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, 2012

 

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.)

 

1010 Wayne Avenue,

14th Floor

Silver Spring, Maryland 20910

(Address of principal executive offices)

 

(301) 429-3200

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   ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   þ   No   ¨

 

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   ¨     Accelerated filer   ¨     Non-accelerated filer   þ

 

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 November 2, 2012
Class A Common Stock, $.001 Par Value   2,719,860
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   41,421,667

 

 
 

 

TABLE OF CONTENTS

 

    Page
   
PART I. FINANCIAL INFORMATION  
   
Item 1. Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2012 and 2011 (Unaudited) 4
  Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Nine Months Ended September 30, 2012 and 2011 (Unaudited) 5
  Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011 6
  Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2012 (Unaudited) 7
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (Unaudited) 8
  Notes to Consolidated Financial Statements (Unaudited) 9
  Consolidating Financial Statements 36
  Consolidating Statement of Operations for the Three Months Ended September 30, 2012 (Unaudited) 36
  Consolidating Statement of Operations for the Three Months Ended September 30, 2011 (Unaudited) 37
  Consolidating Statement of Operations for the Nine Months Ended September 30, 2012 (Unaudited) 38
  Consolidating Statement of Operations for the Nine Months Ended September 30, 2011 (Unaudited) 39
  Consolidating Statement of Comprehensive Income (Loss) for the Three Months Ended September 30, 2012 (Unaudited) 40
  Consolidating Statement of Comprehensive Income (Loss) for the Three Months Ended September 30, 2011 (Unaudited) 41
  Consolidating Statement of Comprehensive Income (Loss) for the Nine Months Ended September 30, 2012 (Unaudited) 42
  Consolidating Statement of Comprehensive Income (Loss) for the Nine Months Ended September 30, 2011 (Unaudited) 43
  Consolidating Balance Sheet as of September 30, 2012 (Unaudited) 44
  Consolidating Balance Sheet as of December 31, 2011 45
  Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2012 (Unaudited) 46
  Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2011 (Unaudited) 47
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 49
Item 3. Quantitative and Qualitative Disclosures About Market Risk 73
Item 4. Controls and Procedures 73
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 74
Item 1A. Risk Factors 75
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 75
Item 3. Defaults Upon Senior Securities 75
Item 4. Submission of Matters to a Vote of Security Holders 75
Item 5. Other Information 76
Item 6. Exhibits 76
  SIGNATURES 77

 

2
 

 

CERTAIN DEFINITIONS

 

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

 

Cautionary Note Regarding Forward-Looking Statements

 

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements do not relay historical facts, but rather reflect our current expectations concerning future operations, results and events. All statements other than statements of historical fact are “forward-looking statements” including any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. You can identify some of these forward-looking statements by our use of words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “likely,” “may,” “estimates” and similar expressions.  You can also identify a forward-looking statement in that such statements discuss matters in a way that anticipates operations, results or events that have not already occurred but rather will or may occur in future periods.  We cannot guarantee that we will achieve any forward-looking plans, intentions, results, operations or expectations.  Because these statements apply to future events, they are subject to risks and uncertainties, some of which are beyond our control that could cause actual results to differ materially from those forecasted or anticipated in the forward-looking statements.  These risks, uncertainties and factors include (in no particular order), but are not limited to:

 

  we are currently not in compliance with NASDAQ rules for continued listing of our Class A and Class D common shares and could face delisting if our share prices do not rebound and are sustained above $1.00 in accordance with NASDAQ rules;

 

  the effects of continued global economic weakness, credit and equity market volatility, high unemployment and continued fluctuations in the U.S. and other world economies may have on our business and financial condition and the business and financial conditions of our advertisers;

 

  our high degree of leverage and potential inability to refinance certain portions of our debt or finance other strategic transactions given fluctuations in market conditions;

 

  continued fluctuations in the U.S. economy and the local economies of the markets in which we operate could negatively impact our ability to meet our cash needs and our ability to maintain compliance with our debt covenants;

 

  fluctuations in the demand for advertising across our various media given the current economic environment;

 

  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 technologies and methodologies;

 

  regulation by the Federal Communications Commission (“FCC”) 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 and content acquisitions costs;

 

  financial losses that may be incurred due to impairment charges against our broadcasting licenses, goodwill and other intangible assets, particularly in light of the current economic environment;

 

  increased competition from new media and technologies;

 

  the impact of our acquisitions, dispositions and similar transactions; and

 

  other factors mentioned in our filings with the Securities and Exchange Commission (“SEC”) including the factors discussed in detail in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2011.

 

You should not place undue reliance on these forward-looking statements, which reflect our views 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,
 
   2012   2011   2012   2011 
   (Unaudited) 
   (In thousands, except share data) 
                 
NET  REVENUE  $109,952   $104,445   $318,910   $266,516 
OPERATING EXPENSES:                    
Programming and technical   32,454    32,742    96,577    82,291 
Selling, general and administrative, including stock-based compensation of $20 and $157, and $52 and $533, respectively   36,650    36,035    107,044    96,336 
Corporate selling, general and administrative, including stock-based compensation of $17 and $602, and $75 and $2,362, respectively   9,630    11,044    29,078    27,576 
Depreciation and amortization   9,685    11,504    29,112    25,825 
Impairment of long-lived assets           313     
Total operating expenses   88,419    91,325    262,124    232,028 
Operating income   21,533    13,120    56,786    34,488 
INTEREST INCOME   108    103    155    120 
INTEREST EXPENSE   22,179    22,973    68,854    65,222 
LOSS ON RETIREMENT OF DEBT               7,743 
GAIN ON INVESTMENT IN AFFILIATED COMPANY               146,879 
EQUITY IN INCOME OF AFFILIATED COMPANY               3,287 
OTHER EXPENSE (INCOME), net   681    (19)   1,284    3 
(Loss) income before provision for (benefit from) income taxes, noncontrolling interests in income of subsidiaries and income (loss) from discontinued operations   (1,219)   (9,731)   (13,197)   111,806 
PROVISION FOR (BENEFIT FROM) INCOME TAXES   9,051    (2,325)   25,814    81,905 
Net (loss) income from continuing operations   (10,270)   (7,406)   (39,011)   29,901 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax   15    11    36    (71)
CONSOLIDATED NET (LOSS) INCOME   (10,255)   (7,395)   (38,975)   29,830 
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS   2,809    2,483    10,663    5,403 
CONSOLIDATED NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS  $(13,064)  $(9,878)  $(49,638) $24,427 
                     
BASIC NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS                    
Continuing operations  $(0.26)  $(0.20)  $(0.99)  $0.48 
Discontinued operations, net of tax   (0.00)   (0.00)   (0.00)   (0.00)
Net (loss) income attributable to common stockholders  $(0.26)  $(0.20)  $(0.99)  $0.48 
                     
DILUTED NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS                    
Continuing operations  $(0.26)  $(0.20)  $(0.99)  $0.46 
Discontinued operations, net of tax   (0.00)   (0.00)   (0.00)   (0.00)
Net (loss) income attributable to common stockholders  $(0.26)  $(0.20)  $(0.99)  $0.46 
                     
WEIGHTED AVERAGE SHARES OUTSTANDING:                    
Basic   50,019,048    50,270,550    50,010,406    51,072,480 
Diluted   50,019,048    50,270,550    50,010,406    52,943,536 

 

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

 

4
 

 

RADIO ONE, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2012   2011   2012   2011 
   (Unaudited) 
   (In thousands) 
                 
CONSOLIDATED NET (LOSS) INCOME  $(10,255)  $(7,395)  $(38,975)  $29,830 
NET CHANGE IN UNREALIZED LOSS ON INVESTMENT ACTIVITIES   27    (220)   147    (164)
COMPREHENSIVE (LOSS) INCOME   (10,228)   (7,615)   (38,828)   29,666 
LESS:  COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS   2,809    2,483    10,663    5,403 
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS  $(13,037)  $(10,098)  $(49,491)  $24,263 

 

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

 

5
 

 

RADIO ONE, INC. AND SUBSIDIARIES

 CONSOLIDATED BALANCE SHEETS

 

   As of 
   September 30, 2012   December 31, 2011 
   (Unaudited)     
   (In thousands, except share data) 
ASSETS          
CURRENT ASSETS:          
Cash and cash equivalents  $48,660   $35,939 
Short-term investments   165    761 
Trade accounts receivable, net of allowance for doubtful accounts of $2,824 and $3,719, respectively   89,255    83,876 
Prepaid expenses   4,802    6,934 
Current portion of content assets   31,021    27,383 
Other current assets   1,264    1,487 
Current assets from discontinued operations   85    90 
Total current assets   175,252    156,470 
CONTENT ASSETS, net   47,413    38,934 
PROPERTY AND EQUIPMENT, net   35,230    33,988 
GOODWILL   272,037    272,037 
RADIO BROADCASTING LICENSES   677,094    677,407 
LAUNCH ASSETS, net   24,969    32,437 
OTHER INTANGIBLE ASSETS, net   239,364    262,980 
LONG-TERM INVESTMENTS   2,367    7,428 
OTHER ASSETS   3,771    3,325 
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS   1,426    1,476 
Total assets  $1,478,923   $1,486,482 
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY          
CURRENT LIABILITIES:          
Accounts payable  $10,187   $5,626 
Accrued interest   5,994    6,703 
Accrued compensation and related benefits   11,296    10,981 
Current portion of content payables   22,015    20,807 
Income taxes payable   1,037    1,794 
Other current liabilities   12,846    12,227 
Current portion of long-term debt   4,587    3,860 
Current liabilities from discontinued operations   186    260 
Total current liabilities   68,148    62,258 
LONG-TERM DEBT, net of current portion and original issue discount   814,733    805,044 
CONTENT PAYABLES, net of current portion   11,596    16,168 
OTHER LONG-TERM LIABILITIES   20,563    18,521 
DEFERRED TAX LIABILITIES   179,361    153,521 
NON-CURRENT LIABILITIES FROM DISCONTINUED OPERATIONS   21    29 
Total liabilities   1,094,422    1,055,541 
           
REDEEMABLE NONCONTROLLING INTEREST   21,580    20,343 
           
STOCKHOLDERS’ EQUITY:          
Convertible preferred stock, $.001 par value, 1,000,000 shares authorized; no shares outstanding at September 30, 2012 and December  31, 2011, respectively        
Common stock — Class A, $.001 par value, 30,000,000 shares authorized; 2,719,860 and 2,731,860 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively   3    3 
Common stock — Class B, $.001 par value, 150,000,000 shares authorized; 2,861,843 shares issued and outstanding as of September 30, 2012  and December 31, 2011, 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, 2012  and December 31, 2011, respectively   3    3 
Common stock — Class D, $.001 par value, 150,000,000 shares authorized; 41,421,667 and 41,409,667 shares issued and outstanding as of September 30, 2012  and December 31, 2011, respectively   41    41 
Accumulated other comprehensive loss   (52)   (199)
Additional paid-in capital   1,000,368    1,001,840 
Accumulated deficit   (845,794)   (796,156)
    Total stockholders’ equity   154,572    205,535 
Noncontrolling interest   208,349    205,063 
Total equity   362,921    410,598 
Total liabilities, redeemable noncontrolling interest and equity  $1,478,923   $1,486,482 

 

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

 

6
 

 

RADIO ONE, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND NONCONTROLLING INTEREST

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(UNAUDITED)

 

   Convertible
Preferred
Stock
   Common
Stock
Class A
   Common
Stock
Class B
   Common
Stock
Class C
   Common
Stock
Class D
   Accumulated
Other
Comprehensive
(Loss) Income
   Additional
Paid-In
Capital
   Accumulated
Deficit
   Noncontrolling
Interest
   Total
Equity
 
   (In thousands) 
     
BALANCE, as of December 31, 2011  $   $3   $3   $3   $41   $(199)  $1,001,840   $(796,156)  $205,063   $410,598 
Consolidated net (loss) income                               (49,638)   11,027    (38,611)
Net change in unrealized loss on investment activities                       147                147 
Dividends paid to noncontrolling interest                                   (7,741)   (7,741)
Conversion of 12,000 shares of Class A common stock to Class D common stock                                        
Adjustment of redeemable noncontrolling interest to estimated redemption value                           (1,599)           (1,599)
Stock-based compensation expense                           127            127 
BALANCE, as of September 30, 2012  $   $3   $3   $3   $41   $(52)  $1,000,368   $(845,794)  $208,349   $362,921 

 

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

 

7
 

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS 

   Nine Months Ended September 30, 
   2012   2011 
   (As Restated) 
   (Unaudited) 
   (In thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Consolidated net (loss) income  $(38,975)  $29,830 
Adjustments to reconcile net (loss) income to net cash from operating activities:          
Depreciation and amortization   29,112    25,825 
Amortization of debt financing costs   2,281    3,040 
Amortization of content assets   28,569    20,564 
Amortization of launch assets   7,468     
Deferred income taxes   25,840    79,937 
Impairment of long-lived assets   313     
Gain on investment in affiliated company       (146,879)
Equity in income of affiliated company       (3,287)
Stock-based compensation   127    2,895 
Non-cash interest   15,069    19,123 
Loss on retirement of debt       7,743 
Effect of change in operating assets and liabilities, net of assets acquired:          
Trade accounts receivable   (5,379)   (27,857)
Prepaid expenses and other assets   2,355    1,157 
Other assets   (299)   3,402 
Accounts payable   4,561    4,271 
Accrued interest   (709)   1,921 
Accrued compensation and related benefits   315    292 
Income taxes payable   (757)   603 
Other liabilities   2,941    6,241 
Payments for content assets   (43,618)   (12,761)
Net cash flows (used in) provided by operating activities of discontinued operations   (27)   290 
Net cash flows provided by operating activities   29,187    16,350 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of property and equipment   (9,535)   (5,410)
Net cash and investments acquired in connection with TV One consolidation       65,245 
Proceeds from sales of investment securities   6,286     
Purchases of investment securities   (629)    
Net cash flows (used in) provided by investing activities   (3,878)   59,835 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from credit facility       378,280 
Repayment of credit facility   (4,829)   (355,611)
Debt refinancing and modification costs   (18)   (6,197)
Repurchase of noncontrolling interests       (54,595)
Proceeds from noncontrolling interest member       2,776 
Repurchase of common stock       (8,516)
Payment of dividends to noncontrolling interest members of Reach Media       (933)
Payment of dividends to noncontrolling interest members of TV One   (7,741)   (7,410)
Net cash flows used in financing activities   (12,588)   (52,206)
INCREASE IN CASH AND CASH EQUIVALENTS   12,721    23,979 
CASH AND CASH EQUIVALENTS, beginning of period   35,939    9,192 
CASH AND CASH EQUIVALENTS, end of period  $48,660   $33,171 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for:          
Interest  $52,017   $40,498 
Income taxes, net  $618   $2,004 

 

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

 

8
 

 

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 an urban-oriented, multi-media company that primarily targets African-American and urban consumers. Our core business is our radio broadcasting franchise that is the largest radio broadcasting operation that primarily targets African-American and urban listeners. We currently own and/or operate 55 broadcast stations located in 16 urban markets in the United States.  While our primary source of revenue is the sale of local and national advertising for broadcast on our radio stations, our operating strategy is to operate the premier multi-media entertainment and information content provider targeting African-American and urban consumers. Thus, we have diversified our revenue streams by making acquisitions and investments in other complementary media properties. Our other media interests include our approximately 51.0% (see Note 3 — Acquisitions) controlling 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 53.5% ownership interest in Reach Media, Inc. (“Reach Media”), which operates the Tom Joyner Morning Show; our ownership of Interactive One, LLC (“Interactive One”), an online platform serving the African-American community through social content, news, information, and entertainment, which operates a number of branded sites, including News One, UrbanDaily and HelloBeautiful; and our ownership of Community Connect, LLC (formerly Community Connect Inc.) (“CCI”), an online social networking company, which operates a number of branded websites, including BlackPlanet, MiGente and Asian Avenue.  CCI is included within the operations of Interactive One. Through our national multi-media presence, we provide advertisers with a unique and powerful delivery mechanism to the African-American and urban audience.

 

As of June 2011, our remaining Boston radio station was made the subject of a local marketing agreement (“LMA”) whereby we have made available, for a fee, air time on this station to another party. The remaining assets and liabilities of stations sold or stations that we do not operate that are the subject of an LMA, have been classified as discontinued operations as of September 30, 2012 and December 31, 2011. Thus, the Boston station’s results from operations for the three and nine months ended September 30, 2012 and 2011, have been classified as discontinued operations in the accompanying consolidated financial statements.

 

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 for the Company’s four reportable segments: (i) Radio Broadcasting; (ii) Reach Media; (iii) Internet; and (iv) Cable Television (See Note 12 – 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 (“GAAP”) 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 2011 Annual Report on Form 10-K/A.

 

(c)  Financial Instruments

 

Financial instruments as of September 30, 2012 and December 31, 2011 consisted of cash and cash equivalents, investments, trade accounts receivable, accounts payable, accrued expenses, note payable, long-term debt and redeemable noncontrolling interest. The carrying amounts approximated fair value for each of these financial instruments as of September 30, 2012 and December 31, 2011, respectively, except for the Company’s outstanding senior subordinated notes. The 63/8% Senior Subordinated Notes due February 2013 had a carrying value of $747,000 and a fair value of approximately $642,000 as of September 30, 2012, and a carrying value of $747,000 and a fair value of approximately $710,000 as of December 31, 2011. The 121/2%/15% Senior Subordinated Notes due May 2016 had a carrying value of approximately $327.0 million and a fair value of approximately $281.3 million as of September 30, 2012, and a carrying value of approximately $312.8 million and a fair value of approximately $262.2 million as of December 31, 2011. The fair values, classified as Level 2, were determined based on the trading values of these instruments in an inactive market as of the reporting date.

 

9
 

 

(d)  Revenue Recognition

 

Within our radio broadcasting and Reach Media segments, 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 Accounting Standards Codification (“ASC”) 605, “Revenue Recognition.”  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. For our radio broadcasting and Reach Media segments, agency and outside sales representative commissions were approximately $9.3 million and $8.4 million for the three months ended September 30, 2012 and 2011, respectively. Agency and outside sales representative commissions were approximately $25.7 million and $23.9 million for the nine months ended September 30, 2012 and 2011, respectively.

 

Interactive One 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.

 

TV One, the driver of revenues in our Cable Television segment, derives advertising revenue from the sale of television air time to advertisers and recognizes revenue when the advertisements are run. TV One also receives affiliate fees and records revenue during the term of various affiliation agreements at levels appropriate for the most recent subscriber counts reported by the applicable affiliate.

 

(e)  Barter Transactions

 

The Company provides advertising time in exchange for programming content and certain services and accounts for these exchanges in accordance with ASC 605, “Revenue Recognition.” The terms of these exchanges generally permit the Company to preempt such 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, 2012 and 2011, barter transaction revenues were $825,000 and $856,000, respectively. For the nine months ended September 30, 2012 and 2011, barter transaction revenues were approximately $2.3 million and $2.5 million, respectively. Additionally, barter transaction costs were reflected in programming and technical expenses and selling, general and administrative expenses of $684,000 and $810,000 and $141,000 and $46,000, for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, barter transaction costs were reflected in programming and technical expenses and selling, general and administrative expenses of approximately $2.0 million and $2.3 million and $224,000 and $188,000, respectively.

 

(f) Earnings Per Share

 

        Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method.  The Company’s potentially dilutive securities include stock options and restricted stock. Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a net loss, as the inclusion of the potentially dilutive common shares would have an anti-dilutive effect.

 

10
 

 

The following table sets forth the calculation of basic and diluted earnings per share (in thousands, except share and per share data):

 

   Three Months Ended
 September 30,
   Nine Months Ended
September 30,
 
   2012   2011   2012   2011 
   (Unaudited) 
   (In Thousands) 
Numerator:                    
Consolidated net (loss) income attributable to common stockholders  $(13,064)  $(9,878)  $(49,638)  $24,427 
Denominator:                    
Denominator for basic net (loss) income per share — weighted average outstanding shares   50,019,048    50,270,550    50,010,406    51,072,480 
Effect of dilutive securities:                    
Stock options and restricted stock               1,871,056 
Denominator for diluted net (loss) income per share — weighted-average outstanding shares   50,019,048    50,270,550    50,010,406    52,943,536 
                     
Net (loss) income attributable to common stockholders per share — basic   $(0.26)  $(0.20)  $(0.99)  $0.48 
Net (loss) income attributable to common stockholders per share — diluted   $(0.26)  $(0.20)  $(0.99)  $0.46 

 

All stock options and restricted stock awards were excluded from the diluted calculation for the three and nine months ended September 30, 2012, as well as the three months ended September 30, 2011, as their inclusion would have been anti-dilutive.  The following table summarizes the potential common shares excluded from the diluted calculation.

 

   Three Months Ended   Three Months Ended   Nine Months Ended 
   September 30, 2012   September 30, 2011   September 30, 2012 
   (Unaudited) 
   (In Thousands) 
         
Stock options   4,831    5,129    4,831 
Restricted stock   105    1,137    114 

 

  (g) Fair Value Measurements

 

We report our financial and non-financial assets and liabilities measured at fair value on a recurring and non-recurring basis under the provisions of ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

 

      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. The fair value of Level 2 assets are based on quoted market prices for similar assets in active markets or quoted prices for identical or similar assets in markets that are not active.

 

  Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.

 

11
 

  

      As of September 30, 2012 and December 31, 2011, the fair values of our financial assets and liabilities are categorized as follows:

 

   Total   Level 1   Level 2   Level 3 
   (Unaudited)  
   (In thousands)  
As of September 30, 2012                    
Assets subject to fair value measurement:                    
Fixed maturity securities – available for sale:                    
Corporate debt securities  $2,432   $2,432   $   $ 
Government sponsored enterprise mortgage-backed securities   100        100     
Total fixed maturity securities (a)   2,532    2,432    100     
Total  $2,532   $2,432   $100   $ 
                     
Liabilities subject to fair value measurement:                    
Incentive award plan (b)  $5,096   $   $   $5,096 
Employment agreement award (c)   11,086            11,086 
Total  $16,182   $   $   $16,182 
                     
Mezzanine equity subject to fair value measurement:                    
Redeemable noncontrolling interest (d)  $21,580   $   $   $21,580 
                     
As of December 31, 2011                    
Assets subject to fair value measurement:                    
Fixed maturity securities – available for sale:                    
Corporate debt securities  $7,178   $7,178   $   $ 
Government sponsored enterprise mortgage-backed securities   1,011        1,011     
Total fixed maturity securities (a)   8,189    7,178    1,011     
Total  $8,189   $7,178   $1,011   $ 
                     
Liabilities subject to fair value measurement:                    
Incentive award plan (b)  $5,096   $   $   $5,096 
Employment agreement award (c)   10,346            10,346 
Total  $15,442   $   $   $15,442 
                     
Mezzanine equity subject to fair value measurement:                    
Redeemable noncontrolling interest (d)  $20,343   $   $   $20,343 

 

(a) Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, fair values are estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

 

(b) These balances are measured based on the estimated enterprise fair value of TV One. For the period ended September 30, 2012, the Company determined that there was no change in TV One’s fair market value since the December 31, 2011 valuation.

 

12
 

 

(c)  Pursuant to an employment agreement (the “Employment Agreement”) executed in April 2008, the Chief Executive Officer (“CEO”) is 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 reviews the factors underlying this award at the end of each quarter including the valuation of TV One and an assessment of the probability that the employment agreement will be renewed and contain this provision. 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 if the CEO voluntarily leaves the Company or is terminated for cause. In calculating the fair value of the award, the Company determined that there was no change in TV One’s fair market value since the December 31, 2011 valuation (See Note 8 – Derivative Instruments and Hedging Activities.) The Company is currently in negotiations with the Company’s CEO for a new employment agreement. Until such time as his new employment agreement is executed, the terms of his April 2008 employment agreement remain in effect including eligibility for the TV One award.

 

(d)  Redeemable noncontrolling interest in Reach Media is measured at fair value using a discounted cash flow methodology.  A third-party valuation firm assisted the Company in calculating the fair value. Inputs to the discounted cash flow analysis include forecasted operating results, discount rate and a terminal value.

 

The following table presents the changes in Level 3 liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2012 and 2011:

 

  

Incentive

Award

Plan

   Employment
Agreement
Award
   Redeemable
Noncontrolling
Interests
 
   (In thousands) 
             
Balance at December 31, 2011  $5,096   $10,346   $20,343 
Losses included in earnings (unrealized)       740     
Net loss attributable to noncontrolling interests           (362)
Change in fair value           1,599 
Balance at September 30, 2012  $5,096   $11,086   $21,580 
                
The amount of total losses for the period included in earnings attributable to the change in unrealized losses relating to assets and liabilities still held at the reporting date  $   $(740)  $ 

 

   Incentive
Award
Plan
   Employment
Agreement
Award
   Redeemable
Noncontrolling
Interests
 
   (In thousands) 
             
Balance at December 31, 2010  $   $6,824   $30,635 
Losses included in earnings (unrealized)       3,538     
Net income attributable to noncontrolling interests           1,533 
Recognition of TV One management incentive award plan in connection with the consolidation of TV One   6,428         
Dividends paid to noncontrolling interests           (933)
Change in fair value           (1,524)
Balance at September 30, 2011  $6,428   $10,362   $29,711 
                
The amount of total losses for the period included in earnings attributable to the change in unrealized losses relating to assets and liabilities still held at the reporting date  $   $(3,538)  $ 

 

13
 

 

Gains (losses) included in earnings were recorded in the consolidated statement of operations as corporate selling, general and administrative expenses for the three and nine months ended September 30, 2012 and 2011.

 

For Level 3 assets and liabilities measured at fair value on a recurring basis as of September 30, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

 

Level 3 liabilities   Valuation Technique   Significant Unobservable
Inputs
  Significant
Unobservable Input
Value
             
Incentive Award Plan   Discounted Cash Flow and Market Multiple Approach   Discount Rate   11.5%
Incentive Award Plan   Discounted Cash Flow and Market Multiple Approach   Long-term Growth Rate   3.0%
Incentive Award Plan   Discounted Cash Flow and Market Multiple Approach   Market Multiple   10x
Incentive Award Plan   Discounted Cash Flow and Market Multiple Approach   Value Per Subscriber   $7.00
Employment Agreement Award   Discounted Cash Flow and Market Multiple Approach   Discount Rate   11.5%
Employment Agreement Award   Discounted Cash Flow and Market Multiple Approach   Long-term Growth Rate   3.0%
Employment Agreement Award   Discounted Cash Flow and Market Multiple Approach   Market Multiple   10x
Employment Agreement Award   Discounted Cash Flow and Market Multiple Approach   Value Per Subscriber   $7.00
Redeemable Noncontrolling Interest   Discounted Cash Flow   Discount Rate   12.0%
Redeemable Noncontrolling Interest   Discounted Cash Flow   Long-term Growth Rate   2.0%

 

       Any significant increases or decreases in significant inputs could result in significantly higher or lower fair value measurements.

 

       Certain assets and liabilities are measured at fair value on a non-recurring basis using Level 3 inputs as defined in ASC 820.  These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances.  Included in this category are goodwill, radio broadcasting licenses and other intangible assets, net, that are written down to fair value when they are determined to be impaired, as well as content assets that are periodically written down to net realizable value. The Company concluded these assets were not impaired during the three and nine months ended September 30, 2011, respectively, and therefore, these assets were reported at carrying value as opposed to fair value. The Company recorded a non-cash impairment charge of $313,000 related to our Charlotte radio broadcasting licenses during the nine months ended September 30, 2012.

  

   (h) Impact of Recently Issued Accounting Pronouncements

 

In May 2011, the FASB issued ASU 2011-04, which provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. The Company adopted this guidance on January 1, 2012, and it did not have a significant impact on the Company’s financial statements.

 

In September 2011, the FASB issued ASU 2011-08, which provides companies with an option to perform a qualitative assessment that may allow them to skip the two-step impairment test. ASU 2011-08 amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If this is the case, companies will need to perform a more detailed two-step goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted this guidance on January 1, 2012 and it did not have a significant impact on the Company’s financial statements.

 

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which was subsequently modified in December 2011 by ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This ASU amends existing presentation and disclosure requirements concerning comprehensive income, most significantly by requiring that comprehensive income be presented with net income in a continuous financial statement, or in a separate but consecutive financial statement. The provisions of this ASU (as modified) are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company's financial statements, other than presentation and disclosure.

 

14
 

 

(i) Liquidity and Uncertainties Related to Going Concern

 

On March 31, 2011, the Company entered into a new senior credit facility (the “2011 Credit Agreement”).  Under the 2011 Credit Agreement, beginning June 30, 2011, the Company became required to maintain compliance with certain financial ratios (as detailed in Note 9 Long-Term Debt below).  Based on our current projections, we expect to be in compliance with these financial ratios and other covenants over the next twelve months.  

 

 (j) Redeemable noncontrolling interest

 

Redeemable noncontrolling interest is an interest in a subsidiary that is redeemable outside of the Company’s control either for cash or other assets. This interest is classified as mezzanine equity and measured at the greater of estimated redemption value at the end of each reporting period or the historical cost basis of the noncontrolling interests adjusted for cumulative earnings allocations.  The resulting increases or decreases in the estimated redemption amount are affected by corresponding charges against retained earnings, or in the absence of retained earnings, additional paid-in-capital.

 

(k) Investments

 

Investment Securities

 

Investments consist primarily of corporate fixed maturity securities and government sponsored enterprise mortgage-backed securities.

 

Investments with original maturities in excess of three months and less than one year are classified as short-term investments. Long-term investments have original maturities in excess of one year.

 

Debt securities are classified as “available-for-sale” and reported at fair value. Investments in available-for-sale fixed maturity securities are classified as either current or noncurrent assets based on their contractual maturities. Fixed maturity securities are carried at estimated fair value based on quoted market prices for the same or similar instruments. Investment income is recognized when earned and reported net of investment expenses. Unrealized gains and losses are excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) until realized, unless the losses are deemed to be other than temporary. Realized gains or losses, including any provision for other-than-temporary declines in value, are included in the statements of operations. For purposes of computing realized gains and losses, the specific-identification method of determining cost was used.

 

Evaluating Investments for Other than Temporary Impairments

 

The Company periodically performs evaluations, on a lot-by-lot and security-by-security basis, of its investment holdings in accordance with its impairment policy to evaluate whether any declines in the fair value of investments are other than temporary. This evaluation consists of a review of several factors, including but not limited to: length of time and extent that a security has been in an unrealized loss position, the existence of an event that would impair the issuer’s future earnings potential, and the near-term prospects for recovery of the market value of a security. The FASB has issued guidance for recognition and presentation of other than temporary impairment (“OTTI”), or FASB OTTI guidance. Accordingly, any credit-related impairment of fixed maturity securities that the Company does not intend to sell, and is not likely to be required to sell, is recognized in the consolidated statements of operations, with the noncredit-related impairment recognized in other comprehensive loss.

 

For fixed maturity securities where fair value is less than amortized cost, and where the securities are not deemed to be credit-impaired, the Company has asserted that it has no intent to sell and that it believes it is more likely than not that it will not be required to sell the investment before recovery of its amortized cost basis. If such an assertion had not been made, the security’s decline in fair value would be deemed to be other than temporary and the entire difference between fair value and amortized cost would be recognized in the statements of income.

 

For fixed maturity securities, a critical component of the evaluation for OTTI is the identification of credit-impaired securities, where the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. The difference between the present value of projected future cash flows expected to be collected and the amortized cost basis is recognized as credit-related OTTI in the statements of income. If fair value is less than the present value of projected future cash flows expected to be collected, the portion of OTTI related to other than credit factors is reduced in accumulated other comprehensive income.

 

15
 

 

In order to determine the amount of credit loss for a fixed maturity security, the Company calculates the recovery value by performing a discounted cash flow analysis based on the present value of future cash flows expected to be received. The discount rate is generally the effective interest rate of the fixed maturity security prior to impairment.

 

When determining the collectability and the period over which the fixed maturity security is expected to recover, the Company considers the same factors utilized in its overall impairment evaluation process described above.

 

The Company believes that it has adequately reviewed its investment securities for OTTI and that its investment securities are carried at fair value. However, over time, the economic and market environment (including any ratings change for any such securities, including US treasury securities and corporate bonds) may provide additional insight regarding the fair value of certain securities, which could change management’s judgment regarding OTTI. This could result in realized losses relating to other than temporary declines being charged against future income. Given the judgments involved, there is a continuing risk that further declines in fair value may occur and material OTTI may be recorded in future periods.

 

(l) Launch Support

 

TV One has entered into certain affiliate agreements requiring various payments by TV One for launch support. Launch assets are assets used to initiate carriage under new affiliation agreements and are amortized over the term of the respective contracts. Amortization is recorded as a reduction to revenue to the extent that revenue is recognized from the vendor, and any excess amortization is recorded as launch support amortization expense. The weighted-average amortization period for launch support is approximately 3.6 years. For the three and nine months ended September 30, 2012, launch asset amortization of approximately $2.5 million and $7.5 million, respectively, was recorded as a reduction in revenue. For the three and nine months ended September 30, 2011, launch asset amortization of approximately $2.5 million and $4.6 million, respectively, was recorded as a reduction in revenue.

 

(m) Content Assets

 

TV One has entered into contracts to acquire entertainment programming rights and programs from distributors and producers. The license periods granted in these contracts generally run from one year to perpetuity. Contract payments are made in installments over terms that are generally shorter than the contract period. Each contract is recorded as an asset and a liability at an amount equal to its gross contractual commitment when the license period begins and the program is available for its first airing.

 

Program rights are recorded at the lower of amortized cost or estimated net realizable value. Program rights are amortized based on the greater of the usage of the program or term of license. Estimated net realizable values are based on the estimated revenues directly associated with the program materials and related expenses. The Company has not recorded any additional amortization expense as a result of evaluating its contracts for recoverability for the three months ended September 30, 2012 and recorded $604,000 for the nine months ended September 30, 2012. The Company recorded an additional $965,000 and approximately $1.3 million of amortization expense as a result of evaluating its contracts for recoverability for the three and nine months ended September 30, 2011, respectively. All produced and licensed content is classified as a long-term asset, except for the portion of the unamortized content balance that will be amortized within one year as it is classified as a current asset.

 

2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS:

 

In its previously filed consolidated financial statements for the nine months ended September 30, 2011, the Company improperly classified cash payments for TV One content assets as investing activities rather than operating activities in its consolidated statements of cash flows. The classification errors had no effect on the reported changes in cash and cash equivalents in any period, and also had no effect on the consolidated balance sheets, the consolidated statements of operations, or the consolidated statements of stockholders’ equity for any period. The reclassification adjustment decreased cash flows from operating activities and increased cash flows from investing activities by approximately $12.8 million for the nine months ended September 30, 2011.

 

16
 

 

The following table summarizes the effects of the restatement adjustments on the consolidated statements of cash flows (in thousands):

 

   Nine Months Ended September 30, 2011 
   As Previously
Reported
   Adjustments   As Restated 
             
CASH FLOWS FROM OPERATING ACTIVITIES:               
Payments for content assets  $-   $(12,761)  $(12,761)
Net cash flows provided by (used in) operating activities   29,111    (12,761)   16,350 
                
CASH FLOWS FROM INVESTING ACTIVITIES:               
Payments for content assets   (12,761)   12,761    - 
Net cash flows provided by investing activities   47,074    12,761    59,835 
                
CASH FLOWS FROM FINANCING ACTIVITIES:               
Net cash flows used in financing activities   (52,206)   -    (52,206)
                
INCREASE IN CASH AND CASH EQUIVALENTS  $23,979   $-   $23,979 

 

3.  ACQUISITIONS:

 

On February 25, 2011, TV One completed a privately placed debt offering of $119 million (the “Redemption Financing”). The Redemption Financing is structured as senior secured notes bearing a 10% coupon and due in 2016. Subsequently, on February 28, 2011, TV One utilized $82.4 million of the Redemption Financing to repurchase 15.4% of its outstanding membership interests from certain of its financial investors and 2.0% of its outstanding membership interests held by TV One management (representing approximately 50% of interests held by management). Beginning on April 14, 2011, the Company began to account for TV One on a consolidated basis after having executed an amendment to the TV One operating agreement with the remaining members of TV One concerning certain governance issues. The Company’s purchase price allocation consisted of approximately $61.2 million to current assets, $39.0 million to launch assets, $2.4 million to fixed assets, $204.1 million to indefinite-lived intangibles (goodwill and TV One brand), $287.3 million to definite-lived intangibles (content assets, acquired advertising contracts, advertiser relationships, affiliation agreements, etc.), $225.7 million to liabilities (including the $119.0 million in debt discussed above) and $203.0 million in noncontrolling interests. In accordance with accounting standards applicable to business combinations, the Company recorded the assets and liabilities of TV One at fair value as of April 14, 2011. The Company recognized an after-tax gain of approximately $146.9 million during the second quarter of 2011 associated with the transaction. The gain is computed as the difference between the carrying value of the Company’s investment in TV One prior to date of consolidation and the fair value of the Company’s interest in TV One as of the consolidation date. Finally, on April 25, 2011, TV One utilized the balance of the Redemption Financing to repurchase 12.4% of its outstanding membership interests from DIRECTV. These redemptions by TV One increased the Company’s ownership interest in TV One from 36.8% to approximately 50.9% as of April 25, 2011. Subsequent to April 2011, our ownership in TV One increased to approximately 51.0% after a redemption of certain management interests.

 

The following unaudited pro forma summary presents consolidated information of the Company as if the consolidation of TV One had occurred on January 1, 2011. The pro forma financial information gives effect to the Company’s consolidation of TV One by the application of the pro forma adjustments to the historical consolidated financial statements of the Company. Such unaudited pro forma financial information is based on the historical financial statements of the Company and TV One and certain adjustments, which the Company believes to be reasonable based on current available information, to give effect to these transactions. Pro forma adjustments were made from January 1, 2011 up to the date of the consolidation with the actual results reflected thereafter in the pro forma financial information.

 

The unaudited pro forma condensed consolidated financial data does not purport to represent what the Company’s results of operations actually would have been if the consolidation of TV One had occurred on January 1, 2011, or what such results will be for any future periods. The actual results in the periods following the consolidation date may differ significantly from that reflected in the unaudited pro forma condensed consolidated financial data for a number of reasons including, but not limited to, differences between the assumptions used to prepare the unaudited pro forma condensed consolidated financial data and the actual amounts.

 

17
 

 

The financial information of TV One has been derived from the historical financial statements of TV One, which were prepared in accordance with GAAP.

  

Unaudited adjustments have been made to adjust the results of TV One for the three and nine months ended September 30, 2011. These adjustments reflect additional amortization expense that would have been incurred assuming the fair value adjustments to intangible assets as well as additional interest expense on the debt assumed had been applied on January 1, 2011.

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2012   2011   2012   2011 
   (Unaudited) 
   (In thousands) 
                 
Net revenue  $109,952   $104,445   $318,910   $301,801 
Costs and expenses, net   123,016    120,026    368,548    230,940 
Net (loss) income    (13,064)   (15,581)   (49,638)   70,861 

 

4.  DISCONTINUED OPERATIONS:

 

As of June 2011, our remaining Boston radio station was made the subject of an LMA whereby we have made available, for a fee, air time on this station to another party. The remaining assets and liabilities of stations sold or stations that we do not operate that are the subject of an LMA, have been classified as discontinued operations as of September 30, 2012 and December 31, 2011. Thus, stations sold or stations that we do not operate that are the subject of an LMA results from operations for the three months and nine months ended September 30, 2012 and 2011, have been classified as discontinued operations in the accompanying consolidated financial statements.

 

The following table summarizes the operating results for all of the stations sold or stations that we do not operate that are the subject of an LMA and are classified as discontinued operations for all periods presented:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2012   2011   2012   2011 
   (Unaudited) 
   (In thousands) 
                 
Net revenue  $   $   $   $59 
Station operating expenses   61    (30)   184    96 
Depreciation and amortization   14    19    50    54 
Interest income   90        270     
Gain on sale of assets               20 
Income (loss) before income taxes   15    11    36    (71)
Income (loss) from discontinued operations, net of tax  $15   $11   $36   $(71)

 

18
 

 

The assets and liabilities of these stations classified as discontinued operations in the accompanying consolidated balance sheets consisted of the following: 

 

   As of 
   September 30,   December 31, 
   2012   2011 
   (Unaudited)     
   (In thousands) 
Currents assets:          
Accounts receivable, net of allowance for doubtful accounts  $85   $90 
Total current assets   85    90 
Intangible assets, net   1,202    1,202 
Property and equipment, net   224    274 
Total assets  $1,511   $1,566 
Current liabilities:          
Other current liabilities  $186   $260 
Total current liabilities   186    260 
Long-term liabilities   21    29 
Total liabilities  $207   $289 

 

5.  GOODWILL AND RADIO BROADCASTING LICENSES:

 

Impairment Testing

 

In the past, we have made acquisitions whereby a significant amount of the purchase price was allocated to radio broadcasting licenses, goodwill and other intangible assets. In accordance with ASC 350, “Intangibles - Goodwill and Other,” we do not amortize our radio broadcasting licenses and goodwill. Instead, we perform a test for impairment annually or on an interim basis when events or changes in circumstances or other conditions suggest impairment may have occurred. Other intangible assets continue to be amortized on a straight-line basis over their useful lives. We perform our annual impairment test as of October 1 of each year.

 

Valuation of Broadcasting Licenses

 

We utilize the services of a third-party valuation firm to provide independent analysis when evaluating the fair value of our radio broadcasting licenses and reporting units. Fair value is estimated to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use the income approach to test for impairment of radio broadcasting licenses. A projection period of 10 years is used, as that is the time horizon in which operators and investors generally expect to recover their investments. When evaluating our radio broadcasting licenses for impairment, the testing is done at the unit of accounting level as determined by ASC 350, “Intangibles - Goodwill and Other.” In our case, each unit of accounting is a clustering of radio stations into one of the 15 geographical radio markets that we own and operate.  Broadcasting license fair values are based on the estimated after-tax discounted future cash flows of the applicable unit of accounting assuming an initial hypothetical start-up operation which possesses FCC licenses as the only asset. Over time, it is assumed the operation acquires other tangible assets such as advertising and programming contracts, employment agreements and going concern value, and matures into an average performing operation in a specific radio market. The income approach model incorporates several variables, including, but not limited to: (i) radio market revenue estimates and growth projections; (ii) estimated market share and revenue for the hypothetical participant; (iii) likely media competition within the market; (iv) estimated start-up costs and losses incurred in the early years; (v) estimated profit margins and cash flows based on market size and station type; (vi) anticipated capital expenditures; (vii) probable future terminal values; (viii) an effective tax rate assumption; and (ix) a discount rate based on the weighted-average cost of capital for the radio broadcast industry. In calculating the discount rate, we considered: (i) the cost of equity, which includes estimates of the risk-free return, the long-term market return, small stock risk premiums and industry beta; (ii) the cost of debt, which includes estimates for corporate borrowing rates and tax rates; and (iii) estimated average percentages of equity and debt in capital structures. Since our annual October 2011 assessment, we have not made any changes to the methodology for valuing broadcasting licenses.

 

19
 

 

During the second quarter of 2012, the total market revenue growth for certain markets was below that used in our 2011 annual impairment testing. We deemed this shortfall to be an impairment indicator that warranted interim impairment testing of certain of our radio broadcasting licenses, which we performed as of June 30, 2012. The Company recorded an impairment charge of $313,000 related to our Charlotte radio broadcasting licenses. The remaining radio broadcasting licenses that were tested during the second quarter of 2012 were not impaired. There were no impairment indicators for our radio broadcast licenses noted during the third quarter of 2012. Below are some of the key assumptions used in the income approach model for estimating broadcasting licenses fair values for all annual and interim impairment assessments performed since January 2011.

 

  May 31,   September 30,   October 1,   June 30, 
Radio Broadcasting Licenses  2011 (a)   2011 (a)   2011   2012 (a) 
                 
Pre-tax impairment charge (in millions)  $   $   $   $0.3 
                     
Discount Rate   10.0%   9.5%   10.0%   10.0%
Year 1 Market Revenue Growth Range   1.3% -2.8   1.5% -2.0 %   1.5% -2.5   1.0% -3.0
Long-term Market Revenue Growth Rate Range (Years 6 – 10)   1.5% - 2.0 %   1.5% - 2.0 %   1.0% - 2.0%   1.0% - 2.0%
Mature Market Share Range   9.0% - 22.5 %   9.3% - 22.4 %   0.7% - 28.9%   5.8% - 15.6%
Operating Profit Margin Range   32.7% - 40.8 %   32.7% - 33.0 %   19.1% - 47.4%   29.1% - 48.0%

 

(a)  Reflects changes only to the key assumptions used in quarterly interim testing for certain reporting units.

 

Valuation of Goodwill

 

The impairment testing of goodwill is performed at the reporting unit level. In testing for the impairment of goodwill, with the assistance of a third-party valuation firm, we primarily rely on the income approach. The approach involves a 10-year model with similar variables as described above for broadcasting licenses, except that the discounted cash flows are generally based on the Company’s estimated and projected market revenue, market share and operating performance for its reporting units, instead of those for a hypothetical participant. We follow a two-step process to evaluate if a potential impairment exists for goodwill. The first step of the process involves estimating the fair value of each reporting unit. If the reporting unit’s fair value is less than its carrying value, a second step is performed as per the guidance of ASC 805-10, “Business Combinations,” to allocate the fair value of the reporting unit to the individual assets and liabilities of the reporting unit in order to determine the implied fair value of the reporting unit’s goodwill as of the impairment assessment date. Any excess of the carrying value of the goodwill over the implied fair value of the goodwill is written off as a charge to operations. Since our annual assessment, we have not made any changes to the methodology of valuing or allocating goodwill when determining the carrying values of the radio markets, Reach Media, Interactive One or TV One.

 

Below are some of the key assumptions used in the income approach model for estimating the fair value for Reach Media for all interim, annual and year end assessments since January 2011. When compared to the discount rates used for assessing radio market reporting units, the higher discount rates used in these assessments reflect a premium for a riskier and broader media business, with a heavier concentration and significantly higher amount of programming content related intangible assets that are highly dependent on the on-air personality Tom Joyner. Reach Media did not meet its budgeted operating cash flow for the third quarter and we performed an interim impairment assessment at September 30, 2012. With the assistance of a third-party valuation firm, the Company completed a valuation of the Reach Media reporting unit and concluded that the carrying value of goodwill attributable to Reach Media had not been impaired.

 

20
 

 

  March 31,   June 30,   September 30,   December 31,   March 31,   June 30,   September 30, 
Reach Media Goodwill   2011   2011   2011   2011   2012   2012   2012 
                 
Pre-tax impairment charge (in millions)  $   $   $   $   $   $   $ 
                                    
Discount Rate   13.5%   13.0%   12.0%   12.5%   12.5%   12.5%   12.0%
Year 1 Revenue Growth Rate   2.5%   2.5%   2.5%   2.5%   2.5%   2.5%   2.0%
Long-term Revenue Growth Rate Range   (1.3)% - 4.9   (0.2)% - 3.9%   (2.0)% - 3.5%   3.0% - 12.7%   2.2% - 9.7%   0.3% - 2.5%   (4.7)% - 2.8%
                                    
Operating Profit Margin Range   16.2% - 27.4%   17.6% - 22.6%   18.8% - 21.7%   (2.0)% - 16.8%   3.7% - 18.1%   4.9% - 15.3%   4.6% - 19.8%

 

In September 2012, the Company performed interim impairment testing on the valuation of goodwill associated with Interactive One. Interactive One net revenues and cash flows declined for the third quarter and year to date 2012 and full year internal projections were revised. When compared to discount rates for the radio reporting units, the higher discount rate used to value the reporting unit is reflective of discount rates applicable to internet media businesses. As a result of the testing, the Company concluded no impairment to the carrying value had occurred. We did not make any changes to the methodology for valuing or allocating goodwill when determining the carrying value. Below are some of the key assumptions used in the income approach model for estimating the fair value for Interactive One since January 2011.

 

   October 1,   September 30, 
Goodwill (Internet Segment)  2011   2012 
         
Pre-tax impairment charge (in millions)  $-   $- 
           
Discount Rate   14.5%   14.0%
Year 1 Revenue Growth Rate   20.3%   15.3%
Long-term Revenue Growth Rate   2.5%   2.5%
Operating Profit Margin Range   0.0% - 28.8%   5.4 – 26.2%

 

21
 

 

Goodwill Valuation Results

 

The table below presents the changes in the carrying amount of goodwill by segment during the nine month period ended September 30, 2012. The goodwill balances for each reporting unit are not disclosed so as to not make publicly available sensitive information that could potentially be competitively harmful to the Company.

 

   Goodwill Carrying Balances 
   As of       As of 
Segment  December 31,
2011
   Increase
(Decrease)
   September 30,
2012
 
       (In millions)     
Radio Broadcasting Segment  $70.8   $   $70.8 
Reach Media Segment   14.4        14.4 
Internet Segment   21.8        21.8 
Cable Television Segment   165.0        165.0 
   Total  $272.0   $   $272.0 

  

6.  INVESTMENT IN AFFILIATED COMPANY:

 

In January 2004, the Company, together with an affiliate of Comcast Corporation and other investors, launched TV One, an entity formed to operate a cable television network featuring lifestyle, entertainment and news-related programming targeted primarily towards African-American viewers. At that time, we committed to make a cumulative cash investment of $74.0 million in TV One, of which $60.3 million had been funded as of April 30, 2007. Since December 31, 2006, the initial four year commitment period for funding the capital had been extended on a quarterly basis due in part to TV One’s lower than anticipated capital needs. In connection with the Redemption Financing (as defined in Note 3 — Acquisitions), we funded our remaining capital commitment amount of approximately $13.7 million on April 19, 2011, and currently anticipate no further capital commitment. In December 2004, TV One entered into a distribution agreement with DIRECTV and certain affiliates of DIRECTV became investors in TV One.

 

On February 25, 2011, TV One completed its $119 million Redemption Financing. The Redemption Financing is structured as senior secured notes bearing a 10% coupon and is due in 2016. Subsequently, on February 28, 2011, TV One utilized $82.4 million of the Redemption Financing to repurchase 15.4% of its outstanding membership interests from certain financial investors and 2.0% of its outstanding membership interests held by TV One management (representing approximately 50% of interests held by management). Beginning on April 14, 2011, the Company began to account for TV One on a consolidated basis after having executed an amendment to the TV One operating agreement with the remaining members of TV One concerning certain governance issues. Finally, on April 25, 2011, TV One utilized the balance of the Redemption Financing to repurchase 12.4% of its outstanding membership interests from DIRECTV. These redemptions by TV One, increased the Company’s holding in TV One from 36.8% to approximately 50.9% as of April 25, 2011. Subsequent to April 2011, our ownership in TV One increased to approximately 51.0% after a further redemption of certain management interests.

 

Prior to the consolidation date, the Company recorded its investment at cost and had adjusted its carrying amount of the investment to recognize the change in the Company’s claim on the net assets of TV One resulting from operating income or losses of TV One as well as other capital transactions of TV One using a hypothetical liquidation at book value approach. On April 14, 2011, the Company began to account for TV One on a consolidated basis and the basis of the assets and liabilities of TV One at that date were recorded at fair value. For the three and nine months ended September 30, 2011, the Company’s allocable share of TV One’s operating income was $0 and approximately $3.3 million, respectively.

 

We entered into separate network services and advertising services agreements with TV One in 2003. Under the network services agreement, we provided TV One with administrative and operational support services and access to Radio One personalities. In consideration of providing these services, we received equity in TV One, and received an annual cash fee of $500,000 for providing services under the network services agreement.  The network services agreement, originally scheduled to expire in January 2009 was extended to January 2011, at which time it expired.

 

22
 

 

Under an advertising services agreement, we provided a specified amount of advertising to TV One. Prior to the consolidation date, the Company was accounting for the services provided to TV One under the advertising services agreement in accordance with ASC 505-50-30, “Equity.”  As services were provided to TV One, the Company recorded revenue based on the fair value of the most reliable unit of measurement in these transactions. The most reliable unit of measurement had been determined to be the value of underlying advertising time that was provided to TV One. Prior to consolidation, the Company recognized $511,000 in revenue relating to this agreement for the nine months ended September 30, 2011. The advertising services agreement was also originally scheduled to expire in January 2009 and was extended to January 2011, at which time it expired. However, we entered into a new advertising services agreement with TV One with an effective date of January 2011. Under the new advertising services agreement, we (i) provide advertising services to TV One on certain of our media properties and (ii) act as media placement agent for TV One in certain instances. In return for such services, TV One pays us for such advertising time and services and, where we act as media placement agent, pays us a media placement fee equal to the lesser of 15% of media placement costs or a market rate, in addition to reimbursing us (or paying in advance) for all actual costs associated with the media placement services.

 

7.  INVESTMENTS:

 

The Company’s investments (short-term and long-term) consist of the following:

 

   Amortized Cost
Basis
   Gross
Unrealized
Losses
   Gross
Unrealized
Gains
   Fair
Value
 
   (In thousands) 
September 30, 2012                    
Corporate debt securities  $2,285   $(16)  $163   $2,432 
Government sponsored enterprise mortgage-backed securities   100    -    -    100 
Total investments  $2,385   $(16)  $163   $2,532 

 

   Amortized Cost
Basis
   Gross
Unrealized
Losses
   Gross
Unrealized
Gains
   Fair
Value
 
   (In thousands) 
December 31, 2011                    
Corporate debt securities  $7,376   $(264)  $66   $7,178 
Government sponsored enterprise mortgage-backed securities   1,012    (2)   1    1,011 
Total investments  $8,388   $(266)  $67   $8,189 

 

The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

   Fair
Value
< 1 Year
   Unrealized
Losses
< 1 Year
   Fair
Value
> 1 Year
   Unrealized
Losses
> 1 Year
   Total
Unrealized
Losses
 
   (In thousands) 
September 30, 2012                    
Corporate debt securities  $-   $-   $775   $(16)  $(16)
Government sponsored enterprise mortgage-backed securities   -    -    -    -    - 
Total investments  $-   $-   $775   $(16)  $(16)

 

23
 

 

   Fair
Value
< 1 Year
   Unrealized
Losses
< 1 Year
   Fair
Value
> 1 Year
   Unrealized
Losses
> 1 Year
   Total
Unrealized
Losses
 
   (In thousands) 
December 31, 2011                         
Corporate debt securities  $2,760   $(178)  $1,693   $(86)  $(264)
Government sponsored enterprise mortgage-backed securities   400    (2)   -    -    (2)
Total investments  $3,160   $(180)  $1,693   $(86)  $(266)

 

The Company’s investments in debt securities are sensitive to interest rate fluctuations, which impact the fair value of individual securities. Unrealized losses on the Company’s investments in debt securities have occurred due to volatility and liquidity concerns within the capital markets during the quarter ended September 30, 2012.

 

The amortized cost and estimated fair value of debt securities at September 30, 2012, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Amortized Cost
Basis
   Fair Value 
   (In thousands) 
Within 1 year  $202   $199 
After 1 year through 5 years   1,635    1,778 
After 5 years through 10 years   448    455 
After 10 years   -    - 
Mortgage-backed securities   100    100 
Total  $2,385   $2,532 

 

A primary objective in the management of the fixed maturity portfolios is to maximize total return relative to underlying liabilities and respective liquidity needs. In achieving this goal, assets may be sold to take advantage of market conditions or other investment opportunities, as well as tax considerations. Sales will generally produce realized gains or losses. In the ordinary course of business, the Company may sell securities for a number of reasons, including, but not limited to: (i) changes to the investment environment; (ii) expectation that the fair value could deteriorate further; (iii) desire to reduce exposure to an issuer or an industry; (iv) changes in credit quality; and (v) changes in expected cash flow. Available-for-sale securities were sold as follows:

 

   Three Months Ended
September 30, 2012
   Nine Months Ended
September 30, 2012
   Three Months Ended
September 30, 2011
   Nine Months Ended
September 30, 2011
 
   (In thousands) 
Proceeds from sales  $719   $6,286   $1,045   $3,575 
Gross realized gains   11    30    2    8 
Gross realized losses   -    (98)   (1)   (66)

 

8.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

 

  ASC 815, “Derivatives and Hedging,” establishes disclosure requirements related to derivative instruments and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. ASC 815 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

 

24
 

 

The fair values and the presentation of the Company’s derivative instruments in the consolidated balance sheets are as follows:

 

   Liability Derivatives
   As of September 30, 2012  As of December 31, 2011
   (Unaudited)   
   (In thousands)
    
   Balance Sheet Location   Fair Value   Balance Sheet Location   Fair Value 
Derivatives not designated as hedging instruments:                
Employment agreement award  Other Long-Term Liabilities  $11,086   Other Long-Term Liabilities  $10,346 
Total derivatives     $11,086      $10,346 

 

The effect and the presentation of the Company’s derivative instruments on the consolidated statements of operations are as follows:

  

Derivatives in
Cash Flow
Hedging
Relationships
  Amount of Gain in Other
Comprehensive Loss on
Derivative (Effective Portion)
  Loss Reclassified from
Accumulated Other Comprehensive
Loss into Income (Effective Portion)
 

Gain (Loss) in Income (Ineffective

Portion and Amount Excluded from
Effectiveness Testing)

    Amount   Location   Amount   Location   Amount
Three Months Ended September 30,
(Unaudited)
(In thousands)
                                             
    2012   2011       2012   2011       2012   2011
Interest rate swaps   $   $   Interest expense   $   $   Interest expense   $   $

 

Derivatives in
Cash Flow
Hedging
Relationships
  Amount of Gain in Other
Comprehensive Loss on
Derivative (Effective Portion)
  Loss Reclassified from
Accumulated Other Comprehensive
Loss into Income (Effective Portion)
   

Gain (Loss) in Income (Ineffective

Portion and Amount Excluded from
Effectiveness Testing)

    Amount   Location   Amount     Location   Amount
Nine Months Ended September 30,
(Unaudited)
(In thousands)
                                               
    2012   2011       2012   2011         2012   2011
Interest rate swaps   $   $   Interest expense   $   $ (258 )   Interest expense   $   $

 

Derivatives Not Designated
as Hedging Instruments
  Location of Gain (Loss)
in Income of Derivative
 

 

Amount of Gain (Loss) in Income of Derivative

 
      Three Months Ended September 30, 
      2012   2011 
      (Unaudited) 
      (In thousands) 
              
Employment agreement award  Corporate selling, general and administrative expense  $(46)  $(3,068)

 

Derivatives Not Designated
as Hedging Instruments
  Location of Gain (Loss)
in Income on Derivative
  Amount of Gain (Loss) in Income of Derivative 
      Nine Months Ended September 30, 
      2012   2011 
      (Unaudited) 
      (In thousands) 
Employment agreement award  Corporate selling, general and administrative expense  $(740)  $(3,538)

 

25
 

  

Hedging Activities

 

In June 2005, pursuant to our Previous Credit Agreement (as defined in Note 9 — Long-Term Debt), the Company entered into four fixed rate swap agreements to reduce interest rate fluctuations on certain floating rate debt commitments. One of the four $25.0 million swap agreements expired in each of June 2007 and 2008, and 2010, respectively. The remaining $25.0 million swap agreement was terminated on March 31, 2011 in conjunction with the March 31, 2011 retirement of our Previous Credit Agreement.  We have no swap agreements in connection with our current credit facilities.

 

Each swap agreement had been accounted for as a qualifying cash flow hedge of the Company’s senior bank debt, in accordance with ASC 815, “Derivatives and Hedging,” 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 financial statements.

 

The Company’s objectives in using interest rate swaps were to manage interest rate risk associated with the Company’s floating rate debt commitments and to add stability to future cash flows. To accomplish this objective, the Company used interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges was recorded in Accumulated Other Comprehensive Loss and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2011, such derivatives were used to hedge the variable cash flows associated with existing floating rate debt commitments.  The ineffective portion of the change in fair value of the derivatives, if any, was recognized directly in earnings.

 

Amounts reported in Accumulated Other Comprehensive Loss related to derivatives were reclassified to interest expense as interest payments were made on the Company’s floating rate debt.

 

Under the swap agreements, the Company paid a fixed rate. The counterparties to the agreements paid the Company a floating interest rate based on the three month LIBOR, for which measurement and settlement is performed quarterly. The counterparties to these agreements were international financial institutions.

 

26
 

 

Other Derivative Instruments

 

The Company recognizes all derivatives at fair value, whether designated in hedging relationships or not, on the balance sheet as either an asset or liability. The accounting for changes in the fair value of a derivative, including certain derivative instruments embedded in other contracts, depends on the intended use of the derivative and the resulting designation. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item are recognized in the statement of operations. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the statement of operations when the hedged item affects net income. If a derivative does not qualify as a hedge, it is marked to fair value through the statement of operations. 

 

As of September 30, 2012, the Company was party to an Employment Agreement executed in April 2008 with the CEO. Pursuant to the Employment Agreement, the CEO is 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 reassessed the estimated fair value of the award at September 30, 2012 to be approximately $11.1 million, and accordingly, adjusted its liability to this amount. 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 if the CEO voluntarily leaves the Company, or is terminated for cause. The Company is currently in negotiations with the Company’s CEO for a new employment agreement. Until such time as his new employment agreement is executed, the terms of his April 2008 employment agreement remain in effect including eligibility for the TV One award.

 

9.  LONG-TERM DEBT:

 

Long-term debt consists of the following:

 

   September 30,
2012
   December 31,
2011
 
   (Unaudited)     
   (In thousands) 
         
Senior bank term debt  $378,256   $383,105 
6⅜% Senior Subordinated Notes due February 2013   747    747 
12½%/15% Senior Subordinated Notes due May 2016   327,034    312,800 
10% Senior Secured TV One Notes due March 2016   119,000    119,000 
Total debt   825,037    815,652 
Less: current portion   4,587    3,860 
Less: original issue discount   5,717    6,748 
Long-term debt, net  $814,733   $805,044 

 

Credit Facilities

 

March 2011 Refinancing Transaction

 

On March 31, 2011, the Company entered into a new senior secured credit facility (the “2011 Credit Agreement”) with a syndicate of banks, and simultaneously borrowed $386.0 million to retire all outstanding obligations under the Company’s previous amended and restated credit agreement and to fund our obligation with respect to a capital call initiated by TV One.  The total amount available under the 2011 Credit Agreement is $411.0 million, consisting of a $386.0 million term loan facility that matures on March 31, 2016 and a $25.0 million revolving loan facility that matures on March 31, 2015. Borrowings under the credit facilities are subject to compliance with certain covenants including, but not limited to, certain financial covenants. Proceeds from the credit facilities can be used for working capital, capital expenditures made in the ordinary course of business, its common stock repurchase program, permitted direct and indirect investments and other lawful corporate purposes.

 

27
 

 

 

The 2011 Credit Agreement contains affirmative and negative covenants that the Company is required to comply with, including:

 

(a)maintaining an interest coverage ratio of no less than:
§ 1.25 to 1.00 on June 30, 2011 and the last day of each fiscal quarter through September 30, 2015; and
§ 1.50 to 1.00 on December 31, 2015 and the last day of each fiscal quarter thereafter.

 

(b)   maintaining a senior secured leverage ratio of no greater than:

§ 5.25 to 1.00 on June 30, 2011;
§ 5.00 to 1.00 on September 30, 2011 and December 31, 2011;
§ 4.75 to 1.00 on March 31, 2012;
§ 4.50 to 1.00 on June 30, 2012, September 30, 2012 and December 31, 2012;
§ 4.00 to 1.00 on March 31, 2013 and the last day of each fiscal quarter through September 30, 2013;
§ 3.75 to 1.00 on December 31, 2013 and the last day of each fiscal quarter through September 30, 2014;
§ 3.25 to 1.00 on December 31, 2014 and the last day of each fiscal quarter through September 30, 2015; and
§ 2.75 to 1.00 on December 31, 2015 and the last day of each fiscal quarter thereafter.

 

(c)   maintaining a total leverage ratio of no greater than:

§ 9.25 to 1.00 on June 30, 2011 and the last day of each fiscal quarter through December 31, 2011;
§ 9.00 to 1.00 on March 31, 2012;
§ 8.75 to 1.00 on June 30, 2012;
§ 8.50 to 1.00 on September 30, 2012 and December 31, 2012;
§ 8.00 to 1.00 on March 31, 2013 and the last day of each fiscal quarter through September 30, 2013;
§ 7.50 to 1.00 on December 31, 2013 and the last day of each fiscal quarter through September 30, 2014;
§ 6.50 to 1.00 on December 31, 2014 and the last day of each fiscal quarter through September 30, 2015; and
§ 6.00 to 1.00 on December 31, 2015 and the last day of each fiscal quarter thereafter.

 

 (d) limitations on:

§ liens;
§ sale of assets;
§ payment of dividends; and
§ mergers.

 

As of September 30, 2012, ratios calculated in accordance with the 2011 Credit Agreement, are as follows:

 

  As of
September
30, 2012
   Covenant
Limit
   Excess
Coverage
 
             
Pro Forma Last Twelve Months Covenant EBITDA (In millions)  $86.1         
Pro Forma Last Twelve Months Interest Expense (In millions)  $57.8         
Senior Debt (In millions)  $355.2         
Total Debt (In millions)  $682.9         
Senior Secured Leverage               
Senior Secured Debt / Covenant EBITDA   4.12x   4.50x   0.38x
Total Leverage               
Total Debt / Covenant EBITDA   7.93x   8.50x   0.57x
Interest Coverage               
Covenant EBITDA / Interest Expense   1.49x   1.25x   0.24x
EBITDA - Earnings before interest, taxes, depreciation and amortization               

 

28
 

 

In accordance with the 2011 Credit Agreement, the calculations for the ratios above do not include the operating results and related debt of Reach Media and TV One.

 

As of September 30, 2012, the Company was in compliance with all of its financial covenants under the 2011 Credit Agreement.  

 

Under the terms of the 2011 Credit Agreement, interest on base rate loans is payable quarterly and interest on LIBOR loans is payable monthly or quarterly. The base rate is equal to the greater of (i) the prime rate, (ii) the Federal Funds Effective Rate plus 0.50% or (iii) the LIBOR Rate for a one-month period plus 1.00%.  The applicable margin on the 2011 Credit Agreement is between (i) 4.50% and 5.50% on the revolving portion of the facility and (ii) 5.00% (with a base rate floor of 2.5% per annum) and 6.00% (with a LIBOR floor of 1.5% per annum) on the term portion of the facility. Commencing on June 30, 2011, quarterly installments of 0.25%, or $960,000, of the principal balance on the term loan are payable on the last day of each March, June, September and December.

 

As of September 30, 2012, the Company had approximately $23.9 million of borrowing capacity under its revolving credit facility. After taking into consideration the financial covenants under the 2011 Credit Agreement, approximately $23.9 million was available to be borrowed.

 

As of September 30, 2012, the Company had outstanding approximately $378.3 million on its term credit facility. During the quarter ended September 30, 2012, the Company repaid its quarterly installment of approximately $1.0 million under the 2011 Credit Agreement. In addition, on April 13, 2012, the Company made an approximately $2.0 million term loan principal repayment based on its December 31, 2011 excess cash flow calculation according to the terms of the 2011 Credit Agreement. The original issue discount is being reflected as an adjustment to the carrying amount of the debt obligation and amortized to interest expense over the term of the credit facility.

 

Senior Subordinated Notes

 

Period after the March 2011 Refinancing Transaction

 

As of September 30, 2012, the Company had outstanding $747,000 of its 63/8% Senior Subordinated Notes due February 2013 and approximately $327.0 million of our 121/2%/15% Senior Subordinated Notes due May 2016. The 121/2%/15% Senior Subordinated Notes due May 2016 had a carrying value of approximately $327.0 million and a fair value of approximately $281.3 million as of September 30, 2012, and the 63/8% Senior Subordinated Notes due February 2013 had a carrying value of $747,000 and a fair value of $642,000 as of September 30, 2012. The fair values were determined based on the trading value of the instruments as of the reporting date.

 

Interest payments under the terms of the 63/8% Senior Subordinated Notes are due in February and August.  Based on the $747,000 principal balance of the 63/8% Senior Subordinated Notes outstanding on September 30, 2012, interest payments of $24,000 are payable each February and August through February 2013.

 

Interest on the 121/2%/15% Senior Subordinated Notes is payable in cash, or at our election, partially in cash and partially through the issuance of additional 121/2%/15% Senior Subordinated Notes (a “PIK Election”) on a quarterly basis in arrears on February 15, May 15, August 15 and November 15, commencing on February 15, 2011.  We made a PIK Election only with respect to interest accruing up to but not including May 15, 2012, and with respect to interest accruing from and after May 15, 2012 such interest accrues at a rate of 121/2% and is payable in cash.

 

Interest on the Exchange Notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid.  Interest will accrue for each quarterly period at a rate of 121/2% if the interest for such quarterly period is paid fully in cash.  In the event of a PIK Election, including the PIK Election that was in effect through May 15, 2012, the interest paid in cash and the interest paid-in-kind by issuance of additional Exchange Notes (“PIK Notes”) accrued for such quarterly period at 6.0% cash per annum and 9.0% PIK per annum.

 

In the absence of an election for any interest period, interest on the Exchange Notes shall be payable according to the election for the previous interest period, provided that interest accruing from and after May 15, 2012 shall accrue at a rate of 121/2% and shall be payable in cash. A PIK Election remained in effect through May 15, 2012. After May 15, 2012, interest accrues at a rate of 121/2% and is payable wholly in cash and the Company no longer has an option to pay any portion of its interest through the issuance of PIK Notes.

 

29
 

 

During the quarter ended September 30, 2012, the Company paid cash interest in the amount of approximately $21.0 million. During the nine months ended September 30, 2012, the Company paid cash interest in the amount of approximately $52.0 million and issued approximately $14.2 million of additional 121/2%/15% Senior Subordinated Notes in accordance with the PIK Election that was in effect through May 15, 2012.

 

The indentures governing the Company’s 121/2%/15% Senior Subordinated Notes also contain covenants that restrict, among other things, the ability of the Company to incur additional debt, purchase common 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 conducts a portion of its business through its subsidiaries. Certain of the Company’s subsidiaries have fully and unconditionally guaranteed the Company’s 121/2%/15% Senior Subordinated Notes, the 63/8% Senior Subordinated Notes and the Company’s obligations under the 2011 Credit Agreement.

 

Senior Secured Notes

 

      In connection with the Redemption Financing, TV One issued $119.0 million in senior secured notes on February 25, 2011. The notes were issued in connection with the repurchase of its equity interest from certain financial investors and TV One management. The notes bear interest at 10.0% per annum, which is payable monthly, and the entire principal amount is due on March 15, 2016.

 

Note Payable

 

In November 2009, Reach Media issued a $1.0 million, 7% promissory note in connection with the repurchase of certain of its common stock held by a minority shareholder, a subsidiary of Cumulus (formerly Citadel). The note was due and paid on December 30, 2011.

 

10.  INCOME TAXES:

 

The Company recorded a tax expense of approximately $25.8 million on a pre-tax loss from continuing operations of approximately $13.2 million for the nine month period ended September 30, 2012 based on the actual effective tax rate as of September 30, 2012.  The Company continues to estimate a range of possible outcomes due to the proportion of deferred tax expense from indefinite-lived intangibles over operating income.  Thus, the Company believes the actual effective rate best represents the estimated effective rate for the nine months ended September 30, 2012 in accordance with ASC 740-270, "Interim Reporting."

 

As of September 30, 2012, the Company continues to maintain a full valuation allowance for entities other than Reach Media for its net deferred tax assets, but excludes deferred tax liabilities related to indefinite-lived intangibles.  In accordance with ASC 740, "Accounting for Income Taxes", the Company continually assesses the adequacy of the valuation allowance by assessing the likely future tax consequences of events that have been realized in the Company's financial statements or tax returns, tax planning strategies, and future profitability.  As of September 30, 2012, the Company does not believe it is more likely than not that the deferred tax assets will be realized.  As part of the assessment, the Company has not included the deferred tax liability related to indefinite-lived intangible assets as a source of future taxable income to support realization of the deferred tax assets.

 

During 2011, the consolidation of TV One included an adjustment to the deferred tax liability related to the partnership investment in TV One. The Company evaluated the deferred tax liability and concluded that a portion will not reverse within the requisite period since it relates to indefinite-lived assets and cannot be offset against deferred tax assets. This item generated a tax expense of $402,000 for the nine months ended September 30, 2012. The deferred tax liability on the indefinite-lived intangible assets of Radio One generated a tax expense of approximately $25.3 million for the nine months ended September 30, 2012. The remaining portion of the tax expense or benefit primarily consists of Radio One state taxes of $248,000 which were offset by a tax benefit from Reach Media of $511,000.

 

30
 

 

11.  STOCKHOLDERS’ EQUITY: 

 

 Stock Repurchase Program

 

In April 2011, the Company’s board of directors authorized a repurchase of shares of the Company’s Class A and Class D common stock (the “2011 Repurchase Authorization”). Under the 2011 Repurchase Authorization, the Company is authorized, but is not obligated, to repurchase up to $15 million worth of its Class A and/or Class D common stock prior to April 13, 2013.  Repurchases will be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws and regulations.  The timing and extent of any repurchases will depend upon prevailing market conditions, the trading price of the Company’s Class A and/or Class D common stock and other factors, and subject to restrictions under applicable law.  The Company expects to implement this stock repurchase program in a manner consistent with market conditions and the interests of the stockholders, including maximizing stockholder value.  During the nine months ended September 30, 2012, the Company did not repurchase any Class A Common Stock or Class D Common Stock.

 

 Stock Option and Restricted Stock Grant Plan

 

Under the Company’s 1999 Stock Option and Restricted Stock Grant Plan (“Plan”), the Company had the authority to issue up to 10,816,198 shares of Class D common stock and 1,408,099 shares of Class A common stock. The Plan expired March 10, 2009. The options previously issued under this plan are exercisable in installments determined by the compensation committee of the Company’s board of directors at the time of grant. These 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. The Company settles stock options upon exercise by issuing stock.

 

A new stock option and restricted stock plan (the “2009 Stock Plan”) was approved by the stockholders at the Company’s annual meeting on December 16, 2009.  The terms of the 2009 Stock Plan are substantially similar to the prior Plan. The Company has the authority to issue up to 8,250,000 shares of Class D common stock under the 2009 Stock Plan. As of September 30, 2012, 4,724,272 shares of Class D common stock were available for grant under the 2009 Stock Plan.

 

In December 2009, the compensation committee and the non-executive members of the Board of Directors approved a long-term incentive plan (the “2009 LTIP”) for certain “key” employees of the Company. The 2009 LTIP is comprised of 3,250,000 shares (the “LTIP Shares”) of the 2009 Stock Plan’s 8,250,000 shares of Class D common stock. Awards of the LTIP Shares were granted in the form of restricted stock and allocated among 31 employees of the Company, including the named executive officers. The named executive officers were allocated LTIP Shares as follows: (i) Chief Executive Officer (“CEO”) (1.0 million shares); (ii) the Chairperson (300,000 shares); (iii) the Chief Financial Officer (“CFO”) (225,000 shares); (iv) the Chief Administrative Officer (“CAO”) (225,000 shares); and (v) the former President of the Radio Division (“PRD”) (130,000 shares). The remaining 1,370,000 shares were allocated among 26 other “key” employees. All awards will vest in three installments.  The awards were granted effective January 5, 2010 and the first installment of 33% vested on June 5, 2010, the second installment vested on June 5, 2011. The third installment was originally scheduled to vest on June 5, 2012 but upon determination by the compensation committee was accelerated to vest on November 19, 2011. Pursuant to the terms of the 2009 Stock Plan, subject to the Company’s insider trading policy, a portion of each recipient’s vested shares may be sold into the open market for employee tax withholding purposes on or about the vesting dates.

 

The Company follows the provisions under ASC 718, “Compensation - Stock Compensation,” using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. These stock-based awards do not participate in dividends until fully vested. The fair value of stock options is determined using the Black-Scholes (“BSM”) valuation model. Such fair value is recognized as an expense over the service period, net of estimated forfeitures, using the straight-line method. Estimating the number of stock awards that will ultimately vest requires judgment, and to the extent actual forfeitures differ substantially from our current estimates, amounts will be recorded as a cumulative adjustment in the period the estimated number of stock awards are revised. We consider many factors when estimating expected forfeitures, including the types of awards, employee classification and historical experience. Actual forfeitures may differ substantially from our current estimate.

 

The Company also uses the BSM valuation model to calculate the fair value of stock-based awards. The BSM incorporates various assumptions including volatility, expected life, and interest rates. For options granted, the Company uses the BSM option-pricing model and determines: (i) the term by using the simplified “plain-vanilla” method as allowed under SAB No. 110; (ii) a historical volatility over a period commensurate with the expected term, with the observation of the volatility on a daily basis; and (iii) a risk-free interest rate that was consistent with the expected term of the stock options and based on the U.S. Treasury yield curve in effect at the time of the grant.

 

31
 

 

Stock-based compensation expense for the three months ended September 30, 2012 and 2011 was $37,000 and $760,000, respectively, and for the nine months ended September 30, 2012 and 2011 was $127,000 and approximately $2.9 million, respectively.

 

 The Company did not grant any stock options during the three months ended September 30, 2011. During the nine months ended September 30, 2011, the Company granted 181,520 stock options. During the three and nine months ended September 30, 2012, the Company granted 150,600 stock options.

 

  Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2012   2011   2012   2011 
                 
Average risk-free interest rate   0.62%       0.62%   2.23%
Expected dividend yield   0.00%       0.00%   0.00%
Expected lives   6.00 Years        6.00 Years    6.00 Years 
Expected volatility   127.5%       127.5%   120.7%

 

Transactions and other information relating to stock options for the nine months ended September 30, 2012 are summarized below:

 

   Number of
Options
   Weighted-Average
Exercise Price
   Weighted-Average
Remaining
Contractual Term
(In Years)
   Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2011   4,811,000   $8.60          
Grants   151,000   $0.83           
Exercised                  
Forfeited/cancelled/expired   (131,000)   5.78           
Balance as of September 30, 2012   4,831,000   $8.43    3.87   $ 
Vested and expected to vest at September 30, 2012   4,813,000   $8.46    3.85   $ 
Unvested at September 30, 2012   184,000   $1.02    9.50   $ 
Exercisable at September 30, 2012   4,647,000   $8.73    3.65   $ 

 

The aggregate intrinsic value in the table above represents the difference between the Company’s stock closing price on the last day of trading during the nine months ended September 30, 2012, and the exercise price, multiplied by the number of shares that would have been received by the holders of in-the-money options had all the option holders exercised their options on September 30, 2012. This amount changes based on the fair market value of the Company’s stock. There were no options exercised during the three and nine months ended September 30, 2012 and 2011. There were no options that vested during the three months ended September 30, 2012 and 2011. The number of options that vested during the nine months ended September 30, 2012 and 2011 were 95,064 and 725,794, respectively.

 

As of September 30, 2012, $141,000 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 13 months. The stock option weighted-average fair value per share for all options outstanding was $3.37 at September 30, 2012.

 

The Company did not grant shares of restricted stock during the three and nine months ended September 30, 2012 and 2011.

 

32
 

 

Transactions and other information relating to restricted stock grants for the nine months ended September 30, 2012 are summarized below:

 

   Shares   Average
Fair Value
at Grant
Date
 
Unvested at December 31, 2011   144,000   $1.10 
Grants      $ 
Vested   (62,000)  $1.09 
Forfeited/cancelled/expired      $ 
Unvested at September 30, 2012   82,000   $1.11 

 

The restricted stock grants were included in the Company’s outstanding share numbers on the effective date of grant. As of September 30, 2012, $74,000 of total unrecognized compensation cost related to restricted stock grants is expected to be recognized over the next 11 months.

 

12.  SEGMENT INFORMATION:

 

The Company has four reportable segments: (i) Radio Broadcasting; (ii) Reach Media; (iii) Internet; and (iv) Cable Television. These segments operate in the United States and are consistently aligned with the Company’s management of its businesses and its financial reporting structure.

 

The Radio Broadcasting segment consists of all broadcast results of operations. The Company aggregates the broadcast markets in which it operates into the Radio Broadcasting segment. The Reach Media segment consists of the results of operations for the Tom Joyner Morning Show and related activities. The Internet segment includes the results of our online business, including the operations of Interactive One and CCI. The Cable Television segment consists of TV One’s results of operations. Corporate/Eliminations/Other represents financial activity associated with our corporate staff and offices and intercompany activity among the four segments.

 

Operating loss or income represents total revenues less operating expenses, depreciation and amortization, and impairment of long-lived assets. Intercompany revenue earned and expenses charged between segments are recorded at fair value and eliminated in consolidation.

 

The accounting policies described in the summary of significant accounting policies in Note 1 – Organization and Summary of Significant Accounting Policies are applied consistently across the segments.

 

33
 

 

Detailed segment data for the three and nine month periods ended September 30, 2012 and 2011 is presented in the following tables:

 

   Three Months Ended September 30, 
   2012   2011 
   (Unaudited) 
   (In thousands) 
Net Revenue:          
Radio Broadcasting  $61,823   $58,733 
Reach Media   11,909    13,427 
Internet   4,452    4,884 
Cable Television   33,232    29,545 
Corporate/Eliminations/Other   (1,464)   (2,144)
Consolidated  $109,952   $104,445 
           
Operating Expenses (excluding depreciation, amortization and impairment charges and including stock-based compensation):          
Radio Broadcasting  $33,663   $35,117 
Reach Media   11,324    10,490 
Internet   4,888    5,086 
Cable Television   24,983    23,303 
Corporate/Eliminations/Other   3,876    5,825 
Consolidated  $78,734   $79,821 
           
Depreciation and Amortization:          
Radio Broadcasting  $1,589   $1,657 
Reach Media   293    988 
Internet   795    838 
Cable Television   6,708    7,779 
Corporate/Eliminations/Other   300    242 
Consolidated  $9,685   $11,504 
           
Operating income (loss):          
Radio Broadcasting  $26,571   $21,959 
Reach Media   292    1,949 
Internet   (1,231)   (1,040)
Cable Television   1,541    (1,537)
Corporate/Eliminations/Other   (5,640)   (8,211)
Consolidated  $21,533   $13,120 

 

   September 30, 2012   December 31, 2011 
   (Unaudited)     
   (In thousands) 
Total Assets:          
Radio Broadcasting  $809,594   $806,822 
Reach Media   32,588    33,737 
Internet   31,551    33,265 
Cable Television   548,041    561,325 
Corporate/Eliminations/Other   57,149    51,333 
Consolidated  $1,478,923   $1,486,482 

 

34
 

  

   Nine Months Ended September 30, 
   2012   2011 
   (Unaudited) 
   (In thousands) 
Net Revenue:          
Radio Broadcasting  $176,316   $167,152 
Reach Media   34,008    37,928 
Internet   14,659    12,705 
Cable Television   97,722    54,711 
Corporate/Eliminations/Other   (3,795)   (5,980)
Consolidated  $318,910   $266,516 
           
Operating Expenses (excluding depreciation, amortization and impairment charges and including stock-based compensation):          
Radio Broadcasting  $104,068   $103,317 
Reach Media   34,631    32,745 
Internet   15,250    14,983 
Cable Television   65,893    40,805 
Corporate/Eliminations/Other   12,857    14,353 
Consolidated  $232,699   $206,203 
           
Depreciation and Amortization:          
Radio Broadcasting  $4,817   $5,091 
Reach Media   887    2,961 
Internet   2,432    2,875 
Cable Television   20,219    14,208 
Corporate/Eliminations/Other   757    690 
Consolidated  $29,112   $25,825 
           
Impairment of Long-Lived Assets:          
Radio Broadcasting  $313   $ 
Reach Media        
Internet        
Cable Television        
Corporate/Eliminations/Other        
Consolidated  $313   $ 
           
Operating income (loss):          
Radio Broadcasting  $67,118   $58,744 
Reach Media   (1,510)   2,222 
Internet   (3,023)   (5,153)
Cable Television   11,610    (302)
Corporate/Eliminations/Other   (17,409)   (21,023)
Consolidated  $56,786   $34,488 

 

13.  RELATED PARTY TRANSACTIONS:

 

The Company’s CEO and Chairperson own a music company called Music One, Inc. (“Music One”). The Company sometimes engages in promoting the recorded music product of Music One. Based on the cross-promotional value received by the Company, we believe that the provision of such promotion is fair.  During the three months ended September 30, 2012 and 2011, Radio One made no payments to or on behalf of Music One. During the nine months ended September 30, 2012 and 2011, Radio One paid $37,000 and $5,000, respectively, to or on behalf of Music One, primarily for market talent event appearances, travel reimbursement and sponsorships. For the three and nine months ended September 30, 2012, the Company provided advertising services to Music One in the amounts of $0 and $1,000, respectively. For the nine months ended September 30, 2011, the Company provided no advertising services to Music One. There were no cash, trade or no-charge orders placed by Music One for the nine months ended September 30, 2012 and 2011, respectively.

 

35
 

 

14.  CONDENSED CONSOLIDATING FINANCIAL STATEMENTS:

 

The Company conducts a portion of its business through its subsidiaries. All of the Company’s Subsidiary Guarantors have fully and unconditionally guaranteed the Company’s 63/8 Senior Subordinated Notes due February 2013, the 121/2%/15% Senior Subordinated Notes due May 2016, and the Company’s obligations under the 2011 Credit Agreement.

 

Set forth below are consolidated balance sheets for the Company and the Subsidiary Guarantors as of September 30, 2012 and December 31, 2011, respectively, and related consolidated statements of operations, comprehensive loss and cash flows for the three and nine months ended September 30, 2012 and 2011, respectively. 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.

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2012

 

   Combined             
   Guarantor   Radio         
   Subsidiaries   One, Inc.   Eliminations   Consolidated 
   (Unaudited) 
   (In thousands) 
                 
NET REVENUE  $36,357   $73,595   $   $109,952 
OPERATING EXPENSES:                    
Programming and technical   7,890    24,564        32,454 
Selling, general and administrative, including stock-based compensation   15,099    21,551        36,650 
Corporate selling, general and administrative, including stock-based compensation       9,630        9,630 
Depreciation and amortization   1,779    7,906         9,685 
Impairment of long-lived assets                
   Total operating expenses   24,768    63,651        88,419 
   Operating income   11,589    9,944        21,533 
INTEREST INCOME       108        108 
INTEREST EXPENSE   308    21,871        22,179 
OTHER EXPENSE, net       681        681 
Income (loss) before provision for income taxes, noncontrolling interests in income of subsidiaries and discontinued operations   11,281    (12,500)       (1,219)
PROVISION FOR INCOME TAXES       9,051        9,051 
Net income (loss) before equity in income of subsidiaries and discontinued operations   11,281    (21,551)       (10,270)
EQUITY IN INCOME OF SUBSIDIARIES       11,296    (11,296)    
Net income (loss) from continuing operations   11,281    (10,255)   (11,296)   (10,270)
INCOME FROM DISCONTINUED OPERATIONS, net of tax   15            15 
CONSOLIDATED NET INCOME (LOSS)   11,296    (10,255)   (11,296)   (10,255)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS       2,809        2,809 
CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS  $11,296   $(13,064)  $(11,296)  $(13,064)

 

36
 

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2011

 

   Combined             
   Guarantor   Radio         
   Subsidiaries   One, Inc.   Eliminations   Consolidated 
   (Unaudited) 
   (In thousands) 
                 
NET REVENUE  $35,403   $69,042   $   $104,445 
OPERATING EXPENSES:                    
Programming and technical   7,995    24,747        32,742 
Selling, general and administrative, including stock-based compensation   14,531    21,504        36,035 
Corporate selling, general and administrative, including stock-based compensation       11,044        11,044 
Depreciation and amortization   1,930    9,574        11,504 
   Total operating expenses   24,456    66,869        91,325 
   Operating income   10,947    2,173        13,120 
INTEREST INCOME       103        103 
INTEREST EXPENSE       22,973        22,973 
OTHER (INCOME) EXPENSE, net       (19)       (19)
Income (loss) before benefit from income taxes, noncontrolling interests in income of subsidiaries and discontinued operations   10,947    (20,678)       (9,731)
BENEFIT FROM INCOME TAXES       (2,325)       (2,325)
Net income (loss) before equity in income of subsidiaries and discontinued operations   10,947    (18,353)       (7,406)
EQUITY IN INCOME OF SUBSIDIARIES       10,959    (10,959)    
Net income (loss) from continuing operations   10,947    (7,394)   (10,959)   (7,406)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax   12    (1)       11 
CONSOLIDATED NET INCOME (LOSS)   10,959    (7,395)   (10,959)   (7,395)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS       2,483        2,483 
CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS  $10,959   $(9,878)  $(10,959)  $(9,878)

 

37
 

 

 RADIO ONE, INC. AND SUBSIDIARIES

 CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2012

 

   Combined
Guarantor
Subsidiaries
   Radio One, Inc.   Eliminations   Consolidated 
   (Unaudited) 
   (In thousands) 
                 
NET REVENUE  $ 103,036   $ 215,874   $    $ 318,910 
OPERATING EXPENSES:                        
Programming and technical   24,209    72,368        96,577 
Selling, general and administrative, including stock-based compensation   44,615    62,429        107,044 
Corporate selling, general and administrative, including stock-based compensation       29,078        29,078 
Depreciation and amortization   5,450    23,662        29,112 
Impairment of long-lived assets   313            313 
   Total operating expenses   74,587    187,537        262,124 
   Operating income   28,449    28,337        56,786 
INTEREST INCOME       155        155 
INTEREST EXPENSE   807    68,047        68,854 
OTHER EXPENSE, NET       1,284        1,284 
Income (loss) before provision for income taxes, noncontrolling interests in income of subsidiaries and discontinued operations   27,642    (40,839)       (13,197)
PROVISION FOR INCOME TAXES       25,814        25,814 
Net income (loss) before equity in income of subsidiaries and discontinued operations   27,642    (66,653)       (39,011)
EQUITY IN INCOME OF SUBSIDIARIES       27,678    (27,678)    
Net income (loss) from continuing operations   27,642    (38,975)   (27,678)   (39,011)
INCOME FROM DISCONTINUED OPERATIONS, net of tax   36            36 
CONSOLIDATED NET INCOME (LOSS)   27,678    (38,975)   (27,678)   (38,975)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS       10,663        10,663 
CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS  $27,678   $(49,638)  $(27,678)  $(49,638)

 

38
 

 

 RADIO ONE, INC. AND SUBSIDIARIES

 CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2011

 

   Combined
Guarantor
Subsidiaries
   Radio One, Inc.   Eliminations   Consolidated 
   (Unaudited) 
   (In thousands) 
                 
NET REVENUE  $97,241   $169,275   $   $266,516 
OPERATING EXPENSES:                    
Programming and technical   24,191    58,100        82,291 
Selling, general and administrative, including stock-based compensation   40,419    55,917        96,336 
Corporate selling, general and administrative, including stock-based compensation       27,576        27,576 
Depreciation and amortization   6,140    19,685        25,825 
   Total operating expenses   70,750    161,278        232,028 
   Operating income   26,491    7,997        34,488 
INTEREST INCOME       120        120 
INTEREST EXPENSE       65,222        65,222 
GAIN ON INVESTMENT IN AFFILIATED COMPANY       146,879        146,879 
EQUITY IN INCOME OF AFFILIATED COMPANY       3,287        3,287 
LOSS ON RETIREMENT OF DEBT       7,743        7,743 
OTHER EXPENSE, NET       3        3 
Income before provision for income taxes, noncontrolling interests in income of subsidiaries and discontinued operations   26,491    85,315        111,806 
PROVISION FOR INCOME TAXES       81,905        81,905 
Net income before equity in income of subsidiaries and discontinued operations   26,491    3,410        29,901 
EQUITY IN INCOME OF SUBSIDIARIES       26,421    (26,421)    
Net income (loss) from continuing operations   26,491    29,831    (26,421)   29,901 
LOSS FROM DISCONTINUED OPERATIONS, net of tax   (70)   (1)       (71)
CONSOLIDATED NET INCOME (LOSS)   26,421    29,830    (26,421)   29,830 
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS       5,403        5,403 
CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS  $26,421   $24,427   $(26,421)  $24,427 

 

39
 

 

RADIO ONE, INC. AND SUBSIDIARIES

 CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended September 30, 2012

 

   Combined             
   Guarantor   Radio         
   Subsidiaries   One, Inc.   Eliminations   Consolidated 
   (Unaudited) 
   (In thousands) 
                 
CONSOLIDATED NET INCOME (LOSS)  $11,296   $(10,255)  $(11,296)  $(10,255)
NET CHANGE IN UNREALIZED LOSS ON INVESTMENT ACTIVITIES       27        27 
COMPREHENSIVE INCOME (LOSS)   11,296    (10,228)   (11,296)   (10,228)
LESS:  COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS       2,809        2,809 
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS  $11,296   $(13,037)  $(11,296)  $(13,037)

 

40
 

 

RADIO ONE, INC. AND SUBSIDIARIES

  CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended September 30, 2011

 

   Combined             
   Guarantor   Radio         
   Subsidiaries   One, Inc.   Eliminations   Consolidated 
   (Unaudited) 
   (In thousands) 
                 
CONSOLIDATED NET INCOME (LOSS)  $10,959   $(7,395)  $(10,959)  $(7,395)
NET CHANGE IN UNREALIZED LOSS ON INVESTMENT ACTIVITIES       (220)       (220)
COMPREHENSIVE INCOME (LOSS)   10,959    (7,615)   (10,959)   (7,615)
LESS:  COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS       2,483        2,483 
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS  $10,959   $(10,098)  $(10,959)  $(10,098)

 

41
 

 

RADIO ONE, INC. AND SUBSIDIARIES

 CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

Nine Months Ended September 30, 2012

 

   Combined             
   Guarantor   Radio         
   Subsidiaries   One, Inc.   Eliminations   Consolidated 
   (Unaudited) 
   (In thousands) 
                 
CONSOLIDATED NET INCOME (LOSS)  $27,678   $(38,975)  $(27,678)  $(38,975)
NET CHANGE IN UNREALIZED LOSS ON INVESTMENT ACTIVITIES       147        147 
COMPREHENSIVE INCOME (LOSS)   27,678    (38,828)   (27,678)   (38,828)
LESS:  COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS       10,663        10,663 
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS  $27,678   $(49,491)  $(27,678)  $(49,491)

 

42
 

 

RADIO ONE, INC. AND SUBSIDIARIES

 CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

Nine Months Ended September 30, 2011

 

   Combined             
   Guarantor   Radio         
   Subsidiaries   One, Inc.   Eliminations   Consolidated 
   (Unaudited) 
   (In thousands) 
                 
CONSOLIDATED NET INCOME (LOSS)  $26,421   $29,830   $(26,421)  $29,830 
NET CHANGE IN UNREALIZED LOSS ON INVESTMENT ACTIVITIES       (164)       (164)
COMPREHENSIVE INCOME (LOSS)   26,421    29,666    (26,421)   29,666 
LESS:  COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS       5,403        5,403 
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS  $26,421   $24,263   $(26,421)  $24,263 

 

43
 

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

As of September 30, 2012

 

   Combined             
   Guarantor   Radio One,         
   Subsidiaries   Inc.   Eliminations   Consolidated 
   (Unaudited) 
   (In thousands) 
                 
ASSETS                    
CURRENT ASSETS:                    
Cash and cash equivalents  $1,593   $47,067   $   $48,660 
Short-term investments       165        165 
Trade accounts receivable, net of allowance for doubtful accounts   31,287    57,968        89,255 
Prepaid expenses and other current assets   1,258    4,808        6,066 
Current portion of content assets       31,021        31,021 
Current assets from discontinued operations   (40)   125        85 
Total current assets   34,098    141,154        175,252 
PROPERTY AND EQUIPMENT, net   17,435    17,795        35,230 
INTANGIBLE ASSETS, net   540,524    672,940        1,213,464 
CONTENT ASSETS, net       47,413        47,413 
LONG-TERM INVESTMENTS       2,367        2,367 
INVESTMENT IN SUBSIDIARIES       578,959    (578,959)    
OTHER ASSETS   318    3,453        3,771 
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS   1,426            1,426 
Total assets  $593,801   $1,464,081   $(578,959)  $1,478,923 
                     
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY                    
                     
CURRENT LIABILITIES:                    
Accounts payable  $2,004   $8,183   $   $10,187 
Accrued interest       5,994        5,994 
Accrued compensation and related benefits   2,417    8,879        11,296 
Current portion of content payables       22,015        22,015 
Income taxes payable       1,037        1,037 
Other current liabilities   9,149    3,697        12,846 
Current portion of long-term debt       4,587        4,587 
Current liabilities from discontinued operations   158    28        186 
Total current liabilities   13,728    54,420        68,148 
LONG-TERM DEBT, net of current portion and original issue discount       814,733        814,733 
CONTENT PAYABLES, net of current portion       11,596        11,596 
OTHER LONG-TERM LIABILITIES   1,093    19,470        20,563 
DEFERRED TAX LIABILITIES       179,361        179,361 
NON-CURRENT LIABILITIES FROM DISCONTINUED OPERATIONS   21            21 
Total liabilities   14,842    1,079,580        1,094,422 
                     
REDEEMABLE NONCONTROLLING INTEREST       21,580        21,580 
                     
STOCKHOLDERS’ EQUITY:                    
Common stock       50        50 
Accumulated other comprehensive loss       (52)       (52)
Additional paid-in capital   160,669    1,000,368    (160,669)   1,000,368 
Retained earnings (accumulated deficit)   418,290    (845,794)   (418,290)   (845,794)
Total stockholders’ equity   578,959    154,572    (578,959)   154,572 
Noncontrolling interest       208,349        208,349 
Total Equity   578,959    362,921    (578,959)   362,921 
Total liabilities, redeemable noncontrolling interest and equity  $593,801   $1,464,081   $(578,959)  $1,478,923 

 

44
 

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

As of December 31, 2011

 

   Combined             
   Guarantor   Radio One,         
   Subsidiaries   Inc.   Eliminations   Consolidated 
   (In thousands) 
ASSETS                    
CURRENT ASSETS:                    
Cash and cash equivalents  $187   $35,752   $   $35,939 
Short-term investments       761        761 
Trade accounts receivable, net of allowance for doubtful accounts   29,896    53,980        83,876 
Prepaid expenses and other current assets   1,691    6,730        8,421 
Current portion of content assets       27,383        27,383 
Current assets from discontinued operations   (35)   125        90 
Total current assets   31,739    124,731        156,470 
PROPERTY AND EQUIPMENT, net   17,994    15,994        33,988 
INTANGIBLE ASSETS, net   551,271    693,590        1,244,861 
CONTENT ASSETS, net       38,934        38,934 
LONG-TERM INVESTMENTS       7,428        7,428 
INVESTMENT IN SUBSIDIARIES       588,292    (588,292)    
OTHER ASSETS   204    3,121        3,325 
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS   1,476            1,476 
Total assets  $602,684   $1,472,090   $(588,292)  $1,486,482 
                     
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY                    
                     
CURRENT LIABILITIES:                    
Accounts payable  $1,568   $4,058   $   $5,626 
Accrued interest       6,703        6,703 
Accrued compensation and related benefits   1,958    9,023        10,981 
Current portion of content payables       20,807        20,807 
Income taxes payable       1,794        1,794 
Other current liabilities   9,367    2,860        12,227 
Current portion of long-term debt       3,860        3,860 
Current liabilities from discontinued operations   230    30        260 
Total current liabilities   13,123    49,135        62,258 
LONG-TERM DEBT, net of current portion and original issue discount       805,044        805,044 
CONTENT PAYABLES, net of current portion       16,168        16,168 
OTHER LONG-TERM LIABILITIES   1,240    17,281        18,521 
DEFERRED TAX LIABILITIES       153,521        153,521 
NON-CURRENT LIABILITIES FROM DISCONTINUED OPERATIONS   29            29 
Total liabilities   14,392    1,041,149        1,055,541 
                     
REDEEMABLE NONCONTROLLING INTEREST       20,343        20,343 
                     
STOCKHOLDERS’ EQUITY:                    
Common stock       50        50 
Accumulated other comprehensive loss       (199)       (199)
Additional paid-in capital   197,680    1,001,840    (197,680)   1,001,840 
Retained earnings (accumulated deficit)   390,612    (796,156)   (390,612)   (796,156)
Total stockholders’ equity   588,292    205,535    (588,292)   205,535 
Noncontrolling interest       205,063        205,063 
Total Equity   588,292    410,598    (588,292)   410,598 
Total liabilities, redeemable noncontrolling interest and equity  $602,684   $1,472,090   $(588,292)  $1,486,482 

 

45
 

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2012

 

   Combined             
   Guarantor   Radio         
   Subsidiaries   One, Inc.   Eliminations   Consolidated 
   (Unaudited) 
   (In thousands) 
     
CASH FLOWS FROM OPERATING ACTIVITIES:                    
Consolidated net income (loss)  $27,678   $(38,975)  $(27,678)  $(38,975)
Adjustments to reconcile net income (loss) to net cash from operating activities:                    
Depreciation and amortization   5,450    23,662        29,112 
Amortization of debt financing costs       2,281        2,281 
Amortization of content assets       28,569        28,569 
Amortization of launch assets       7,468        7,468 
Deferred income taxes       25,840        25,840 
Impairment of long-lived assets   313            313 
Stock-based compensation and other non-cash compensation       127        127 
Non-cash interest       15,069        15,069 
Effect of change in operating assets and liabilities, net of assets acquired:               
Trade accounts receivable, net   (1,391)   (3,988)       (5,379)
Prepaid expenses and other current assets   1,687    668        2,355 
Other assets   (114)   (185)       (299)
Accounts payable   436    4,125        4,561 
Due to corporate/from subsidiaries   (32,584)   32,584         
Accrued interest       (709)       (709)
Accrued compensation and related benefits   459    (144)       315 
Income taxes payable       (757)       (757)
Other liabilities   (365)   3,306        2,941 
Payments for content assets       (43,618)       (43,618)
Net cash flows (used in) provided by operating activities from discontinued operations   (163)   136        (27)
Net cash flows provided by (used in) by operating activities   1,406    55,459    (27,678)   29,187 
CASH FLOWS FROM INVESTING ACTIVITIES:                    
Purchase of property and equipment       (9,535)       (9,535)
Proceeds from sales of investment securities       6,286        6,286 
Purchases of investment securities       (629)       (629)
Investment in subsidiaries       (27,678)   27,678     
Net cash flows (used in) provided by investing activities       (31,556)   27,678    (3,878)
CASH FLOWS FROM FINANCING ACTIVITIES:                    
Repayment of credit facility       (4,829)       (4,829)
Debt refinancing and modification costs       (18)       (18)
Payment of dividends to noncontrolling interest members of TV One       (7,741)       (7,741)
Net cash flows used in financing activities       (12,588)       (12,588)
INCREASE IN CASH AND CASH EQUIVALENTS   1,406    11,315        12,721 
CASH AND CASH EQUIVALENTS, beginning of period   187    35,752        35,939 
CASH AND CASH EQUIVALENTS, end of period  $1,593   $47,067   $   $48,660 
46
 

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2011

 

  Combined             
  Guarantor   Radio         
  Subsidiaries   One, Inc.   Eliminations   Consolidated 
  (Unaudited) 
  (As Restated) 
  (In thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:                    
Consolidated net income (loss)  $26,421    29,830    (26,421)   29,830 
Adjustments to reconcile net income (loss) to net cash from operating activities:                    
Depreciation and amortization   6,140    19,685        25,825 
Amortization of debt financing costs       3,040        3,040 
Amortization of content assets       20,564        20,564 
Deferred income taxes       79,937        79,937 
Gain on investment in affiliated company       (146,879)       (146,879)
Equity in income of affiliated company       (3,287)       (3,287)
Stock-based compensation and other non-cash compensation       2,895        2,895 
Non-cash interest       19,123        19,123 
Loss on retirement of debt       7,743        7,743 
Effect of change in operating assets and liabilities, net of assets acquired:                    
Trade accounts receivable, net   (798)   (27,059)       (27,857)
Prepaid expenses and other current assets   327    830        1,157 
Other assets   226    3,176        3,402 
Accounts payable   591    3,680        4,271 
Due to corporate/from subsidiaries   (33,184)   33,184         
Accrued interest       1,921        1,921 
Accrued compensation and related benefits   (456)   748        292 
Income taxes payable       603        603 
Other liabilities   (178)   6,419        6,241 
Payments for content assets       (12,761)       (12,761)
Net cash flows provided by operating activities from discontinued operations       290        290 
Net cash flows (used in) provided by operating activities   (911)   43,682    (26,421)   16,350 
CASH FLOWS FROM INVESTING ACTIVITIES:                    
Purchase of property and equipment       (5,410)       (5,410)
Net cash and investments acquired in connection with TV One consolidation       65,245        65,245 
Investment in subsidiaries       (26,421)   26,421     
Net cash flows provided by investing activities       33,414    26,421    59,835 
CASH FLOWS FROM FINANCING ACTIVITIES:                    
Proceeds from credit facility       378,280        378,280 
Repayment of credit facility       (355,611)       (355,611)
Debt refinancing and modification costs       (6,197)       (6,197)
Repurchase of noncontrolling interest       (54,595)       (54,595)
Proceeds from noncontrolling interest member       2,776        2,776 
Payment of dividends to noncontrolling interest shareholders of Reach Media       (933)       (933)
Payment of dividends to noncontrolling interest shareholders of TV One       (7,410)       (7,410)
Repurchase of common stock       (8,516)       (8,516)
Net cash flows used in financing activities       (52,206)       (52,206)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   (911)   24,890        23,979 
CASH AND CASH EQUIVALENTS, beginning of period   1,043    8,149        9,192 
CASH AND CASH EQUIVALENTS, end of period  $132   $33,039   $   $33,171 

 

47
 

 

15. COMMITMENTS AND CONTINGENCIES:

 

Royalty Agreements

 

Effective December 31, 2009, our radio music license agreements with the two largest performance rights organizations, American Society of Composers, Authors and Publishers (“ASCAP”) and Broadcast Music, Inc. (“BMI”) expired. The Radio Music License Committee (“RMLC”), which negotiates music licensing fees for most of the radio industry with ASCAP and BMI, at that time, reached an agreement with these organizations on a temporary fee schedule that reflected a provisional discount of 7.0% against 2009 fee levels. The temporary fee reductions became effective in January 2010. In May 2010 and June 2010, the U.S. District Court’s judge charged with determining the licenses fees ruled to further reduce interim fees paid to ASCAP and BMI, respectively, down approximately another 11.0% from the previous temporary fees negotiated with the RMLC. In January 2012, the U.S. District Court approved a settlement between RMLC and ASCAP. The settlement determined the amount to be paid to ASCAP for usage through 2016. In addition, stations received a credit for overpayments made in 2010 and 2011 to ASCAP. In June 2012, RMLC and BMI reached a settlement agreement. The settlement covers the period through 2016 and determined a new fee structure based on percentage of revenue. In addition, stations received a credit for overpayments made in 2010 and 2011 to BMI.

 

The Company has entered into other fixed and variable fee music license agreements with other performance rights organizations, which expire as late as December 2016. In connection with these agreements, the Company incurred expenses of approximately $2.4 million and $7.8 million for the three and nine month periods ended September 30, 2012, respectively, and approximately $3.1 million and $9.4 million, respectively, for the three and nine month periods ended September 30, 2011.

 

Other Contingencies

 

The Company has been named as a defendant in several legal actions arising in the ordinary course of business. It is management’s opinion, after consultation with its legal counsel, that the outcome of these claims will not have a material adverse effect on the Company’s financial position or results of operations.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2012, we had four standby letters of credit totaling approximately $1.1 million in connection with our annual insurance policy renewals and real estate leases.  

 

Noncontrolling Interest Shareholders’ Put Rights

 

Beginning on February 28, 2012, the noncontrolling interest shareholders of Reach Media have an annual right to require Reach Media to purchase all or a portion of their shares at the then current fair market value for such shares.   Beginning in 2012, this annual right can be exercised for a 30-day period beginning February 28 of each year. The purchase price for such shares may be paid in cash and/or registered Class D Common Stock of Radio One, at the discretion of Radio One. As a result, our ability to fund business operations, new acquisitions or new business initiatives could be limited. The noncontrolling interest shareholders of Reach Media did not exercise their right during the 30-day period that ended March 29, 2012. However, we have no assurances that they will or will not exercise their rights in future years.

 

16.  SUBSEQUENT EVENTS:

 

The Company announced it has signed a definitive agreement to sell the assets of one of its Columbus, Ohio radio stations, WJKR-FM (The Jack, 98.9 FM), to Salem Media of Ohio, Inc., a subsidiary of Salem Communications.  The closing on the sale of WJKR-FM is subject to customary conditions, prorations and adjustments, including approval from the Federal Communications Commission (“FCC”). The Company expects the transaction to close shortly after final consent from the FCC. However, under a local marketing agreement, Salem will be providing programming for the station beginning as of November 1, 2012.

 

On October 22, 2012, the Company announced that Alfred Liggins, the Company’s CEO and President, would add oversight of all daily network operations for TV One to his portfolio of duties. The Company announced that Mr. Liggins would assume the title of CEO of TV One effective November 1.  As a result, the Company further announced that TV One’s current President and CEO Wonya Lucas would step down at the end of October 2012.

48
 

 

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/A for the year ended December 31, 2011.

 

Introduction

 

Revenue

 

We primarily derive revenue from the sale of advertising time and program sponsorships to local and national advertisers on our radio stations. Advertising revenue is affected primarily by the advertising rates our radio stations 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 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 months ended September 30, 2012 and 2011, approximately 56.9% and 57.2%, respectively, of our net revenue was generated from the sale of advertising in our core radio business, excluding Reach Media. Of our total net revenue, for the three months ended September 30, 2012, approximately 42.2% of our net revenue was generated from local advertising and approximately 33.7% was generated from national advertising, including network advertising. In comparison, during the three months ended September 30, 2011, approximately 43.4% of our net revenue was generated from local advertising and approximately 32.8% was generated from national advertising, including network advertising. During the nine months ended September 30, 2012 and 2011, approximately 56.0% and 63.9% respectively, of our net revenue was generated from the sale of advertising in our core radio business, excluding Reach Media. Of our total net revenue, for the nine months ended September 30, 2012, approximately 41.4% of our net revenue was generated from local advertising and approximately 33.1% was generated from national advertising, including network advertising. In comparison, during the nine months ended September 30, 2011, approximately 46.7% of our net revenue was generated from local advertising and approximately 32.7% was generated from national advertising, including network advertising. National advertising also includes advertising revenue generated from our Internet segment. The balance of net revenue from our radio franchise was generated from tower rental income, ticket sales and revenue related to our sponsored events, management fees and other revenue. The change in revenue mix is due to the consolidation of TV One.

 

In the broadcasting industry, radio stations and television 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 for our spot inventory, we closely monitor the use of trade and barter agreements.

 

Interactive One derives its revenue principally from advertising services, including diversity recruiting advertising. 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.

 

TV One generates the Company’s cable television revenue, and derives its revenue principally from advertising and affiliate revenue. Advertising revenue is derived from the sale of television air time to advertisers and is recognized when the advertisements are run. TV One also receives affiliate fees and records revenue during the term of various affiliation agreements at levels appropriate for the most recent subscriber counts reported by the applicable affiliate.

 

Expenses

 

Our significant broadcast expenses are: (i) employee salaries and commissions; (ii) programming expenses; (iii) marketing and promotional 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, in certain markets, the 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.

 

49
 

 

We generally incur marketing and promotional expenses to increase our radio and cable television audiences. However, because Arbitron reports ratings either monthly or quarterly, depending on the particular market, any changed ratings and the effect on advertising revenue tends to lag behind both the reporting of the ratings and the incurrence of advertising and promotional expenditures.

 

In addition to salaries and commissions, major expenses for our internet business include membership traffic acquisition costs, software product design, post application software development and maintenance, database and server support costs, the help desk function, data center expenses connected with internet service provider (“ISP”) hosting services and other internet content delivery expenses.

 

Major expenses for our cable television business include content acquisition and amortization, sales and marketing.

 

Measurement of Performance

 

We monitor and evaluate the growth and operational performance 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 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, revenue from sponsored events and other revenue. Net revenue is recognized for our online business as impressions are delivered, as “click throughs” are reported or ratably over contract periods, where applicable. Net revenue is recognized for our cable television business as advertisements are run, and during the term of the affiliation agreements at levels appropriate for the most recent subscriber counts reported by the affiliate.

 

(b) Station operating income:  Net income (loss) before depreciation and amortization, income taxes, interest income, interest expense, equity in income of affiliated company, noncontrolling interests in income (loss) of subsidiaries, gain/loss on retirement of debt, other expense, corporate expenses, stock-based compensation expenses, impairment of long-lived assets and gain or loss from discontinued operations, net of tax, 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 in the United States (“GAAP”). Nevertheless, station operating income is a significant basis used by our management to measure the operating performance of our stations within the various markets. Station operating income provides helpful information about our results of operations, apart from expenses associated with our fixed and long-lived intangible assets, income taxes, investments, impairment charges, debt financings and retirements, corporate overhead, stock-based compensation and discontinued operations. Our measure of station operating income may not be comparable to similarly titled measures of other companies as our definition includes the results of all four segments (Radio Broadcasting, Reach Media, Internet and Cable Television). Station operating income does not represent operating loss or cash flow from operating activities, as those terms are defined under GAAP, 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 GAAP. Nevertheless, we believe that station operating income margin is a useful measure of our performance because it provides helpful information about our profitability as a percentage of our net revenue. Station operating margin include results from all four segments (Radio Broadcasting, Reach Media, Internet and Cable Television).

 

(d) Adjusted EBITDA: Adjusted EBITDA consists of net loss plus (1) depreciation, amortization, income taxes, interest expense, noncontrolling interest in income of subsidiaries, impairment of long-lived assets, stock-based compensation, loss on retirement of debt, loss from discontinued operations, net of tax, less (2) equity in income of affiliated company, other income, interest income, gain on retirement of debt and gain on purchase of affiliated company. Net income before interest income, interest expense, income taxes, depreciation and amortization is commonly referred to in our business as “EBITDA.” Adjusted EBITDA and EBITDA are not measures of financial performance under generally accepted accounting principles. We believe Adjusted EBITDA is often a useful measure of a company’s operating performance and is a significant basis used by our management to measure the operating performance of our business because Adjusted EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our acquisitions and debt financing, our taxes, impairment charges, as well as our equity in (income) loss of our affiliated company, gain on retirements of debt, and any discontinued operations. Accordingly, we believe that Adjusted EBITDA provides useful information about the operating performance of our business, apart from the expenses associated with our fixed assets and long-lived intangible assets, capital structure or the results of our affiliated company. Adjusted EBITDA is frequently used as one of the bases for comparing businesses in our industry, although our measure of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Adjusted EBITDA and EBITDA do not purport to represent operating income or cash flow from operating activities, as those terms are defined under generally accepted accounting principles, and should not be considered as alternatives to those measurements as an indicator of our performance.

 

50
 

 

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,
 
   2012   2011   2012   2011 
   (In thousands, except margin data) 
                 
Net revenue  $109,952   $104,445   $318,910   $266,516 
Station operating income   40,868    35,825    115,341    88,422 
Station operating income margin   37.2%   34.3%   36.2%   33.2%
Consolidated net (loss) income attributable to common stockholders  $(13,064)  $(9,878)  $(49,638)  $24,427 

 

The reconciliation of net income (loss) to station operating income is as follows:

 

   Three Months Ended   Nine Months Ended 
   September 30, 
   2012   2011   2012   2011 
   (In thousands) 
Consolidated net (loss) income attributable to common stockholders  $(13,064)  $(9,878)  $(49,638)  $24,427 
Add back non-station operating income items included in consolidated net (loss) income:                    
Interest income   (108)   (103)   (155)   (120)
Interest expense   22,179    22,973    68,854    65,222 
Provision for (benefit from) income taxes   9,051    (2,325)   25,814    81,905 
Corporate selling, general and administrative, excluding stock-based compensation   9,613    10,442    29,003    25,214 
Stock-based compensation   37    759    127    2,895 
Equity in income of affiliated company               (3,287)
Loss on retirement of debt               7,743 
Gain on investment in affiliated company               (146,879)
Other expense (income), net   681    (19)   1,284    3 
Depreciation and amortization   9,685    11,504    29,112    25,825 
Noncontrolling interests in income of subsidiaries   2,809    2,483    10,663    5,403 
Impairment of long-lived assets           313     
(Income) loss from discontinued operations, net of tax   (15)   (11)   (36)   71 
Station operating income  $40,868   $35,825   $115,341   $88,422 

 

51
 

The reconciliation of net income (loss) to adjusted EBITDA is as follows:

 

   Three Months Ended   Nine Months Ended 
   September 30, 
   2012   2011   2012   2011 
   (In thousands) 
Adjusted EBITDA Reconciliation:                     
Consolidated net (loss) income attributable to common stockholders, as reported  $(13,064)  $(9,878)  $(49,638)  $24,427 
Add back non-station operating income items included in consolidated net (loss) income:                    
Interest income   (108)   (103)   (155)   (120)
Interest expense   22,179    22,973    68,854    65,222 
Provision for (benefit from) income taxes   9,051    (2,325)   25,814    81,905 
Depreciation and amortization   9,685    11,504    29,112    25,825 
EBITDA   27,743    22,171    73,987    197,259 
Stock-based compensation   37    759    127    2,895 
Gain on investment in affiliated company               (146,879)
Loss on retirement of debt               7,743 
Equity in income of affiliated company               (3,287)
Other expense (income), net   681    (19)   1,284    3 
Noncontrolling interests in income of subsidiaries   2,809    2,483    10,663    5,403 
Impairment of long-lived assets           313     
(Income) loss from discontinued operations, net of tax   (15)   (11)   (36)   71 
Adjusted EBITDA  $31,255   $25,383   $86,338   $63,208 

 

52
 

 

RADIO ONE, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

  

The following table summarizes our historical consolidated results of operations:

 

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011 (In thousands)

  

   Three Months Ended September 30,     
   2012   2011   Increase/(Decrease) 
     (Unaudited)         
                 
Statements of Operations:                    
Net revenue  $109,952   $104,445   $5,507    5.3%
Operating expenses:                    
Programming and technical, excluding stock-based compensation   32,454    32,742    (288)   (0.9)
Selling, general and administrative, excluding stock-based compensation   36,630    35,878    752    2.1 
Corporate selling, general and administrative, excluding stock-based compensation   9,613    10,442    (829)   (7.9)
Stock-based compensation   37    759    (722)   (95.1)
Depreciation and amortization   9,685    11,504    (1,819)   (15.8)
   Total operating expenses   88,419    91,325    (2,906)   (3.2)
   Operating income   21,533    13,120    8,413    64.1 
Interest income   108    103    5    4.9 
Interest expense   22,179    22,973    (794)   (3.5)
Other expense (income), net   681    (19)   700    3,684.2 
Loss before provision for (benefit from) income taxes, noncontrolling interests in income of subsidiaries and discontinued operations   (1,219)   (9,731)   (8,512)   (87.5)
Provision for (benefit from) income taxes   9,051    (2,325)   11,376    489.3 
   Net loss from continuing operations   (10,270)   (7,406)   (2,864)   (38.7)
Income from discontinued operations, net of tax   15    11    4    36.4 
   Consolidated net loss   (10,255)   (7,395)   (2,860)   (38.7)
Net income attributable to noncontrolling interests   2,809    2,483    326    13.1 
Net loss attributable to common stockholders  $(13,064)  $(9,878)  $(3,186)   (32.3)%

 

53
 

 

 Net revenue

 

Three Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$109,952   $104,445   $5,507    5.3%

  

During the three months ended September 30, 2012, we recognized approximately $110.0 million in net revenue compared to approximately $104.4 million during the same period in 2011. These amounts are net of agency and outside sales representative commissions, which were approximately $9.3 million during the three months ended September 30, 2012, compared to approximately $8.4 million for the comparable period in 2011. We began to consolidate the results of TV One during the second quarter of 2011 and recognized approximately $33.2 million of revenue from our new cable television segment during the three months ended September 30, 2012 compared to $29.5 million for the comparable period in 2011. Net revenue for our radio broadcasting segment, including syndicated programming, increased 5.3% for the quarter ended September 30, 2012 compared to the same period in 2011. Our Baltimore, Cleveland, Columbus, Detroit, Indianapolis, Raleigh and Washington D.C. clusters posted the most significant quarterly growth, while our Houston, Philadelphia and St. Louis markets posted the most significant declines. Reach Media’s net revenues decreased 11.3% in the third quarter 2012 compared to the same period in 2011 partially due to changes to certain of Reach Media’s affiliate agreements that became effective on January 1, 2012 as well as lower than expected sponsorships associated with certain events. Net revenues for our internet business decreased 8.9% for the three months ended September 30, 2012 compared to the same period in 2011 due to a decrease in direct sales.

 

Operating Expenses

 

Programming and technical, excluding stock-based compensation

 

Three Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$32,454   $32,742   $(288)   (0.9)%

 

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 programming content on our radio stations. Programming and technical expenses for radio also include expenses associated with our programming research activities and music royalties. For our internet business, programming and technical expenses include software product design, post-application software development and maintenance, database and server support costs, the help desk function, data center expenses connected with ISP hosting services and other internet content delivery expenses. For our cable television segment, programming and technical expenses include expenses associated with the technical, programming, production, and content management. Approximately $13.2 million of our consolidated programming and technical operating expenses were incurred by TV One for the three months ended September 30, 2012 versus approximately $13.6 million for the comparable period in 2011. This decrease is primarily related to lower content amortization for the three months ended September 30, 2012. This decrease is partially offset by higher payroll and talent costs in our radio broadcasting and Reach Media segments.

 

Selling, general and administrative, excluding stock-based compensation

 

Three Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$36,630   $35,878   $752    2.1%

 

Selling, general and administrative expenses include expenses associated with our sales departments, offices and facilities and personnel (outside of our corporate headquarters), marketing and promotional expenses, special events and sponsorships and back office expenses. Expenses to secure ratings data for our radio stations and visitors’ data for our websites are also included in selling, general and administrative expenses. In addition, selling, general and administrative expenses for the Radio segment and Internet segment include expenses related to the advertising traffic (scheduling and insertion) functions. Selling, general and administrative expenses also include membership traffic acquisition costs for our online business. The increase is primarily related to TV One as marketing and promotional expenses were higher because of the new series that were introduced during the three months ended September 30, 2012.

 

54
 

 

 

 

Corporate selling, general and administrative, excluding stock-based compensation

 

Three Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$9,613   $10,442   $(829)   (7.9)%

  

Corporate expenses consist of expenses associated with our corporate headquarters and facilities, including personnel. The decrease in corporate expenses was due to a non-cash decrease in compensation expense for the Chief Executive Officer in connection with the valuation of the potential payment for the TV One award element in his employment Agreement. This decrease was partially offset by higher research and consulting expenses at our cable television segment.

 

Stock-based compensation

 

Three Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$37   $759   $(722)   (95.1)%

 

Vesting associated with the Company’s long-term incentive plan, whereby officers and certain key employees were granted a total of 3,250,000 shares of restricted stock in January of 2010, was fully completed as of December 31, 2011. Stock-based compensation requires measurement of compensation costs 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.

 

Depreciation and amortization

 

Three Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$9,685   $11,504   $(1,819)   (15.8)%

 

The decrease in depreciation and amortization expense for the three months ended September 30, 2012 was due to the completion of amortization for certain intangible assets and the completion of useful lives for certain assets.

 

Interest expense

 

Three Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$22,179   $22,973   $(794)   (3.5)%

 

Interest expense decreased to approximately $22.2 million for the quarter ended September 30, 2012 compared to approximately $23.0 million for the same period in 2011. Through May 15, 2012, interest on the Company’s 121/2%/15% Senior Subordinated Notes was payable at our election partially in cash and partially through the issuance of additional 121/2%/15% Senior Subordinated Notes (a “PIK Election”) on a quarterly basis. The PIK Election expired on May 15, 2012 and interest accruing from and after May 15, 2012 accrues at a rate of 121/2% and is payable in cash.

 

Provision for (benefit from) income taxes

 

Three Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$9,051   $(2,325)  $11,376    489.3%

 

For the three months ended September 30, 2012, the provision for income taxes was approximately $9.1 million, primarily attributable to the change in deferred tax liabilities related to indefinite-lived intangibles. The benefit for income taxes of approximately $2.3 million for the same period in 2011 was attributable to changes in the estimated annual effective rate based on the increase in the deferred tax liability for indefinite-lived intangibles and expected pre-tax income of the Company due to the impact of the consolidation of TV One.

 

55
 

 

Income from discontinued operations, net of tax

 

Three Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$15   $11   $4    36.4%

  

Included in the income from discontinued operations, net of tax, are the results of operations for radio stations sold or stations that we do not operate that are the subject of an LMA. The activity for the three months ended September 30, 2012 and 2011 resulted primarily from our remaining station in our Boston market entering into an LMA. The income from discontinued operations, net of tax, includes no tax provision for the three months ended September 30, 2012 and 2011.

 

Noncontrolling interests in income of subsidiaries

 

Three Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$2,809   $2,483   $326    13.1%

  

The increase in noncontrolling interests in income of subsidiaries was due primarily to greater net income generated by TV One during the three months ended September 30, 2012 compared to the same period in 2011.

 

Other Data

 

Station operating income

  

Station operating income increased to approximately $40.9 million for the three months ended September 30, 2012 compared to approximately $35.8 million for the comparable period in 2011, an increase of $5.1 million or 14.2%. This increase was primarily due to the impact of consolidating TV One results, as TV One generated approximately $10.8 million of station operating income during the quarter ended September 30, 2012 compared to $7.6 million during the quarter ended September 30, 2011.

 

Station operating income margin

 

Station operating income margin increased to 37.2% for the three months ended September 30, 2012 from 34.3% for the comparable period in 2011. The margin increase was primarily attributable to the impact of consolidating TV One results given TV One’s greater station operating margin of 32.5% for the three months ended September 30, 2012 compared to station operating margin of 25.8% for the three months ended September 30, 2012.

 

56
 

 

RADIO ONE, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

 

The following table summarizes our historical consolidated results of operations:

 

Nine Months Ended September 30, 2012, Compared to Nine Months Ended September 30, 2011 (In thousands)

  

   Nine Months Ended September 30,     
   2012   2011   Increase/(Decrease) 
     (Unaudited)         
                 
Statements of Operations:                    
Net revenue  $318,910   $266,516   $52,394    19.7%
Operating expenses:                    
Programming and technical, excluding stock-based compensation   96,577    82,291    14,286    17.4 
Selling, general and administrative, excluding stock-based compensation   106,992    95,803    11,189    11.7 
Corporate selling, general and administrative, excluding stock-based compensation   29,003    25,214    3,789    15.0 
Stock-based compensation   127    2,895    (2,768)   (95.6)
Depreciation and amortization   29,112    25,825    3,287    12.7 
Impairment of long-lived assets   313        313    100.0 
   Total operating expenses   262,124    232,028    30,096    13.0 
   Operating income   56,786    34,488    22,298    64.7 
Interest income   155    120    35    29.2 
Interest expense   68,854    65,222    3,632    5.6 
Loss on retirement of debt       7,743    (7,743)   (100.0)
Gain on investment in affiliated company       146,879    (146,879)   (100.0)
Equity in income of affiliated company       3,287    (3,287)   (100.0)
Other expense, net   1,284    3    1,281    42,700.0 
(Loss) income before provision for income taxes, noncontrolling interests in income of subsidiaries and discontinued operations   (13,197)   111,806    (125,003)   (111.8)
Provision for income taxes   25,814    81,905    (56,091)   (68.5)
   Net (loss) income from continuing operations   (39,011)   29,901    (68,912)   (230.5)
Income (loss) from discontinued operations, net of tax   36    (71)   107    150.7 
  Consolidated net (loss) income   (38,975)   29,830    (68,805)   (230.7)
Net income attributable to noncontrolling interests   10,663    5,403    5,260    97.4 
Net (loss) income attributable to common stockholders  $(49,638)  $24,427   $(74,065)   (303.2)%

 

57
 

 

Net revenue

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$318,910   $266,516   $52,394    19.7%

 

During the nine months ended September 30, 2012, we recognized approximately $318.9 million in net revenue compared to approximately $266.5 million during the same period in 2011. These amounts are net of agency and outside sales representative commissions, which were approximately $25.7 million during the nine months ended 2012, compared to approximately $23.9 million during the same period in 2011. We began to consolidate the results of TV One during the three months ended June 30, 2011 and recognized approximately $54.7 million of revenue from our cable television segment for the period April 15, 2011 through September 30, 2011 versus approximately $97.7 million for the nine months ended September 30, 2012. Net revenue for our radio broadcasting segment increased 5.5% for the nine months ended September 30, 2012. Our Atlanta, Baltimore, Cincinnati, Cleveland, Detroit, Indianapolis, Raleigh and Washington DC markets experienced the most significant net revenue growth, while our Houston, Philadelphia and St. Louis markets experienced declines. Reach Media’s net revenue decreased 10.3% for the nine months ended September 30, 2012 compared to the same period in 2011 partially due to changes to certain of Reach Media’s affiliate agreements that became effective on January 1, 2012 as well as lower than expected sponsorships associated with certain events. Net revenue for our internet business increased 15.4% for the nine months ended September 30, 2012 compared to the same period in 2011.

 

Operating Expenses

 

Programming and technical, excluding stock-based compensation

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$96,577   $82,291   $14,286    17.4%

 

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 programming content on our radio stations. Programming and technical expenses for radio also include expenses associated with our programming research activities and music royalties. For our internet business, programming and technical expenses include software product design, post-application software development and maintenance, database and server support costs, the help desk function, data center expenses connected with ISP hosting services and other internet content delivery expenses. For our cable television segment, programming and technical expenses include expenses associated with the technical, programming, production, and content management. The increase for the nine months ended September 30, 2012 compared to the same period in 2011 is primarily related to consolidating the results of TV One. Approximately $37.3 million of our consolidated programming and technical operating expenses were recognized directly from TV One during the nine months ended September 30, 2012 versus approximately $25.4 million for the period April 15, 2011 through September 30, 2011. Of these total amounts, for the nine months ended September 30, 2012 and 2011, approximately $28.6 million and $20.6 million, respectively, relates to content amortization. The additional increase of our programming and technical expenses is due to higher payroll and talent costs in our radio broadcasting and Reach Media segments.

 

Selling, general and administrative, excluding stock-based compensation

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$106,992   $95,803   $11,189    11.7%

 

Selling, general and administrative expenses include expenses associated with our sales departments, offices and facilities and personnel (outside of our corporate headquarters), marketing and promotional expenses, special events and sponsorships and back office expenses. Expenses to secure ratings data for our radio stations and visitors’ data for our websites are also included in selling, general and administrative expenses. In addition, selling, general and administrative expenses for the Radio segment and Internet segment include expenses related to the advertising traffic (scheduling and insertion) functions. Selling, general and administrative expenses also include membership traffic acquisition costs for our online business. During the nine months ended September 30, 2012 and 2011, our cable television segment recognized approximately $22.0 million and $14.0 million, respectively. The increase was primarily due to the impact of consolidating nine months of results of TV One in 2012 versus a shorter period in 2011. In addition, there are increased payroll costs, research expenses and traffic acquisition costs at our other segments during the nine months ended September 30, 2012 compared to the same period in 2011.

 

58
 

 

Stock-based compensation

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$127   $2,895   $(2,768)   (95.6)%

 

Vesting associated with the Company’s long-term incentive plan, whereby officers and certain key employees were granted a total of 3,250,000 shares of restricted stock in January of 2010, was fully completed as of December 31, 2011. Stock-based compensation requires measurement of compensation costs 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.

 

Corporate selling, general and administrative, excluding stock-based compensation

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$29,003   $25,214   $3,789    15.0%

 

Corporate expenses consist of expenses associated with our corporate headquarters and facilities, including personnel. The increase in corporate expenses was due to higher payroll costs, research expenses and professional fees at our cable television segment. The increase was partially offset by a non-cash decrease in compensation expense for the Chief Executive Officer in connection with the valuation of the potential payment for the TV One award element in his employment Agreement.

 

Depreciation and amortization

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$29,112   $25,825   $3,287    12.7%

 

The increase in depreciation and amortization expense for the nine months ended September 30, 2012 was due primarily to additional depreciation and amortization expense of approximately $6.0 million resulting from the increase in fixed and intangible assets recorded as part of the consolidation of TV One. This increased expense was partially offset by the completion of amortization for certain intangible assets and the completion of depreciation and amortization for certain assets across our other segments.

 

Impairment of long-lived assets

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$313   $   $313    100.0%

 

The increase in impairment of long-lived assets for the nine months ended September 30, 2012 was related to a non-cash impairment charge recorded to reduce the carrying value of our Charlotte radio broadcasting licenses.

 

Interest expense

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$68,854   $65,222   $3,632    5.6%

 

The increase in interest expense for the nine months ended September 30, 2012 was due to our entry into the March 31, 2011 senior secured credit facility (the “2011 Credit Agreement”) as well as the consolidation of TV One, which included debt and interest expense associated with the TV One Notes.  Higher interest rates associated with the 2011 Credit Agreement were in effect for the nine months ended September 30, 2012 compared to the same period in 2011.  Through May 15, 2012, interest on the Company’s 121/2%/15% Senior Subordinated Notes was payable at our election partially in cash and partially through the issuance of additional 121/2%/15% Senior Subordinated Notes (a “PIK Election”) on a quarterly basis. The PIK Election expired on May 15, 2012 and interest accruing from and after May 15, 2012 accrues at a rate of 121/2% and is payable in cash. Approximately $2.9 million of the increased interest expense relates to the TV One Notes.

 

59
 

 

Loss on retirement of debt

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$   $7,743   $(7,743)   (100.0)%

 

The loss on retirement of debt for the nine months ended September 30, 2011 was due to a charge related to the retirement of the 2011 Credit Facility on March 31, 2011.  This amount includes a write-off of approximately $6.5 million of capitalized debt financing costs associated with the Amended and Restated Credit Facility and a write-off of approximately $1.2 million associated with the termination of the Company’s interest rate swap agreement.

 

Gain on investment in affiliated company

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$   $146,879   $(146,879)   (100.0)%

 

The gain on investment in affiliated company of approximately $146.9 million for the nine months ended September 30, 2011 was due to obtaining the controlling interest in and the accounting impact of consolidating TV One’s operating results as of April 14, 2011.

 

Equity in income of affiliated company

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$   $3,287   $(3,287)   (100.0)%

 

Equity in income of affiliated company primarily reflects our estimated equity in the net income of TV One. The decrease to equity in income of affiliated company for the nine months ended September 30, 2012 was due to the consolidation of TV One during the second quarter of 2011. Previously, the Company’s share of the net income was driven by TV One’s capital structure and the Company’s percentage ownership of the equity securities of TV One. Beginning on April 14, 2011, the Company began to account for TV One on a consolidated basis.

 

Provision for income taxes

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$25,814   $81,905   $(56,091)   (68.5)%

 

For the nine months ended September 30, 2012, the provision for income taxes was approximately $25.8 million based on the actual effective tax rate as of September 30, 2012. The provision for income taxes of approximately $81.9 million for the same period in 2011 was attributable to the increase in the deferred tax liability for indefinite-lived intangible assets due to the impact of the consolidation of TV One.

 

Income (loss) from discontinued operations, net of tax

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$36   $(71)  $107    150.7%

  

Included in the income (loss) from discontinued operations, net of tax, are the results of operations for radio stations sold or stations that we do not operate that are the subject of an LMA. The activity for the nine months ended September 30, 2012 and 2011 resulted primarily from our remaining station in our Boston market entering into an LMA. The income (loss) from discontinued operations, net of tax, includes no tax provision for the nine months ended September 30, 2012 and 2011.

 

60
 

 

 Noncontrolling interests in income of subsidiaries

 

Nine Months Ended September 30,   Increase/(Decrease) 
2012   2011     
$10,663   $5,403   $5,260    97.4%

 

The increase in noncontrolling interests in income of subsidiaries was due primarily to the impact of consolidating TV One’s operating results for a full nine months ended September 30, 2012. This amount was partially offset by a net loss generated by Reach Media for the nine months ended September 30, 2012 compared to net income for the same period in 2011.

 

 Other Data

 

Station operating income

 

Station operating income increased to approximately $115.3 million for the nine months ended September 30, 2012 compared to approximately $88.4 million for the comparable period in 2011, an increase of $26.9 million or 30.4%. This increase was primarily due to consolidating TV One results, as TV One generated approximately $38.5 million of station operating income during the nine months ended September 30, 2012 compared to $15.2 million during the nine months ended September 30, 2011.

 

Station operating income margin

 

Station operating income margin increased to 36.2% for the nine months ended September 30, 2012 from 33.2% for the comparable period in 2011. The margin increase was primarily attributable to the impact of consolidating TV One results given TV One’s greater station operating margin of 39.4% for the nine months ended September 30, 2012 compared to station operating margin of 27.8% for the nine months ended September 30, 2011.

 

61
 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary source of liquidity is cash provided by operations and, to the extent necessary, borrowings available under our senior credit facility and other debt or equity financing.

 

For the purposes of the below discussion, the term “November 2010 Refinancing Transactions” refers to (i) our November 24, 2010, exchange and cancellation of approximately $97.0 million of our 8⅞% senior subordinated notes due 2011 (the “2011 Notes”) and approximately $199.3 million of our 6⅜% senior subordinated notes due 2013 (the “2013 Notes” and together with the 2011 Notes, the “Prior Notes”) for approximately $287.0 million of our 2016 Notes; (ii) our entrance into supplemental indentures in respect of each of the Prior Notes which waived any and all existing defaults and events of default that had arisen or may have arisen that may be waived and eliminated substantially all of the covenants in each indenture governing the Prior Notes, other than the covenants to pay principal of and interest on the Prior Notes when due, and eliminated the related events of default; and (iii) our entrance into an amendment to our senior credit facility as described below.

 

Credit Facilities

 

March 2011 Refinancing Transaction

 

On March 31, 2011, the Company entered into a new senior secured credit facility (the “2011 Credit Agreement”) with a syndicate of banks, and simultaneously borrowed $386.0 million to retire all outstanding obligations under the Company’s previous amended and restated credit agreement and to fund our obligation with respect to a capital call initiated by TV One.  The total amount available under the 2011 Credit Agreement is $411.0 million, consisting of a $386.0 million term loan facility that matures on March 31, 2016 and a $25.0 million revolving loan facility that matures on March 31, 2015. Borrowings under the credit facilities are subject to compliance with certain covenants including, but not limited to, certain financial covenants. Proceeds from the credit facilities can be used for working capital, capital expenditures made in the ordinary course of business, its common stock repurchase program, permitted direct and indirect investments and other lawful corporate purposes.

 

The 2011 Credit Agreement contains affirmative and negative covenants that the Company is required to comply with, including:

 

(a)maintaining an interest coverage ratio of no less than:
§ 1.25 to 1.00 on June 30, 2011 and the last day of each fiscal quarter through September 30, 2015; and
§ 1.50 to 1.00 on December 31, 2015 and the last day of each fiscal quarter thereafter.

 

(b) maintaining a senior secured leverage ratio of no greater than:

§ 5.25 to 1.00 on June 30, 2011;
§ 5.00 to 1.00 on September 30, 2011 and December 31, 2011;
§ 4.75 to 1.00 on March 31, 2012;
§ 4.50 to 1.00 on June 30, 2012, September 30, 2012 and December 31, 2012;
§ 4.00 to 1.00 on March 31, 2013 and the last day of each fiscal quarter through September 30, 2013;
§ 3.75 to 1.00 on December 31, 2013 and the last day of each fiscal quarter through September 30, 2014;
§ 3.25 to 1.00 on December 31, 2014 and the last day of each fiscal quarter through September 30, 2015; and
§ 2.75 to 1.00 on December 31, 2015 and the last day of each fiscal quarter thereafter.

 

(c) maintaining a total leverage ratio of no greater than:

§ 9.25 to 1.00 on June 30, 2011 and the last day of each fiscal quarter through December 31, 2011;
§ 9.00 to 1.00 on March 31, 2012;
§ 8.75 to 1.00 on June 30, 2012;
§ 8.50 to 1.00 on September 30, 2012 and December 31, 2012;
§ 8.00 to 1.00 on March 31, 2013 and the last day of each fiscal quarter through September 30, 2013;
§ 7.50 to 1.00 on December 31, 2013 and the last day of each fiscal quarter through September 30, 2014;
§ 6.50 to 1.00 on December 31, 2014 and the last day of each fiscal quarter through September 30, 2015; and
§ 6.00 to 1.00 on December 31, 2015 and the last day of each fiscal quarter thereafter.

 

 (d) limitations on:

§ liens;
§ sale of assets;
§ payment of dividends; and
§ mergers.

 

62
 

 

As of September 30, 2012, ratios calculated in accordance with the 2011 Credit Agreement, are as follows:

 

   As of
September
30, 2012
   Covenant
Limit
   Excess
Coverage
 
             
Pro Forma Last Twelve Months Covenant EBITDA (In millions)  $86.1           
                
Pro Forma Last Twelve Months Interest Expense (In millions)  $57.8           
                
Senior Debt (In millions)  $355.2           
Total Debt (In millions)  $682.9           
                
Senior Secured Leverage               
Senior Secured Debt / Covenant EBITDA   4.12 x    4.50x   0.38x
                
Total Leverage               
Total Debt / Covenant EBITDA   7.93 x    8.50x   0.57x
                
Interest Coverage               
Covenant EBITDA / Interest Expense   1.49 x    1.25x   0.24x
                
EBITDA - Earnings before interest, taxes, depreciation and amortization               

 

In accordance with the 2011 Credit Agreement, the calculations for the ratios above do not include the operating results and related debt of Reach Media and TV One.

 

As of September 30, 2012, the Company was in compliance with all of its financial covenants under the 2011 Credit Agreement.  

 

Under the terms of the 2011 Credit Agreement, interest on base rate loans is payable quarterly and interest on LIBOR loans is payable monthly or quarterly. The base rate is equal to the greater of (i) the prime rate, (ii) the Federal Funds Effective Rate plus 0.50% or (iii) the LIBOR Rate for a one-month period plus 1.00%.  The applicable margin on the 2011 Credit Agreement is between (i) 4.50% and 5.50% on the revolving portion of the facility and (ii) 5.00% (with a base rate floor of 2.5% per annum) and 6.00% (with a LIBOR floor of 1.5% per annum) on the term portion of the facility. Commencing on June 30, 2011, quarterly installments of 0.25%, or $960,000, of the principal balance on the term loan are payable on the last day of each March, June, September and December.

 

As of September 30, 2012, the Company had approximately $23.9 million of borrowing capacity under its revolving credit facility. After taking into consideration the financial covenants under the 2011 Credit Agreement, approximately $23.9 million was available to be borrowed.

 

As of September 30, 2012, the Company had outstanding approximately $378.3 million on its term credit facility. During the quarter ended September 30, 2012, the Company repaid its quarterly installment of approximately $1.0 million under the 2011 Credit Agreement. In addition, on April 13, 2012, the Company made an approximately $2.0 million term loan principal repayment based on its December 31, 2011 excess cash flow calculation according to the terms of the 2011 Credit Agreement. The original issue discount is being reflected as an adjustment to the carrying amount of the debt obligation and amortized to interest expense over the term of the credit facility.

 

63
 

 

Senior Subordinated Notes

 

Period after the March 2011 Refinancing Transaction

 

As of September 30, 2012, the Company had outstanding $747,000 of its 63/8% Senior Subordinated Notes due February 2013 and approximately $327.0 million of our 121/2%/15% Senior Subordinated Notes due May 2016. The 121/2%/15% Senior Subordinated Notes due May 2016 had a carrying value of approximately $327.0 million and a fair value of approximately $281.3 million as of September 30, 2012, and the 63/8% Senior Subordinated Notes due February 2013 had a carrying value of $747,000 and a fair value of $642,000 as of September 30, 2012. The fair values were determined based on the trading value of the instruments as of the reporting date.

 

Interest payments under the terms of the 63/8% Senior Subordinated Notes are due in February and August.  Based on the $747,000 principal balance of the 63/8% Senior Subordinated Notes outstanding on September 30, 2012, interest payments of $24,000 are payable each February and August through February 2013.

 

Interest on the 121/2%/15% Senior Subordinated Notes is payable in cash, or at our election, partially in cash and partially through the issuance of additional 121/2%/15% Senior Subordinated Notes (a “PIK Election”) on a quarterly basis in arrears on February 15, May 15, August 15 and November 15, commencing on February 15, 2011.  We made a PIK Election only with respect to interest accruing up to but not including May 15, 2012, and with respect to interest accruing from and after May 15, 2012 such interest accrues at a rate of 121/2% and is payable in cash.

 

Interest on the Exchange Notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid.  Interest will accrue for each quarterly period at a rate of 121/2% if the interest for such quarterly period is paid fully in cash.  In the event of a PIK Election, including the PIK Election that was in effect through May 15, 2012, the interest paid in cash and the interest paid-in-kind by issuance of additional Exchange Notes (“PIK Notes”) accrued for such quarterly period at 6.0% cash per annum and 9.0% PIK per annum.

 

In the absence of an election for any interest period, interest on the Exchange Notes shall be payable according to the election for the previous interest period, provided that interest accruing from and after May 15, 2012 shall accrue at a rate of 121/2% and shall be payable in cash. A PIK Election remained in effect through May 15, 2012. After May 15, 2012, interest accrues at a rate of 121/2% and is payable wholly in cash and the Company no longer has an option to pay any portion of its interest through the issuance of PIK Notes.

 

During the quarter ended September 30, 2012, the Company paid cash interest in the amount of approximately $21.0 million. During the nine months ended September 30, 2012, the Company paid cash interest in the amount of approximately $52.0 million and issued approximately $14.2 million of additional 121/2%/15% Senior Subordinated Notes in accordance with the PIK Election that was in effect through May 15, 2012.

 

The indentures governing the Company’s 121/2%/15% Senior Subordinated Notes also contain covenants that restrict, among other things, the ability of the Company to incur additional debt, purchase common 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 conducts a portion of its business through its subsidiaries. Certain of the Company’s subsidiaries have fully and unconditionally guaranteed the Company’s 121/2%/15% Senior Subordinated Notes, the 63/8% Senior Subordinated Notes and the Company’s obligations under the 2011 Credit Agreement.

 

64
 

 

The following table summarizes the interest rates in effect with respect to our debt as of September 30, 2012:

 

Type of Debt  Amount Outstanding   Applicable
Interest
Rate
 
   (In millions)     
         
Senior bank term debt, net of original issue discount (at variable rates)(1)  $372.5    7.50%
121/2 %/15% Senior Subordinated Notes (fixed rate)  $327.0    12.50%
10% Senior Secured TV One Notes due March 2016 (fixed rate)  $119.0    10.00%
63/8% Senior Subordinated Notes (fixed rate)  $0.7    6.38%

 

(1) Subject to variable Libor plus a spread currently at 7.50% and incorporated into the applicable interest rate set forth above.

 

The indentures governing our Prior Notes and our 2016 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 2011 Credit Agreement also requires compliance with financial tests based on financial position and results of operations, including an interest coverage, senior secured leverage, and total leverage ratios, all of which could effectively limit our ability to borrow under the 2011 Credit Agreement.

 

TV One issued $119.0 million in senior secured notes on February 25, 2011. The notes were issued in connection with the repurchase of its equity interest from certain financial investors and TV One management. The notes bear interest at 10.0% per annum, which is payable monthly, and the entire principal amount is due on March 15, 2016.

 

In November 2009, Reach Media issued a $1.0 million, 7% promissory note in connection with the repurchase of certain of its common stock held by a minority shareholder, a subsidiary of Cumulus (formerly Citadel). The note was due and paid on December 30, 2011.

 

The following table provides a comparison of our statements of cash flows for the nine months ended September 30, 2012 and 2011:

 

   2012   2011 
   (In thousands) 
         
Net cash flows provided by operating activities  $29,187   $16,350 
Net cash flows (used in) provided by investing activities  $(3,878)  $59,835 
Net cash flows used in financing activities  $(12,588)  $(52,206)

 

      Net cash flows provided by operating activities were approximately $29.2 million and $16.4 million for the nine months ended September 30, 2012 and 2011, respectively. Cash flow from operating activities for the nine months ended September 30, 2012 increased from the prior year primarily due to improved operating results and improved working capital changes, partially offset by increased payments for content assets.

 

      Net cash flows used in investing activities were approximately $3.9 million for the nine months ended September 30, 2012 compared to net cash flows provided by investing activities of approximately $59.8 million for the nine months ended September 30, 2011. Capital expenditures, including digital tower and transmitter upgrades, and deposits for station equipment and purchases were approximately $9.5 million and $5.4 million for the nine months ended September 30, 2012 and 2011, respectively. Proceeds from sales of investment securities were approximately $6.2 million for the nine months ended September 30, 2012. Cash flow from investing activities for the nine months ended September 30, 2011 were primarily due to the net cash and investments acquired in connection with the TV One consolidation of approximately $65.2 million.

 

65
 

 

Net cash flows used in financing activities were approximately $12.6 million and $52.2 million for the nine months September 30, 2012 and 2011, respectively. During the nine months ended September 30, 2011, the Company borrowed approximately $378.3 million from its credit facility. During the nine months ended September 30, 2012 and 2011, the Company repaid approximately $4.8 million and $355.6 million, respectively, in outstanding debt. During the nine months ended September 30, 2011, we repurchased a noncontrolling interest in TV One for approximately $54.6 million. During the nine months ended September 30, 2012 and 2011, respectively, we capitalized $18,000 and approximately $6.2 million of costs associated with our evaluation of various alternatives associated with our indebtedness and its upcoming maturities. In addition, during the nine months ended September 30, 2011, we repurchased approximately $8.5 million of our Class D Common Stock.  TV One paid approximately $7.8 million and $7.4 million in dividends to noncontrolling interest shareholders for the nine months ended September 30, 2012 and 2011, respectively.

  

      Credit Rating Agencies

 

Our corporate credit ratings by Standard & Poor's Rating Services and Moody's Investors Service are speculative-grade and have been downgraded and upgraded at various times during the last several years. Any reductions in our credit ratings could increase our borrowing costs, reduce the availability of financing to us or increase our cost of doing business or otherwise negatively impact our business operations.  

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our significant accounting policies are described in Note 1 - Organization and Summary of Significant Accounting Policies of the consolidated financial statements in our Annual Report on Form 10-K/A. 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/A for the year ended December 31, 2011, 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 to our existing accounting policies or estimates since we filed our Annual Report on Form 10-K/A for the year ended December 31, 2011.  

 

Goodwill and Radio Broadcasting Licenses

 

Impairment Testing

 

We have made several radio station acquisitions in the past for which a significant portion of the purchase price was allocated to goodwill and radio broadcasting licenses. 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, 2012, we had approximately $677.1 million in broadcast licenses and $272.0 million in goodwill, which totaled $949.1 million, and represented approximately 64.2% of our total assets. Therefore, we believe estimating the fair value of goodwill and radio broadcasting licenses is a critical accounting estimate because of the significance of their carrying values in relation to our total assets. We recorded an impairment charge of $313,000 against our Charlotte radio broadcasting licenses during the nine months ended September 30, 2012. We did not record any impairment charges for the nine months ended September 30, 2011.

 

We test for impairment annually, or when events or changes in circumstances or other conditions suggest impairment may have occurred. Our annual impairment testing is performed for assets owned as of October 1. Impairment exists when the carrying value of these assets exceeds its respective fair value. When the carrying value exceeds fair value, an impairment amount is charged to operations for the excess.

 

66
 

 

Valuation of Broadcasting Licenses

 

       We utilize the services of a third-party valuation firm to provide independent analysis when evaluating the fair value of our radio broadcasting licenses and reporting units. The testing for radio broadcasting licenses is performed at the unit of accounting level as determined by ASC 350, “Intangibles - Goodwill and Other.” In our case, each unit of accounting is a clustering of radio stations into one geographical market. We use the income approach to value broadcasting licenses, which involves a 10-year model that incorporates several variables, including, but not limited to: (i) estimated discounted cash flows of a hypothetical market participant; (ii) estimated radio market revenue and growth projections; (iii) estimated market share and revenue for the hypothetical participant; (iv) likely media competition within the market; (v) estimated start-up costs and losses incurred in the early years; (vi) estimated profit margins and cash flows based on market size and station type; (vii) anticipated capital expenditures; (viii) probable future terminal values; (ix) an effective tax rate assumption; and (x) a discount rate based on the weighted-average cost of capital for the radio broadcast industry. In calculating the discount rate, we considered: (i) the cost of equity, which includes estimates of the risk-free return, the long-term market return, small stock risk premiums and industry beta; (ii) the cost of debt, which includes estimates for corporate borrowing rates and tax rates; and (iii) estimated average percentages of equity and debt in capital structures. Since our October 2011 annual assessment, we have not made any changes to the methodology for valuing broadcasting licenses.

 

During the second quarter of 2012, the total market revenue growth for certain markets was below that used in our 2011 annual impairment testing. We deemed this shortfall to be an impairment indicator that warranted interim impairment testing of certain of our radio broadcasting licenses, which we performed as of June 30, 2012. The Company recorded an impairment charge of $313,000 related to our Charlotte radio broadcasting licenses. The remaining radio broadcasting licenses that were tested during the second quarter of 2012 were not impaired. There were no impairment indicators for our radio broadcast licenses noted during the third quarter of 2012. Below are some of the key assumptions used in the income approach model for estimating broadcasting licenses fair values for all annual and interim impairment assessments performed since January 2011.

 

Radio Broadcasting  May 31,   September 30,   October 1,   June 30, 
Licenses  2011 (a)   2011 (a)   2011   2012 (a) 
                 
Pre-tax impairment charge (in millions)  $   $   $   $0.3 
                     
Discount Rate   10.0%   9.5%   10.0%   10.0%
Year 1 Market Revenue Growth Range   1.3% -2.8%   1.5% -2.0%   1.5% -2.5%   1.0% -3.0%
Long-term Market Revenue Growth Rate Range (Years 6 – 10)   1.5% - 2.0%   1.5% - 2.0%   1.0% - 2.0%   1.0% - 2.0%
Mature Market Share Range   9.0% - 22.5 %   9.3% - 22.4%   0.7% - 28.9%   5.8% - 15.6%
Operating Profit Margin Range   32.7% - 40.8%   32.7% - 33.0%   19.1% - 47.4%   29.1% - 48.0%

 

(a)  Reflects changes only to the key assumptions used in the interim testing for certain units of accounting.

 

67
 

 

Valuation of Goodwill

 

The impairment testing of goodwill is performed at the reporting unit level. In testing for the impairment of goodwill, with the assistance of a third-party valuation firm, we primarily rely on the income approach. The approach involves a 10-year model with similar variables as described above for broadcasting licenses, except that the discounted cash flows are generally based on the Company’s estimated and projected market revenue, market share and operating performance for its reporting units, instead of those for a hypothetical participant. We follow a two-step process to evaluate if a potential impairment exists for goodwill. The first step of the process involves estimating the fair value of each reporting unit. If the reporting unit’s fair value is less than its carrying value, a second step is performed to allocate the fair value of the reporting unit to the individual assets and liabilities of the reporting unit in order to determine the implied fair value of the reporting unit’s goodwill as of the impairment assessment date. Any excess of the carrying value of the goodwill over the implied fair value of the goodwill is written off as a charge to operations. Since our annual assessment, we have not made any changes to the methodology of valuing or allocating goodwill when determining the carrying values of the radio markets, Reach Media, Interactive One or TV One.

 

Below are some of the key assumptions used in the income approach model for estimating the fair value for Reach Media for all interim, annual and year end assessments since January 2011. When compared to the discount rates used for assessing radio market reporting units, the higher discount rates used in these assessments reflect a premium for a riskier and broader media business, with a heavier concentration and significantly higher amount of programming content related intangible assets that are highly dependent on the on-air personality Tom Joyner. Reach Media did not meet its budgeted operating cash flow for the third quarter and we performed an interim impairment assessment at September 30, 2012. With the assistance of a third-party valuation firm, the Company completed a valuation of the Reach Media reporting unit and concluded that the carrying value of goodwill attributable to Reach Media had not been impaired.

 

   March 
31,
   June
30,
   September
30,
   December
31,
   March
31,
   June
30,
   September
30,
 
Reach Media Goodwill  2011   2011   2011   2011   2012   2012   2012 
                             
Pre-tax impairment charge (in millions)  $   $   $   $   $   $   $ 
                                    
Discount Rate   13.5%   13.0%   12.0%   12.5%   12.5%   12.5%   12.0%
Year 1 Revenue Growth Rate   2.5%   2.5%   2.5%   2.5%   2.5%   2.5%   2.0%
Long-term Revenue Growth Rate Range   (1.3)% - 4.9%   (0.2)% - 3.9%   (2.0)% - 3.5%   3.0% - 12.7%   2.2% - 9.7%   0.3% - 2.5%   (4.7)% - 2.8%
                                    
Operating Profit Margin Range   16.2% - 27.4%   17.6% - 22.6%   18.8% - 21.7%   (2.0)% - 16.8%   3.7% - 18.1%   4.9% - 15.3%   4.6% - 19.8%

 

In September 2012, the Company performed interim impairment testing on the valuation of goodwill associated with Interactive One. Interactive One net revenues and cash flows declined for the third quarter and year to date 2012 and full year internal projections were revised. When compared to discount rates for the radio reporting units, the higher discount rate used to value the reporting unit is reflective of discount rates applicable to internet media businesses. As a result of the testing, the Company concluded no impairment to the carrying value had occurred. We did not make any changes to the methodology for valuing or allocating goodwill when determining the carrying value. Below are some of the key assumptions used in the income approach model for estimating the fair value for Interactive One since January 2011.

 

68
 

 

   October 1,   September 30, 
Goodwill (Internet Segment)  2011   2012 
         
Pre-tax impairment charge (in millions)  $-   $- 
           
Discount Rate   14.5%   14.0%
Year 1 Revenue Growth Rate   20.3%   15.3%
Long-term Revenue Growth Rate   2.5%   2.5%
Operating Profit Margin Range   0.0% - 28.8%   5.4 – 26.2%

 

      As part of our annual testing, when arriving at the estimated fair values for radio broadcasting licenses and goodwill, we also performed a reasonableness test by comparing our overall average implied multiple based on our cash flow projections and fair values to recently completed sales transactions, and by comparing our fair value estimates to the market capitalization of the Company. The results of these comparisons confirmed that the fair value estimates resulting from our annual assessment for 2011 were reasonable.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2011, the FASB issued ASU 2011-04, which provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. The Company adopted this guidance on January 1, 2012 and it did not have a significant impact on the Company’s financial statements.

 

In September 2011, the FASB issued ASU 2011-08, which provides companies with an option to perform a qualitative assessment that may allow them to skip the two-step impairment test. ASU 2011-08 amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If this is the case, companies will need to perform a more detailed two-step goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted this guidance on January 1, 2012 and it did not have a significant impact on the Company’s financial statements.

 

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which was subsequently modified in December 2011 by ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This ASU amends existing presentation and disclosure requirements concerning comprehensive income, most significantly by requiring that comprehensive income be presented with net income in a continuous financial statement, or in a separate but consecutive financial statement. The provisions of this ASU (as modified) are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company's financial statements, other than presentation and disclosure.

 

69
 

 

CAPITAL AND COMMERICAL COMMITMENTS:

 

Radio Broadcasting Licenses

 

Each of the Company’s radio stations operates pursuant to one or more licenses issued by the Federal Communications Commission that have a maximum term of eight years prior to renewal. The Company’s radio broadcasting licenses expire at various times through October 1, 2020. Although the Company may apply to renew its radio broadcasting licenses, third parties may challenge the Company’s renewal applications. The Company is not aware of any facts or circumstances that would prevent the Company from having its current licenses renewed.

 

Indebtedness

   

We have several debt instruments outstanding within our corporate structure. The total amount available under our 2011 Credit Agreement is $411.0 million, consisting of a $386.0 million term loan facility that matures on March 31, 2016 and a $25.0 million revolving loan facility that matures on March 31, 2015. We also have outstanding $747,000 in 63/8% Senior Subordinated Notes due February 2013 and $327.0 million in our 121/2%/15% Senior Subordinated Notes due May 2016. Finally, TV One issued $119.0 million in senior secured notes on February 25, 2011. The notes were issued in connection with the repurchase of its equity interest from certain financial investors and TV One management. The notes bear interest at 10.0% per annum, which is payable monthly, and the entire principal amount is due on March 15, 2016. See “Liquidity and Capital Resources.”  

 

 Royalty Agreements

 

Effective December 31, 2009, our radio music license agreements with the two largest performance rights organizations, American Society of Composers, Authors and Publishers (“ASCAP”) and Broadcast Music, Inc. (“BMI”) expired. The Radio Music License Committee (“RMLC”), which negotiates music licensing fees for most of the radio industry with ASCAP and BMI, at that time, reached an agreement with these organizations on a temporary fee schedule that reflected a provisional discount of 7.0% against 2009 fee levels. The temporary fee reductions became effective in January 2010. In May 2010 and June 2010, the U.S. District Court’s judge charged with determining the licenses fees ruled to further reduce interim fees paid to ASCAP and BMI, respectively, down approximately another 11.0% from the previous temporary fees negotiated with the RMLC. In January 2012, the U.S. District Court approved a settlement between RMLC and ASCAP. The settlement determined the amount to be paid to ASCAP for usage through 2016. In addition, stations received a credit for overpayments made in 2010 and 2011 to ASCAP. In June 2012, RMLC and BMI reached a settlement agreement. The settlement covers the period through 2016 and determined a new fee structure based on percentage of revenue. In addition, stations received a credit for overpayments made in 2010 and 2011 to BMI.

 

The Company has entered into other fixed and variable fee music license agreements with other performance rights organizations, which expire as late as December 2016. In connection with these agreements, the Company incurred expenses of approximately $2.4 million and $7.8 million for the three and nine month periods ended September 30, 2012, respectively, and approximately $3.1 million and $9.4 million, respectively, for the three and nine month periods ended September 30, 2011.

 

Lease obligations

 

We have non-cancelable operating leases for office space, studio space, broadcast towers and transmitter facilities that expire over the next 19 years.

 

Operating Contracts and Agreements

 

We have other operating contracts and agreements including employment contracts, on-air talent 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.

 

70
 

 

Reach Media Noncontrolling Interest Shareholders’ Put Rights

 

Beginning on February 28, 2012, the noncontrolling interest shareholders of Reach Media have an annual right to require Reach Media to purchase all or a portion of their shares at the then current fair market value for such shares.   Beginning in 2012, this annual right can be exercised for a 30-day period beginning February 28 of each year. The purchase price for such shares may be paid in cash and/or registered Class D Common Stock of Radio One, at the discretion of Radio One. As a result, our ability to fund business operations, new acquisitions or new business initiatives could be limited. The noncontrolling interest shareholders of Reach Media did not exercise their right during the 30-day period that ended March 29, 2012. However, we have no assurances that they will or will not exercise their rights in future years.

 

Contractual Obligations Schedule

 

The following table represents our contractual obligations as of September 30, 2012:

 

   Payments Due by Period 
Contractual Obligations  2012   2013   2014   2015   2016   2017 and
Beyond
   Total 
   (In thousands) 
63/8% Senior Subordinated Notes(1)  $12   $753   $   $   $   $   $765 
121/2%/15% Senior Subordinated Notes(1)   10,220    40,879    40,879    40,879    339,980        472,837 
Credit facilities(2)   8,272    32,239    31,951    31,663    372,771        476,896 
Other operating contracts / agreements(3)   25,513    39,308    26,050    5,301    4,623    642    101,437 
Operating lease obligations   2,419    8,314    7,283    6,140    5,322    17,383    46,861 
Senior Secured Notes(4)   2,975    11,900    11,900    11,900    121,777        160,452 
Total  $49,411   $133,393   $118,063   $95,883   $844,473   $18,025   $1,259,248 

 

(1) Includes interest obligations based on current effective interest rate on senior subordinated notes outstanding as of September 30, 2012.
   
(2) Includes interest obligations based on current effective interest rate and projected interest expense on credit facilities outstanding as of September 30, 2012.
   
(3) Includes employment contracts, severance obligations, on-air talent contracts, consulting agreements, equipment rental agreements, programming related agreements, and other general operating agreements. Also includes contracts that TV One has entered into to acquire entertainment programming rights and programs from distributors and producers.  These contracts relate to content assets as well as prepaid programming related agreements.
   
(4) Represents $119.0 million issued by TV One in senior secured notes on February 25, 2011.  The notes were issued in connection with the repurchase of its equity interest from certain financial investors and TV One management.  The notes bear interest at 10.0% per annum, which is payable monthly, and the entire principal amount is due on March 15, 2016.

 

71
 

 

Other Contingencies

 

The Company has been named as a defendant in several legal actions arising in the ordinary course of business. It is management’s opinion, after consultation with its legal counsel, that the outcome of these claims will not have a material adverse effect on the Company’s financial position or results of operations.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2012, we had four standby letters of credit totaling approximately $1.1 million in connection with our annual insurance policy renewals and real estate leases.  

 

RELATED PARTY TRANSACTIONS

 

The Company’s CEO and Chairperson own a music company called Music One, Inc. (“Music One”). The Company sometimes engages in promoting the recorded music product of Music One. Based on the cross-promotional value received by the Company, we believe that the provision of such promotion is fair.  During the three months ended September 30, 2012 and 2011, Radio One made no payments to or on behalf of Music One. During the nine months ended September 30, 2012 and 2011, Radio One paid $37,000 and $5,000, respectively, to or on behalf of Music One, primarily for market talent event appearances, travel reimbursement and sponsorships. For the three and nine months ended September 30, 2012, the Company provided advertising services to Music One in the amounts of $0 and $1,000, respectively. For the nine months ended September 30, 2011, the Company provided no advertising services to Music One. There were no cash, trade or no-charge orders placed by Music One for the nine months ended September 30, 2012 and 2011, respectively.

 

72
 

 

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/A, for the fiscal year ended December 31, 2011.  Our exposure related to market risk has not changed materially since December 31, 2011.

 

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 the Chief Financial Officer (“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 three months ended September 30, 2012, 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.

 

73
 

 

PART II. OTHER INFORMATION

  

Item 1.  Legal Proceedings

 

Legal Proceedings

 

In November 2001, Radio One and certain of its officers and directors were named as defendants in a shareholder class action 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 Cases. 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. In 2007, the settlement was terminated pursuant to stipulation of the parties.

 

In February 2009, plaintiffs informed the court that a new settlement of all IPO Cases had been agreed to in principle, subject to formal approval by the parties and preliminary and final approval by the court. In April 2009, the parties submitted a tentative settlement agreement to the court and moved for preliminary approval thereof. In June 2009, the court granted preliminary approval of the tentative settlement and ordered that notice of the settlement be published and mailed to class members. In October 2009, the court certified the settlement class in each IPO Case and granted final approval to the settlement. Thereafter, a number of shareholders filed appeals to the Second Circuit Court of Appeals, objecting to the settlement. On January 10, 2012, the last of these shareholder appeals was dismissed with prejudice.  Accordingly, the settlement is now final, all claims against us and our officers and directors in the IPO Cases will be dismissed with prejudice, and our pro rata share of the settlement fund will be fully funded by insurance. 

 

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.

 

74
 

 

Item 1A.  Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2011 (the “2011 Annual Report”), which could materially affect our business, financial condition or future results. The risks described in our 2011 Annual Report, as updated by our quarterly reports on Form 10-Q and Form 10-Q/A, are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also materially adversely affect our business, financial condition and/or operating results.

 

We are currently not in compliance with NASDAQ rules for continued listing of our Class A and Class D common shares.

 

Our shares of Class A and Class D common stock are currently not in compliance with NASDAQ rules for continued listing and may be at risk of being delisted.

 

On July 13, 2012, the Company received notification (the “Class D Notification”) from the NASDAQ Stock Markets (“NASDAQ”) that for the 30 consecutive business days prior to July 13, 2012, the bid price of the Company’s Class D common stock had closed below the minimum $1.00 per share requirement for continued listing under Marketplace Rule 5450(a)(1). As such, the Company’s Class D common stock had become non-compliant with NASDAQ’s continued listing requirements.  In accordance with NASDAQ Marketplace Rule 5810(c)(3)(A), the Company has a grace period of 180 calendar days, or until January 9, 2013, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of the Company’s Class D common stock must meet or exceed $1.00 per share for at least ten consecutive business days during this 180-day grace period.  If the Company does not regain compliance by January 9, 2013, NASDAQ will provide written notification that the Company’s Class D common stock will be delisted.  However, the Company may apply to transfer its Class D common stock to the NASDAQ Capital Market.   If its application is approved, NASDAQ will afford the Company a second 180 calendar day compliance period in order to regain compliance while on the NASDAQ Capital Market.  If the Company does not regain compliance after such additional compliance period, NASDAQ will provide written notification that the Company’s Class D common stock will be delisted.  The Class D Notification did not impact upon the Company’s Class A common stock.

 

On July 26, 2012, the Company received notification (the “Class A Notification”) from NASDAQ that for the 30 consecutive business days prior to July 26, 2012, the bid price of the Company’s Class A common stock had closed below the minimum $1.00 per share requirement for continued listing. As such, the Company’s Class A common stock had become non-compliant with NASDAQ’s continued listing requirements.  As with the Company’s Class D common stock, the Company has a grace period of 180 calendar days, or until January 22, 2013, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of the Company’s Class A common stock must meet or exceed $1.00 per share for at least ten consecutive business days during this 180-day grace period.  If the Company does not regain compliance by January 22, 2013, NASDAQ will provide written notification that the Company’s Class A common stock will be delisted.  However, the Company may apply for an additional grace period if it meets all of the criteria for continued listing other than the minimum closing bid price at the time of application for the additional grace period. If the Company then fails to regain compliance within the additional grace period permitted by the NASDAQ Capital Market, the Company’s Class A common stock will be subject to delisting by NASDAQ.

 

The Company will consider available options to resolve the noncompliance with the minimum bid price requirement for both the Class A and Class D common stock, including but not limited to the implementation of a reverse stock split. However, there can be no assurance that the Company will be able to regain compliance with the minimum bid price requirements or other NASDAQ listing criteria for either class of stock.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities

  

None.

 

Item 4.  Removed and Reserved

 

75
 

 

Item 5.  Other Information

 

 None.

 

Item 6.  Exhibits

 

Exhibit    
Number   Description
     
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.
101   Financial information from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL.

 

76
 

 

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/ PETER D. THOMPSON
   
  Peter D. Thompson
  Executive Vice President and
  Chief Financial Officer
  (Principal Accounting Officer)

 

November 13, 2012 

 

77

 

 

 

Exhibit 31.1

 

I, Alfred C. Liggins, III, Chief Executive Officer and President of Radio One, Inc., certify that:

 

1.I have reviewed this quarterly 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 Rules13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules13a-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’sthirdfiscal 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.

 

    By: /s/ Alfred C. Liggins, III
      Alfred C. Liggins, III
      President and Chief Executive Officer
  Date:November 13, 2012  

 

 

 

Exhibit 31.2

 

I, Peter D. Thompson, Executive Vice President, Chief Financial Officer and Principal Accounting Officer of Radio One, Inc., certify that:

 

1.I have reviewed this quarterly 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 Rules13a-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’sthird 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.

 

    By: /s/ Peter D. Thompson
      Peter D. Thompson
      Executive Vice President,
      Chief Financial Officer and Principal Accounting Officer
  Date:November 13, 2012  

 

 

 

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 endedSeptember 30, 2012 (the “Report”) fully complies with the requirements of Section 13(a) or Section15(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.

 

    By: /s/ Alfred C. Liggins, III
      Name: Alfred C. Liggins, III
      Title: President and Chief Executive Officer
  Date:November 13, 2012  

 

      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.

 

 

 

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 endedSeptember 30, 2012 (the “Report”) fully complies with the requirements of Section 13(a) or Section15(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.

 

    By: /s/ Peter D. Thompson
      Name: Peter D. Thompson
      Title: Executive Vice President and Chief Financial Officer
  Date:November 13, 2012  

 

      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.