Delaware	52-1166660
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

 

Class	Outstanding at October 31, 2008
Class A Common Stock, $.001 Par Value	3,016,730
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	80,481,225

•

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 ratings and measurement methodologies;

•

regulation by the Federal Communications Commission relative to maintaining our broadcasting licenses, enacting media ownership rules and enforcing of indecency rules;

•

changes in our key personnel and on-air talent;

•

increases in the costs of our programming, including on-air talent;

•

the financial losses sustained due to impairment charges against its broadcasting licenses, goodwill and other intangible assets;

•

increased competition from new technologies;

•

the impact of our acquisitions, dispositions and similar transactions;

•

our high degree of leverage and potential inability to refinance our debt given current market conditions;

•

our current non-compliance with NASDAQ rules for continued listing of our Class A and Class D common stock;

•

the current global financial crisis and deteriorating U.S.economy may have an impact on our business and financial condition; 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 2007 Annual 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,
		2008				2007				2008					2007
		(Unaudited)
						(As Adjusted – See Note 1)									(As Adjusted – See Note 1)
		(In thousands, except share data)
NET  REVENUE		$	86,156			$	88,214			$	242,086				$	244,874
OPERATING EXPENSES:
Programming and technical			21,512				18,661				61,430					54,835
Selling, general and administrative			30,042				28,169				82,505					76,276
Corporate selling, general and administrative			7,079				5,023				31,416					21,242
Depreciation and amortization			5,222				3,664				14,057					11,047
Impairment of long-lived assets			337,936				—				337,936					5,506
Total operating expenses			401,791				55,517				527,344					168,906
Operating (loss) income			(315,635	)			32,697				(285,258	)				75,968
INTEREST INCOME			111				292				442					853
INTEREST EXPENSE			14,130				18,400				46,549					55,047
EQUITY IN LOSS OF AFFILIATED COMPANY			1,119				2,903				3,918					10,209
OTHER INCOME (EXPENSE),net			5,630				(15	)			6,601					(23	)
(Loss) income before (benefit) provision from income taxes, minority interest in income of subsidiaries and discontinued operations			(325,143	)			11,671				(328,682	)				11,542
(BENEFIT) PROVISION FROM INCOME TAXES			(59,651	)			5,513				(40,992	)				6,164
MINORITY INTEREST IN INCOME OF SUBSIDIARIES			1,260				1,274				3,141					3,099
Net (loss) income from continuing operations			(266,752	)			4,884				(290,831	)				2,279
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,  net of tax			639				(194	)			(5,808	)				(5,642	)
NET (LOSS) INCOME		$	(266,113	)		$	4,690			$	(296,639	)			$	(3,363	)
BASIC AND DILUTED NET (LOSS) INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE		$	(2.82	)		$	0.05			$	(2.99	)			$	0.02	*
BASIC AND DILUTED NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS PER COMMON SHARE		$	0.01			$	0.00			$	(0.06	)			$	(0.06	)*
BASIC AND DILUTED NET (LOSS) INCOME PER COMMON SHARE		$	(2.81	)		$	0.05			$	(3.05	)			$	(0.03	)*
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic			94,537,081				98,710,633				97,219,115					98,710,633
Diluted			94,537,081				98,725,387				97,219,115					98,710,633

*  Earnings per share amounts do not add due to rounding.

The accompanying notes are an integral part of these consolidated financial statements.

 

 

5

 

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RADIO ONE, INC. AND SUBSIDIARIES

 CONSOLIDATED BALANCE SHEETS

		September 30, 2008					December 31, 2007
		(Unaudited)					(As Adjusted-
							See Note 1)
		(In thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	30,393				$	24,247
Trade accounts receivable, net of allowance for doubtful accounts of $2,428 and $2,021, respectively			56,760					50,425
Prepaid expenses and other current assets			5,462					6,118
Deferred income tax asset			14,918					15,147
Current assets from discontinued operations			309					3,249
Total current assets			107,842					99,186
PROPERTY AND EQUIPMENT, net			50,416					44,740
GOODWILL			164,803					146,156
RADIO BROADCASTING LICENSES, net			814,792					1,118,747
OTHER INTANGIBLE ASSETS, net			52,499					45,418
INVESTMENT IN AFFILIATED COMPANY			46,757					48,399
OTHER ASSETS			9,035					8,573
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS			61					152,123
Total assets		$	1,246,205				$	1,663,342
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	6,012				$	4,958
Accrued interest			7,777					19,004
Accrued compensation and related benefits			18,313					16,319
Income taxes payable			—					4,463
Other current liabilities			10,656					12,124
Current portion of long-term debt			41,536					26,004
Current liabilities from discontinued operations			700					2,704
Total current liabilities			84,994					85,576
LONG-TERM DEBT, net of current portion			723,613					789,500
OTHER LONG-TERM LIABILITIES			4,769					5,227
DEFERRED INCOME TAX LIABILITY			107,500					149,950
NON-CURRENT LIABILITIES FROM DISCONTINUED OPERATIONS			—					483
Total liabilities			920,876					1,030,736
MINORITY INTEREST IN SUBSIDIARIES			1,125					3,889
STOCKHOLDERS’ EQUITY:
Convertible preferred stock, $.001 par value, 1,000,000 shares authorized; no shares outstanding at September 30, 2008 and December 31, 2007			—					—
Common stock — Class A, $.001 par value, 30,000,000 shares authorized; 3,016,730 and 4,321,378 shares issued and outstanding as of September 30, 2008 and December 31, 2007, respectively			3					4
Common stock — Class B, $.001 par value, 150,000,000 shares authorized; 2,861,843 and 2,861,863 shares issued and outstanding as of September 30, 2008 and December 31, 2007, respectively			3					3
Common stock — Class C, $.001 par value, 150,000,000 shares authorized; 3,121,048 shares issued and outstanding as of September 30, 2008 and December 31, 2007, respectively			3					3
Common stock — Class D, $.001 par value, 150,000,000 shares authorized; 82,077,346 and 88,638,576 shares issued and outstanding as of September 30, 2008 and December 31, 2007, respectively			81					89
Accumulated other comprehensive (loss) income			(1,082	)				644
Stock subscriptions receivable			—					(1,717	)
Additional paid-in capital			1,036,417					1,044,273
Accumulated deficit			(711,221	)				(414,582	)
Total stockholders’ equity			324,204					628,717
Total liabilities and stockholders’ equity		$	1,246,205				$	1,663,342

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

6

 

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RADIO ONE, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)

 

		Convertible Preferred Stock			Common Stock Class A			Common Stock Class B			Common Stock Class C			Common Stock Class D			Comprehensive Loss				Accumulated Other Comprehensive Income (Loss)				Stock  Subscriptions Receivable				Additional Paid-In Capital				Accumulated Deficit					Total  Stockholders’ Equity
																																	(As Adjusted – See Note 1)
		(In thousands, except share data)
BALANCE, as of December 31, 2007		$	—		$	4		$	3		$	3		$	89						$	644			$	(1,717	)		$	1,044,273			$	(414,582	)		$	628,717
Comprehensive loss:
Net loss			—			—			—			—			—		$	(296,639	)			—				—				—				(296,639	)			(296,639	)
Change in unrealized loss on derivative and hedging activities, net of taxes			—			—			—			—			—			(1,726	)			(1,726	)			—				—				—				(1,726	)
Comprehensive loss																	$	(298,365	)
Repurchase of 421,661 shares of Class A and 8,769,704 shares of Class D			—			(1	)		—			—			(8	)						—				—				(9,188	)			—				(9,197	)
Vesting of non-employee restricted stock			—			—			—			—			—							—				—				90				—				90
Repayment of officer’s loan			—			—			—			—			—							—				1,737				—				—				1,737
Stock-based compensation expense			—			—			—			—			—							—				—				1,242				—				1,242
Interest income on stock subscriptions receivable			—			—			—			—			—							—				(20	)			—				—				(20	)
BALANCE, as of September 30, 2008		$	—		$	3		$	3		$	3		$	81						$	(1,082	)		$	—			$	1,036,417			$	(711,221	)		$	324,204

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

7

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RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
	For the Nine Months Ended September 30,
	2008									2007
										(As Adjusted - See Note 1)
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(296,639			)					$	(3,363	)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization		14,057									11,047
Amortization of debt financing costs		1,989									1,630
Amortization of production content		—									332
Deferred income taxes		(42,684			)						(912	)
Impairment of long-lived assets		337,936									5,506
Equity in loss of affiliated company		3,918									10,209
Minority interest in income of subsidiaries		3,141									3,099
Stock-based compensation and other non-cash compensation		1,279									751
Gain on retirement of debt		(6,694			)						—
Amortization of contract inducement and termination fee		(1,421			)						(1,421	)
Change in interest due on stock subscription receivable		(20			)						(59	)
Effect of change in operating assets and liabilities, net of assets acquired:
Trade accounts receivable, net		(6,335			)						(2,507	)
Prepaid expenses and other current assets		703									196
Income tax receivable		—									1,296
Other assets		(6,201			)						5
Accounts payable		3,501									(5,669	)
Accrued interest		(11,227			)						(10,391	)
Accrued compensation and related benefits		(941			)						1,309
Income taxes payable		(4,463			)						1,032
Other liabilities		(1,630			)						(1,686	)
Net cash flows provided from operating activities from discontinued operations		2,397									6,010
Net cash flows (used in) provided from operating activities		(9,334			)						16,414
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(7,887			)						(6,183	)
Equity investments		—									(11,886	)
Acquisitions, net of cash acquired		(70,426			)						—
Purchase of other intangible assets		(1,195			)						(5	)
Proceeds from sale of assets		150,224									104,000
Deposits and payments for station purchases and other assets		161									(5,100	)
Net cash flows provided from investing activities in discontinued operations		—									365
Net cash flows provided from investing activities		70,877									81,191
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of other debt		(1,004			)						(27	)
Repurchase of Senior Subordinated Notes		(44,406			)						—
Repayment of credit facility		(151,611			)						(102,500	)
Proceeds from credit facility		153,000									—
Repurchase of common stock		(9,197			)						—
Repayment of stock subscriptions receivable		1,737									—
Debt refinancing costs		—									(3,004	)
Payment of dividend to minority interest shareholders		(3,916			)						(2,940	)
Net cash flows used in financing activities		(55,397			)						(108,471	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		6,146									(10,866	)
CASH AND CASH EQUIVALENTS, beginning of period		24,247									32,406
CASH AND CASH EQUIVALENTS, end of period	$	30,393								$	21,540
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	57,776								$	64,754
Income taxes	$	6,747								$	4,574
Supplemental Note: In July 2007, a seller financed loan of approximately $2.6 million was incurred when the Company acquired the assets of WDBZ-AM, a radio station located in the Cincinnati metropolitan area.  As of September 30, 2008, this loan was paid in full.
The accompanying notes are an integral part of these consolidated financial statements.

 

 

8

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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 its 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, we have recently diversified our revenue streams and have made acquisitions and investments in other complementary media properties.  In April 2008, we completed our acquisition of Community Connect Inc. (“CCI”), an online social networking company that hosts the website BlackPlanet, the largest social networking site primarily targeted at African-Americans.   This acquisition is consistent with our operating strategy of becoming a multi-media entertainment and information content provider to African-American consumers.  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; and our acquisition of certain assets of Giant Magazine, LLC (“Giant Magazine”), an urban-themed lifestyle and entertainment magazine. Through our national multi-media presence, we provide advertisers with a unique and powerful delivery mechanism to the African-American audience.   

 

While diversifying our operations, since December 2006, we completed the sale of approximately $287.9 million of our non-core radio assets.  While we maintained our core radio franchise, these dispositions have allowed the Company to more strategically allocate its resources consistent with its long-term multi-media operating strategy. We currently own 53 broadcast stations located in 16 urban markets in the United States.

As part of our consolidated financial statements, consistent with our financial reporting structure and how the Company currently manages its businesses, we have provided selected financial information on the Company’s two reportable segments: (i) Radio Broadcasting and (ii) Internet/Publishing. (See Note 10 – Segment Information.)

(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 2007 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.)

   During the second quarter of 2008, Radio One was advised that prior period financial statements of TV One, an affiliate accounted for under the equity method, had been restated to correct certain errors that affected the reported amount of members’ equity and liabilities.  These restatement adjustments had a corresponding effect on the Company’s share of the earnings of TV One reported in prior periods.  Under the guidance of Staff Accounting Bulletin (“SAB”) No. 99, “Materiality” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” the Company has determined the errors are immaterial to our consolidated financial statements for all prior periods.  However, because the effects of correcting the cumulative prior period errors would have been material to our second quarter 2008 consolidated financial statements, we have adjusted certain previously reported amounts in the accompanying 2007 interim consolidated financial statements.

 

 

 

9

 

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The impact on the financial statements is as follows (in thousands):

Selected Balance Sheet Data
		As Previously Reported, December 31, 2007				Adjustments				As Adjusted, December 31, 2007
Investment in Affiliated Company		$	52,782			$	(4,383	)		$	48,399
Total Assets		$	1,667,725			$	(4,383	)		$	1,663,342
Accumulated Deficit		$	(410,199	)		$	(4,383	)		$	(414,582	)
Total Stockholders’ Equity		$	633,100			$	(4,383	)		$	628,717

 

 

Selected Statement of Operations Data
		Three Months Ended September 30, 2007												Nine Months Ended September 30, 2007
		As Previously Reported*				Adjustments				As Adjusted				As Previously Reported*				Adjustments				As Adjusted
Equity in Loss of Affiliated Company		$	2,793			$	110			$	2,903			$	7,551			$	2,658			$	10,209
Income before benefit from income taxes, minority interest in income of subsidiaries and discontinued operations		$	11,781			$	(110	)		$	11,671			$	14,200			$	(2,658	)		$	11,542
Net income (loss) from continuing operations		$	4,994			$	(110	)		$	4,884			$	4,937			$	(2,658	)		$	2,279
Net income (loss)		$	4,801			$	(110	)		$	4,690			$	(704	)		$	(2,658	)		$	(3,363	)
Basic and Diluted Net Income from Continuing Operations per Common Share		$	0.05			$	0.00			$	0.05			$	0.05			$	(0.03	)**		$	0.02	**
Basic and Diluted Net Income (Loss) from Discontinued Operations per Common Share			0.00				0.00				0.00				(0.06	)			0.00	**			(0.06	)**
Basic and Diluted Net Income per Common Share		$	0.05			$	0.00			$	0.05			$	(0.01	)		$	(0.02	)**		$	(0.03	)**

*   As adjusted to reflect the impact of discontinued operations for the Company’s disposal of the Los Angeles station.

** Earnings per share amounts do not add due to rounding.

(c)  Financial Instruments

Financial instruments as of September 30, 2008 and December 31, 2007 consisted of cash and cash equivalents, short-term investments, 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, 2008 and December 31, 2007, except for the Company’s outstanding Senior Subordinated Notes. The 8 7/8% Senior Subordinated Notes had a fair value of approximately $204.1 million and $282.0 million as of September 30, 2008 and December 31, 2007, respectively. The 6 3/8% Senior Subordinated Notes had a fair value of approximately $136.0 million and $166.5 million as of September 30, 2008 and December 31, 2007, respectively. The fair value was determined based on the fair market value of similar instruments.

 

 

 

10

 

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(d)  Revenue Recognition

The Company recognizes revenue for broadcast advertising when a commercial is broadcast and is reported, net of agency and outside sales representative commissions, in accordance with SAB 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 $9.2 million and $10.0 million during the three months ended September 30, 2008 and 2007, respectively. Agency and outside sales representative commissions were approximately $26.6 million and $28.2 million during the nine months ended September 30, 2008 and 2007, respectively.

CCI, which the Company acquired in April 2008, currently generates the majority of the Company’s internet revenue, and derives such revenue principally from advertising services, including advertising aimed at diversity recruiting. Advertising services include the sale of banner and sponsorship advertisements.  Advertising revenue is recognized either as impressions (the number of times advertisements appear in viewed pages) are delivered, when “click through” purchases or leads are reported, or ratably over the contract period, where applicable. CCI has a diversity recruiting agreement with Monster, Inc. (“Monster”).  Under the agreement, Monster posts job listings and advertising on CCI’s websites and CCI earns revenue for displaying the images on its websites.

Publishing revenue generated by Giant Magazine, mainly advertising, subscription and newsstand sales, is recognized when the issue is available for sale.

(e)  Barter Transactions

 The Company provides broadcast advertising time in exchange for programming content and certain services. In accordance with guidance provided by the Emerging Issues Task Force (“EITF”) No. 99-17,“Accounting for Advertising Barter Transactions,” the terms of these 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 broadcasting 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, 2008 and 2007, barter transaction revenues were reflected in net revenue of $722,000 and $675,000, respectively. For the nine months ended September 30, 2008 and 2007, barter transaction revenues were reflected in net revenue of approximately $1.9 million and $1.8 million, respectively. Additionally, barter transaction costs were reflected in programming and technical expenses and selling, general and administrative expenses of $680,000 and $692,000 and $41,000 and $0, in the respective three month periods ended September 30, 2008 and 2007. For the nine months ended September 30, 2008 and 2007, barter transaction costs were reflected in programming and technical expenses and selling, general and administrative expenses of approximately $1.8 million and $1.7 million and $124,000 and $124,000, respectively.

(f)  Comprehensive (Loss) Income

The Company’s comprehensive (loss) income consists of net (loss) income 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 loss consists of losses on derivative instruments that qualify for cash flow hedge treatment.

 

The following table sets forth the components of comprehensive (loss) income:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		(In thousands)								(In thousands)
Net (loss) income		$	(266,113	)		$	4,690			$	(296,639	)		$	(3,363	)
Other comprehensive loss (net of tax benefit of $0 and $721, and tax provision of $0 and $644, respectively):
Derivative and hedging activities			(260	)			(810	)			(1,726	)			(644	)
Comprehensive (loss) income		$	(266,373	)		$	3,880			$	(298,365	)		$	(4,007	)

 

 

 

11

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(g) Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The standard responds to investors’ requests for more information about: (1) the extent to which companies measure assets and liabilities at fair value; (2) the information to measure fair value; and (3) the effect that fair value measurements have on earnings. SFAS No. 157 is applied whenever another standard requires (or permits) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. We adopted SFAS No. 157 effective January 1, 2008. The FASB deferred the effective date of SFAS No. 157 as it relates to fair value measurement requirements for nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis until the beginning of our 2009 fiscal year.

 

 The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

 

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets and liabilities that can be accessed at measurement date.

	Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
	Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.

As of September 30, 2008, the fair values of our financial liabilities are categorized as follows:

  

		Total			Level 1			Level 2			Level 3
		(In thousands)
Liabilities:
Interest rate swaps (a)		$	1,084		$	—		$	1,084		$	—
Employment agreement award (b)			4,554			—			—			4,554
Total liabilities		$	5,638		$	—		$	1,084		$	4,554
(a) Based on London Interbank Offered Rate (“LIBOR”).
(b) Pursuant to an employment agreement (the “Employment Agreement”) executed in April 2008, the Chief Executive Officer (“CEO”) will be eligible to receive an award amount equal to 8% of any proceeds from distributions or other liquidity events in excess of the return of the Company’s aggregate investment in TV One. The Company reviewed the factors underlying this award during the quarter ended September 30, 2008 and concluded there was no change to the fair value of the award. The Company’s obligation to pay the award will be triggered only after the Company’s recovery of the aggregate amount of its capital contribution in TV One and only upon actual receipt of distributions of cash or marketable securities or proceeds from a liquidity event with respect to the Company’s membership interest in TV One. The CEO was fully vested in the award upon execution of the Employment Agreement, and the award lapses upon expiration of the Employment Agreement in April 2011, or earlier if the CEO voluntarily leaves the Company or is terminated for cause. The Company engaged an independent third party to perform a fair valuation of the award. (See Note 6 – Derivative Instruments.)

 

(h) Software Development Costs

The Company has adopted American Institute of Certified Public Accountants (“AICPA”) Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.”  Accordingly, direct internal and external costs associated with the development of the features and functionality of the Company’s software, incurred during the application development stage, are capitalized and amortized using the straight-line method of the estimated life of three years.

 

 

 

12

 

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(i) Impact of Recently Issued Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.”  SFAS No. 161 requires disclosure of the fair value of derivative instruments and their gains and losses in a tabular format.  It also provides for more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk related.  Finally, it requires cross referencing within footnotes to enable financial statement users to locate important information about derivative instruments.  This statement is effective for interim periods beginning after November 15, 2008, although early application is encouraged.  The Company has not completed its assessment of the impact this new pronouncement will have on disclosures to the Company’s consolidated financial statements.

 

 In December 2007, the FASB issued SFAS No. 141R,“Business Combinations.” SFAS No. 141R replaces SFAS No. 141, and requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at fair value.  SFAS No. 141R also requires transaction costs related to the business combination to be expensed as incurred.  SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The effective date for the Company will be January 1, 2009.  We have not determined the impact of SFAS No. 141R related to future acquisitions, if any, on our consolidated financial statements.

 

 In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51.” This statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  This statement is effective for fiscal years beginning after December 15, 2008. The effective date for the Company will be January 1, 2009. We have not determined the impact this new pronouncement will have on the consolidated financial statements.

In December 2007, the SEC issued SAB No. 110 that modified SAB No. 107 regarding the use of a “simplified” method in developing an estimate of expected term of “plain vanilla” share options in accordance with SFAS No. 123R,“Share-Based Payment.”  Under SAB No. 107, the use of the “simplified” method was not allowed beyond December 31, 2007. SAB No. 110 allows, however, the use of the “simplified” method beyond December 31, 2007 under certain circumstances. We currently use the “simplified” method under SAB No. 107, and we expect to continue to use the “simplified” method in future periods if the facts and circumstances permit.