XNAS:ROIAK Radio One Inc Class D Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 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   o

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   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   o     Accelerated filer   o     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 July 31, 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 Six Months Ended June 30, 2012 and 2011 (Unaudited)
4
 
Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Six Months Ended June 30, 2012 and 2011 (Unaudited)
 5 
 
Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011
6
 
Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2012 (Unaudited)
 7 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited)
8
 
Notes to Consolidated Financial Statements (Unaudited) 
9
 
Consolidating Financial Statements                                                            
35
 
Consolidating Statement of Operations for the Three Months Ended June 30, 2012 (Unaudited)
35
 
Consolidating Statement of Operations for the Three Months Ended June 30, 2011 (Unaudited)
36
 
Consolidating Statement of Operations for the Six Months Ended June 30, 2012 (Unaudited)
37
 
Consolidating Statement of Operations for the Six Months Ended June 30, 2011 (Unaudited)
38
 
Consolidating Statement of Comprehensive Income (Loss) for the Three Months Ended June 30, 2012 (Unaudited)
39
 
Consolidating Statement of Comprehensive Income (Loss) for the Three Months Ended June 30, 2011 (Unaudited)
40
 
Consolidating Statement of Comprehensive Income (Loss) for the Six Months Ended June 30, 2012 (Unaudited)
41
 
Consolidating Statement of Comprehensive Income (Loss) for the Six Months Ended June 30, 2011 (Unaudited)
42
 
Consolidating Balance Sheet as of June 30, 2012 (Unaudited)
43
 
Consolidating Balance Sheet as of December 31, 2011
44
 
Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2012 (Unaudited)
45
 
Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2011 (Unaudited)
46
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
49
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
72
Item 4.
Controls and Procedures                                                                                                                                        
72
   
PART II. OTHER INFORMATION
 
   
Item 1.
Legal Proceedings                                                                                                                                         
73
Item 1A.
Risk Factors                                                                                                                                         
74
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
74
Item 3.
Defaults Upon Senior Securities                                                                                                                 
74
Item 4.
Submission of Matters to a Vote of Security Holders                                                                                   
74
Item 5.
Other Information                                                                                                                                         
74
Item 6.
Exhibits                                                                                                                                         
74
 
SIGNATURES                                                                                                                                         
75
 
 
 
 
 

 
 
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;

 
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 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 June 30,
   
Six Months Ended June 30,
 
 
2012
   
2011
   
2012
   
2011
 
 
(Unaudited)
 
(In thousands, except share data)
 
                               
NET  REVENUE
$
105,916
   
$
97,062
   
$
208,958
   
$
162,070
 
OPERATING EXPENSES:
                             
Programming and technical
 
32,958
     
30,718
     
64,123
     
49,549
 
Selling, general and administrative, including stock-based compensation of $15 and $212, and $32 and $376, respectively
 
31,568
     
31,806
     
70,394
     
60,301
 
Corporate selling, general and administrative, including stock-based compensation of $31 and $987, and $58 and $1,760, respectively
 
9,855
     
8,510
     
19,448
     
16,532
 
Depreciation and amortization
 
9,742
     
10,238
     
19,427
     
14,321
 
Impairment of long-lived assets
 
313
     
     
313
     
 
Total operating expenses
 
84,436
     
81,272
     
173,705
     
140,703
 
Operating income
 
21,480
     
15,790
     
35,253
     
21,367
 
INTEREST INCOME
 
25
     
9
     
47
     
17
 
INTEREST EXPENSE
 
22,928
     
22,916
     
46,675
     
42,249
 
LOSS ON RETIREMENT OF DEBT
 
     
     
     
7,743
 
GAIN ON INVESTMENT IN AFFILIATED COMPANY
 
     
146,879
     
     
146,879
 
EQUITY IN INCOME OF AFFILIATED COMPANY
 
     
208
     
     
3,287
 
OTHER EXPENSE, net
 
610
     
47
     
603
     
22
 
(Loss) income before (benefit from) provision for income taxes, noncontrolling interests in income of subsidiaries and income (loss) from discontinued operations
 
(2,033
)
   
139,923
     
(11,978
)
   
121,536
 
(BENEFIT FROM) PROVISION FOR INCOME TAXES
 
(48,491
)
   
38,611
     
16,763
     
84,230
 
Net income (loss) from continuing operations
 
46,458
     
101,312
     
(28,741
)
   
37,306
 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
 
7
     
(45
)
   
21
     
(81
)
CONSOLIDATED NET INCOME (LOSS)
 
46,465
     
101,267
     
(28,720
)
   
37,225
 
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
 
3,797
     
2,717
     
7,854
     
2,920
 
CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
42,668
   
$
98,550
   
$
(36,574
)
 
$
34,305
 
                               
BASIC NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
                             
Continuing operations
$
0.85
   
$
1.94
   
$
(0.73
)
 
$
0.67
 
Discontinued operations, net of tax
 
0.00
     
(0.00
)
   
0.00
     
(0.00
)
Net income (loss) attributable to common stockholders
$
0.85
   
$
1.94
   
$
(0.73
   
$
0.67
 
                               
DILUTED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
                             
Continuing operations
$
0.85
   
$
1.86
   
$
(0.73
)
 
$
0.64
 
Discontinued operations, net of tax
 
0.00
     
(0.00
)
   
0.00
     
(0.00
)
Net income (loss) attributable to common stockholders
$
0.85
   
$
1.86
   
$
(0.73
)
 
$
0.64
 
                             
WEIGHTED AVERAGE SHARES OUTSTANDING:
                             
Basic
 
50,006,085
     
50,831,560
     
49,997,752
     
51,474,556
 
Diluted
 
50,124,418
     
52,905,060
     
49,997,752
     
53,646,473
 


The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 
 
RADIO ONE, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(Unaudited)
 
 
(In thousands)
 
                   
CONSOLIDATED NET INCOME (LOSS)
$ 46,465   $ 101,267   $ (28,720 )   $ 37,225  
NET CHANGE IN UNREALIZED LOSS ON INVESTMENT ACTIVITIES
  23     56     120       56  
COMPREHENSIVE INCOME (LOSS)
  46,488     101,323     (28,600     37,281  
LESS:  COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
  3,797     2,717     7,854       2,920  
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$ 42,691     98,606     (36,454     34,361  
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
5

 
RADIO ONE, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
  
As of
 
 
June 30, 2012
   
December 31, 2011
 
 
(Unaudited)
       
ASSETS
(In thousands, except share data)
 
CURRENT ASSETS:
         
Cash and cash equivalents
$
42,760
   
$
35,939
 
Short-term investments
 
232
     
761
 
Trade accounts receivable, net of allowance for doubtful accounts of $2,679 and $3,719, respectively
 
88,089
     
83,876
 
Prepaid expenses
 
3,499
     
6,934
 
Current portion of content assets
 
27,820
     
27,383
 
Other current assets
 
1,086
     
1,487
 
Current assets from discontinued operations
 
89
     
90
 
Total current assets
 
163,575
     
156,470
 
CONTENT ASSETS, net
 
44,857
     
38,934
 
PROPERTY AND EQUIPMENT, net
 
34,718
     
33,988
 
GOODWILL
 
272,037
     
272,037
 
RADIO BROADCASTING LICENSES
 
677,094
     
677,407
 
LAUNCH ASSETS, net
 
27,458
     
32,437
 
OTHER INTANGIBLE ASSETS, net
 
247,231
     
262,980
 
LONG-TERM INVESTMENTS
 
2,920
     
7,428
 
OTHER ASSETS
 
3,057
     
3,325
 
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS
 
1,440
     
1,476
 
Total assets
$
1,474,387
   
$
1,486,482
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY
             
CURRENT LIABILITIES:
             
Accounts payable
$
6,107
   
$
5,626
 
Accrued interest
 
5,928
     
6,703
 
Accrued compensation and related benefits
 
10,935
     
10,981
 
Current portion of content payables
 
18,680
     
20,807
 
Income taxes payable
 
926
     
1,794
 
Other current liabilities
 
11,284
     
12,227
 
Current portion of long-term debt
 
4,587
     
3,860
 
Current liabilities from discontinued operations
 
283
     
260
 
Total current liabilities
 
58,730
     
62,258
 
LONG-TERM DEBT, net of current portion and original issue discount
 
815,343
     
805,044
 
CONTENT PAYABLES, net of current portion
 
13,536
     
16,168
 
OTHER LONG-TERM LIABILITIES
 
19,351
     
18,521
 
DEFERRED TAX LIABILITIES
 
170,752
     
153,521
 
NON-CURRENT LIABILITIES FROM DISCONTINUED OPERATIONS
 
24
     
29
 
Total liabilities
 
1,077,736
     
1,055,541
 
               
REDEEMABLE NONCONTROLLING INTEREST
 
18,000
     
20,343
 
               
STOCKHOLDERS’ EQUITY:
             
Convertible preferred stock, $.001 par value, 1,000,000 shares authorized; no shares outstanding at June 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 June 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 June 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 June 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 June 30, 2012  and December 31, 2011, respectively
 
41
     
41
 
Accumulated other comprehensive loss
 
(79
   
(199
Additional paid-in capital
 
1,003,706
     
1,001,840
 
Accumulated deficit
 
(832,730
)
   
(796,156
)
    Total stockholders’ equity
 
170,947
     
205,535
 
Noncontrolling interest
 
207,704
     
205,063
 
Total equity
 
378,651
     
410,598
 
Total liabilities, redeemable noncontrolling interest and equity
$
1,474,387
   
$
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 SIX MONTHS ENDED JUNE 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
                                              (36,574 )     8,421       (28,153 )
Net change in unrealized loss on investment activities
                                  120                         120  
Dividends paid to noncontrolling interest
                                                    (5,780 )     (5,780
Conversion of 12,000 shares of Class A common stock to Class D common stock
                                                           
Adjustment of redeemable noncontrolling interest to estimated redemption value
                                        1,776                   1,776  
Stock-based compensation expense
                                        90                   90  
BALANCE, as of
June 30, 2012
  $     $ 3     $ 3     $ 3     $ 41     $ (79 )   $ 1,003,706     $ (832,730 )   $ 207,704     $ 378,651  
 
 
The accompanying notes are an integral part of these consolidated financial statements. 

 
7

 
 
RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Six Months Ended June 30,
 
   
2012
   
2011
 
   
(Unaudited)
 
   
(In thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Consolidated net (loss) income
 
$
(28,720
)
 
$
37,225
 
Adjustments to reconcile net (loss) income to net cash from operating activities:
               
Depreciation and amortization
   
19,427
     
14,321
 
Amortization of debt financing costs
   
1,520
     
2,339
 
Amortization of content assets
   
18,240
     
9,406
 
Amortization of launch assets
   
4,979
     
 
Deferred income taxes
   
17,231
     
84,230
 
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
   
90
     
2,136
 
Non-cash interest
   
14,235
     
12,391
 
Loss on retirement of debt
   
     
7,743
 
Effect of change in operating assets and liabilities, net of assets acquired:
               
Trade accounts receivable
   
  (4,213
   
(24,754
)
Prepaid expenses and other assets
   
3,835
 
   
2,713
 
Other assets
   
268
     
1,925
 
Accounts payable
   
481
 
   
1,639
 
Accrued interest
   
(775
)
   
1,804
 
Accrued compensation and related benefits
   
(46
)
   
(128
Income taxes payable
   
(868
   
243
 
Other liabilities
   
1,336
 
   
(1,547
    Payments for content assets     (29,132      (2,345
Net cash flows (used in) provided by operating activities of discontinued operations
   
(19
   
616
 
Net cash flows provided by (used in) operating activities
   
18,182
 
   
(209
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property and equipment
   
(6,712
)
   
(3,610
)
Net cash and investments acquired in connection with TV One consolidation
   
     
65,245
 
Proceeds from sales of investment securities
   
5,567
     
 
Purchases of investment securities
   
(530
)
   
 
Net cash flows (used in) provided by investing activities
   
(1,675
)
   
61,635
 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from credit facility
   
     
378,280
 
Repayment of credit facility
   
(3,889
)
   
(353,681
Debt refinancing and modification costs
   
(17
)
   
(5,999
Repurchase of noncontrolling interests
   
     
(54,595
)
Proceeds from noncontrolling interest member
   
     
2,776
 
Repurchase of common stock
   
     
(7,510
)
Payment of dividends to noncontrolling interest members of TV One
   
(5,780
   
 
Net cash flows used in financing activities
   
(9,686
)
   
 (40,729
)
INCREASE IN CASH AND CASH EQUIVALENTS
   
6,821
     
20,697
 
CASH AND CASH EQUIVALENTS, beginning of period
   
35,939
 
   
9,192
 
CASH AND CASH EQUIVALENTS, end of period
 
$
42,760
   
$
29,889
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for:
               
Interest
 
$
31,015
   
$
25,330
 
Income taxes, net
 
$
347
   
$
863
 
 
 
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 54 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 June 30, 2012 and December 31, 2011. Thus, the Boston station’s results from operations for the three and six months ended June 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.
 
 
9

 
 
(c)  Financial Instruments
 
Financial instruments as of June 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 June 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 $545,000 as of June 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 $261.6 million as of June 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 as of the reporting date.

(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 $9.2 million and $8.6 million for the three months ended June 30, 2012 and 2011, respectively. Agency and outside sales representative commissions were approximately $16.4 million and $15.4 million for the six months ended June 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 June 30, 2012 and 2011, barter transaction revenues were $711,000 and $761,000, respectively. For the six months ended June 30, 2012 and 2011, barter transaction revenues were approximately $1.4 million and $1.6 million, respectively. Additionally, barter transaction costs were reflected in programming and technical expenses and selling, general and administrative expenses of $670,000 and $698,000 and $41,000 and $63,000, for the three months ended June 30, 2012 and 2011, respectively.  For the six months ended June 30, 2012 and 2011, barter transaction costs were reflected in programming and technical expenses and selling, general and administrative expenses of approximately $1.4 million and $1.5 million and $83,000 and $129,000, respectively.

 
10

 
 
(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.
 
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
 June 30,
  
 
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
 
(Unaudited)
 
Numerator:
     
Consolidated net income (loss) attributable to common stockholders
 
$
42,668
   
$
98,550
   
$
(36,574
)
 
$
34,305
 
        Denominator:
                               
Denominator for basic net income (loss) per share - weighted average outstanding shares
   
50,006,085
     
50,831,560
     
49,997,752
     
51,474,556
 
    Effect of dilutive securities:
                               
Stock options and restricted stock
   
118,333
     
2,073,500
     
     
2,171,917
 
    Denominator for diluted net income (loss) per share - weighted-average outstanding shares
   
50,124,418
     
52,905,060
     
49,997,752
     
53,646,473
 
                                 
Net income (loss) attributable to common stockholders per share - basic 
 
$
0.85
   
$
1.94
   
$
(0.73
)
 
$
0.67
 
Net income (loss) attributable to common stockholders per share - diluted 
 
$
0.85
   
$
1.86
   
$
(0.73
)
 
$
0.64
 

All stock options and restricted stock awards were excluded from the diluted calculation for the six months ended June 30, 2012, as their inclusion would have been anti-dilutive.  The following table summarizes the potential common shares excluded from the diluted calculation.
  
 
Six Months Ended 
June 30, 2012
 
 
(Unaudited)
 
 
(In Thousands)
 
     
Stock options 
4,712
 
Restricted stock 
119
 

 
(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.
   
 
Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
 
 
11

 
     
  As of June 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 June 30, 2012
             
Assets subject to fair value measurement:
             
Fixed maturity securities – available for sale:
             
Corporate debt securities
$ 2,951   $ 2,951   $   $
Government sponsored enterprise mortgage-backed securities
  201         201    
Total fixed maturity securities (a)
  3,152     2,951     201    
Total
$ 3,152   $ 2,951   $ 201   $
                       
Liabilities subject to fair value measurement:
                   
Incentive award plan (b)
$ 5,096   $   $   $ 5,096
Employment agreement award (c)
  11,039             11,039
Total
$ 16,135   $   $   $ 16,135
                       
Mezzanine equity subject to fair value measurement:
                     
Redeemable noncontrolling interest (d)
$ 18,000   $   $   $ 18,000
                       
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 June 30, 2012, the Company determined that there was no change in TV One’s fair market value since the December 31, 2011 valuation.
 
(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.
 

 
12

 
 
      The following table presents the changes in Level 3 liabilities measured at fair value on a recurring basis for the six months ended June 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)
 
   
693
   
 
Net loss attributable to noncontrolling interests
 
   
   
(567
Change in fair value
 
   
   
(1,776
)
Balance at June 30, 2012
$
5,096
 
$
11,039
 
$
18,000
 
                   
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
$
 
$
(693
)
$
 

   
 
 
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)
 
   
470
   
 
Net income attributable to noncontrolling interests
 
   
   
606
 
Recognition of TV One management incentive award plan in connection with the consolidation of TV One
 
6,428
   
   
 
Change in fair value
 
   
   
(2,505
)
Balance at June 30, 2011
$
6,428
 
$
7,294
 
$
28,736
 
                   
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
$
 
$
(470
)
$
 

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

        For Level 3 assets and liabilities measured at fair value on a recurring basis as of June 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
 
Discount Rate
 
11.5%
Incentive Award Plan
 
Discounted Cash Flow
 
Long-term Growth Rate
 
3.0%
Employment Agreement Award
 
Discounted Cash Flow
 
Discount Rate
 
11.5%
Employment Agreement Award
 
Discounted Cash Flow
 
Long-term Growth Rate
 
3.0%
Redeemable Noncontrolling Interest
 
Discounted Cash Flow
 
Discount Rate
 
12.5%
Redeemable Noncontrolling Interest
 
Discounted Cash Flow
 
Long-term Growth Rate
 
2.5%

        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 six months ended June 30, 2011, respectively, and therefore, these assets were reported at carrying value as opposed to fair value.  The Company recorded impairment of $313,000 related to our Charlotte radio broadcasting licenses during the three and six months ended June 30, 2012.

 
13

 

 
 (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.
 
(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.

 
14

 
 
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.

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 six months ended June 30, 2012, launch asset amortization of approximately $2.4 million and $4.9 million, respectively, was recorded as a reduction in revenue.  For each of the three and six month periods ended June 30, 2011, launch amortization of approximately $2.1 million 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 recorded an additional $508,000 of amortization expense as a result of evaluating its contracts for recoverability for the three months ended June 30, 2012. 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.
 
 
15

 
 
 
2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS:

In its previously filed consolidated financial statements, 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 for the year ended December 31, 2011 and all interim periods within that year after the first quarter of 2011 and the three month period ended March 31, 2012. 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 will decrease cash flows from operating activities and increase cash flows from investing activities by approximately $10.7 million for the three months ended March 31, 2012, by approximately $23.4 million for the year ended December 31, 2011 and by approximately $2.3 million for the six months ended June 30, 2011.

The following table summarizes the effects of the restatement adjustments on the consolidated statements of cash flows (in thousands):
 
 
Three Months Ended March 31, 2012
   
Year Ended December 31, 2011
   
Six Months Ended June 30, 2011
 
 
As Previously Reported
   
Adjustments
   
As Restated
   
As Previously Reported
   
Adjustments
   
As Restated
   
As Previously Reported
   
Adjustments
   
As Restated
 
                                                                       
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                      
Payments for content assets
$ -     (10,714 )   (10,714 )   -     (23,412 )   (23,412 )   $ -     (2,345 )   (2,345 )
Net cash flows provided by (used in) operating activities
  23,199       (10,714 )     12,485       55,018       (23,412 )     31,606       2,136       (2,345 )     (209 )
                                                                       
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                      
Payments for content assets
          10,714       10,714       (23,412 )     23,412       -       (2,345 )     2,345       -  
Net cash flows provided by (used in) investing activities
  (10,163 )     10,714       551       32,388       23,412       55,800       59,290       2,345       61,635  
                                                                       
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                      
Net cash flows used in financing activities
  (5,091 )     -       (5,091 )     (60,659 )     -       (60,659 )     (40,729 )     -       (40,729 )
                                                                       
INCREASE IN CASH AND CASH EQUIVALENTS
7,945     -     $ 7,945     26,747     -     26,747     20,697     -     20,697  
 
 
 
 
 

 
 
16

 
 
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 preliminary 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.

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 to 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 from January 1, 2011, as well as additional pro forma adjustments, to give effect to these transactions occurring on January 1, 2011.

 
Three Months Ended
 June 30,
 
Six Months Ended
 June 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(Unaudited)
 
 
(In thousands)
 
                         
Net revenue
$
105,916
 
$
101,515
 
$
208,958
 
$
197,355
 
Costs and expenses, net
 
63,248
   
93,776
   
245,532
   
110,913
 
Net income (loss)
 
42,668
   
7,739
   
(36,574
)
 
86,442
 
 
 
 
17

 
 
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 June 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 six months ended June 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
 June 30,
   
Six Months Ended
 June 30,
 
 
2012
 
2011
   
2012
 
2011
 
 
(Unaudited)
 
 
(In thousands)
 
                           
Net revenue
$
 
$
22
   
$
 
$
59
 
Station operating expenses
 
65
   
48
     
123
   
125
 
Depreciation and amortization
 
18
   
19
     
36
   
35
 
Interest income
 
90
   
     
180
   
 
Gain on sale of assets
 
   
     
   
20
 
Income (loss) before income taxes
 
7
   
(45
)
   
21
   
(81
)
Provision for income taxes  
   
     
   
 
Income (loss) from discontinued operations, net of tax
$
7
 
$
(45
)
 
$
21
 
$
(81
)

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

 
As of
 
 
June 30,
 
December 31,
 
 
2012
 
2011
 
 
(Unaudited)
     
 
(In thousands)
 
Currents assets:
       
Accounts receivable, net of allowance for doubtful accounts
$ 89     $ 90  
Total current assets
  89       90  
Intangible assets, net
  1,202       1,202  
Property and equipment, net
  238       274  
Total assets
$ 1,529     $ 1,566  
Current liabilities:
             
Other current liabilities
$ 283     $ 260  
Total current liabilities
  283       260  
Long-term liabilities
  24       29  
Total liabilities
$ 307     $ 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.
 
 
18

 
 
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/or 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.

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. 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 Licenses
May 31, 2011 (a)
   
September 30, 2011 (a)
   
October 1, 2011
   
June 30, 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.
 
 
19

 
 
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. With the assistance of a third-party valuation firm, the Company assessed the fair value of the redeemable noncontrolling interest in Reach Media at June 30, 2012. Upon review of the results of the interim and year-end impairment tests, and quarter-end assessment, the Company concluded that the carrying value of goodwill attributable to Reach Media had not been impaired.
 
Reach Media Goodwill  
March 31, 2011
   
June 30, 2011
   
September 30, 2011
   
December 31, 2011
   
March 31, 2012
   
June 30, 2012
 
                                     
Pre-tax impairment charge (in millions)
  $     $     $     $     $     $  
                                                 
Discount Rate
    13.5 %     13.0 %     12.0 %     12.5 %     12.5 %     12.5 %
Year 1 Revenue Growth Rate
    2.5 %     2.5 %     2.5 %     2.5 %     2.5 %     2.5 %
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 %
                                                 
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 %
 
Goodwill Valuation Results
 
The table below presents the changes in the carrying amount of goodwill by segment during the six month period ended June 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)
   
June 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
 
 
 
20

 
 
 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 months and six months June 30, 2011, the Company’s allocable share of TV One’s operating income was $208,000 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.

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. The Company recognized $501,000 in revenue relating to this agreement for the three months ended June 30, 2011 and $874,000 in revenue relating to this agreement for the six months ended June 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.
 
 
 
21

 
 
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)
 
June 30, 2012
                       
Corporate debt securities
  $ 2,831     $ (38 )   $ 158     $ 2,951  
Government sponsored enterprise mortgage-backed securities
    201       -       -       201  
Total investments
  $ 3,032     $ (38 )   $ 158     $ 3,152  

   
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)
June 30, 2012
                           
Corporate debt securities
  $ 399     $ (23 )   $ 703     $ (15 )   $ (38 )
Government sponsored enterprise mortgage-backed securities
    -       -       -       -       -  
Total investments
  $ 399     $ (23 )   $ 703     $ (15 )   $ (38 )

   
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 June 30, 2012.

 
 
22

 
 
The amortized cost and estimated fair value of debt securities at June 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
  $ 236     $ 233  
After 1 year through 5 years
    2,028       2,146  
After 5 years through 10 years
    567