radio broadcasting licenses in a market could result in an impairment charge. The Company performs an annual impairment test on assets owned as of October 1st of each year during the fourth quarter, or when other conditions suggest impairment may have occurred.
 
During the three months ended September 30, 2007, the Company evaluated certain long-lived assets where warranted for potential impairment due to its asset disposition strategy and changes in management’s focus in certain of its radio property markets. It was determined that the carrying value of the Company’s goodwill and certain radio broadcast licenses in those markets exceeded the current fair market value. For the nine months ended September 30, 2007, the Company reduced the carrying value of goodwill and radio broadcasting licenses by approximately $3.5 million and $12.4 million, respectively. The carrying amount of radio broadcasting licenses at September 30, 2007 and December 31, 2006 was approximately $1.7 billion. The carrying amount of goodwill at September 30, 2007 and December 31, 2006 was approximately $146.2 million and $148.1 million, respectively.
 
Other intangible assets, excluding goodwill and radio broadcasting licenses, are being amortized on a straight-line basis over various periods. Other intangible assets consist of the following:
 
                     
    September 30,
    December 31,
    Period of
    2007     2006     Amortization
    (In thousands)      
 
Trade names
  $ 16,823     $ 16,798     2-5 Years
Talent agreement
    19,549       19,549     10 Years
Debt financing costs
    20,825       17,771     Term of debt
Intellectual property
    14,162       14,157     4-10 Years
Affiliate agreements
    7,769       7,768     1-10 Years
Favorable transmitter leases and other intangibles
    5,628       5,609     6-60 Years
                     
      84,756       81,652      
Less: Accumulated amortization
    (37,894 )     (32,561 )    
                     
Other intangible assets, net
  $ 46,862     $ 49,091      
                     
 
Amortization expense of intangible assets for the nine months ended September 30, 2007 and 2006 was approximately $3.7 million and $3.3 million, respectively. The amortization of deferred financing costs was charged to interest expense for all periods presented.
 
The following table presents the Company’s estimate of amortization expense for the years 2007 through 2011 for intangible assets, excluding deferred financing costs.
 
         
    (In thousands)  
 
2007
  $ 4,708  
2008
    4,002  
2009
    3,987  
2010
    3,937  
2011
    3,423  
 
Actual amortization expense may vary as a result of future acquisitions and dispositions.


12


 

 
RADIO ONE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.   INVESTMENT IN AFFILIATED COMPANY:
 
In July 2003, the Company entered into a joint venture agreement with an affiliate of Comcast Corporation and other investors to create TV One, an entity formed to operate a cable television network featuring lifestyle, entertainment and news-related programming targeted primarily towards African-American viewers. The Company has committed to make a cumulative cash investment of approximately $74.0 million in TV One over approximately four years, of which the Company has funded approximately $8.7 million for the nine months ended September 30, 2007, and since inception, approximately $60.3 million as of September 30, 2007. As of September 30, 2007, the Company owned approximately 36% of TV One on a fully-converted basis.
 
The Company has recorded its investment in TV One at cost and has adjusted the carrying amount of the investment to recognize the change in the Company’s claim on the net assets of TV One resulting from losses of TV One as well as other capital transactions of TV One using a hypothetical liquidation at book value approach. For the three and nine months ended September 30, 2007 and 2006, the Company’s allocable share of TV One’s losses was approximately $2.8 million and approximately $7.6 million, and $635,000 and $1.6 million, respectively. During 2007, the Company’s allocable share of TV One’s losses increased due to the composition of TV One’s capital structure and the Company’s ownership levels in the equity securities of TV One that are currently absorbing its net losses.
 
The Company also entered into separate network services and advertising services agreements with TV One in 2003. Under the network services agreement, which expires in January 2009, the Company is providing TV One with administrative and operational support services. Under the advertising services agreement, the Company is providing a specified amount of advertising to TV One over a term of five years ending in January 2009. In consideration for providing these services, the Company has received equity in TV One and receives an annual fee of $500,000 in cash for providing services under the network services agreement.
 
The Company is accounting for the services provided to TV One under the advertising and network services agreements in accordance with Emerging Issues Task Force (“EITF”), Issue No. 00-8, “Accounting by a Grantee for an Equity Instrument to Be Received in Conjunction with Providing Goods or Services.” As services are provided to TV One, the Company is recording revenue based on the fair value of the most reliable unit of measurement in these transactions. For the advertising services agreement, this has been determined to be the value of underlying advertising time that is being provided to TV One. For the network services agreement, this has been determined to be the value of the equity received in TV One. As a result, the Company is re-measuring the fair value of the equity received in consideration of its obligations under the network services agreement in each subsequent reporting period as the services are provided. The Company recognized revenue relating to these two agreements in amounts of approximately $1.3 million and $.6 million for the three months ended September 30, 2007, and 2006, and approximately $3.5 million and $1.4 million for the nine months ended September 30, 2007 and 2006, respectively.
 
6.   DERIVATIVE INSTRUMENTS:
 
In June 2005, pursuant to the Credit Agreement (as defined in Note 7 — Long-Term Debt), the Company entered into four fixed rate swap agreements to reduce interest rate fluctuations on certain floating rate debt commitments. In June 2007, one of the four $25.0 million swap agreements expired. The Company accounts for the swap agreements using the mark-to-market method of accounting.
 
The swap agreements have the following terms:
 
                         
Agreement
  Notional Amount     Expiration     Fixed Rate  
 
No. 1
  $ 25.0 million       June 16, 2008       4.13 %
No. 2
    25.0 million       June 16, 2010       4.27  
No. 3
    25.0 million       June 16, 2012       4.47  


13


 

 
RADIO ONE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Each swap agreement has been accounted for as a qualifying cash flow hedge of the Company’s senior bank term debt, in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 133 “Accounting for Derivative Instruments and Hedging Activities,” whereby changes in the fair market value are reflected as adjustments to the fair value of the derivative instruments as reflected on the accompanying consolidated balance sheets.
 
Under the swap agreements, the Company pays the fixed rate listed in the table above. The counterparties to the agreements pay the Company a floating interest rate based on the three-month London Interbank Offered Rate (“LIBOR”), for which measurement and settlement is performed quarterly. The counterparties to these agreements are international financial institutions. The Company estimates the net fair value of these instruments as of September 30, 2007 to be a receivable of $700,000. The fair value of the interest swap agreements is estimated by obtaining quotations from the financial institutions that are parties to the Company’s swap agreements. The fair value is an estimate of the net amount that the Company would receive on September 30, 2007, if the agreements were transferred to other parties or cancelled by the Company.
 
Costs incurred to execute the swap agreements are deferred and amortized over the term of the swap agreements. The amounts incurred by the Company, representing the effective difference between the fixed rate under the swap agreements and the variable rate on the underlying term of the debt, are included in interest expense in the accompanying consolidated statements of operations. In the event of early termination of these swap agreements, any gains or losses would be amortized over the respective lives of the underlying debt or recognized currently if the debt is terminated earlier than initially anticipated.
 
7.   LONG-TERM DEBT:
 
Long-term debt consists of the following:
 
                 
    September 30,
    December 31,
 
    2007     2006  
    (In thousands)  
 
87/8% senior subordinated notes
  $ 300,000     $ 300,000  
63/8% senior subordinated notes
    200,000       200,000  
Credit facilities
    335,000       437,500  
Seller financed acquisition loan
    1,410        
Capital lease obligations
          27  
                 
Total long-term debt
    836,410       937,527  
Less: current portion
    (18,910 )     (7,513 )
                 
Long term debt, net of current portion
  $ 817,500     $ 930,014  
                 
 
Credit Facilities
 
In June 2005, the Company entered into a credit agreement with a syndicate of banks (the “Credit Agreement”). The Credit Agreement was amended in April 2006 and September 2007 to modify certain financial covenants and other provisions. The term of the Credit Agreement is seven years and the amount available under the Credit Agreement consists of a $500.0 million revolving facility and an initial $300.0 million term loan. Borrowings under the credit facility are subject to compliance with certain provisions of the Credit Agreement, including financial covenants. The Company may use proceeds from the credit facilities for working capital, capital expenditures made in the ordinary course of business, its common stock repurchase program, refinancing under certain conditions, investments and acquisitions permitted under the Credit Agreement, and other lawful corporate purposes. The Credit Agreement contains affirmative and negative covenants that the Company must comply with, including (a) maintaining an interest coverage ratio of no less than 1.60 to 1.00 through June 30, 2008, no less than 1.75 to 1.00 from July 1, 2008 to December 31, 2009, no less than 2.00 to 1.00 from January 1, 2010 through


14


 

 
RADIO ONE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
December 31, 2010, and no less than 2.25 to 1.00 from January 1, 2011 and thereafter, (b) maintaining a total leverage ratio of no greater than 7.75 to 1.00 through March 31, 2008, no greater than 7.50 to 1.00 from April 1, 2008 through September 30, 2008, no greater than 7.25 to 1.00 from October 1, 2008 through June 30, 2010, no greater than 6.50 to 1.00 from July 1, 2010 through September 30, 2011, and no greater that 6.00 to 1.00 from October 1, 2011 and thereafter, (c) limitations on liens, (d) limitations on the sale of assets, (e) limitations on the payment of dividends, and (f) limitations on mergers, as well as other customary covenants. Simultaneous with entering into the Credit Agreement in June 2005, the Company borrowed $437.5 million to retire all outstanding obligations under its previous credit agreement. The Company repaid $102.5 million of the outstanding term loan in September 2007, with the proceeds from the sale of assets and cash on hand.
 
The Credit Agreement and the indentures governing the Company’s senior subordinated notes contain covenants that restrict, among other things, the ability of the Company to incur additional debt, purchase capital stock, make capital expenditures, make investments or other restricted payments, swap or sell assets, engage in transactions with related parties, secure non-senior debt with assets, or merge, consolidate or sell all or substantially all of its assets.
 
The Company’s borrowings under the Credit Agreement are secured by substantially all of the assets of the Company and certain of its subsidiaries.
 
Future minimum principal payments of long-term debt as of September 30, 2007 are as follows:
 
                 
    Senior
    Credit
 
    Subordinated
    Facilities
 
    Notes     and Other  
    (In thousands)  
 
October — December 2007
  $     $ 2,810  
2008
          26,100  
2009
          45,000  
2010
          50,000  
2011
    300,000       50,000  
2012 and thereafter
    200,000       162,500  
                 
Total long-term debt
  $ 500,000     $ 336,410  
                 
 
8.   INCOME TAXES:
 
The effective tax rate for continuing operations for the nine month period ended September 30, 2007 was 45.6%. This rate is higher than the statutory tax rate due to lower pre-tax book income, which is adversely impacted by the permanent differences between incomes subject to tax for book purposes versus tax purposes and the tax impact of discrete items during the nine months ended September 30, 2007. These discrete items include the tax impact of impairment charges and the tax impact of cancellation of non-qualified stock options, partially offset by the current year benefit of the reversal of state tax reserves due to expired statutes and the cumulative impact of a change in the tax treatment of executive compensation for Internal Revenue Code Section 162(m) based on the amended proxy disclosure rules. As of September 30, 2007, the Company’s annual effective tax rate is projected at 51.2%, which is impacted by the permanent differences between incomes subject to tax for book purposes versus tax purposes.
 
The Company adopted SFAS No. 123(R), “Share-Based Payment” as of January 1, 2006 and incorporated the tax impact into its effective tax rate above. This has increased the expected effective tax rate for 2007 in comparison with prior years due to the unfavorable tax treatment of the Company’s book compensation expense for incentive stock options.
 
We adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the implementation of FIN No. 48, we recorded a $923,000 increase in the net liability for unrecognized tax positions, which was recorded as an


15


 

 
RADIO ONE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
adjustment to the opening balance of accumulated deficit on January 1, 2007. On the adoption date, we had approximately $4.9 million of unrecognized tax benefits, of which approximately $3.3 million would affect our effective tax rate if recognized. The total amount of unrecognized tax benefits as of September 30, 2007 was approximately $4.9 million. The Company estimates the possible change prior to September 30, 2008 to be a decrease in the amount of unrecognized tax benefits of $0 to $200,000 due to closed statutes in states where amortization liability exists.
 
In accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. This policy did not change as a result of the adoption of FIN No. 48. Our consolidated statement of operations for the three and nine month periods ended September 30, 2007 and our consolidated balance sheet as of that date include interest expense of $10,000 and $(16,000) and accrued interest of $75,000, respectively.
 
As of September 30, 2007, the Company was not under audit in any jurisdiction for federal or state income tax purposes. However, the Company’s open tax years for United States federal income tax examinations include the tax years ended December 31, 2004 through 2006. In addition, the Company’s open tax years for state and local income tax examinations include the tax years ended December 31, 2002 through 2006.
 
9.   STOCKHOLDERS’ EQUITY:
 
Stock Option and Restricted Stock Grant Plan
 
Radio One may issue up to 10,816,198 shares of Class D Common Stock under the Company’s Stock Option and Restricted Stock Grant Plan (“Plan”). At inception of the Plan, the Company’s board of directors authorized 1,408,099 shares of Class A common stock to be issuable under this plan. As of September 30, 2007, 6,386,042 shares were available for grant. The options are exercisable in installments determined by the compensation committee of the Company’s board of directors. The options expire as determined by the compensation committee, but no later than ten years from the date of the grant. The Company uses an average life for all option awards to determine value. The Company settles stock options upon exercise by issuing stock.
 
The Company uses the Black-Scholes Model (“BSM”) to calculate the fair value of stock-based awards. The BSM incorporates various assumptions including volatility, expected life, and interest rates. The expected volatility is based on the historical volatility of the Company’s common stock over the preceding three years. The expected life is based on historical exercise patterns and post-vesting termination behavior within each of the four groups identified by the Company. The interest rate for periods within the expected life of the award is based on the United States Treasury yield curve in effect at the time of grant.
 
The Company granted 115,841 stock options during the three months ended September 30, 2007 and had no stock option grants during the three months ended September 30, 2006. The Company granted 216,000 and 42,500 stock options during the nine months ended September 30, 2007 and 2006, respectively. The per share weighted-average fair values of options granted during the three months ended September 30, 2007 was $2.11 on the date of grant. The per share weighted-average fair values of options granted during the nine months ended September 30, 2007 and 2006 were $2.96 and $4.66, respectively.
 
These fair values were derived using the BSM with the following weighted-average assumptions:
 
                 
    For the Three Months
  For the Nine Months
    Ended September 30,   Ended September 30,
    2007   2006   2007   2006
 
Average risk-free interest rate
  4.60%     4.70%   4.82%
Expected dividend yield
  0.00%     0.00%   0.00%
Expected lives
  7.7 years     7.7 years   7.7 years
Expected volatility
  40.00%     40.00%   40.00%


16


 

 
RADIO ONE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Transactions and other information relating to the stock options for the period ended September 30, 2007 are summarized below:
 
                                 
                Weighted-
       
          Weighted-
    Average
       
          Average
    Remaining
    Aggregate
 
    Number of
    Exercise
    Contractual
    Intrinsic
 
    Options     Price     Term     Value  
                (In years)        
 
Balance as of December 31, 2006
    5,876,000     $ 14.49                  
Granted
    216,000       5.14                
Exercised
                         
Forfeited or Cancelled
    1,350,000       14.30                
                                 
Balance as of September 30, 2007
    4,742,000       14.12       6.24        
                                 
Vested and expected to vest as of September 30, 2007
    4,408,000       14.12       6.24        
Unvested as of September 30, 2007
    886,000       11.51       8.25        
Exercisable as of September 30, 2007
    3,856,000       14.72       5.66        
 
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing price on the last day of trading during the three months ended September 30, 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the option holders exercised their in-the-money options on September 30, 2007. This amount changes based on the fair market value of the Company’s stock. The number of options that vested during the three and nine months ended September 30, 2007 were 17,125 and 75,211, respectively.
 
As of September 30, 2007, approximately $3.8 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of approximately two years. The stock option weighted-average fair value per share was $6.47 at September 30, 2007.
 
The Company granted 84,000 restricted stock grants during the three months ended September 30, 2007. The Company granted 232,500 restricted stock grants during the nine months ended September 30, 2007.
 
Transactions and other information relating to restricted stock grants for the period ended September 30, 2007 are summarized below:
 
                 
          Weighted-
 
    Number of
    Average
 
    Restricted
    Fair Value at
 
    Shares(1)     Grant Date  
 
Unvested as of December 31, 2006
    16,500     $ 19.71  
Granted
    232,500       6.20  
Vested
           
Forfeited, Cancelled, Expired
           
Unvested as of September 30, 2007
    249,000       7.10  
 
 
(1) The restricted stock grants were included in the Company’s outstanding share numbers on the effective date of grant.
 
As of September 30, 2007, approximately $1.2 million of total unrecognized compensation cost related to restricted stock grants is expected to be recognized over a weighted-average period of 2.5 years.


17


 

 
RADIO ONE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
10.   CONTRACT TERMINATION:
 
In connection with the termination in 2005 of the Company’s sales representation agreements with Interep National Radio Sales, Inc. (“Interep”), and its new agreement with Katz Communications, Inc. (“Katz”), as the Company’s sole national sales representative, Katz paid the Company $3.4 million as an inducement to enter into the new agreements and agreed to pay Interep approximately $5.3 million to satisfy the Company’s termination obligations. The Company is amortizing both over the four-year life of the new Katz agreements as a reduction to selling, general and administrative expense. As of September 30, 2007, approximately $1.9 million of the deferred termination obligation and inducement amount is reflected in other long-term liabilities on the accompanying consolidated balance sheets, and approximately $2.1 million is reflected in other current liabilities.
 
11.   RELATED PARTY TRANSACTION:
 
In July 2007, the Company purchased the assets of WDBZ-AM, a radio station located in the Cincinnati metropolitan area from Blue Chip Communications, Inc. (“Blue Chip”) for approximately $2.6 million financed by the seller. The financing is a 5.1% interest bearing loan payable monthly through July 2008. Blue Chip is owned by L. Ross Love, a former member of the Company’s board of directors. The transaction was approved by a special committee of independent directors appointed by the board of directors. Additionally, the Company retained an independent valuation firm to provide a fair value appraisal of the station. Since 2001 and up until closing, the station had been operated under an LMA, and the results of its operations had been included in the Company’s consolidated financial statements since the LMA. The station was consolidated with the Company’s existing Cincinnati operations in 2001.
 
12.   SUBSEQUENT EVENTS:
 
In October 2007, the Company entered into an agreement to sell the assets of its radio station WMCU-AM (formerly WTPS-AM), located in the Miami metropolitan area, to Salem Communications Holding Corporation (“Salem”) for approximately $12.3 million in cash. Salem began operating the station under an LMA effective October 18, 2007. The Company’s board of directors approved the sale of this station in September 2007. Subject to the necessary regulatory approvals, the transaction is expected to close in the first quarter of 2008.
 
In October 2007, the Company committed (subject to the completion and execution of requisite legal documentation) to invest in QCP Capital Partners Fund, L.P. (the “Fund”), a new private equity fund with a target amount of $200.0 million, which is in the early stages of being raised. If QCP is successful in its fundraising process, the Company has committed to invest 1% of the Fund total, with a maximum investment of $2.0 million, which the Company would expect to contribute to the fund over a multi-year period, as is typical with funds of this type. Additionally, the Company will become a member of the general partner of the Fund, and become a member of QCP Capital Partners, LLC, the management company for the Fund. The Company also agreed to provide a working capital line of credit to QCP Capital Partners, LLC, in the amount of $775,000. The line of credit note is unsecured and bears interest at a rate of 7% per annum. The final repayment of all principal and interest is due from QCP Capital Partners, LLC to the Company no later than December 31, 2009.


18


 

 
CONSOLIDATING FINANCIAL STATEMENTS
 
The Company conducts a portion of its business through its subsidiaries, certain of which are restricted in their operations under the terms of the Credit Agreement. All of the Company’s restricted subsidiaries (“Subsidiary Guarantors”) have fully and unconditionally guaranteed the Company’s 87/8% senior subordinated notes due 2011, the 63/8% senior subordinated notes due 2013 and the Company’s obligations under the Credit Agreement.
 
Set forth below are consolidating financial statements for the Company and the Subsidiary Guarantors as of September 30, 2007 and 2006 and for the three-month and nine-month periods then ended. Also included is the consolidating balance sheet for the Company and the Subsidiary Guarantors as of September 30, 2007 and December 31, 2006. The equity method of accounting has been used by the Company to report its investments in subsidiaries. Separate financial statements for the Subsidiary Guarantors are not presented based on management’s determination that they do not provide additional information that is material to investors.


19


 

RADIO ONE, INC. AND SUBSIDIARIES
 
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007
 
                                 
    Combined
                   
    Guarantor
    Radio
             
    Subsidiaries     One, Inc.     Eliminations     Consolidated  
          (Unaudited)
       
          (In thousands)        
 
NET REVENUE
  $ 38,689     $ 51,700     $     $ 90,389  
                                 
OPERATING EXPENSES:
                               
Programming and technical
    7,777       12,037             19,814  
Selling, general and administrative
    13,497       16,676             30,173  
Corporate selling, general and administrative
          5,027             5,027  
Depreciation and amortization
    1,450       2,323             3,773  
                                 
Total operating expenses
    22,724       36,063             58,787  
                                 
Operating income
    15,965       15,637             31,602  
INTEREST INCOME
          292             292  
INTEREST EXPENSE
          18,400             18,400  
EQUITY IN NET LOSS OF AFFILIATED COMPANY
          2,793             2,793  
OTHER INCOME (EXPENSE), net
    117       (132 )           (15 )
                                 
Income (loss) before provision for income taxes, minority interest in income of subsidiaries and income (loss) from discontinued operations
    16,082       (5,396 )           10,686  
PROVISION FOR INCOME TAXES
          5,892             5,892  
MINORITY INTEREST IN INCOME OF SUBSIDIARIES
          1,274             1,274  
                                 
Net income (loss) before equity in income of subsidiaries and income (loss) from discontinued operations
    16,082       (12,562 )           3,520  
EQUITY IN INCOME OF SUBSIDIARIES
          22,755       (22,755 )      
                                 
Net income from continuing operations
    16,082       10,193       (22,755 )     3,520  
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
    6,673       (5,392 )           1,281  
                                 
Net income
  $ 22,755     $ 4,801     $ (22,755 )   $ 4,801  
                                 
 
The accompanying notes are an integral part of this consolidating financial statement.


20


 

RADIO ONE, INC. AND SUBSIDIARIES
 
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
 
                                 
    Combined
                   
    Guarantor
    Radio
             
    Subsidiaries     One, Inc.     Eliminations     Consolidated  
          (Unaudited)
       
          (As Adjusted - See Note 1) (In thousands)        
 
NET REVENUE
  $ 37,022     $ 54,910     $     $ 91,932  
                                 
OPERATING EXPENSES:
                               
Programming and technical
    6,129       12,826             18,955  
Selling, general and administrative
    12,056       15,333             27,389  
Corporate selling, general and administrative
          7,936             7,936  
Depreciation and amortization
    1,153       2,223             3,376  
                                 
Total operating expenses
    19,338       38,318             57,656  
                                 
Operating income
    17,684       16,592             34,276  
INTEREST INCOME
          493             493  
INTEREST EXPENSE 
          18,733             18,733  
EQUITY IN NET LOSS OF AFFILIATED COMPANY
          635             635  
OTHER INCOME, net
    3       8             11  
                                 
Income (loss) before provision for income taxes, minority interest in income of subsidiaries and income (loss) from discontinued operations
    17,687       (2,275 )           15,412  
PROVISION FOR INCOME TAXES
          7,418             7,418  
MINORITY INTEREST IN INCOME OF SUBSIDIARIES
          882             882  
                                 
Net income (loss) before equity in income of subsidiaries and income (loss) from discontinued operations
    17,687       (10,575 )           7,112  
EQUITY IN INCOME OF SUBSIDIARIES
          19,622       (19,622 )      
                                 
Net income from continuing operations
    17,687       9,047       (19,622 )     7,112  
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
    1,935       (1,013 )           922  
                                 
Net income
  $ 19,622     $ 8,034     $ (19,622 )   $ 8,034  
                                 
 
The accompanying notes are an integral part of this consolidating financial statement.


21


 

RADIO ONE, INC. AND SUBSIDIARIES
 
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
 
                                 
    Combined
                   
    Guarantor
    Radio
             
    Subsidiaries     One, Inc.     Eliminations     Consolidated  
          (Unaudited)
       
          (In thousands)        
 
NET REVENUE
  $ 109,936     $ 142,144     $     $ 252,080  
                                 
OPERATING EXPENSES:
                               
Programming and technical
    22,934       35,367             58,301  
Selling, general and administrative
    40,267       43,298             83,565  
Corporate selling, general and administrative
          21,247             21,247  
Depreciation and amortization
    4,380       7,033             11,413  
Impairment of long-lived assets
    5,506                   5,506  
                                 
Total operating expenses
    73,087       106,945             180,032  
                                 
Operating income
    36,849       35,199             72,048  
INTEREST INCOME
          852             852  
INTEREST EXPENSE
    1       55,046             55,047  
EQUITY IN NET LOSS OF AFFILIATED COMPANY
          7,551             7,551  
OTHER INCOME (EXPENSE), net
    1       (23 )           (22 )
                                 
Income (loss) before provision for income taxes, minority interest in income of subsidiaries and (loss) from discontinued operations
    36,849       (26,569 )           10,280  
PROVISION FOR INCOME TAXES
          4,691             4,691  
MINORITY INTEREST IN INCOME OF SUBSIDIARIES
          3,099             3,099  
                                 
Net income (loss) before equity in income of subsidiaries and (loss) from discontinued operations
    36,849       (34,359 )           2,490  
EQUITY IN INCOME OF SUBSIDIARIES
          33,783       (33,783 )      
                                 
Net income (loss) from continuing operations
    36,849       (576 )     (33,783 )     2,490  
(LOSS) FROM DISCONTINUED OPERATIONS, net of tax
    (3,066 )     (130 )           (3,196 )
                                 
Net income (loss)
  $ 33,783     $ (706 )   $ (33,783 )   $ (706 )
                                 
 
The accompanying notes are an integral part of this consolidating financial statement.


22


 

RADIO ONE, INC. AND SUBSIDIARIES
 
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
 
                                 
    Combined
                   
    Guarantor
    Radio
             
    Subsidiaries     One, Inc.     Eliminations     Consolidated  
          (Unaudited)
       
          (As Adjusted - See Note 1) (In thousands)        
 
NET REVENUE
  $ 103,009     $ 155,804     $     $ 258,813  
                                 
OPERATING EXPENSES:
                               
Programming and technical
    18,711       36,989             55,700  
Selling, general and administrative
    36,158       43,638             79,796  
Corporate selling, general and administrative
          22,761             22,761  
Depreciation and amortization
    3,945       6,684             10,629  
                                 
Total operating expenses
    58,814       110,072             168,886  
                                 
Operating income
    44,195       45,732             89,927  
INTEREST INCOME
    (7 )     1,041             1,034  
INTEREST EXPENSE
    2       54,077             54,079  
EQUITY IN NET LOSS OF AFFILIATED COMPANY
          1,569             1,569  
OTHER EXPENSE, net
    3       266             269  
                                 
Income (loss) before provision for income taxes, minority interest in income of subsidiaries and income (loss) from discontinued operations
    44,183       (9,139 )           35,044  
PROVISION FOR INCOME TAXES
          16,393             16,393  
MINORITY INTEREST IN INCOME OF SUBSIDIARIES
          1,920             1,920  
                                 
Net income (loss) before equity in income of subsidiaries and income (loss) from discontinued operations
    44,183       (27,452 )           16,731  
EQUITY IN INCOME OF SUBSIDIARIES
          48,205       (48,205 )      
                                 
Net income from continuing operations
    44,183       20,753       (48,205 )     16,731  
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
    4,022       (2,022 )           2,000  
                                 
Net income
  $ 48,205     $ 18,731     $ (48,205 )   $ 18,731  
                                 
 
The accompanying notes are an integral part of this consolidating financial statement.


23


 

RADIO ONE, INC. AND SUBSIDIARIES
 
CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2007
 
                                 
    Combined
                   
    Guarantor
    Radio
             
    Subsidiaries     One, Inc.     Eliminations     Consolidated  
          (Unaudited)
       
          (In thousands)        
 
ASSETS
CURRENT ASSETS:
                               
Cash and cash equivalents
  $ 844     $ 20,696     $     $ 21,540  
Trade accounts receivable, net of allowance for doubtful accounts
    30,111       31,068             61,179  
Prepaid expenses and other current assets
    2,430       4,030             6,460  
Deferred income tax asset
    2,282       560             2,842  
Current assets from discontinued operations
    3,920       529             4,449  
                                 
Total current assets
    39,587       56,883             96,470  
PROPERTY AND EQUIPMENT, net
    23,919       19,734             43,653  
INTANGIBLE ASSETS, net
    1,795,118       60,545             1,855,663  
INVESTMENT IN SUBSIDIARIES
          1,817,475       (1,817,475 )      
INVESTMENT IN AFFILIATED COMPANY
          55,979             55,979  
OTHER ASSETS
    413       9,903               10,316  
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS
    4,160       10,641             14,801  
                                 
Total assets
  $ 1,863,197     $ 2,031,160     $ (1,817,475 )   $ 2,076,882  
                                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
                               
Accounts payable
  $ 1,158     $ 3,041     $     $ 4,199  
Accrued interest
          8,582             8,582  
Accrued compensation and related benefits
    2,887       14,755             17,642  
Income taxes payable
    (1 )     3,498             3,497  
Other current liabilities
    2,383       9,985             12,368  
Current portion of long-term debt
          18,910             18,910  
Current liabilities from discontinued operations
    473       597             1,070  
                                 
Total current liabilities
    6,900       59,368             66,268  
LONG-TERM DEBT, net of current portion
          817,500             817,500  
OTHER LONG-TERM LIABILITIES
    1,923       4,238             6,161  
DEFERRED INCOME TAX LIABILITY
    36,886       127,916             164,802  
NON-CURRENT LIABILITIES FROM DISCONTINUED OPERATIONS
    13       454             467  
                                 
Total liabilities
    45,722       1,009,476             1,055,198  
                                 
MINORITY INTEREST IN SUBSIDIARIES
          3,079             3,079  
STOCKHOLDERS’ EQUITY:
                               
Common stock
          99             99  
Accumulated other comprehensive income
          323             323  
Stock subscriptions receivable
          (1,701 )           (1,701 )
Additional paid-in capital
    1,024,311       1,043,699       (1,024,311 )     1,043,699  
Retained earnings (accumulated deficit)
    793,164       (23,815 )     (793,164 )     (23,815 )
                                 
Total stockholders’ equity
    1,817,475       1,018,605       (1,817,475 )     1,018,605  
                                 
Total liabilities and stockholders’ equity
  $ 1,863,197     $ 2,031,160     $ (1,817,475 )   $ 2,076,882  
                                 
 
The accompanying notes are an integral part of this consolidating financial statement.


24


 

RADIO ONE, INC. AND SUBSIDIARIES
 
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2006
 
                                 
    Combined
                   
    Guarantor
    Radio
             
    Subsidiaries     One, Inc.     Eliminations     Consolidated  
          (Unaudited)
       
          (As Adjusted - See Note 1)
       
          (In thousands)        
 
ASSETS
CURRENT ASSETS:
                               
Cash and cash equivalents
  $ 884     $ 31,522     $     $ 32,406  
Trade accounts receivable, net of allowance for doubtful accounts
    26,508       30,640             57,148  
Prepaid expenses and other current assets
    1,841       3,536             5,377  
Income tax receivable
          1,296             1,296  
Deferred income tax asset
    2,282       574             2,856  
Current assets from discontinued operations
    4,353       476             4,829  
                                 
Total current assets
    35,868       68,044             103,912  
PROPERTY AND EQUIPMENT, net
    25,913       20,443             46,356  
INTANGIBLE ASSETS, net
    1,798,654       62,135             1,860,789  
INVESTMENT IN SUBSIDIARIES
          1,928,923       (1,928,923 )      
INVESTMENT IN AFFILIATED COMPANY
          51,711             51,711  
OTHER ASSETS
    665       5,408             6,073  
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS
    115,637       10,732             126,369  
                                 
Total assets
  $ 1,976,737     $ 2,147,396     $ (1,928,923 )   $ 2,195,210  
                                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
                               
Accounts payable
  $ 3,205     $ 6,741     $     $ 9,946  
Accrued interest
          19,273             19,273  
Accrued compensation and related benefits
    2,646       15,465             18,111  
Income taxes payable
    (1 )     2,466             2,465  
Other current liabilities
    2,046       11,641             13,687  
Current portion of long-term debt
          7,513             7,513  
Current liabilities from discontinued operations
    838       474             1,312  
                                 
Total current liabilities
    8,734       63,573             72,307  
LONG-TERM DEBT, net of current portion
    14       930,000             930,014  
OTHER LONG-TERM LIABILITIES
    2,082       6,119             8,201  
DEFERRED INCOME TAX LIABILITY
    36,886       128,730             165,616  
NON-CURRENT LIABILITIES FROM DISCONTINUED OPERATIONS
    98       727             825  
                                 
Total liabilities
    47,814       1,129,149             1,176,963  
                                 
MINORITY INTEREST IN SUBSIDIARIES
          (20 )           (20 )
STOCKHOLDERS’ EQUITY:
                               
Common stock
          99             99  
Accumulated other comprehensive income
          967             967  
Stock subscriptions receivable
          (1,642 )           (1,642 )
Additional paid-in capital
    1,117,726       1,041,029       (1,117,726 )     1,041,029  
Retained earnings (accumulated deficit)
    811,197       (22,186 )     (811,197 )     (22,186 )
                                 
Total stockholders’ equity
    1,928,923       1,018,267       (1,928,923 )     1,018,267  
                                 
Total liabilities and stockholders’ equity
  $ 1,976,737     $ 2,147,396     $ (1,928,923 )   $ 2,195,210  
                                 
 
The accompanying notes are an integral part of this consolidating financial statement.


25


 

RADIO ONE, INC. AND SUBSIDIARIES
 
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
 
                                 
    Combined
                   
    Guarantor
    Radio
             
    Subsidiaries     One, Inc.     Eliminations     Consolidated  
          (Unaudited)
       
          (In thousands)        
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                               
Net income (loss)
  $ 33,783     $ (706 )   $ (33,783 )   $ (706 )
Adjustments to reconcile net income (loss) to net cash from operating activities:
                               
Depreciation and amortization
    4,380       7,033             11,413  
Amortization of debt financing costs
          1,630             1,630  
Amortization of production content
          332             332  
Deferred income taxes
          (912 )           (912 )
Long-lived asset impairment
    5,506                   5,506  
Equity in net loss of affiliated company
          7,551             7,551  
Minority interest in income of subsidiaries
          3,099             3,099  
Stock-based compensation and other compensation
    830       (48 )           782  
Amortization of contract inducement and termination fee
    (1,545 )                 (1,545 )
Effect of change in operating assets and liabilities, net of assets acquired:
                             
Trade accounts receivable
    (3,603 )     (428 )           (4,031 )
Prepaid expenses and other current assets
          77             77  
Income tax receivable
          1,296             1,296  
Other assets
          (591 )           (591 )
Accounts payable
    (2,047 )     (3,700 )           (5,747 )
Accrued interest
          (10,691 )           (10,691 )
Accrued compensation and related benefits
    240       1,045             1,285  
Income taxes payable
          1,032             1,032  
Other liabilities
    (311 )     (572 )           (883 )
Net cash from (used in) operating activities of discontinued operations
    11,185       (3,609 )           7,576  
                                 
Net cash flows from operating activities
    48,418       1,838       (33,783 )     16,473  
                                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Purchase of property and equipment
          (5,823 )           (5,823 )
Equity investments
          (11,886 )           (11,886 )
Investment in subsidiaries
          (33,783 )     33,783        
Deposits for station equipment and purchases
          (5,100 )           (5,100 )
Proceeds from sale of assets
          104,000             104,000  
                                 
Net cash flows from investing activities
          47,408       33,783       81,191  
                                 
CASH FLOWS USED IN FINANCING ACTIVITIES:
                               
Repayment of debt
          (27 )           (27 )
Repayment of credit facility
          (102,500 )           (102,500 )
Debt refinancing costs
          (3,004 )           (3,004 )
Change in interest due on stock subscriptions receivable
          (59 )           (59 )
Payment of minority interest shareholders
          (2,940 )           (2,940 )
                                 
Net cash flows used in financing activities
          (108,530 )           (108,530 )
                                 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    48,418       (59,284 )           (10,866 )
CASH AND CASH EQUIVALENTS, beginning of period
    574       31,832             32,406  
                                 
CASH AND CASH EQUIVALENTS, end of period
  $ 48,992     $ (27,452 )   $     $ 21,540  
                                 
 
The accompanying notes are an integral part of this consolidating financial statement.


26


 

RADIO ONE, INC. AND SUBSIDIARIES
 
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
 
                                 
    Combined
                   
    Guarantor
    Radio
             
    Subsidiaries     One, Inc.     Eliminations     Consolidated  
    (Unaudited)
 
    (As Adjusted - See Note 1)
 
    (In thousands)  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                               
Net income
  $ 48,205     $ 18,731     $ (48,205 )   $ 18,731  
Adjustments to reconcile net income to net cash from operating activities:
                               
Depreciation and amortization
    3,945       6,684             10,629  
Amortization of debt financing costs
          1,580             1,580  
Amortization of production content
          2,518             2,518  
Deferred income taxes
          13,918             13,918  
Loss on write-down of investment
          270             270  
Equity in net losses of affiliated company
          1,569             1,569  
Minority interest in income of subsidiaries
          1,920             1,920  
Stock-based compensation and other compensation
    1,405       3,469             4,874  
Amortization of contract inducement and termination fee
    (697 )     (849 )           (1,546 )
Effect of change in operating assets and liabilities, net of assets acquired:
                               
Trade accounts receivable, net
    (3,420 )     (2,006 )           (5,426 )
Prepaid expenses and other current assets
    496       (1,190 )           (694 )
Income tax receivable
          2,655             2,655  
Due to corporate/from subsidiaries
    (4,037 )     4,037              
Accounts payable
    (498 )     2,449             1,951  
Accrued interest
          (9,785 )           (9,785 )
Accrued compensation and related benefits
    (39 )     (1,945 )           (1,984 )
Income taxes payable
          (358 )           (358 )
Other liabilities
    1,161       1,889             3,050  
Net cash used in operating activities from discontinued operations
    1,285       (757 )           528  
                                 
Net cash flows from operating activities
    47,806       44,799       (48,205 )     44,400  
                                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Purchase of property and equipment
    (3,857 )     (6,357 )           (10,214 )
Equity investments
          (9,743 )           (9,743 )
Acquisitions
    (43,727 )     (227 )           (43,954 )
Investment in subsidiaries
          (48,205 )     48,205        
Purchase of other intangible assets
    (202 )     (481 )           (683 )
Net cash used in investing activities from discontinued operations
                       
                                 
Net cash flows used in investing activities
    (47,786 )     (65,013 )     48,205       (64,594 )
                                 
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
                               
Repayment of debt
    (20 )                 (20 )
Proceeds from credit facility
          33,000             33,000  
Repayment of credit facility
          (12,000 )           (12,000 )
Proceeds from exercise of stock options
          52             52  
Change in interest due on stock subscription receivable
          (56 )           (56 )
Payment to minority interest shareholders
          (2,940 )           (2,940 )
                                 
Net cash flows (used in) from financing activities
    (20 )     18,056             18,036  
                                 
(DECREASE) IN CASH AND CASH EQUIVALENTS
          (2,158 )           (2,158 )
CASH AND CASH EQUIVALENTS, beginning of period
    794       18,287             19,081  
                                 
CASH AND CASH EQUIVALENTS, end of period
  $ 794     $ 16,129     $     $ 16,923  
                                 
 
The accompanying notes are an integral part of this consolidating financial statement.


27


 

 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following information should be read in conjunction with “Selected Financial Data” and the Consolidated Financial Statements and Notes thereto included elsewhere in this report and the audited financial statements and Management’s Discussion and Analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2006.
 
Introduction
 
Revenue
 
We primarily derive revenue from the sale of advertising time and program sponsorships to local and national advertisers. Advertising revenue is affected primarily by the advertising rates our radio stations and programs are able to charge, as well as the overall demand for radio advertising time in a market. These rates are largely based upon a radio station’s audience share in the demographic groups targeted by advertisers, the size of the market, the number of radio stations in the related market, and the supply of and demand for radio advertising time. Advertising rates are generally highest during morning and afternoon commuting hours.
 
During the three and nine months ended September 30, 2007, approximately 56% and 58% of our net revenue was generated from local advertising and in both periods approximately 36% was generated from national advertising, including network advertising. In comparison, during the three and nine months ended September 30, 2006, approximately 56% and 58% of our net revenue was generated from local advertising and in both periods approximately 37% was generated from national spot advertising, including network advertising. The balance of revenue was generated from tower rental income, ticket sales and revenue related to our sponsored events, management fees and other revenue.
 
In the broadcasting industry, radio stations often utilize trade or barter agreements to reduce cash expenses by exchanging advertising time for goods or services. In order to maximize cash revenue from our spot inventory, we closely monitor the use of trade and barter agreements.
 
In December 2006, the Company completed the acquisition of certain net assets of Giant Magazine, LLC (“Giant Magazine”). Giant Magazine primarily derives revenue from the sale of advertising in the magazine, as well as newsstand and subscription revenue generated from sales of the magazine.
 
Expenses
 
Our significant broadcast expenses are (i) employee salaries and commissions, (ii) programming expenses, (iii) advertising and promotion expenses, (iv) rental of premises for office facilities and studios, (v) rental of transmission tower space and (vi) music license royalty fees. We strive to control these expenses by centralizing certain functions such as finance, accounting, legal, human resources and management information systems and the overall programming management function. We also use our multiple stations, market presence and purchasing power to negotiate favorable rates with certain vendors and national representative selling agencies.
 
We generally incur advertising and promotional expenses to increase our audiences. However, because Arbitron reports ratings quarterly, any changed ratings and therefore the effect on advertising revenue, tends to lag behind the incurrence of advertising and promotional expenditures.
 
Measurement of Performance
 
We monitor the growth and operational results of our business using net income and the following key metrics:
 
(a) Net revenue:  The performance of an individual radio station or group of radio stations in a particular market is customarily measured by its ability to generate net revenue. Net revenue consists of gross broadcast revenue, net of local and national agency and outside sales representative commissions consistent with industry practice. Net revenue is recognized in the period in which advertisements are broadcast. Net revenue also includes advertising aired in exchange for goods and services, which is recorded at fair value.


28


 

(b) Station operating income:  Net income (loss) before depreciation and amortization, income taxes, interest income, interest expense, equity in loss of affiliated company, minority interest in income of subsidiaries, impairment of long-lived assets, other income/expense, corporate expenses, stock-based compensation expenses, income (loss) from discontinued operations, net of tax, and gains (losses) on sales of assets is commonly referred to in our industry as station operating income. Station operating income is not a measure of financial performance under generally accepted accounting principles. Nevertheless, we believe station operating income is often a useful measure of a broadcasting company’s operating performance and is a significant basis used by our management to measure the operating performance of our stations within the various markets because station operating income provides helpful information about our results of operations, apart from expenses associated with our physical plant, income taxes provision, investments, debt financings, overhead, stock-based compensation, and gains, losses and operational results from discontinued operations. Station operating income is frequently used as one of the bases for comparing businesses in our industry, although our measure of station operating income may not be comparable to similarly titled measures of other companies. Station operating income does not purport to represent operating loss or cash flow from operating activities, as those terms are defined under generally accepted accounting principles, and should not be considered as an alternative to those measurements as an indicator of our performance.
 
(c) Station operating income margin:  Station operating income margin represents station operating income as a percentage of net revenue. Station operating income margin is not a measure of financial performance under generally accepted accounting principles. Nevertheless, we believe that station operating income margin is a useful measure of our performance because it provides information about our profitability as a percentage of our net revenue.
 
Summary of Performance
 
The tables below provide a summary of our performance based on the metrics described above:
 
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2007     2006     2007     2006  
    (In thousands, except margin data)     (In thousands, except margin data)  
 
Net revenue
  $ 90,389     $ 91,932     $ 252,080     $ 258,813  
Station operating income
    40,935       46,329       111,802       125,509  
Station operating income margin
    45.3 %     50.4 %     44.4 %     48.5 %
Net income (loss)
  $ 4,801     $ 8,034     $ (706 )   $ 18,731  


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The reconciliation of net income to station operating income is as follows:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2007     2006     2007     2006  
    (In thousands)     (In thousands)  
 
Net income (loss) as reported
  $ 4,801     $ 8,034     $ (706 )   $ 18,731  
Add back non-station operating income items included in net income:
                               
Interest income
    (292 )     (493 )     (852 )     (1,034 )
Interest expense
    18,400       18,733       55,047       54,079  
Provision for income taxes
    5,892       7,418       4,691       16,393  
Corporate selling, general and administrative, excluding stock-based compensation
    4,637       7,345       20,299       20,989  
Stock-based compensation
    923       1,332       2,536       3,964  
Equity in loss of affiliated company
    2,793       635       7,551       1,569  
Other expense (income), net
    15       (11 )     22       269  
Depreciation and amortization
    3,773       3,376       11,413       10,629  
Minority interest in income of subsidiaries
    1,274       882       3,099       1,920  
Impairment of long-lived assets
                5,506        
(Income) loss from discontinued operations, net of tax
    (1,281 )     (922 )     3,196       (2,000 )
                                 
Station operating income
  $ 40,935     $ 46,329     $ 111,802     $ 125,509  
                                 


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RADIO ONE, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
 
The following table summarizes our historical consolidated results of operations:
 
Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006 (In thousands)
 
                                 
    Three Months Ended
       
    September 30,              
    2007     2006     Increase/(Decrease)  
          (Unaudited)
             
          (As Adjusted -
             
          See Note 1)              
 
Statements of Income:
                               
Net revenue
  $ 90,389     $ 91,932     $ (1,543 )     (1.7 )%
Operating expenses:
                               
Programming and technical, excluding stock-based compensation
    19,699       18,793       906       4.8  
Selling, general and administrative, stock-based compensation
    29,755       26,810       2,945       11.0  
Corporate selling, general and administrative, excluding stock-based compensation
    4,637       7,345       (2,708 )     (36.9 )
Stock-based compensation
    923       1,332       (409 )     (30.7 )
Depreciation and amortization
    3,773       3,376       397       11.8  
                                 
Total operating expenses
    58,787       57,656       1,131       2.0  
                                 
Operating income
    31,602       34,276       (2,674 )     (7.8 )
Interest income
    292       493       (201 )     (40.8 )
Interest expense
    18,400       18,733       (333 )     (1.8 )
Equity in loss of affiliated company
    2,793       635       2,158       339.8  
Other (expense) income, net
    (15 )     11       (26 )     (236.4 )
                                 
Income before provision for income taxes, minority interest in income of subsidiaries and discontinued operations
    10,686       15,412       (4,726 )     (30.7 )
Provision for income taxes
    5,892       7,418       (1,526 )     (20.6 )
Minority interest in income of subsidiaries
    1,274       882       392       44.4  
                                 
Net income from continuing operations
    3,520       7,112       (3,592 )     (50.5 )
Income from discontinued operations, net of tax
    1,281       922       359       38.9  
                                 
Net income
  $ 4,801     $ 8,034     $ (3,233 )     (40.2 )%
                                 
 
Net revenue
 
                             
Three Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 90,389     $ 91,932     $ (1,543 )     (1.7 )%
 
During the three months ended September 30, 2007, we recognized approximately $90.4 million in net revenue compared to approximately $91.9 million during the same period in 2006. These amounts are net of agency and outside sales representative commissions, which were approximately $10.3 million during the three months ended September 30, 2007, compared to approximately $11.1 million during the same period in 2006. In addition to an overall radio industry decline in the markets in which we operate, the decrease in net revenue was due primarily to a significant decline in net revenue from our Los Angeles station, as well as declines from our Baltimore, Detroit and Philadelphia markets. The decline in net revenue was also due to the absence of a sponsorship revenue event in


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2007 similar to our August 2006 25th Anniversary event. These declines in net revenue were partially offset by an increase in net revenue from our Atlanta market, an increase in Reach Media’s net revenue associated with a sponsored event, and an increase in net revenue from the consolidation of the operating results of Giant Magazine. Excluding the operating results of Giant Magazine, which we acquired in December 2006, our net revenue declined 2.9% for the three months ended September 30, 2007, compared to the same period in 2006.
 
Operating Expenses
 
Programming and technical, excluding stock-based compensation
 
                             
Three Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 19,699     $ 18,793     $ 906       4.8 %
 
Programming and technical expenses include expenses associated with on-air talent and the management and maintenance of the systems, tower facilities, and studios used in the creation, distribution and broadcast of our programming on our radio stations. Programming and technical expenses also include expenses associated with our research activities and music royalties. The increase in programming and technical expenses during the three months ended September 30, 2007 was due primarily to the consolidation of the operating results of Giant Magazine, which was acquired in December of 2006, and increases in on-air talent, research and music royalties expenses. Increased programming and technical expenses also resulted from expenses associated with two stations acquired or operated since August 2006. These increased programming and technical expenses were partially offset by a reduction in television production costs associated with the Tom Joyner television series, which ended September 2006, a reduction in expenses associated with our news/talk network, and a reduction in expenses associated with a 2006 film venture. Excluding the operating results of Giant Magazine, programming and technical expenses were essentially unchanged and increased only 0.4% for the three months ended September 30, 2007, compared to the same period in 2006.
 
Selling, general and administrative, excluding stock-based compensation
 
                             
Three Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 29,755     $ 26,810     $ 2,945       11.0 %
 
Selling, general and administrative expenses include expenses associated with our sales departments, offices, facilities and personnel (outside of our corporate headquarters), marketing expenses, back office expenses, and the advertising traffic (scheduling and insertion) functions. The increase in selling, general and administrative expenses during the three months ended September 30, 2007, was due to the consolidation of the operating results of Giant Magazine, which was acquired in December 2006, increased expenses for a Reach Media sponsored event, additional legal and professional expenses and expenses associated with our new internet initiative. Increased selling, general and administrative expenses also resulted from expenses associated with two stations acquired or operated since August 2006. These expense increases were partially offset by lower bad debt allowances and decreases in expenses associated with the news/talk network. Excluding the operating results of Giant Magazine, selling, general and administrative expenses increased 7.8% for the three months ended September 30, 2007, compared to the same period in 2006.
 
Corporate selling, general and administrative, excluding stock-based compensation
 
                             
Three Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 4,637     $ 7,345     $ (2,708 )     (36.9 )%
 
Corporate selling, general and administrative expenses consist of expenses associated with our corporate headquarters and facilities, including personnel. The decrease in corporate expenses during the three months ended September 30, 2007 resulted primarily from the reduction of retention bonus expenses anticipated to be paid to the Chief Financial Officer (“CFO”) given his announced departure in December 2007, which is earlier than the


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retention date of October 2010 called for in his employment agreement. The decrease also resulted from the absence of expenses associated with the August 2006 25th Anniversary event. These decreases were partially offset by higher compensation, primarily from recent hires, recruiting fees, research and legal and professional expenses. Excluding the expenses associated with the retention bonus reduction and the 2006 25th Anniversary event, corporate selling, general and administrative expenses increased 13.9% for the three months ended September 30, 2007, compared to the same period in 2006.
 
Stock-based compensation
 
                             
Three Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 923     $ 1,332     $ (409)     (30.7 )%
 
Stock-based compensation consists of expenses associated with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation expense over the service period for awards expected to vest. Stock based compensation also includes expenses associated with restricted stock grants. The decrease in stock-based compensation for the three months ended September 30, 2007 was primarily due to cancellations and the completion of the vesting period for certain stock option grants.
 
Depreciation and amortization
 
                             
Three Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 3,773     $ 3,376     $ 397       11.8 %
 
The increase in depreciation and amortization for the three months ended September 30, 2007 was primarily due to an increase in amortization for the WMOJ-FM intellectual property acquisition made in September 2006, an increase in depreciation for two stations acquired or operated since August 2006, and additional depreciation for capital expenditures made subsequent to September 30, 2006.
 
Interest income
 
                             
Three Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 292     $ 493     $ (201)     (40.8 )%
 
The decrease in interest income for the three months ended September 30, 2007 is primarily due to lower average cash balances, cash equivalents and short-term investments.
 
Interest expense
 
                             
Three Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 18,400     $ 18,733     $ (333)     (1.8 )%
 
The decrease in interest expense during the three months ended September 30, 2007 resulted primarily from interest savings associated with lower net borrowings due to debt pay downs, which was partially offset by fees associated with the operation of WPRS-FM (formerly WXGG-FM) pursuant to a local marketing agreement (LMA) which began April 2007. LMA fees are classified as interest expense.
 
Equity in loss of affiliated company
 
                             
Three Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 2,793     $ 635     $ 2,158       339.8 %


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The increase in the loss is attributable to an increase in the percentage share of losses in 2007 driven by specialized accounting guidance related to TV One’s current capital structure and the Company’s ownership levels in the equity securities of TV One that are currently absorbing its net losses.
 
Provision for income taxes
 
                             
Three Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 5,892     $ 7,418     $ (1,526 )     (20.6 )%
 
The decrease in the provision for income taxes compared to the same period in 2006 was due primarily to lower pre-tax income, permanent differences between incomes subject to tax for book purposes versus tax purposes and additional valuation allowances for charitable contributions and certain state net operating loss carryforwards and certain discrete items. For the quarter ended September 30, 2007, our effective tax rate was 55.1%. As of September 30, 2007 the annual effective tax rate is projected at 51.2%, which is impacted by the permanent differences between incomes subject to tax for tax purposes versus book purposes.
 
Minority interest in income of subsidiaries
 
                             
Three Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 1,274     $ 882     $ 392       44.4 %
 
The increase in minority interest in income of subsidiaries is due primarily to an increase in the net income of Reach Media, and a decrease in the net loss of certain other consolidated entities for the three months ended September 30, 2007, compared to the same period in 2006.


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RADIO ONE, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
 
The following table summarizes our historical consolidated results of operations:
 
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006 (In thousands)
 
                                 
    Nine Months Ended
             
    September 30,              
    2007     2006     Increase/(Decrease)  
    (Unaudited)     (Unaudited)
             
          (As Adjusted -
             
          See Note 1)              
 
Statements of Operations:
                               
Net revenue
  $ 252,080     $ 258,813     $ (6,733 )     (2.6 )%
Operating expenses:
                               
Programming and technical, excluding stock-based compensation
    57,922       55,226       2,696       4.9  
Selling, general and administrative, excluding stock-based compensation
    82,356       78,078       4,278       5.5  
Corporate selling, general and administrative, excluding stock-based compensation
    20,299       20,989       (690 )     (3.3 )
Stock-based compensation
    2,536       3,964       (1,428 )     (36.0 )
Depreciation and amortization
    11,413       10,629       784       7.4  
Impairment of long-lived assets
    5,506             5,506        
                                 
Total operating expenses
    180,032       168,886       11,146       6.6  
                                 
Operating income
    72,048       89,927       (17,879 )     (19.9 )
Interest income
    852       1,034       (182 )     (17.6 )
Interest expense
    55,047       54,079       968       1.8  
Equity in loss of affiliated company
    7,551       1,569       5,982       381.3  
Other expense, net
    22       269       (247 )     (91.8 )
                                 
Income before provision for income taxes, minority interest in income of subsidiaries and discontinued operations
    10,280       35,044       (24,764 )     (70.7 )
Provision for income taxes
    4,691       16,393       (11,702 )     (71.4 )
Minority interest in income of subsidiaries
    3,099       1,920       1,179       61.4  
                                 
Net income from continuing operations
    2,490       16,731       (14,241 )     (85.1 )
(Loss) income from discontinued operations, net of tax
    (3,196 )     2,000       (5,196 )     (259.8 )
                                 
Net (loss) income
  $ (706 )   $ 18,731     $ (19,437 )     (103.8 )%
                                 
 
Net revenue
 
                             
Nine Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 252,080     $ 258,813     $ (6,733 )     (2.6 )%
 
During the nine months ended September 30, 2007, we recognized approximately $252.1 million in net revenue compared to approximately $258.8 million during the same period in 2006. These amounts are net of agency and outside sales representative commissions, which were approximately $29.1 million during the nine months ended 2007, compared to approximately $31.4 million during the same period in 2006. In addition to an overall radio industry decline in the markets in which we operate, the decrease in net revenue was due primarily to a significant decline in net revenue from our Los Angeles station, and declines from our Detroit, Philadelphia,


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Baltimore and Washington, DC markets. The decline in net revenue was also due to the absence of a sponsorship revenue event in 2007 similar to our August 2006 25th Anniversary event. These declines were partially offset by increased net revenue from our Atlanta and Cincinnati markets, and increased net revenue from the consolidation of the January through September 2007 operating results of Giant Magazine, which was acquired in December 2006. Excluding the operating results of Giant Magazine, our net revenue declined 3.7% for the nine months ended September 30, 2007, compared to the same period in 2006.
 
Operating Expenses
 
Programming and technical, excluding stock-based compensation
 
                             
Nine Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 57,922     $ 55,226     $ 2,696       4.9 %
 
Programming and technical expenses include expenses associated with on-air talent and the management and maintenance of the systems, tower facilities, and studios used in the creation, distribution and broadcast of our programming on our radio stations. Programming and technical expenses also include expenses associated with our research activities and music royalties. The increase in programming and technical expenses during the nine months ended September 30, 2007 was due primarily to the consolidation of the January through September 2007 operating results of Giant Magazine, which was acquired in December 2006, and increases in on-air talent, research, music royalties, travel and tower expenses. Increased programming and technical expenses also resulted from expenses associated with two stations acquired or operated since August 2006. These increased programming and technical expenses were partially offset by a reduction in television production costs associated with the Tom Joyner television series, which ended September 2006. Excluding the operating results of Giant Magazine, programming and technical expenses were essentially unchanged and increased only 0.1% for the nine months ended September 30, 2007, compared to the same period in 2006.
 
Selling, general and administrative, excluding stock-based compensation
 
                             
Nine Months Ended September 30,              
2007
    2006     Increase/(Decrease)  
 
$ 82,356     $ 78,078     $ 4,278       5.5 %
 
Selling, general and administrative expenses include expenses associated with our sales departments, offices, facilities and personnel (outside of our corporate headquarters), marketing expenses, back office expenses, and the advertising traffic (scheduling and insertion) functions. The increase in selling, general and administrative expenses during the nine months ended September 30, 2007, was due to the consolidation of the January through September 2007 operating results of Giant Magazine, which was acquired in December 2006, expenses associated with the new internet initiative, increased promotional and events spending, and additional legal and professional expenses. Increased selling, general and administrative expenses also resulted from expenses associated with two stations acquired or operated since August 2006. These expenses were slightly offset by lower bad debt allowances and lower expenses associated with the news/talk network and a 2006 film venture. Excluding the operating results of Giant Magazine, selling, general and administrative expenses increased 3.2% for the nine months ended September 30, 2007, compared to the same period in 2006.
 
Corporate selling, general and administrative, excluding stock-based compensation
 
                             
Nine Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 20,299     $ 20,989     $ (690 )     (3.3 )%
 
Corporate selling, general and administrative expenses consist of expenses associated with our corporate headquarters and facilities, including personnel. The decrease in corporate expenses during the nine months ended September 30, 2007 resulted primarily from the reduction of retention bonus expenses anticipated to be paid to the CFO given his announced departure in December 2007, which is earlier than the retention date of October 2010


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called for in his employment agreement. The decrease was also due to the absence of expenses associated with the August 2006 25th Anniversary event and reduced severance expenses. These decreases were partially offset by additional legal and professional fees associated with the voluntary investigation of our historical stock option grant practices and higher compensation, mostly from recent hires, and additional recruiting fees, research and contract labor expenses. Excluding the retention bonus expenses and the legal and professional fees associated with the voluntary stock option grant investigation, corporate selling, general and administrative expenses decreased 3.3% for the nine months ended September 30, 2007, compared to the same period in 2006.
 
Stock-based compensation
 
                             
Nine Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 2,536     $ 3,964     $ (1,428 )     (36.0 )%
 
Stock-based compensation consists of expenses associated with SFAS No. 123(R), which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation expense over the service period for awards expected to vest. Stock based compensation also includes expenses associated with restricted stock grants. The decrease in stock-based compensation for the nine months ended September 30, 2007 was primarily due to cancellations and the completion of the vesting period for certain stock option grants.
 
Depreciation and amortization
 
                             
Nine Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 11,413     $ 10,629     $ 784       7.4 %
 
The increase in depreciation and amortization for the nine months ended September 30, 2007 was primarily due to an increase in amortization for the WMOJ-FM intellectual property acquisition made in September 2006, an increase in depreciation for two stations acquired or operated since August 2006, and an increase in depreciation for capital expenditures made subsequent to September 30, 2006. These increases were partially offset by the completion of trade names amortization in a certain market.
 
Impairment of long-lived assets
 
                             
Nine Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 5,506     $     $ 5,506        
 
The increase in impairment of long-lived assets for the nine months ended September 30, 2007 was related to a one-time charge for the impairment of goodwill and the radio broadcasting license for our Boston station, WILD-AM.
 
Interest income
 
                             
Nine Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 852     $ 1,034     $ (182)     (17.6 )%
 
The decrease in interest income for the nine months ended September 30, 2007 is primarily due from interest income from an income tax receivable as well as lower average cash balances, cash equivalents and short-term investments.


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Interest expense
 
                             
Nine Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 55,047     $ 54,079     $ 968       1.8 %
 
The increase in interest expense resulted from higher market interest rates on the variable portion of our debt, which was partially offset by interest savings from debt pay downs resulting in lower overall net borrowings as of September 30, 2007. The increase in interest expense also resulted from fees associated with the operation of WPRS-FM (formerly WXGG-FM) pursuant to an LMA, which began in April 2007. LMA fees are classified as interest expense.
 
Equity in loss of affiliated company
 
                             
Nine Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 7,551     $ 1,569     $ 5,982       381.3 %
 
The increase in loss of affiliated company during the nine months ended September 30, 2007 is primarily due to an increase in our share of TV One’s losses related to TV One’s current capital structure and the Company’s ownership levels in the equity securities of TV One that are currently absorbing its net losses.
 
Provision for income taxes
 
                             
Nine Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 4,691     $ 16,393     $ (11,702 )     (71.4 )%
 
The decrease in the provision for income taxes was due primarily to a significant decrease in the pre-tax income for the nine months ended September 30, 2007, compared to the same period in 2006. In addition, this decrease was also impacted by various discrete items on a year-to-date basis, including the tax impact of impairment charges, the cancellation of non-qualified stock options, and the cumulative impact of Internal Revenue Code Section 162(m) adjustments. Our effective tax rate on a year-to-date basis as of September 30, 2007 was 45.6% compared to 46.8% for the same period in 2006. As of September 30, 2007, our annual effective tax rate is projected at 51.2%, which is impacted by the permanent differences between incomes subject to tax for book purposes versus tax purposes.
 
Minority interest in income of subsidiaries
 
                             
Nine Months Ended September 30,              
2007     2006     Increase/(Decrease)  
 
$ 3,099     $ 1,920     $ 1,179       61.4 %
 
The increase in minority interest in income of subsidiaries is due to an increase in Reach Media’s net income and a decrease in the net loss of certain other consolidated entities for the nine months ended September 30, 2007, compared to the same period in 2006.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Our primary source of liquidity is cash provided by operations and, to the extent necessary, borrowings available under our credit facilities and other debt or equity financing.
 
In June 2005, the Company entered into a credit agreement with a syndicate of banks (the “Credit Agreement”). The Credit Agreement was amended in April 2006 and September 2007 to modify certain financial covenants and other provisions. The term of the Credit Agreement is seven years and the amount available under the Credit Agreement consists of a $500.0 million revolving facility and an initial $300.0 million term loan. Borrowings under the credit facility are subject to compliance with certain provisions of the Credit Agreement,


38


 

including financial covenants. The Company may use proceeds from the credit facilities for working capital, capital expenditures made in the ordinary course of business, its common stock repurchase program, refinancing under certain conditions, investments and acquisitions permitted under the Credit Agreement, and other lawful corporate purposes. The Credit Agreement contains affirmative and negative covenants that the Company must comply with, including (a) maintaining an interest coverage ratio of no less than 1.60 to 1.00 through June 30, 2008, no less than 1.75 to 1.00 from July 1, 2008 to December 31, 2009, no less than 2.00 to 1.00 from January 1, 2010 through December 31, 2010, and no less than 2.25 to 1.00 from January 1, 2011 and thereafter, (b) maintaining a total leverage ratio of no greater than 7.75 to 1.00 through March 31, 2008, no greater than 7.50 to 1.00 from April 1, 2008 through September 30, 2008, no greater than 7.25 to 1.00 from October 1, 2008 through June 30, 2010, no greater than 6.50 to 1.00 from July 1, 2010 through September 30, 2011, and no greater that 6.00 to 1.00 from October 1, 2011 and thereafter, (c) limitations on liens, (d) limitations on the sale of assets, (e) limitations on the payment of dividends, and (f) limitations on mergers, as well as other customary covenants. Simultaneous with entering into the Credit Agreement in June 2005, the Company borrowed $437.5 million to retire all outstanding obligations under its previous credit agreement. The Company repaid $102.5 million of the outstanding term loan in September 2007, with the proceeds of the sale of assets and cash on hand. The Company is in compliance with all debt covenants as September 30, 2007
 
As of September 30, 2007, we had approximately $360.8 million of committed but unused borrowings. Taking into consideration the covenants under the Credit Agreement, $73.5 million of that amount was available to be drawn down. Both the term loan facility and the revolving facility under the Credit Agreement bear interest, at our option, at a rate equal to either (i) the London Interbank Offered Rate (“LIBOR”) plus a spread that ranges from 0.63% to 2.25%, or (ii) the prime rate plus a spread of up to 1.25%. The amount of the spread varies depending on our leverage ratio. We also pay a commitment fee that varies depending on certain financial covenants and the amount of unused commitment, up to a maximum of 0.375% per annum on the unused commitment of the revolving facility.
 
Under the Credit Agreement, we are required from time to time to protect ourselves from interest rate fluctuations using interest rate hedge agreements. As a result, we have entered into various fixed rate swap agreements designed to mitigate our exposure to higher floating interest rates. These swap agreements require that we pay a fixed rate of interest on the notional amount to a bank and that the bank pays to us a variable rate equal to three-month LIBOR. As of September 30, 2007, we had three swap agreements in place for a total notional amount of $75.0 million, and the periods remaining on these three swap agreements range in duration from 9 to 57 months.
 
Our credit exposure under the swap agreements is limited to the cost of replacing an agreement in the event of non-performance by our counter-party; however, we do not anticipate non-performance. All of the swap agreements are tied to the three-month LIBOR, which may fluctuate significantly on a daily basis. The valuation of each swap agreement is affected by the change in the three-month LIBOR and the remaining term of the agreement. Any increase in the three-month LIBOR results in a more favorable valuation, while a decrease results in a less favorable valuation.
 
The following table summarizes the interest rates in effect with respect to our debt as of September 30, 2007:
 
                 
    Amount
    Applicable
 
Type of Debt
  Outstanding     Interest Rate  
    (In millions)        
 
Senior bank term debt (swap matures June 16, 2012)(1)
  $ 25.0       6.72 %
Senior bank term debt (swap matures June 16, 2010)(1)
    25.0       6.57 %
Senior bank term debt (swap matures June 16, 2008)(1)
    25.0       6.38 %
Senior bank term debt (subject to variable interest rates)(2)
    122.5       7.63 %
Senior bank revolving debt (subject to variable interest rates)(2)
    137.5       7.63 %
87/8% senior subordinated notes (fixed rate)
    300.0       8.88 %
63/8% senior subordinated notes (fixed rate)
    200.0       6.38 %
Seller financed acquisition loan
    1.4       5.10 %


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(1) A total of $75.0 million is subject to fixed rate swap agreements that became effective in June 2005. Under our fixed rate swap agreements, we pay a fixed rate plus a spread based on our leverage ratio, as defined in our Credit Agreement. That spread is currently set at 2.25% and is incorporated into the applicable interest rates set forth above.
 
(2) Subject to rolling 90-day LIBOR plus a spread currently at 2.25% and incorporated into the applicable interest rate set forth above.
 
Our Credit Agreement and the indentures governing our senior subordinated notes require that we comply with certain financial covenants limiting our ability to incur additional debt. Such terms also place restrictions on us with respect to the sale of assets, liens, investments, dividends, debt repayments, capital expenditures, transactions with affiliates, consolidation and mergers, and the issuance of equity interests, among other things. Our Credit Agreement also requires compliance with financial tests based on financial position and results of operations, including a leverage ratio, an interest coverage ratio and a fixed charge coverage ratio, all of which could effectively limit our ability to borrow under the Credit Agreement or to otherwise raise funds in the debt market.
 
The following table provides a comparison of our statements of cash flows for the nine months ended September 30, 2007 and 2006:
 
                 
    2007     2006  
    (In thousands)  
 
Net cash flows from operating activities
  $ 16,473     $ 44,400  
Net cash flows from (used in) investing activities
    81,191       (64,594 )
Net cash flows (used in) from financing activities
    (108,530 )     18,036  
 
Net cash flows from operating activities were approximately $16.5 million and $44.4 million for the nine months ended September 30, 2007 and 2006, respectively. Cash flows from operating activities for the nine months ended September 30, 2007 decreased from the prior year due primarily to a decrease in net income of approximately $19.4 million and a decrease in overall working capital.
 
Net cash flows from investing activities were approximately $81.2 million for the nine months ended September 30, 2007 compared to net cash flows used in investing activities of approximately $64.6 million for the nine months ended September 30, 2006. Capital expenditures, including digital tower and transmitter upgrades, and deposits for station equipment and purchases were approximately $5.8 million and $10.2 million for the nine months ended September 30, 2007 and 2006, respectively. We funded approximately $8.7 million of our investment commitment in TV One for each of the nine month periods ended September 30, 2007 and 2006. The Company received $104.0 million in proceeds from completing the sales of certain radio stations in the Louisville, Dayton, and Minneapolis markets during the nine months ended September 30, 2007. Also, during the nine months ended September 30, 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 and the assets of WIFE-FM, a radio station in the Cincinnati metropolitan area for approximately $18.2 million. In connection with this acquisition, we also acquired the intellectual property of radio station WMOJ-FM, also in the Cincinnati market, for approximately $5.0 million in cash and changed WIFE-FM’s call sign to WMOJ-FM.
 
Net cash flows used in financing activities were approximately $108.5 for the nine months ended September 30, 2007 compared to net cash flows provided from financing activities of approximately $18.0 million for the nine months ended September 30, 2006. The Company used $102.5 million of the proceeds from completing the sales of certain radio stations to pay down debt during the nine months ended September 30, 2007. In addition, the Company incurred approximately $3.0 million in amendment fees associated with amending financial covenants of the Credit Agreement. During the nine months ended September 30, 2006, we borrowed approximately $33.0 million from our credit facility and paid approximately $2.9 million in dividends to Reach Media’s minority interest shareholders. In September 2006, we made a repayment on our revolving credit facility of $12.0 million.
 
From time to time we consider opportunities to acquire additional radio stations, primarily in the top 60 African-American markets, and to make strategic investments and divestitures. In July 2007, we acquired the assets of WDBZ-AM, a radio station located in the Cincinnati metropolitan area, for approximately $2.6 million in


40


 

seller financing. Up until closing in July 2007, we had been operating WDBZ-AM pursuant to an LMA since August 2001. 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, for approximately $38.0 million in cash, and a local marketing agreement with Bonneville International Corporation to operate the radio station pending the completion of the acquisition. Subject to the necessary regulatory approvals, we expect to complete the acquisition in the first quarter of 2008. Other than our agreement to purchase WPRS-FM (formerly WXGG-FM) from Bonneville, and our agreement with an affiliate of Comcast Corporation, DIRECTV and other investors to fund TV One (the balance of our commitment was approximately $13.7 million at September 30, 2007), we have no other definitive agreements to make acquisitions of additional radio stations or to make strategic investments. We anticipate that any future acquisitions or strategic investments will be financed through funds generated from operations, cash on hand, equity financings, permitted debt financings, debt financings through unrestricted subsidiaries or a combination of these sources. However, there can be no assurance that financing from any of these sources, if available, will be available on favorable terms.
 
As of September 30, 2007, we had two standby letters of credit totaling $487,000 in connection with our annual insurance policy renewals and a third standby letter of credit totaling approximately $1.3 million in connection with a special event. The standby letter of credit in place for the special event is reduced each time payments against the total guarantee are made to the vendor. To date, there has been no activity on these standby letters of credit.
 
Our ability to meet our debt service obligations and reduce our total debt, our ability to refinance the 87/8% senior subordinated notes at or prior to their scheduled maturity date in 2011, and our ability to refinance the 63/8% senior subordinated notes at or prior to their scheduled maturity date in 2013 will depend upon our future performance which, in turn, will be subject to general economic conditions and to financial, business and other factors, including factors beyond our control. In the next twelve months, our principal liquidity requirements will be for working capital, continued business development, strategic investment opportunities and for general corporate purposes, including capital expenditures.
 
We believe that, based on current levels of operations and anticipated internal growth, for the foreseeable future, cash flows from operations together with other available sources of funds will be adequate to make required payments of principle and interest on our indebtedness, to fulfill our commitment to fund TV One, to fund acquisitions, and to fund anticipated capital expenditures and working capital requirements. However, in order to finance future acquisitions or investments, if any, we may require additional financing and there can be no assurance that we will be able to obtain such financing on terms acceptable to us.
 
Credit Rating Agencies
 
On a continuing basis, credit rating agencies such as Moody’s Investor Services and Standard & Poor’s evaluate our debt. As a result of their reviews, our credit rating could change. We believe that any significant downgrade in our credit rating could adversely impact our future liquidity. The effect of a change in our credit rating may limit or eliminate our ability to obtain debt financing, or include, among other things, interest rate changes under any future credit facilities, notes or other types of debt.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Our accounting policies are described in Note 1 of the Consolidated Financial Statements in our Annual Report on Form 10-K. We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. In Management’s Discussion and Analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2006, we summarized the policies and estimates that we believe to be most critical in understanding the judgments involved in preparing our financial statements and the uncertainties that could affect our results of operations, financial condition and cash flows. There have been no material changes in such policies or estimates since we filed our Annual Report on Form 10-K for the year ended December 31, 2006.


41


 

Goodwill and Radio Broadcasting Licenses
 
We have made several acquisitions in the past for which a significant portion of the purchase price was allocated to radio broadcasting licenses and goodwill. Goodwill exists whenever the purchase price exceeds the fair value of tangible and identifiable intangible net assets acquired in business combinations. As of September 30, 2007, we have recorded approximately $1.7 billion in radio broadcasting licenses and goodwill, which represented approximately 84% of our total assets. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” for such assets owned as of October 1st, we test annually for impairment during each fourth quarter. Asset impairment exists when the recorded value of these assets exceeds their respective fair value. When the recorded value exceeds fair value, an impairment amount is charged to operations for the excess. We have recorded $0 and approximately $15.9 million in impairment charges for the three months and nine months ended September 30, 2007, respectively, and no impairment charges for the same periods in 2006. We believe estimating the value of radio broadcasting licenses and goodwill is a critical accounting estimate because:
 
  •  the carrying value of radio broadcast licenses and goodwill is significant in relation to our total assets;
 
  •  the estimate contains assumptions incorporating variables including, but not limited to, discounted cash flows, market revenue and growth projections, stations performance, profitability margins, capital expenditures, multiples for station sales, our weighted-average cost of capital and terminal values; and
 
  •  Our recent asset disposition strategy, and corresponding multiples and sale prices have, and could continue to result in indicators of impairment associated with these assets.
 
Changes in our estimated fair values as a result of either future asset disposition or our annual impairment testing could result in future write-downs to the recorded values of these assets.
 
Allowance for Doubtful Accounts
 
We must make an estimated allowance for the uncollectibility of our accounts receivable. We review historical write-off activity by market, customer concentrations, customer creditworthiness and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In the past four years, including the nine months ended September 30, 2007, our historical results have usually averaged approximately 6% of our outstanding trade receivables and have been a reliable method to estimate future allowances. If the financial condition of our customers or markets were to deteriorate, adversely affecting their ability to make payments, additional allowances could be required.
 
Deferred Taxes and Effective Tax Rates
 
We estimate the provision for income taxes, income tax liabilities, deferred tax assets and liabilities, and any valuation allowances in accordance with FAS No. 109, “Accounting for Income Taxes”. We estimate effective tax rates based on local tax laws and statutory rates, apportionment factors, taxable income for our operating jurisdictions and disallowable items, among other factors. Audits by the Internal Revenue Service or state and local tax authorities could yield different interpretations from our own, and differences between taxes recorded and taxes owed per our filed returns could cause us to record additional taxes.
 
To address the exposures of unrecognized tax positions, in January 2007, we adopted (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — Interpretation of SFAS No. 109, which recognizes the impact of a tax position in the financial statements if it is more likely than not that the position would be sustained on audit based on the technical merits of the position. Upon the adoption of FIN No. 48, we recorded a $923,000 increase to our net tax liability in order to account for the impact of potential unfavorable outcomes of our tax positions if challenged by taxing authorities. This $923,000 was a cumulative effect adjustment as January 1, 2007. Future outcomes of our tax positions may be more or less than the currently recorded liability, which could result in recording additional taxes, or reversing some portion of the liability, and recognizing a tax benefit once it is determined the liability is either inadequate or no longer necessary as potential issues get resolved, or as statutes of limitations in various tax jurisdictions close.


42


 

We also have significant net operating loss (“NOL”) carryforwards which are recorded as deferred tax assets in the amounts of approximately $300.8 million of gross federal NOLs and approximately $19.1 million of net state NOLs as of December 31, 2006, which expire beginning in 2018 through 2026. Where appropriate, we have recorded a valuation allowance against certain state NOLs where future tax benefits may not be realized. Based on our current estimates and judgments of projected taxable income, including gains from asset sales, and tax planning strategies, such as transfer pricing, we believe that the remaining NOLs will be utilized within the carryforward period. If we do not generate the projected levels of taxable income and if our tax planning strategies do not materialize as assumed, we may not realize future tax benefits from remaining NOLs, and additional valuation allowances may need to be recorded.
 
Valuation of Share-Based Compensation
 
We determine the fair value of stock options using the Black-Scholes model (“BSM”). The BSM incorporates various highly subjective assumptions including expected stock price volatility, for which historical data is heavily relied upon, expected life of options granted, forfeiture rates and interest rates. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that previously recorded.
 
Contingencies and Litigation
 
We regularly evaluate our exposure relating to any contingencies or litigation and record a liability when available information indicates that a liability is probable and estimable. We also disclose significant matters that are reasonably possible to result in a loss, or are probable, but for which an estimate of the liability is not currently available. To the extent actual contingencies and litigation outcomes differ from amounts previously recorded, additional amounts may need to be reflected.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — Interpretation of SFAS No. 109,” which clarifies the accounting for uncertainty in income taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 requires that the Company recognize the impact of a tax position in the financial statements, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN No. 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN No. 48 were effective beginning January 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The impact to the Company of adopting FIN No. 48 on its financial statements is a $923,000 increase to accumulated deficit and a corresponding increase to income tax liability as of January 1, 2007.
 
CAPITAL AND COMMERCIAL COMMITMENTS
 
Long-term debt
 
Our long-term debt consists of obligations under our Credit Agreement, our 87/8% senior subordinated notes and our 63/8% senior subordinated notes.
 
Lease obligations
 
We have non-cancelable operating leases for office space, studio space, and broadcast towers and transmitter facilities that expire over the next 22 years.


43


 

Operating Contracts and Agreements
 
We have other operating contracts and agreements including employment contracts, on-air contracts, severance obligations, retention bonuses, consulting agreements, equipment rental agreements, programming related agreements and other general operating agreements that expire over the next seven years.
 
Contractual Obligations Schedule
 
The following table represents our contractual obligations as of September 30, 2007:
 
                                                         
    Payments Due by Period  
    October-
                                     
    December
                            2012 and
       
Contractual Obligations
  2007     2008     2009     2010     2011     Beyond     Total  
    (In thousands)  
 
87/8% senior subordinated notes(1)
  $ 13,313     $ 26,625     $ 26,625     $ 26,625     $ 313,313     $     $ 406,501  
63/8% senior subordinated notes(1)
    4,781       12,750       12,750       12,750       12,750       212,750       268,531  
Credit facilities(2)
    9,436       51,829       69,172       70,631       66,945       176,069       444,082  
Other operating contracts/agreements(3)(4)(5)
    18,412       34,259       26,394       10,693       11,088       33,437       134,283  
Operating lease obligations
    1,999       7,447       6,544       5,657       4,965       13,465       40,077  
                                                         
Total
  $ 47,941     $ 132,910     $ 141,485     $ 126,356     $ 409,061     $ 435,721     $ 1,293,474  
                                                         
 
 
(1) Includes interest obligations based on current effective interest rate on senior subordinated notes outstanding as of September 30, 2007.
 
(2) Includes interest obligations based on current effective interest rate and projected interest expense on credit facilities outstanding as of September 30, 2007.
 
(3) Includes employment contracts, severance obligations, on-air talent contracts, consulting agreements, equipment rental agreements, programming related agreements, and other general operating agreements.
 
(4) Includes a retention bonus of approximately $2.0 million pursuant to an employment agreement with the Chief Administrative Officer (“CAO”) for remaining employed with the Company through and including October 31, 2008. If the CAO’s employment ends before October 31, 2008, the amount paid will be a pro rata portion of the retention bonus based on the number of days of employment between October 31, 2004 and October 31, 2008.
 
(5) Includes an anticipated retention bonus payment of approximately $3.5 million pursuant to an employment agreement with the Chief Financial Officer (“CFO”) for remaining employed with the Company until his announced departure date of December 31, 2007. This amount anticipated to be paid is a pro rata portion of a $7.0 million retention bonus, had he remained employed with the Company for ten years, and is based on the number of days of employment between October 18, 2005 and December 31, 2007.
 
Reflected in the obligations above, as of September 30, 2007, we had three swap agreements in place for a total notional amount of $75.0 million. The periods remaining on the swap agreements range in duration from 9 to 57 months. If we terminate our interest swap agreements before they expire, we will be required to pay early termination fees. Our credit exposure under these agreements is limited to the cost of replacing an agreement in the event of non-performance by our counter-party; however, we do not anticipate non-performance.
 
RELATED PARTY TRANSACTION
 
In July 2007, the Company acquired the assets of WDBZ-AM, a radio station located in the Cincinnati metropolitan area from Blue Chip Communications, Inc. (“Blue Chip”) for approximately $2.6 million in seller financing. The financing is a 5.1% interest bearing loan payable monthly through July 2008. Blue Chip is owned by L. Ross Love, a former member of the Company’s board of directors. The transaction was approved by a special committee of independent directors appointed by the board of directors. Additionally, the Company retained an independent valuation firm to provide fair value appraisal of the station.


44


 

 
Item 3:   Quantitative and Qualitative Disclosures About Market Risk
 
For quantitative and qualitative disclosures about market risk affecting Radio One, see Item 7A: “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K, for the fiscal year ended December 31, 2006. Our exposure related to market risk has not changed materially since December 31, 2006.
 
Item 4.   Controls and Procedures
 
Evaluation of disclosure controls and procedures
 
We have carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO concluded that as of such date, our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure controls objectives. Our management, including our CEO and CFO, has concluded that our disclosure controls and procedures are effective in reaching that level of reasonable assurance.
 
Changes in internal control over financial reporting
 
During the quarter ended September 30, 2007, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


45


 

 
PART II. OTHER INFORMATION
 
Item 1.   Legal Proceedings
 
In November 2001, Radio One and certain of its officers and directors were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of New York, captioned, In re Radio One, Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-10160. Similar complaints were filed in the same court against hundreds of other public companies (Issuers) that conducted initial public offerings of their common stock in the late 1990s (“the IPO Cases”). In the complaint filed against Radio One (as amended), the plaintiffs claimed that Radio One, certain of its officers and directors, and the underwriters of certain of its public offerings violated Section 11 of the Securities Act. The plaintiffs’ claim was based on allegations that Radio One’s registration statement and prospectus failed to disclose material facts regarding the compensation to be received by the underwriters, and the stock allocation practices of the underwriters. The complaint also contains a claim for violation of Section 10(b) of the Securities Exchange Act of 1934 based on allegations that these omissions constituted a deceit on investors. The plaintiffs seek unspecified monetary damages and other relief.
 
In July 2002, Radio One joined in a global motion, filed by the Issuers, to dismiss the IPO Lawsuits. In October 2002, the court entered an order dismissing the Company’s named officers and directors from the IPO Lawsuits without prejudice, pursuant to an agreement tolling the statute of limitations with respect to Radio One’s officers and directors until September 30, 2003. In February 2003, the court issued a decision denying the motion to dismiss the Section 11 and Section 10(b) claims against Radio One and most of the Issuers.
 
In July 2003, a Special Litigation Committee of Radio One’s board of directors approved in principle a tentative settlement with the plaintiffs. The proposed settlement would have provided for the dismissal with prejudice of all claims against the participating Issuers and their officers and directors in the IPO Cases and the assignment to plaintiffs of certain potential claims that the Issuers may have against their underwriters. In September 2003, in connection with the proposed settlement, Radio One’s named officers and directors extended the tolling agreement so that it would not expire prior to any settlement being finalized. In June 2004, Radio One executed a final settlement agreement with the plaintiffs. In 2005, the court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the settlement. On February 24, 2006, the Court dismissed litigation filed against certain underwriters in connection with the claims to be assigned to the plaintiffs under the settlement. On April 24, 2006, the Court held a Final Fairness Hearing to determine whether to grant final approval of the settlement. On December 5, 2006, the Second Circuit Court of Appeals vacated the district court’s earlier decision certifying as class actions the six IPO Cases designated as “focus cases.” Thereafter, the District Court ordered a stay of all proceedings in all of the IPO Cases pending the outcome of plaintiffs’ petition to the Second Circuit for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Second Circuit denied plaintiffs’ rehearing petition, but clarified that the plaintiffs may seek to certify a more limited class in the district court. Accordingly, the settlement will not be finally approved.
 
Plaintiffs filed amended complaints in the six “focus cases” on or about August 14, 2007. In September 2007, Radio One’s named officers and directors again extended the tolling agreement with plaintiffs. On or about September 27, 2007, plaintiffs moved to certify the classes alleged in the “focus cases” and to appoint class representatives and class counsel in those cases. The issuers in the “focus cases” expect to file motions to dismiss the claims against them on or about November 9, 2007.
 
Radio One is involved from time to time in various routine legal and administrative proceedings and threatened legal and administrative proceedings incidental to the ordinary course of our business. Radio One believes the resolution of such matters will not have a material adverse effect on its business, financial condition or results of operations.
 
Item 1A.  Risk Factors
 
There have been no material changes to our risk factors as set forth in our most recently filed Form 10-K.


46


 

 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
Item 3.   Defaults Upon Senior Securities
 
None.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
On July 19, 2007, the Company held its Annual Meeting of its holders of common stock pursuant to a Notice of Annual Meeting of Stockholders and Proxy Statement dated June 21, 2007, a copy of which has been previously filed with the Securities and Exchange Commission. Stockholders were asked to vote upon the following proposals:
 
1) The election of Terry L. Jones and Brian W. McNeill as Class A directors to serve until the 2008 annual meeting of stockholders or until their successors are duly elected and qualified.
 
2) The election of Catherine L. Hughes, Alfred C. Liggins, III, D. Geoffrey Armstrong, Ronald E. Blaylock and B. Doyle Mitchell, Jr. as directors to serve until the 2008 annual meeting of stockholders or until their successors are duly elected and qualified.
 
3) The ratification of the appointment of Ernst & Young LLP as independent auditors for Radio One for the year ending December 31, 2007.
 
                     
        Number of Votes  
        Class A     Class B  
 
Proposal 1
                   
Jones
  For     2,030,727          
    Withhold Authority     104,544          
McNeill
  For     2,028,827          
    Withhold Authority     106,444          
Proposal 2
                   
Hughes
  For     1,035,749       28,618,430  
    Withhold Authority     1,099,522          
Liggins
  For     1,035,535       28,618,430  
    Withhold Authority     1,099,736          
Armstrong
  For     2,037,531       28,618,430  
    Withhold Authority     97,740          
Blayock
  For     2,119,108       28,618,430  
    Withhold Authority     16,163          
Mitchell
  For     862,837       28,618,430  
    Withhold Authority     1,272,434          
Proposal 3
  For     2,121,208       28,618,430  
    Against     13,241          
    Abstain     822          
 
Item 5.   Other Information
 
On August 6, 2007, Barry A. Mayo joined the Company as President of the Radio Division. In connection with his employment, the Company entered into an Employment Agreement dated August 6, 2007 (the “Agreement”) with Mr. Mayo, effective immediately. As compensation under the Agreement, Mr. Mayo will receive the following:
 
  •  annual base salary of $500,000, and annual increases of not less than 3%;
 
  •  a quarterly bonus potential up to $25,000 at the conclusion of each quarter, beginning with the fourth quarter of 2007, based on achievement of broadcast cash flow goals;


47


 

 
  •  discretionary annual incentive bonus in accordance with Company’s standard bonus payment schedule and policy based on performance and operating results of the Radio Division;
 
  •  a restricted stock grant of 50,000 shares of Class D common stock, vesting in two equal annual increments or upon a change in control;
 
  •  options to purchase 50,000 shares of the Company’s Class D common stock, at an exercise price equal to the closing price of the stock on the grant date. The shares have a grant date value equal to $105,500 based on the method used by the Company for computing stock option expense for financial statement purposes. The options vest in two equal annual increments and shall vest fully in the event of a change in control.
 
The Agreement provides for potential severance payments as follows:
 
  •  a pro rata portion of any bonus earned, if employment is terminated due to death or disability;
 
  •  in the event of termination without cause, severance in the amount of $300,000.
 
The foregoing description of the Agreement is qualified in its entirety by reference to the Agreement, which has been filed with the June 30, 2007 Form 10-Q as Exhibit 10.2 and is incorporated herein by reference.
 
Prior to his appointment as President of the Radio Division at Radio One, Mr. Mayo served as a consultant to the Company from July 2006 until he joined Radio One. He was Sr. Vice President and Market Manager of Emmis Communications Corporation, a publicly held radio broadcasting and media company, from 2003 to 2006. Prior to that Mr. Mayo was a consultant with Mayomedia, a media consulting firm he founded in 1995.
 
Item 6.   Exhibits
 
         
  31 .1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31 .2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32 .1   Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32 .2   Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


48


 

 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
RADIO ONE, INC.
 
   
/s/  SCOTT R. ROYSTER
Scott R. Royster
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
 
November 8, 2007


49

exv31w1
 

Exhibit 31.1
I, Alfred C. Liggins, III, Chief Executive Officer and President of Radio One, Inc., certify that:
  1.   I have reviewed this annual report on Form 10-Q of Radio One, Inc.;
 
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
  a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of this report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
Date: November 8, 2007
  By: /s/ Alfred C. Liggins, III
 
  Alfred C. Liggins, III
 
  President and Chief
 
  Executive Officer

exv31w2
 

Exhibit 31.2
I, Scott R. Royster, Executive Vice President, Chief Financial Officer and Principal Accounting Officer of Radio One, Inc., certify that:
  1.   I have reviewed this annual report on Form 10-Q of Radio One, Inc.;
 
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(i) for the registrant and have:
  a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of this report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: November 8, 2007
  /s/   Scott R. Royster
 
      Scott R. Royster
 
      Executive Vice President,
 
      Chief Financial Officer and
 
      Principal Accounting Officer

exv32w1
 

Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Radio One, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:
  (i)   the accompanying Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
 
  (ii)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 8, 2007
         
By:
  /s/ Alfred C. Liggins, III    
 
       
 
  Name: Alfred C. Liggins, III    
 
  Title: President and Chief Executive Officer    
A signed original of this written statement required by Section 906 has been provided to Radio One, Inc. and will be retained by Radio One, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

exv32w2
 

Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Radio One, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:
  (i)   the accompanying Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
 
  (ii)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 8, 2007
         
By:   /s/ Scott R. Royster
 
  Name:   Scott R. Royster
 
  Title:   Executive Vice President
 
      and Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Radio One, Inc. and will be retained by Radio One, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.