XNAS:ROIAK Radio One Inc Class D Quarterly Report 10-Q/A Filing - 3/31/2012

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

 

Form 10-Q/A

 ________________

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 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 May 4, 2012
Class A Common Stock, $.001 Par Value   2,731,860
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   41,409,667

 

 
 

 

EXPLANATORY NOTE

  

This Amendment No. 1 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012 (the “Amended 10-Q”), amends our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, filed with the Securities and Exchange Commission on May 05, 2012 (the “Original 10-Q”). This Amended 10-Q amends the Original 10-Q for the purpose of amending its previously filed consolidated statement of cash flows for the three month period ended March 31, 2012 to adjust certain items contained therein. As a result of these adjustments, net cash flows provided by operating activities for the quarterly period ended March 31, 2012 decreased by approximately $10.7 million, net cash flows provided by investing activities for the quarterly period ended March 31, 2012 increased by approximately $10.7 million, and net cash flows used in financing activities were unchanged.

 

The adjustments have no impact on the net increase in cash and cash equivalents for the quarterly period ended March 31, 2012 or the cash and cash equivalents balance as of March 31, 2012. In addition, these adjustments have no impact to the consolidated balance sheet as of March 31, 2012, or the consolidated statement of operations and consolidated statement of changes in stockholders’ equity for the quarterly period ended March 31, 2012.

 

This Amended 10-Q does not reflect events occurring after the filing of the Original 10-Q and does not modify or update the disclosure in the Original 10-Q, other than the amendments noted above, the evaluation and current developments of controls and procedures in Item 4, and the filing of certifications of our principal executive officer and principal financial officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002.

 

2
 

 

TABLE OF CONTENTS

 

    Page
   
PART I. FINANCIAL INFORMATION  
   
Item 1. Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (Unaudited) 5
  Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2012 and 2011 (Unaudited) 6
  Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011 7
  Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2012 (Unaudited) 8
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited) 9
  Notes to Consolidated Financial Statements (Unaudited)  10
  Consolidating Financial Statements 44
  Consolidating Statement of Operations for the Three Months Ended March 31, 2012 (Unaudited) 44
  Consolidating Statement of Operations for the Three Months Ended March 31, 2011 (Unaudited) 45
  Consolidating Statement of Comprehensive Loss for the Three Months Ended March 31, 2012 (Unaudited) 46
  Consolidating Statement of Comprehensive Loss for the Three Months Ended March 31, 2011 (Unaudited) 47
  Consolidating Balance Sheet as of March 31, 2012 (Unaudited) 48
  Consolidating Balance Sheet as of December 31, 2011 49
  Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2012 (Unaudited) 50
  Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2011 (Unaudited) 51
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 53
Item 3. Quantitative and Qualitative Disclosures About Market Risk 81
Item 4. Controls and Procedures 81
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 82
Item 1A. Risk Factors 83
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 83
Item 3. Defaults Upon Senior Securities 83
Item 4. Submission of Matters to a Vote of Security Holders 83
Item 5. Other Information 83
Item 6. Exhibits 83
  SIGNATURES 84

 

3
 

 

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:

 

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.

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RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Three Months Ended March 31, 
   2012   2011 
   (Unaudited) 
   (In thousands, except share data) 
         
NET REVENUE  $103,042   $65,009 
OPERATING EXPENSES:          
Programming and technical   31,165    18,831 
Selling, general and administrative, including stock-based compensation of $17 and $164, respectively   38,826    28,495 
Corporate selling, general and administrative, including stock-based compensation of $27 and $773, respectively   9,593    8,022 
Depreciation and amortization   9,685    4,084 
Total operating expenses   89,269    59,432 
Operating income   13,773    5,577 
INTEREST INCOME   22    8 
INTEREST EXPENSE   23,747    19,333 
LOSS ON RETIREMENT OF DEBT       7,743 
EQUITY IN INCOME OF AFFILIATED COMPANY       3,079 
OTHER INCOME, net   7    25 
Loss before provision for income taxes, noncontrolling interests in income of subsidiaries and income (loss) from discontinued operations   (9,945)   (18,387)
PROVISION FOR INCOME TAXES   65,254    45,619 
Net loss from continuing operations   (75,199)   (64,006)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax   14    (36)
CONSOLIDATED NET LOSS   (75,185)   (64,042)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS   4,057    203 
CONSOLIDATED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS  $(79,242)  $(64,245)
           
BASIC AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS          
Continuing operations  $(1.59)  $(1.23)
Discontinued operations, net of tax   (0.00)   (0.00)
Net loss attributable to common stockholders  $(1.58)*  $(1.23)
           
WEIGHTED AVERAGE SHARES OUTSTANDING:          
Basic   49,994,974    52,117,552 
Diluted   49,994,974    52,117,552 

 

* Per share amounts do not add due to rounding.

 

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

5
 

RADIO ONE, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

   Three Months Ended March 31, 
   2012   2011 
   (Unaudited) 
   (In thousands) 
         
CONSOLIDATED NET LOSS  $(75,185)  $(64,042)
Net change in unrealized loss on investment activities   97    - 
COMPREHENSIVE LOSS   (75,088)   (64,042)
LESS:  COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS   4,057    203 
COMPREHENSIVE LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS  $(79,145)  $(64,245)

 

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

 

6
 

RADIO ONE, INC. AND SUBSIDIARIES

 CONSOLIDATED BALANCE SHEETS

 

   As of 
   March 31, 2012   December 31, 2011 
   (Unaudited)     
   (In thousands, except share data) 
ASSETS          
CURRENT ASSETS:          
Cash and cash equivalents  $43,884   $35,939 
Short-term investments   561    761 
Trade accounts receivable, net of allowance for doubtful accounts of $2,560 and $3,719, respectively   80,346    83,876 
Prepaid expenses   5,416    6,934 
Current portion of content assets   27,525    27,383 
Other current assets   1,367    1,487 
Current assets from discontinued operations   94    90 
Total current assets   159,193    156,470 
PREPAID PROGRAMMING AND DEPOSITS   5,284    2,329 
CONTENT ASSETS, net   38,976    36,605 
PROPERTY AND EQUIPMENT, net   34,258    33,988 
GOODWILL   272,037    272,037 
RADIO BROADCASTING LICENSES   677,407    677,407 
LAUNCH ASSETS, net   29,948    32,437 
OTHER INTANGIBLE ASSETS, net   255,106    262,980 
LONG-TERM INVESTMENTS   4,213    7,428 
OTHER ASSETS   3,281    3,325 
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS   1,458    1,476 
Total assets  $1,481,161   $1,486,482 
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY          
CURRENT LIABILITIES:          
Accounts payable  $8,236   $5,626 
Accrued interest   6,824    6,703 
Accrued compensation and related benefits   11,585    10,981 
Current portion of content payables   22,241    20,807 
Income taxes payable   1,363    1,794 
Other current liabilities   10,088    12,227 
Current portion of long-term debt   4,607    3,860 
Current liabilities from discontinued operations   240    260 
Total current liabilities   65,184    62,258 
LONG-TERM DEBT, net of current portion and original issue discount   810,707    805,044 
CONTENT PAYABLES, net of current portion   15,375    16,168 
OTHER LONG-TERM LIABILITIES   18,982    18,521 
DEFERRED TAX LIABILITIES   219,103    153,521 
NON-CURRENT LIABILITIES FROM DISCONTINUED OPERATIONS   26    29 
Total liabilities   1,129,377    1,055,541 
           
REDEEMABLE NONCONTROLLING INTEREST   23,452    20,343 
           
STOCKHOLDERS’ EQUITY:          
Convertible preferred stock, $.001 par value, 1,000,000 shares authorized; no shares outstanding at March 31, 2012 and December  31, 2011, respectively        
Common stock — Class A, $.001 par value, 30,000,000 shares authorized; 2,731,860 shares issued and outstanding as of March 31, 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 March 31, 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 March 31, 2012  and December 31, 2011, respectively   3    3 
Common stock — Class D, $.001 par value, 150,000,000 shares authorized; 41,409,667 shares issued and outstanding as of March 31, 2012  and December 31, 2011, respectively   41    41 
Accumulated other comprehensive loss   (102)   (199)
Additional paid-in capital   998,554    1,001,840 
Accumulated deficit   (875,398)   (796,156)
    Total stockholders’ equity   123,104    205,535 
Noncontrolling interest   205,228    205,063 
Total equity   328,332    410,598 
Total liabilities, redeemable noncontrolling interest and equity  $1,481,161   $1,486,482 

 

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

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RADIO ONE, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND NONCONTROLLING INTEREST

FOR THE THREE MONTHS ENDED MARCH 31, 2012 (UNAUDITED)

 

   Radio One, Inc. Stockholders         
   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                               (79,242)   4,278    (74,964)
Net change in unrealized loss on investment activities                       97                97 
Dividends paid to noncontrolling interest                                   (4,113)   (4,113)
Adjustment of redeemable noncontrolling interests to estimated redemption value                           (3,330)           (3,330)
Stock-based compensation expense                           44            44 
BALANCE, as of March 31, 2012  $   $3   $3   $3   $41   $(102)  $998,554   $(875,398)  $205,228   $328,332 

 

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

 

8
 

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS 

 

   Three Months Ended March 31, 
   2012   2011 
   (Restated)   (As Adjusted
– See Note 1)
 
   (Unaudited) 
   (In thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Consolidated net loss  $(75,185)  $(64,042)
Adjustments to reconcile net loss to net cash from operating activities:          
Depreciation and amortization   9,685    4,084 
Amortization of debt financing costs   760    1,591 
Amortization of content assets   8,321     
Amortization of launch assets   2,489     
Deferred income taxes   65,582    45,042 
Equity in income of affiliated company       (3,079)
Stock-based compensation   44    937 
Non-cash interest   7,038    6,520 
Loss on retirement of debt       7,743 
Effect of change in operating assets and liabilities, net of assets acquired:          
Trade accounts receivable   3,530    11,222 
Prepaid expenses and other assets   1,518    2,618 
Other assets   (3,007)   98 
Accounts payable   2,610    (1,369)
Accrued interest   121    425 
Accrued compensation and related benefits   604    (1,209)
Income taxes payable   (431)   582 
Other liabilities   (484)   (3,474)
Payments for content assets   (10,714)   - 
Net cash flows provided by (used in) operating activities of discontinued operations   4    22 
Net cash flows provided by operating activities   12,485    7,711 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of property and equipment   (2,960)   (1,812)
Proceeds from sales of investment securities   3,859     
Purchases of investment securities   (348)    
Net cash flows provided by (used in) investing activities   551   (1,812)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from credit facility       378,280 
Repayment of credit facility   (965)   (353,681)
Debt refinancing and modification costs   (13)   (5,873)
Payment of dividends to noncontrolling interest members of TV One   (4,113)    
Net cash flows (used in) provided by financing activities   (5,091)   18,726 
INCREASE IN CASH AND CASH EQUIVALENTS   7,945    24,625 
CASH AND CASH EQUIVALENTS, beginning of period   35,939    9,192 
CASH AND CASH EQUIVALENTS, end of period  $43,884   $33,817 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid (received) for:          
Interest  $15,490   $10,797 
Income taxes, net  $60   $(6)

 

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

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RADIO ONE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

(a)Organization

 

 Radio One, Inc. (a Delaware corporation referred to as “Radio One”) and its subsidiaries (collectively, the “Company”) is 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 March 31, 2012 and December 31, 2011. Thus, the Boston station’s results from operations for the three months ended March 31, 2012 and 2011, have been reclassified 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 on the Company’s four reportable segments: (i) Radio Broadcasting; (ii) Reach Media; (iii) Internet; and (iv) Cable Television. (See Note 13 – 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/A 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.

 

Certain reclassifications associated with accounting for discontinued operations have been made to the accompanying prior period financial statements to conform to the current period presentation. These reclassifications had no effect on previously reported net income or loss, or any other previously reported statements of operations, balance sheet or cash flow amounts. (See Note 4 — Discontinued Operations.)

 

10
 

(c)  Financial Instruments

 

Financial instruments as of March 31, 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 March 31, 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 $702,000 as of March 31, 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 $319.8 million and a fair value of approximately $225.5 million as of March 31, 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 $7.2 million and $6.8 million for the three months ended March 31, 2012 and 2011, respectively.

 

Interactive One, the primary driver of revenue in our internet segment, 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 March 31, 2012 and 2011, barter transaction revenues were $722,000 and $854,000, respectively. Additionally, barter transaction costs were reflected in programming and technical expenses and selling, general and administrative expenses of $680,000 and $771,000 and $42,000 and $83,000, for the three months ended March 31, 2012 and 2011, respectively.

 

11
 

 

(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 March 31, 
   2012   2011 
     (Unaudited) 
Numerator:          
Net loss attributable to common stockholders  $(79,242)  $(64,245)
Denominator:          
Denominator for basic net loss per share - weighted-average outstanding shares   49,994,974    52,117,552 
Effect of dilutive securities:          
Stock options and restricted stock   -    - 
Denominator for diluted net loss per share - weighted-average outstanding shares   49,994,974    52,117,552 
           
Net loss attributable to common stockholders per share -basic   $(1.58)  $(1.23)
Net loss attributable to common stockholders per share -diluted   $(1.58)  $(1.23)

 

12
 

 

All stock options and restricted stock awards were excluded from the diluted calculation for the three months ended March 31, 2012 and 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 March 31,
 
   2012   2011 
   (Unaudited) 
   (In thousands) 
         
Stock options   4,811    5,111 
Restricted stock awards   119    2,260 

 

(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.

 

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As of March 31, 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 March 31, 2012                    
Assets subject to fair value measurement:                    
Fixed maturity securities – available for sale:                    
Corporate debt securities  $4,273   $4,273   $   $ 
Government sponsored enterprise mortgage-backed securities   501        501     
Total fixed maturity securities (a)   4,774    4,273    501     
Total  $4,774   $4,273   $501   $ 
                     
Liabilities subject to fair value measurement:                    
Incentive award plan (b)  $5,096   $   $   $5,096 
Employment agreement award (c)   10,696            10,696 
Total  $15,792   $   $   $15,792 
                     
Mezzanine equity subject to fair value measurement:                    
Redeemable noncontrolling interests (d)  $23,452   $   $   $23,452 
                     
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 interests (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 March 31, 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 9 – 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.

 

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(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 three months ended March 31, 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)       350     
Net loss attributable to noncontrolling interests           (221)
Change in fair value           3,330 
Balance at March 31, 2012  $5,096   $10,696   $23,452 
                
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  $   $(350)  $ 

 

   Incentive
Award
Plan
   Employment
Agreement
Award
   Redeemable
Noncontrolling
Interests
 
             
   (In thousands) 
             
Balance at December 31, 2010  $   $6,824   $30,635 
Gains included in earnings (unrealized)       (40)    
Net income attributable to noncontrolling interests           203 
Change in fair value           431 
Balance at March 31, 2011  $   $6,784   $31,269 
                
The amount of total gains for the period included in earnings attributable to the change in unrealized losses relating to assets and liabilities still held at the reporting date  $   $40   $ 

 

 

Gains (losses) included in earnings were recorded in the consolidated statement of operations as corporate selling, general and administrative expenses for the three months ended March 31, 2012 and 2011.

 

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For Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 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 months ended March 31, 2012, and, therefore, were reported at carrying value as opposed to fair value. 

 

(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 US 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, we became required to maintain compliance with certain financial ratios (as detailed in Note 10 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.   

 

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 (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 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.

 

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.

 

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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 treasuries 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 months ended March 31, 2012, launch asset amortization of approximately $2.5 million was recorded as a reduction of 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 $96,000 of amortization expense as a result of evaluating its contracts for recoverability for the three months ended March 31, 2012. All produced and co-produced content is classified as a long-term asset, except for the portion of the unamortized licensed content balance that will be amortized within one year, as it is classified as a current asset.

 

(n) Prepaid Programming and Deposits

 

Prepaid programming and deposits represent deposits made for the acquisition of TV One programming rights and the production of content that have not been recorded as content assets as the license period has not begun and the asset is not available for its first airing.

 

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 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 decreased cash flows from operating activities and increased cash flows from investing activities by approximately $10.7 million for the three months ended March 31, 2012.

 

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    
    As Previously
Reported
    Adjustments     As Restated    
                     
CASH FLOWS FROM OPERATING ACTIVITIES:                          
Payments for content assets   $ -     $ (10,714 )   $ (10,714 )  
Net cash flows provided by (used in) operating activities     23,199       (10,714 )     12,485    
                           
CASH FLOWS FROM INVESTING ACTIVITIES:                          
Payments for content assets     -       10,714       10,714    
Net cash flows provided by (used in) investing activities     (10,163 )     10,714       551    
                           
CASH FLOWS FROM FINANCING ACTIVITIES:                          
Net cash flows used in financing activities     (5,091 )     -       (5,091 )  
                           
INCREASE IN CASH AND CASH EQUIVALENTS   $ 7,945     $ -     $ 7,945    

  

3.  ACQUISITIONS:

 

In February 2005, the Company acquired approximately 51% of the common stock of Reach Media for approximately $55.8 million in a combination of approximately $30.4 million of cash and 1,809,648 shares of the Company’s Class D common stock valued at approximately $25.4 million. A subsidiary of Citadel, Reach Media’s sales representative and an investor in the company, owned a noncontrolling interest in Reach Media. In November 2009, that subsidiary sold its ownership interest to Reach Media in exchange for a $1.0 million note that was due and paid in December 2011 (See Note 10 – Long-Term Debt) as an inducement for Reach Media to execute a new sales representation agreement. This transaction increased Radio One’s common stock interest in Reach Media to 53.5%.

 

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 Radio One’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 Radio One’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.

 

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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 US 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
March 31,
 
   2012   2011 
   (Unaudited) 
   (In thousands) 
         
Net revenue  $103,042   $95,841 
Costs and expenses, net   182,284    8,180 
Net (loss) income   (79,242)   87,661 

 

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 made subject to an LMA have been reclassified as discontinued operations as of March 31, 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 ended March 31, 2012 and 2011, have been reclassified as discontinued operations in the accompanying consolidated financial statements.

 

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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 are classified as discontinued operations for all periods presented:

 

   Three Months Ended
March 31,
 
   2012   2011 
   (In thousands) 
         
Net revenue  $   $37 
Station operating expenses   58    76 
Depreciation and amortization   18    16 
Interest income   (90)    
Gain on sale of assets       (19)
Income (loss) before income taxes   14    (36)
Provision for income taxes        
Income (loss) from discontinued operations, net of tax  $14   $(36)

 

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

 

   As of 
   March 31,   December 31, 
   2012   2011 
   (Unaudited)     
   (In thousands) 
Currents assets:        
Accounts receivable, net of allowance for doubtful accounts  $94   $89 
Total current assets   94    89 
Intangible assets, net   1,202    1,202 
Property and equipment, net   256    274 
Total assets  $1,552   $1,565 
Current liabilities:          
Other current liabilities  $241   $260 
Total current liabilities   241    260 
Long-term liabilities   26    29 
Total liabilities  $267   $289 

 

5.  GOODWILL, RADIO BROADCASTING LICENSES AND OTHER INTANGIBLE ASSETS:

 

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.

 

20
 

 

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. Effective January 1, 2002, we began using the income approach to test for impairment of radio broadcasting licenses. We believe this method of valuation to be consistent with ASC 805-20-S-99-3, “Use of the Residual Method to Value Acquired Assets Other Than Goodwill.” 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 2011, the total market revenue growth for certain markets was below that used in our 2010 annual impairment testing. We deemed that to be an impairment indicator that warranted interim impairment testing of certain of our radio broadcasting licenses, which we performed as of May 31, 2011. During the third quarter of 2011, there was further deterioration of revenue growth in certain markets, and as such, we deemed that to be an impairment indicator that warranted interim testing of certain radio broadcasting licenses as of September 30, 2011. The Company concluded that our radio broadcasting licenses were not impaired during the second or third quarters of 2011. The Company completed its annual impairment testing as of October 1, 2011 and concluded that our radio broadcasting licenses 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,     September 30,     October 1,  
2011 (a)     2011 (a)     2011  
                         
Pre-tax impairment charge
(in millions)
  $     $     $  
                         
Discount Rate     10.0 %     9.5 %     10.0 %
Year 1 Market Revenue Growth Rate or Range     1.3% -2.8 %     1.5% -2.0 %     1.5% -2.5 %
Long-term Market Revenue Growth Rate Range (Years 6 – 10)     1.5% - 2.0 %     1.5% - 2.0 %     1.0% - 2.0 %
Mature Market Share Range     9.0% - 22.5 %     9.3% - 22.4 %     0.7% - 28.9 %
Operating Profit Margin Range     32.7% - 40.8 %     32.7% - 33.0 %     19.1% - 47.4 %

 

(a)Reflects changes only to the key assumptions used in the second and third quarter interim testing for certain reporting units.

 

21
 

 

Valuation of Goodwill

 

The impairment testing of goodwill is performed at the reporting unit level. We had 19 reporting units as of our October 2011 annual impairment assessment. For the purpose of evaluating goodwill for impairment, the 19 reporting units consisted of the 15 radio markets that we own and/or operate and four other business divisions. 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.

 

During the second and third quarters of 2011, the operating performance and current projections for the remainder of the year for specific radio markets were below that used in our 2010 annual impairment testing. We deemed that to be an impairment indicator that warranted interim impairment testing of goodwill associated with specific radio markets, which we performed as of May 31, 2011 and as of September 30, 2011, respectively. The Company concluded that goodwill had not been impaired during the second and third quarters of 2011. We completed our annual impairment assessment as of October 1, 2011. As a result of our annual testing, we recorded an impairment charge of approximately $14.5 million against goodwill in our Columbus market during the fourth quarter of 2011.

 

Below are some of the key assumptions used in the income approach model for estimating goodwill fair values for the annual and interim impairments assessments performed since January 2011.

  

Goodwill (Radio
Market Reporting
  May 31,   September 30,   October 1, 
Units)  2011 (a)   2011 (a)   2011 
             
Pre-tax impairment charge (in millions)  $   $–     $14.5 
                
Discount Rate   10.0%   9.5%   10.0%
Year 1 Market Revenue Growth Rate or Range   1.5% -3.0 %    1.5%   2.0% -2.5 % 
Long-term Market Revenue Growth Rate or Range (Years 6 – 10)   1.5% - 2.0 %    1.5%   1.5% - 2.0 % 
Mature Market Share or Share Range   7.0% - 23.0 %    13.8%   7.4% - 20.8 % 
Operating Profit Margin or Margin Range   30.0% - 56.0 %    36.0%   29.5% - 54.0 % 

 

(a)  Reflects changes only to the key assumptions used in the second and third quarter interim testing for certain reporting units.

 

22
 

 

In March, June and September of 2011, the Company performed interim impairment testing on the valuation of goodwill associated with Reach Media. Reach Media’s actual operating results did not meet budgeted results during 2011 and as such, interim impairment testing for goodwill attributable to Reach Media was performed. As a result of the interim impairment tests, the Company concluded that the carrying value of goodwill attributable to Reach Media had not been impaired. We also completed an impairment assessment as of December 31, 2011 for Reach Media. Due to amendments of existing Reach Media affiliate agreements with Radio One, Reach Media’s expected future cash flows will be reduced. There were no goodwill impairment charges recorded as part of our year end impairment testing. However, the Company recognized a non-cash impairment charge of approximately $7.8 million related to the long-lived assets of Reach Media.

 

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 March 31, 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.

 

   March 31,   June 30,   September 30,   December 31,   March 31, 
Reach Media Goodwill  2011   2011   2011   2011   2012 
                     
Pre-tax impairment charge (in millions)  $   $   $   $   $ 
                          
Discount Rate   13.5%   13.0%   12.0%   12.5%   12.5%
Year 1 Revenue Growth Rate   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%
                          
Operating Profit Margin Range   16.2% - 27.4%   17.6% - 22.6%   18.8% - 21.7%   (2.0)% - 16.8%   3.7% - 18.1%

 

Goodwill Valuation Results

 

The table below presents the changes in the carrying amount of goodwill by segment during the three month period ended March 31, 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)
   March 31,
 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 

 

23
 

Intangible Assets Excluding Goodwill and Radio Broadcasting Licenses

 

Other intangible assets, excluding goodwill and radio broadcasting licenses, are amortized on a straight-line basis over various periods. Other intangible assets consist of the following:

 

   As of     
   March 31, 2012   December 31, 2011   Period of
Amortization
 
   (Unaudited)         
   (In thousands)     
             
Trade names  $17,133   $17,133    2-5 Years 
Talent agreement   19,549    19,549    10 Years 
Debt financing and modification costs   16,128    16,115    Term of debt 
Intellectual property   14,151    14,151    4-10 Years 
Affiliate agreements   186,755    186,755    1-10 Years 
Acquired income leases   1,282    1,282    3-9 Years 
Non-compete agreements   1,260    1,260    1-3 Years 
Advertiser agreements   47,688    47,688    2-7 Years 
Favorable office and transmitter leases   3,358    3,358    2-60 Years 
Brand names   2,539    2,539    2.5 Years 
Brand name - unamortized   39,688    39,688    Indefinite 
Other intangibles   3,662    3,662    1-5 Years 
    353,193    353,180      
Less: Accumulated amortization   (98,087)   (90,200)     
Other intangible assets, net  $255,106   $262,980      

 

Amortization expense of intangible assets for the three months ended March 31, 2012 and 2011 was approximately $7.1 million and $1.4 million, respectively. The amortization of deferred financing costs was charged to interest expense for all periods presented. The amount of deferred financing costs included in interest expense for the three months ended March 31, 2012 and 2011 was approximately $1.1 million and $1.6 million, respectively.

 

The following table presents the Company’s estimate of amortization expense for the remainder of 2012 and years 2013 through 2017 for intangible assets, excluding deferred financing costs:

 

   (In thousands) 
     
2012 (April through December)  $21,341 
2013  $27,912 
2014  $27,314 
2015  $26,043 
2016  $25,886 
2017  $25,880 

 

Actual amortization expense may vary as a result of future acquisitions and dispositions.

 

24
 

 

The gross value and accumulated amortization of the launch assets is as follows:

 

   March 31, 2012   Weighted Average Period of Amortization 
   (Unaudited)     
   (In thousands)     
         
Launch assets  $39,543    3.6 Years 
Less: Accumulated amortization   (9,595)     
Launch assets, net  $29,948      

 

Future estimated launch support amortization expense or revenue reduction related to launch assets for the remainder of 2012 and years 2013 through 2015 is as follows:

 

   (In thousands) 
     
2012 (April through December)  $7,500 
2013  $9,947 
2014  $9,902 
2015  $2,599 

 

6.  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.

 

The gross value and accumulated amortization of the content assets is as follows:

 

   March 31, 2012   Period of Amortization 
   (Unaudited)     
   (In thousands)     
         
Content assets  $106,241    1-8 Years 
Less: Accumulated amortization   (39,740)     
Content assets, net  $66,501      

 

Future estimated content amortization expense related to agreements entered into as of March 31, 2012 for the remainder of 2012 and years 2013 through 2017 is as follows:

 

   (In thousands) 
     
2012 (April through December)  $21,964 
2013  $20,403 
2014  $12,260 
2015  $5,102 
2016  $2,785 
2017  $1,364 

 

25
 

 

7.  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 Radio One’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 ended March 31, 2012 and 2011, the Company’s allocable share of TV One’s operating income was $0 and approximately $3.1 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 $160,000 and $373,000 in revenue relating to this agreement for the three months ended March 31, 2012 and 2011, respectively. 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.

 

26
 

Summarized unaudited financial information for our significant equity investment is reported below (in thousands, amounts represent 100% of investee financial information):

 

Statement of Operations  Three Months Ended 
March 31, 2011
 
   (In thousands) 
     
Net revenue  $30,832 
Costs and expenses   24,408 
Earnings from continuing operations   6,424 
Net income  $6,424 

 

Balance Sheet  As of March 31, 2011 
   (In thousands) 
     
Current assets  $58,011 
Non-current assets  $151,092 
Current liabilities  $8,885 
Non-current liabilities  $169,648 
Equity  $30,570 

 

8.  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) 
March 31, 2012                    
Corporate debt securities  $4,173   $(59)  $159   $4,273 
Government sponsored enterprise mortgage-backed securities   504    (3)   -    501 
Total investments  $4,677   $(62)  $159   $4,774 

 

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) 
March 31, 2012                         
Corporate debt securities  $859   $(26)  $1,326   $(33)  $(59)
Government sponsored enterprise mortgage-backed securities   -    -    498    (3)   (3)
Total investments  $859   $(26)  $1,824   $(36)  $(62)

 

27
 

 

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 March 31, 2012.

 

The amortized cost and estimated fair value of debt securities at March 31, 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 
         
Within 1 year  $591   $582 
After 1 year through 5 years   2,476    2,573 
After 5 years through 10 years   903    918 
After 10 years   203    200 
Mortgage-backed securities   504    501 
Total  $4,677   $4,774 

 

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
March 31, 2012
 
     
Proceeds from sales  $3,859 
Gross realized gains   8 
Gross realized losses   (37)

 

9.  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.

 

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

 

    Liability Derivatives  
    As of March 31, 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   $ 10,696   Other Long-Term Liabilities   $ 10,346  
Total derivatives       $ 10,696       $ 10,346  

 

28
 

 

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 March 31, 
   (Unaudited) 
   (In thousands) 
                               
   2012   2011      2012   2011      2012   2011 
Interest rate swaps  $   $158   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 March 31,  
        2012     2011  
        (Unaudited)  
        (In thousands)  
           
Employment agreement award   Corporate selling, general and administrative expense   $ 350     $ 40  

 

Hedging Activities

 

In June 2005, pursuant to our Previous Credit Agreement (as defined in Note 10 — 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.

 

29
 

 

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.

  

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 March 31, 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 March 31, 2012 to be approximately $10.7 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.

 

10.  LONG-TERM DEBT:

 

Long-term debt consists of the following:

 

   March 31, 2012   December
31, 2011
 
   (Unaudited)     
   (In thousands) 
         
Senior bank term debt  $382,140   $383,105 
6⅜% Senior Subordinated Notes due February 2013   747    747 
12½%/15% Senior Subordinated Notes due May 2016   319,838    312,800 
10% Senior Secured TV One Notes due March 2016   119,000    119,000 
Total debt   821,725    815,652 
Less: current portion   4,607    3,860 
Less: original issue discount   6,411    6,748 
Long-term debt, net  $810,707   $805,044 

 

30
 

 

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.

 

31
 

 

As of March 31, 2012, ratios calculated in accordance with the 2011 Credit Agreement, are as follows:

 

    As of
March 31,
2012
    Covenant
Limit
    Excess
Coverage
 
                   
Pro Forma Last Twelve Months Covenant EBITDA (In millions)   $ 85.7              
                     
Pro Forma Last Twelve Months Interest Expense (In millions)   $ 48.7              
                     
Senior Debt (In millions)   $ 359.5              
Total Debt (In millions)   $ 680.0              
                     
Senior Secured Leverage                     
Senior Secured Debt / Covenant EBITDA      4.19   4.75   0.56
                     
Total Leverage                    
Total Debt / Covenant EBITDA     7.93 x     9.00 x     1.07 x
                         
Interest Coverage                        
Covenant EBITDA / Interest Expense     1.76 x     1.25 x     0.51 x
                         
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 March 31, 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 $386.0 million term loan are payable on the last day of each March, June, September and December.

 

As of March 31, 2012, the Company had approximately $23.8 million of borrowing capacity under its revolving credit facility. After taking into consideration the financial covenants under the 2011 Credit Agreement, the full amount was available to be borrowed.

 

As of March 31, 2012, the Company had outstanding approximately $382.1 million on its term credit facility. During the quarter ended March 31, 2012, the Company repaid approximately $1.0 million under the 2011 Credit Agreement. Proceeds from the 2011 Credit Agreement of approximately $378.3 million, net of original issue discount, were used to repay the Amended and Restated Credit Agreement (as defined below) and pay other fees and expenses, with the balance of the proceeds used to fund the TV One capital call. 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.

 

32
 

Period between and including the November 2010 Refinancing Transactions and entering into the 2011 Credit Agreement

 

On November 24, 2010, the Company entered into a credit agreement amendment with its prior syndicate of banks. The credit agreement amendment, which amended and restated the Previous Credit Agreement (as defined below) (as so amended and restated, the “Amended and Restated Credit Agreement”), among other things, replaced the existing amount of outstanding revolving loans with a $323.0 million term loan and provided for three tranches of revolving loans, including a $20.0 million revolver to be used for working capital, capital expenditures, investments, and other lawful corporate purposes, a $5.1 million revolver to be used solely to redeem and retire the 2011 Notes, and a $13.7 million revolver to be used solely to fund a capital call with respect to TV One (the “November 2010 Refinancing Transaction”).  

 

The Amended and Restated Credit Agreement provided for maintenance of the following maximum fixed charge coverage ratio as of the last day of each fiscal quarter:

 

Effective Period   Ratio
November 24, 2010 to December 30, 2010   1.05 to 1.00
December 31, 2010 to June 30, 2012   1.07 to 1.00

 

The Amended and Restated Credit Agreement also provided for maintenance of the following maximum total leverage ratios (subject to certain adjustments if subordinated debt is issued or any portion of the $13.7 million revolver was used to fund a TV One capital call):

 

Effective Period   Ratio
November 24, 2010 to December 30, 2010   9.35 to 1.00
December 31, 2010 to December 30, 2011   9.00 to 1.00
December 31, 2011 and thereafter   9.25 to 1.00

 

 The Amended and Restated Credit Agreement also provided for maintenance of the following maximum senior leverage ratios (subject to certain adjustments if any portion of the $13.7 million revolver was used to fund a TV One capital call):

 

Beginning   No greater than
November 24, 2010 to December 30, 2010   5.25 to 1.00
December 31, 2010 to March 30, 2011   5.00 to 1.00
March 31, 2011 to September 29, 2011   4.75 to 1.00
September 30, 2011 to December 30, 2011   4.50 to 1.00
December 31, 2011 and thereafter   4.75 to 1.00

 

The Amended and Restated Credit Agreement provided for maintenance of average weekly availability at any time during any period set forth below:

 

Beginning  Average weekly availability no less than 
November 24, 2010 through and including June 30, 2011  $10,000,000 
July 1, 2011 and thereafter  $15,000,000 

 

During the period between and including November 24, 2010 and March 31, 2011, the Company was in compliance with all of its financial covenants under the Amended and Restated Credit Agreement.

 

33
 

 

Under the terms of the Amended and Restated Credit Agreement, interest on both alternate base rate loans and LIBOR loans was payable monthly.  The LIBOR interest rate floor was 1.00% and the alternate base rate was equal to the greater of the prime rate, the Federal Funds Effective Rate plus 0.50% and the LIBOR Rate for a one-month period plus 1.00%.  Interest payable on (i) LIBOR loans were at LIBOR plus 6.25% and (ii) alternate base rate loans was at an alternate base rate plus 5.25% (and, in each case, could have been permanently increased if the Company exceeded certain senior leverage ratio levels, tested quarterly beginning June 30, 2011).  The interest rate paid in excess of LIBOR could have been as high as 7.25% during the last quarter prior to maturity if the Company exceeded the senior leverage ratio levels on each test date. Commencing on September 30, 2011, quarterly installments of 0.25%, or $807,500, of the principal balance on the $323.0 million term loan were payable on the last day of each March, June, September and December.

 

Under the terms of the Amended and Restated Credit Agreement, quarterly installments of principal on the term loan facility were payable on the last day of each March, June, September and December commencing on September 30, 2007 in a percentage amount of the principal balance of the term loan facility outstanding on September 30, 2007, net of loan repayments, of 1.25% between September 30, 2007 and June 30, 2008, 5.0% between September 30, 2008 and June 30, 2009, and 6.25% between September 30, 2009 and June 30, 2012. Based on the (i) $174.4 million net principal balance of the term loan facility outstanding on September 30, 2008, (ii) a $70.0 million prepayment in March 2009, (iii) a $31.5 million prepayment in May 2009 and (iv) a $5.0 million prepayment in May 2010, quarterly payments of $4.0 million are payable between June 30, 2010 and June 30, 2012.

 

On December 24, 2010, all remaining outstanding 2011 Notes were repurchased pursuant to the indenture governing the 2011 Notes.  We incurred approximately $4.5 million in borrowings under the Amended and Restated Credit Agreement in connection with such repurchase.

 

As a result of our repurchase and refinancing of the 2011 Notes, the expiration of the Amended and Restated Credit Agreement was June 30, 2012.

 

On March 31, 2011, the Company repaid all obligations under, and terminated, the Amended and Restated Credit Agreement with proceeds from a new senior credit facility governed by the 2011 Credit Agreement. During the quarter ended March 31, 2011 the Company did not borrow from the Amended and Restated Credit Agreement and repaid approximately $353.7 million.

 

 Pre November 2010 Refinancing Transactions

 

In June 2005, the Company entered into the Credit Agreement with a syndicate of banks (the “Previous Credit Agreement”), and simultaneously borrowed $437.5 million to retire all outstanding obligations under its Previous Credit Agreement. The Previous Credit Agreement was amended in April 2006 and September 2007 to modify certain financial covenants and other provisions. Prior to the November 2010 Refinancing Transaction, the Previous Credit Agreement was to expire the earlier of (a) six months prior to the scheduled maturity date of the 8⅞% Senior Subordinated Notes due July 1, 2011 (January 1, 2011) (unless the 8⅞% Senior Subordinated Notes have been repurchased or refinanced prior to such date) or (b) June 30, 2012. The total amount available under the Credit Agreement was $800.0 million, consisting of a $500.0 million revolving facility and a $300.0 million term loan facility. Borrowings under the credit facilities were subject to compliance with certain provisions including, but not limited, to financial covenants. The Company could use proceeds from the credit facilities 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.

 

During the quarter ended March 31, 2010, we noted that certain of our subsidiaries identified as guarantors in our financial statements did not have requisite guarantees filed with the trustee as required under the terms of the indentures governing the 6⅜% Senior Subordinated Notes due 2013 (the “2013 Notes”) and 2011 Notes (the “Non-Joinder of Certain Subsidiaries”).  The Non-Joinder of Certain Subsidiaries caused a non-monetary, technical default under the terms of the relevant indentures at December 31, 2009, causing a non-monetary, technical cross-default at December 31, 2009 under the terms of our Previous Credit Agreement.  On March 30, 2010, we joined the relevant subsidiaries as guarantors under the relevant indentures (the “Joinder”).  Further, on March 30, 2010, we entered into a third amendment (the “Third Amendment”) to the Previous Credit Agreement.  The Third Amendment provided for, among other things: (i) a $100.0 million revolver commitment reduction (from $500.0 million to $400.0 million) under the bank facilities; (ii) a 1.0% floor with respect to any loan bearing interest at a rate determined by reference to the adjusted LIBOR (iii) certain additional collateral requirements; (iv) certain limitations on the use of proceeds from the revolving loan commitments; (v) the addition of Interactive One, LLC as a guarantor of the loans under the Previous Credit Agreement and under the notes governed by the Company’s 2011 Notes and 2013 Notes; (vi) the waiver of the technical cross-defaults that existed as of December 31, 2009 and through the date of the amendment arising due to the Non-Joinder of Certain Subsidiaries; and (vii) the payment of certain fees and expenses of the lenders in connection with their diligence work on the amendment. 

 

34
 

 

Under the terms of the Previous Credit Agreement, upon any breach or default under either the 8⅞% Senior Subordinated Notes due July 2011 or the 6⅜% Senior Subordinated Notes due February 2013, the lenders could among other actions immediately terminate the Previous Credit Agreement and declare the loans then outstanding under the Previous Credit Agreement to be due and payable in whole immediately.  Similarly, under the 8⅞% Senior Subordinated Notes and the 6⅜% Senior Subordinated Notes, a default under the terms of the Previous Credit Agreement would constitute an event of default, and the trustees or the holders of at least 25% in principal amount of the then outstanding notes (under either class) could have declared the principal of such class of note and interest to be due and payable immediately.

 

As of each of June 30, 2010, July 1, 2010 and September 30, 2010, we were not in compliance with the terms of the Previous Credit Agreement.  More specifically, (i) as of June 30, 2010, we failed to maintain a total leverage ratio of 7.25 to 1.00 (ii) as of each of July 1, 2010 and September 30, 2010, as a result of a step down of the total leverage ratio from no greater than 7.25 to 1.00 to no greater than 6.50 to 1.00 effective for the period July 1, 2010 to September 30, 2011, we also failed to maintain the requisite total leverage ratio and (iii) as of September 30, 2010, we failed to maintain a senior leverage ratio of 4.00 to 1.00.  On July 15, 2010, the Company and its subsidiaries entered into a forbearance agreement (the “Forbearance Agreement”) with Wells Fargo Bank, N.A. (successor by merger to Wachovia Bank, National Association), as administrative agent (the “Agent”), and financial institutions constituting the majority of outstanding loans and commitments (the “Required Lenders”) under the Previous Credit Agreement, relating to the defaults and events of default existing as of June 30, 2010 and July 1, 2010.  On August 13, 2010, we entered into an amendment to the  Forbearance Agreement (the “Forbearance Agreement Amendment”) that, among other things, extended the termination date of the Forbearance Agreement to September 10, 2010, unless terminated earlier by its terms, and provided additional forbearance related to the then anticipated default caused by an opinion of Ernst & Young LLP expressing substantial doubt about the Company’s ability to continue as a going concern as issued in connection with the restatement of our financial statements.  Under the Forbearance Agreement and the Forbearance Agreement Amendment, the Agent and the Required Lenders maintained the right to deliver “payment blockage notices” to the trustees for the holders of the 2011 Notes and/or the 2013 Notes.

 

On August 5, 2010, the Agent delivered a payment blockage notice to the Trustee under the Indenture governing our 2013 Notes.  As a result, neither we nor any of our guaranteeing subsidiaries could make any payment or distribution of any kind or character in respect of obligations under the 2013 Notes, including the interest payment that was scheduled to be made on August 16, 2010.  The 30-day grace period for the nonpayment of interest before such nonpayment constituted an event of default under the 2013 Notes Indenture expired on September 15, 2010.  While the trustee or holders of at least 25% in principal amount of the then outstanding 2013 Notes could have declared the principal amount, and accrued and unpaid interest, on all outstanding 2013 Notes to be due and payable immediately as a result of such event of default, no such remedies were exercised as we continued to negotiate the terms of the amended exchange offer and a new support agreement with the members of the ad hoc group of holders of our 2011 Notes and 2013 Notes.  The event of default under the 2013 Notes Indenture also constituted an event of default under the Previous Credit Agreement.  While the Forbearance Agreement Amendment expired by its terms on September 10, 2010, we and the Agent continued to negotiate the terms of a credit facility amendment and the Agent and the lenders did not exercise additional remedies under the Previous Credit Agreement. The Amended and Restated Credit Agreement cured all of these issues.

 

Senior Subordinated Notes

 

Period after the November 2010 Refinancing Transactions and after the March 2011 Refinancing Transaction

 

On November 24, 2010, we issued $286.8 million of our 121/2%/15% Senior Subordinated Notes due May 2016 in a private placement and exchanged and then cancelled approximately $97.0 million of $101.5 million in aggregate principal amount outstanding of our 2011 Notes and approximately $199.3 million of $200.0 million in aggregate principal amount outstanding of our 2013 Notes (the 2013 Notes together with the 2011 Notes, the “Prior Notes”).  We entered 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 and interest on the Prior Notes when due, and eliminated the related events of default. Subsequently, all remaining outstanding 2011 Notes were repurchased pursuant to the indenture governing the 2011 Notes, effective as of December 24, 2010.

 

35
 

 

As of March 31, 2012, the Company had outstanding $747,000 of its 6⅜% Senior Subordinated Notes due February 2013 and $319.8 million of its 12½%/15% Senior Subordinated Notes due May 2016. The 12½%/15% Senior Subordinated Notes due May 2016 had a carrying value of $319.8 million and a fair value of approximately $225.5 million as of March 31, 2012, and the 6⅜% Senior Subordinated Notes due February 2013 had a carrying value of $747,000 and a fair value of approximately $702,000 as of March 31, 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 6⅜% Senior Subordinated Notes are due in February and August.  Based on the $747,000 principal balance of the 6⅜% Senior Subordinated Notes outstanding on March 31, 2012, interest payments of $24,000 are payable each February and August through February 2013.

 

Interest on the 12½%/15% Senior Subordinated Notes is payable in cash, or at our election, partially in cash and partially through the issuance of additional 12½%/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 may make 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 shall accrue at a rate of 12.5% per annum and shall be 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 12.5% per annum if the interest for such quarterly period is paid fully in cash.  In the event of a PIK Election, including the PIK Election currently in effect, the interest paid in cash and the interest paid-in-kind by issuance of additional Exchange Notes (“PIK Notes”) will accrue 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 12.5% per annum and shall be payable in cash. A PIK Election is currently in effect and will remain in effect through May 15, 2012. After May 15, 2012, interest shall accrue at a rate of 12.5% per annum and shall be payable wholly in cash and the Company will no longer have an option to pay any portion of its interest through the issuance of PIK Notes.

 

During the quarter ended March 31, 2012, the Company paid cash interest in the amount of approximately $15.5 million and issued approximately $7.0 million of additional 12½%/15% Senior Subordinated Notes in accordance with the PIK Election that is currently in effect.

 

The indentures governing the Company’s 12½%/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 12½%/15% Senior Subordinated Notes, the 6⅜% Senior Subordinated Notes and the Company’s obligations under the 2011 Credit Agreement.

 

36
 

Period prior to November 2010 Refinancing Transactions

 

Subsequent to December 31, 2009, we noted that certain of our subsidiaries identified as guarantors in our financial statements did not have requisite guarantees filed with the trustee as required under the terms of the indentures (the “Non-Joinder of Certain Subsidiaries”).  The Non-Joinder of Certain Subsidiaries caused a non-monetary, technical default under the terms of the relevant indentures at December 31, 2009, causing a non-monetary, technical cross-default at December 31, 2009 under the terms of our Credit Agreement dated as of June 13, 2005.  We have since joined the relevant subsidiaries as guarantors under the relevant indentures (the “Joinder”).  Further, on March 30, 2010, we entered into a third amendment (the “Third Amendment”) to the Credit Agreement.  The Third Amendment provides for, among other things: (i) a $100.0 million revolver commitment reduction under the bank facilities; (ii) a 1.0% floor with respect to any loan bearing interest at a rate determined by reference to the adjusted LIBOR; (iii) certain additional collateral requirements; (iv) certain limitations on the use of proceeds from the revolving loan commitments; (v) the addition of Interactive One, LLC as a guarantor of the loans under the Credit Agreement and under the notes governed by the Company’s 2001 and 2005 senior subordinated debt documents; (vi) the waiver of the technical cross-defaults that existed as of December 31, 2009 and through the date of the amendment arising due to the Non-Joinder of Certain Subsidiaries; and (vii) the payment of certain fees and expenses of the lenders in connection with their diligence in connection with the amendment.    

 

As of each of June 30, 2010, July 1, 2010 and September 30, 2010, we were not in compliance with the terms of our Previous Credit Agreement.  More specifically, (i) as of June 30, 2010, we failed to maintain a total leverage ratio of 7.25 to 1.00 (ii) as of each of July 1, 2010 and September 30, 2010, as a result of a step down of the total leverage ratio from no greater than 7.25 to 1.00 to no greater than 6.50 to 1.00 effective for the period July 1, 2010 to September 30, 2011, we also failed to maintain the requisite total leverage ratio and (iii) as of September 30, 2010, we failed to maintain a senior leverage ratio of 4.00 to 1.00.  On July 15, 2010, the Company and its subsidiaries entered into the Forbearance Agreement with Wells Fargo Bank, N.A. (successor by merger to Wachovia Bank, National Association), as Agent, and the Required Lenders under our Previous Credit Agreement, relating to the defaults and events of default existing as of June 30, 2010 and July 1, 2010.  On August 13, 2010, we entered into an amendment to the  Forbearance Agreement Amendment that, among other things, extended the termination date of the Forbearance Agreement to September 10, 2010, unless terminated earlier by its terms, and provided additional forbearance related to the then anticipated default caused by an opinion of Ernst & Young LLP expressing substantial doubt about the Company’s ability to continue as a going concern as issued in connection with the restatement of our financial statements.  Under the Forbearance Agreement and the Forbearance Agreement Amendment, the Agent and the Required Lenders maintained the right to deliver “payment blockage notices” to the trustees for the holders of the 2011 Notes and/or the 2013 Notes.

  

On August 5, 2010, the Agent under our Previous Credit Agreement delivered a payment blockage notice to the Trustee under the Indenture governing our 2013 Notes.  As a result, neither we nor any of our guaranteeing subsidiaries could make any payment or distribution of any kind or character in respect of obligations under the 2013 Notes, including the interest payment that was scheduled to be made on August 16, 2010.  The 30-day grace period for the nonpayment of interest before such nonpayment constituted an event of default under the 2013 Notes Indenture expired on September 15, 2010.  While the trustee or holders of at least 25% in principal amount of the then outstanding 2013 Notes could declare the principal amount, and accrued and unpaid interest, on all outstanding 2013 Notes to be due and payable immediately as a result of such event of default, as of the date of this filing, no such remedies were exercised as we continued to negotiate the terms of the amended exchange offer and a new support agreement with the members of the ad hoc group of holders of our 2011 and 2013 Notes.  The event of default under the 2013 Notes Indenture also constituted an event of default under the Previous Credit Agreement.  As of November 24, 2010, as a result of the November 2010 Refinancing Transactions, any and all existing defaults and events of default that had arisen or may have arisen were cured.

 

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.

 

37
 

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. As noted above, the note was issued in connection with Reach Media reacquiring Citadel’s noncontrolling stock ownership in Reach Media as well as entering into a new sales representation agreement with Radio Networks, a subsidiary of Citadel.

 

Future scheduled minimum principal payments of debt as of March 31, 2012 are as follows:

 

   Senior
Subordinated
Notes
     Credit Facility   Senior Secured
Notes
 
   (Unaudited) 
   (In thousands) 
             
April – December 2012  $   $2,895   $ 
2013   747    3,860     
2014       3,860     
2015       3,860     
2016   319,838    367,665    119,000 
Total Debt  $320,585   $382,140   $119,000 

 

11.  INCOME TAXES:

 

The Company recorded a tax expense of approximately $65.3 million on a pre-tax loss from continuing operations of approximately $9.9 million for the three month period ended March 31, 2012, which resulted in a tax rate of (656.1)%. This rate is based on the blending of an estimated annual effective tax rate of (744.0)% for Radio One, which has a full valuation allowance for its deferred tax assets (“DTAs”), with an estimated annual effective tax rate of 44.4% for Reach Media, which does not have a valuation allowance.   

 

The Company concluded it was more likely than not that the benefit from certain of its DTAs would not be realized. The Company considered its historically profitable jurisdictions, its sources of future taxable income and tax planning strategies in determining the amount of valuation allowance recorded. As part of that assessment, the Company also determined that it was not appropriate under generally accepted accounting principles to benefit its DTAs based on deferred tax liabilities (“DTLs”) related to indefinite-lived intangibles that cannot be scheduled to reverse in the same period. Because the DTL in this case would not reverse until some future indefinite period when the intangibles are either sold or impaired, any resulting temporary differences cannot be considered a source of future taxable income to support realization of the DTAs. For the three months ended March 31, 2012, an additional valuation allowance for the current year anticipated increase to DTAs related to net operating loss carryforwards from the amortization of indefinite-lived intangibles was included in the annual effective tax rate calculation.

 

During 2011, the consolidation of TV One included an adjustment to the DTL related to the partnership investment in TV One. The Company evaluated the DTL and concluded that a portion will not reverse within the requisite period since it relates to indefinite-lived assets and cannot be offset against the DTAs. This item generated a tax expense of approximately $1.0 million for the three months ended March 31, 2012 and did not generate any expense for the three months ended March 31, 2011 as the consolidation of TV One did not occur until the second quarter of 2011. The DTL on the indefinite-lived intangibles of Radio One generated a tax expense of approximately $64.0 million for the three months ended March 31, 2012. The remaining portion of the tax expense of $258,000 consisted principally of Radio One state taxes of $750,000 which were offset by a tax benefit from Reach Media of $492,000.

 

38
 

 

12.  STOCKHOLDERS’ EQUITY: 

 

Common Stock

 

The Company has four classes of common stock, Class A, Class B, Class C and Class D. Generally, the shares of each class are identical in all respects and entitle the holders thereof to the same rights and privileges. However, with respect to voting rights, each share of Class A common stock entitles its holder to one vote and each share of Class B common stock entitles its holder to ten votes. The holders of Class C and Class D common stock are not entitled to vote on any matters. The holders of Class A common stock can convert such shares into shares of Class C or Class D common stock. Subject to certain limitations, the holders of Class B common stock can convert such shares into shares of Class A common stock. The holders of Class C common stock can convert such shares into shares of Class A common stock. The holders of Class D common stock have no such conversion rights.

 

 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.  The Company continues to have an open stock repurchase authorization with respect to its Class A and D stock. During the three months ended March 31, 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 March 31, 2012, 4,844,051 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 tax purposes on or about the vesting dates.

 

39
 

 

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.

 

Stock-based compensation expense for the three months ended March 31, 2012 and 2011 was approximately $44,000 and $937,000 respectively.

 

The Company did not grant stock options during the three months ended March 31, 2012 and granted 114,675 stock options during the three months ended March 31, 2011.

 

   Three Months Ended March 31, 
   2012   2011 
Average risk-free interest rate       2.86%
Expected dividend yield       0.00%
Expected lives       6.25 years 
Expected volatility       117.12%

 

Transactions and other information relating to stock options for the three months ended March 31, 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      $           
Exercised                  
Forfeited/cancelled/expired                  
Balance as of March 31, 2012   4,811,000   $8.60    4.22   $ 
Vested and expected to vest at March 31, 2012   4,799,000   $8.62    4.21   $ 
Unvested at March 31, 2012   113,000   $1.55    9.01   $ 
Exercisable at March 31, 2012   4,698,000   $8.77    4.10   $ 

 

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 three months ended March 31, 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 March 31, 2012. This amount changes based on the fair market value of the Company’s stock. There were no options exercised during the three months ended March 31, 2012. The number of options that vested during the three months ended March 31, 2012 was 15,772.

 

As of March 31, 2012, $80,000 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 5.7 months. The stock option weighted-average fair value per share was $3.45 at March 31, 2012.

 

The Company did not grant shares of restricted stock during the three months ended March 31, 2012 and 2011.

 

40
 

 

Transactions and other information relating to restricted stock grants for the three months ended March 31, 2012 are summarized below:

 

   Shares   Average
Fair Value
at Grant
Date
 
Unvested at December 31, 2011   144,000   $1.10 
Grants      $ 
Vested   (25,000)  $1.04 
Forfeited/cancelled/expired      $ 
Unvested at March 31, 2012   119,000   $1.12 

 

The restricted stock grants were included in the Company’s outstanding share numbers on the effective date of grant. As of March 31, 2012, $109,000 of total unrecognized compensation cost related to restricted stock grants is expected to be recognized over the next 14 months.

 

13.  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.

 

41
 

 

Detailed segment data for the three months ended March 31, 2012 and 2011 is presented in the following tables:

 

   Three Months Ended March 31, 
   2012   2011 
   (Unaudited) 
   (In thousands) 
Net Revenue:          
Radio Broadcasting  $52,733   $48,258 
Reach Media   13,553    14,725 
Internet   5,785    3,515 
Cable Television   32,236     
Corporate/Eliminations/Other   (1,265)   (1,489)
Consolidated  $103,042   $65,009 
           
Operating Expenses (excluding depreciation, amortization and impairment charges and including stock-based compensation):          
Radio Broadcasting  $35,324   $31,936 
Reach Media   14,362    13,937 
Internet   5,464    5,072 
Cable Television   20,318     
Corporate/Eliminations/Other   4,116    4,403 
Consolidated  $79,584   $55,348 
           
Depreciation and Amortization:          
Radio Broadcasting  $1,605   $1,752 
Reach Media   301    984 
Internet   814    1,118 
Cable Television   6,748     
Corporate/Eliminations/Other   217    230 
Consolidated  $9,685   $4,084 
           
Operating income (loss):          
Radio Broadcasting  $15,804   $14,570 
Reach Media   (1,110)   (196)
Internet   (493)   (2,675)
Cable Television   5,170     
Corporate/Eliminations/Other   (5,598)   (6,122)
Consolidated  $13,773   $5,577 

 

   March 31, 2012   December 31, 2011 
   (Unaudited)     
   (In thousands) 
Total Assets:          
Radio Broadcasting  $799,464   $806,822 
Reach Media   32,145    33,737 
Internet   33,673    33,265 
Cable Television   558,093    561,325 
Corporate/Eliminations/Other   57,786    51,333 
Consolidated  $1,481,161   $1,486,482 

 

42
 

 

14.  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 March 31, 2012 and 2011, Radio One paid $0 and $4,000, respectively, to or on behalf of Music One, primarily for market talent event appearances, travel reimbursement and sponsorships. For the three months ended March 31, 2012 and 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 three months ended March 31, 2012 and 2011.

 

There were no office space or administrative support transactions between Radio One and Music One during the three months ended March 31, 2012 and 2011, respectively. Advertising spots are priced at an average unit rate. Based on the cross-promotional nature of the activities provided by Music One and received by the Company, we believe that these methodologies of charging average unit rates or passing through the actual costs incurred are fair and reflect terms no more favorable than terms generally available to a third-party.

 

43
 

 

15.  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 6⅜ Senior Subordinated Notes due February 2013, the 12½%/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 March 31, 2012 and December 31, 2011, and related consolidated statements of operations, comprehensive loss and cash flows for the three months ended March 31, 2012 and 2011. 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 March 31, 2012

 

   Combined             
   Guarantor   Radio         
   Subsidiaries   One, Inc.   Eliminations   Consolidated 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
   (In thousands) 
                 
NET REVENUE  $31,103   $71,939   $   $103,042 
OPERATING EXPENSES:                    
Programming and technical   8,410    22,755        31,165 
Selling, general and administrative, including stock-based compensation   14,708    24,118        38,826 
Corporate selling, general and administrative, including stock-based compensation       9,593        9,593 
Depreciation and amortization   1,821    7,864        9,685 
Total operating expenses   24,939    64,330        89,269 
Operating income   6,164    7,609        13,773 
INTEREST INCOME       22        22 
INTEREST EXPENSE   249    23,498        23,747 
OTHER INCOME net        7        7 
Income (loss) before provision for income taxes, noncontrolling interests in income of subsidiaries and discontinued operations   5,915    (15,860)       (9,945)
PROVISION FOR INCOME TAXES       65,254        65,254 
Net income (loss) before equity in income of subsidiaries and discontinued operations   5,915    (81,114)       (75,199)
EQUITY IN INCOME OF SUBSIDIARIES       5,930    (5,930)    
Net income (loss) from continuing operations   5,915    (75,184)   (5,930)   (75,199)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax   15    (1)       14 
CONSOLIDATED NET INCOME (LOSS)   5,930    (75,185)   (5,930)   (75,185)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS       4,057        4,057 
CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS  $5,930   $(79,242)  $(5,930)  $(79,242)

 

44
 

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended March 31, 2011

 

   Combined             
   Guarantor   Radio         
   Subsidiaries   One, Inc.   Eliminations   Consolidated 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
   (In thousands) 
                 
NET REVENUE  $28,095   $36,914   $   $65,009 
OPERATING EXPENSES:                    
Programming and technical   8,518    10,313        18,831 
Selling, general and administrative, including stock-based compensation   12,871    15,624        28,495 
Corporate selling, general and administrative, including stock-based compensation       8,022        8,022 
Depreciation and amortization   2,188    1,896        4,084 
Total operating expenses   23,577    35,855        59,432 
Operating income   4,518    1,059        5,577 
INTEREST INCOME       8        8 
INTEREST EXPENSE       19,333        19,333 
EQUITY IN INCOME OF AFFILIATED COMPANY       3,079        3,079 
LOSS ON RETIREMENT OF DEBT       7,743        7,743 
OTHER INCOME, net       25        25 
Income (loss) before provision for income taxes, noncontrolling interests in income of subsidiaries and discontinued operations   4,518    (22,905)       (18,387)
PROVISION FOR INCOME TAXES       45,619        45,619 
Net income (loss) before equity in income of subsidiaries and discontinued operations   4,518    (68,524)       (64,006)
EQUITY IN INCOME OF SUBSIDIARIES       4,482    (4,482)    
Net income (loss) from continuing operations   4,518    (64,042)   (4,482)   (64,006)
LOSS FROM DISCONTINUED OPERATIONS, net of tax   (36)           (36)
CONSOLIDATED NET INCOME (LOSS)   4,482    (64,042)   (4,482)   (64,042)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS       203        203 
CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS  $4,482   $(64,245)  $(4,482)  $(64,245)

 

45
 

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

Three Months Ended March 31, 2012

 

   Combined             
   Guarantor   Radio         
   Subsidiaries   One, Inc.   Eliminations   Consolidated 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
   (In thousands) 
                 
CONSOLIDATED NET INCOME (LOSS)  $5,930   $(75,185)  $(5,930)  $(75,185)
Net change in unrealized loss on investment activities       97        97 
COMPREHENSIVE INCOME (LOSS)   5,930    (75,088)   (5,930)   (75,088)
LESS:  COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS       4,057        4,057 
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS  $5,930   $(79,145)  $(5,930)  $(79,145)

 

46
 

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

Three Months Ended March 31, 2011

 

   Combined             
   Guarantor   Radio         
   Subsidiaries   One, Inc.   Eliminations   Consolidated 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
   (In thousands) 
                 
COMPREHENSIVE INCOME (LOSS)  $4,482   $(64,042)  $(4,482)  $(64,042)
LESS:  COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS       203        203 
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS  $4,482   $(64,245)  $(4,482)  $(64,245)

 

47
 

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

As of March 31, 2012

 

   Combined             
   Guarantor   Radio One,         
   Subsidiaries   Inc.   Eliminations   Consolidated 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
   (In thousands) 
                 
ASSETS 
CURRENT ASSETS:                    
Cash and cash equivalents  $(1)  $43,885   $   $43,884 
Short-term investments       561        561 
Trade accounts receivable, net of allowance for doubtful accounts   27,735    52,611        80,346 
Prepaid expenses and other current assets   1,730    5,053        6,783 
Current portion of content assets       27,525        27,525 
Current assets from discontinued operations   (31)   125        94 
Total current assets   29,433    129,760        159,193 
PREPAID PROGRAMMING AND DEPOSITS       5,284        5,284 
PROPERTY AND EQUIPMENT, net   17,755    16,503        34,258 
INTANGIBLE ASSETS, net   550,836    683,662        1,234,498 
CONTENT ASSETS, net       38,976        38,976 
LONG-TERM INVESTMENTS       4,213        4,213 
INVESTMENT IN SUBSIDIARIES       585,019    (585,019)    
OTHER ASSETS   234    3,047        3,281 
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS   1,458            1,458 
Total assets  $599,716   $1,466,464   $(585,019)  $1,481,161 
                     
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY 
                     
CURRENT LIABILITIES:                    
Accounts payable  $1,543   $6,693   $   $8,236 
Accrued interest       6,824        6,824 
Accrued compensation and related benefits   2,075    9,510        11,585 
Current portion of content payables       22,241        22,241 
Income taxes payable       1,363        1,363 
Other current liabilities   9,593    495        10,088 
Current portion of long-term debt       4,607        4,607 
Current liabilities from discontinued operations   212    28        240 
Total current liabilities   13,423    51,761        65,184 
LONG-TERM DEBT, net of current portion and original issue discount       810,707        810,707 
CONTENT PAYABLES, net of current portion       15,375        15,375 
OTHER LONG-TERM LIABILITIES   1,248    17,734        18,982 
DEFERRED TAX LIABILITIES       219,103        219,103 
NON-CURRENT LIABILITIES FROM DISCONTINUED OPERATIONS   26            26 
Total liabilities   14,697    1,114,680        1,129,377 
                     
REDEEMABLE NONCONTROLLING INTEREST       23,452        23,452 
                     
STOCKHOLDERS’ EQUITY:                    
Common stock       50        50 
Accumulated other comprehensive loss       (102)       (102)
Additional paid-in capital   188,477    998,554    (188,477)   998,554 
Retained earnings (accumulated deficit)   396,542    (875,398)   (396,542)   (875,398)
Total stockholders’ equity   585,019    123,104    (585,019)   123,104 
Noncontrolling interest       205,228        205,228 
Total Equity   585,019    328,332    (585,019)   328,332 
Total liabilities, redeemable noncontrolling interest and equity  $599,716   $1,466,464   $(585,019)  $1,481,161 

 

48
 

 

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 
PREPAID PROGRAMMING AND DEPOSITS       2,329        2,329 
PROPERTY AND EQUIPMENT, net   17,994    15,994        33,988 
INTANGIBLE ASSETS, net   551,271    693,590        1,244,861 
CONTENT ASSETS, net       36,605        36,605 
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 

 

49
 

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2012

 

   Combined             
   Guarantor   Radio         
   Subsidiaries   One, Inc.   Eliminations   Consolidated 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
       (Restated)        (Restated) 
   (In thousands) 
     
CASH FLOWS FROM OPERATING ACTIVITIES:                    
Consolidated net income (loss)  $5,930   $(75,185)  $(5,930)  $(75,185)
Adjustments to reconcile net income (loss) to net cash from operating activities:                    
Depreciation and amortization   1,821    7,864        9,685 
Amortization of debt financing costs       760        760 
Amortization of content assets       8,321        8,321 
Amortization of launch assets       2,489        2,489 
Deferred income taxes       65,582        65,582 
Stock-based compensation and other non-cash compensation       44        44 
Non-cash interest       7,038        7,038 
Effect of change in operating assets and liabilities, net of assets acquired:                    
Trade accounts receivable, net   2,161    1,369        3,530 
Prepaid expenses and other current assets   (39)   1,557        1,518 
Other assets   (30)   (2,977)       (3,007)
Accounts payable   (25)   2,635        2,610 
Due to corporate/from subsidiaries   (10,361)   10,361         
Accrued interest       121        121 
Accrued compensation and related benefits   117    487        604 
Income taxes payable       (431)       (431)
Other liabilities   234    (718)       (484)
Payments for content assets       (10,714)       (10,714)
Net cash flows provided by operating activities from discontinued operations   4            4 
Net cash flows (used in) provided by operating activities   (188)   18,603    (5,930)   12,485 
CASH FLOWS FROM INVESTING ACTIVITIES:                    
Purchase of property and equipment       (2,960)       (2,960)
Investment in subsidiaries       (5,930)   5,930     
Proceeds from sales of investment securities       3,859        3,859 
Purchases of investment securities       (348)       (348)
Net cash flows (used in) provided by investing activities       (5,379)   5,930    551
CASH FLOWS FROM FINANCING ACTIVITIES:                    
Repayment of credit facility       (965)       (965)
Debt refinancing and modification costs       (13)       (13)
Payment of dividends to noncontrolling interest members of TV One       (4,113)       (4,113)
Net cash flows used in financing activities       (5,091)       (5,091)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   (188)   8,133        7,945 
CASH AND CASH EQUIVALENTS, beginning of period   187    35,752        35,939 
CASH AND CASH EQUIVALENTS, end of period  $(1)  $43,885   $   $43,884 

 

50
 

 

RADIO ONE, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2011

 

   Combined             
   Guarantor   Radio         
   Subsidiaries   One, Inc.   Eliminations   Consolidated 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
   (In thousands) 
     
CASH FLOWS FROM OPERATING ACTIVITIES:                    
Consolidated net income (loss)  $4,482   $(64,042)  $(4,482)  $(64,042)
Adjustments to reconcile net income (loss) to net cash from operating activities:                    
Depreciation and amortization   2,188    1,896        4,084 
Amortization of debt financing costs       1,591        1,591 
Loss on retirement of debt       7,743        7,743 
Non-cash interest       6,520        6,520 
Deferred income taxes       45,042        45,042 
Equity in income of affiliated company       (3,079)       (3,079)
Stock-based compensation and other non-cash compensation       937        937 
Effect of change in operating assets and liabilities, net of assets acquired:                    
Trade accounts receivable, net   6,904    4,318        11,222 
Prepaid expenses and other current assets   39    2,579        2,618 
Other assets   20    78        98 
Accounts payable   198    (1,567)       (1,369)
Due to corporate/from subsidiaries   (13,509)   13,509         
Accrued interest       425        425 
Accrued compensation and related benefits   (367)   (842)       (1,209)
Income taxes payable       582        582 
Other liabilities   (67)   (3,407)       (3,474)
Net cash flows provided by operating activities from discontinued operations       22        22 
Net cash flows (used in) provided by operating activities   (112)   12,305    (4,482)   7,711 
CASH FLOWS FROM INVESTING ACTIVITIES:                    
Purchase of property and equipment       (1,812)       (1,812)
Investment in subsidiaries       (4,482)   4,482     
Net cash flows (used in) provided by investing activities       (6,294)   4,482    (1,812)
CASH FLOWS FROM FINANCING ACTIVITIES:                    
Proceeds from credit facility, net of original issue discount       378,280        378,280 
Repayment of credit facility       (353,681)       (353,681)
Debt refinancing and modification costs       (5,873)       (5,873)
Net cash flows provided by financing activities       18,726        18,726 
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   (112)   24,737        24,625 
CASH AND CASH EQUIVALENTS, beginning of period   1,043    8,149        9,192 
CASH AND CASH EQUIVALENTS, end of period  $931   $32,886   $   $33,817 

 

51
 

 

16. 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, has reached an agreement with these organizations on a temporary fee schedule that reflects 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 determines the amount to be paid to ASCAP for usage through 2016. In addition, stations will receive a credit for overpayments made in 2010 and 2011.

 

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. During each of the three months ended March 31, 2012 and 2011, the Company incurred expenses of approximately $2.8 million in connection with these agreements.

 

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 March 31, 2012, we had four standby letters of credit totaling approximately $1.2 million in connection with our annual insurance policy renewals and real estate leases.  In addition, Reach Media had a letter of credit of $500,000 outstanding as of March 31, 2012.

 

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.

 

17.  SUBSEQUENT EVENTS:

 

On April 11, 2012 a standby letter of credit in the amount of $220,000 in connection with our annual insurance policy renewals was reduced to $100,000.

 

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 Credit Agreement.

 

52
 

 

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 March 31, 2012, approximately 51.9% of our net revenue was generated from the sale of advertising in our core radio business, excluding Reach Media. Of our total net revenue, approximately 38.4% of our net revenue was generated from local advertising and approximately 31.5% was generated from national advertising, including network advertising. In comparison, during the three months ended March 31, 2011, approximately 56.1% of our net revenue was generated from local advertising and approximately 29.1%, 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.

 

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. 

 

53
 

 

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.

 

54
 

 

Summary of Performance

 

The tables below provide a summary of our performance based on the metrics described above:

 

   Three Months Ended March
31,
 
   2012   2011 
   (In thousands, except margin
data)
 
         
Net revenue  $103,042   $65,009 
Station operating income   33,068    17,847 
Station operating income margin   32.1%   27.5%
Consolidated net loss attributable to common stockholders  $(79,242)  $(64,245)

 

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

 

   Three Months Ended
March 31,
 
   2012   2011 
   (In thousands) 
         
Consolidated net loss attributable to common stockholders  $(79,242)  $(64,245)
Add back non-station operating income items included in consolidated net loss:          
Interest income   (22)   (8)
Interest expense   23,747    19,333 
Provision for income taxes   65,254    45,619 
Corporate selling, general and administrative, excluding stock-based compensation   9,566    7,249 
Stock-based compensation   44    937 
Loss on retirement of debt       7,743 
Equity in income of affiliated company       (3,079)
Other income, net   (7)   (25)
Depreciation and amortization   9,685    4,084 
Noncontrolling interests in income of subsidiaries   4,057    203 
(Income) loss from discontinued operations, net of tax   (14)   36 
Station operating income  $33,068   $17,847 

 

55
 

 

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

 

   Three Months Ended
March 31,
 
   2012   2011 
   (In thousands) 
Adjusted EBITDA reconciliation:          
Consolidated net loss attributable to common stockholders, as reported  $(79,242)  $(64,245)
Add back non-station operating income items included in consolidated net loss:          
Interest income   (22)   (8)
Interest expense   23,747    19,333 
Provision for income taxes   65,254    45,619 
Depreciation and amortization   9,685    4,084 
EBITDA  $19,422   $4,783 
Stock-based compensation   44    937 
Loss on retirement of debt       7,743 
Equity in income of affiliated company       (3,079)
Other income, net   (7)   (25)
Noncontrolling interests in income of subsidiaries   4,057    203 
(Income) loss from discontinued operations, net of tax   (14)   36 
Adjusted EBITDA  $23,502   $10,598 

 

56
 

 

RADIO ONE, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

 

The following table summarizes our historical consolidated results of operations:

 

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011 (In thousands)

 

   Three Months Ended March 31,         
   2012   2011   Increase/(Decrease) 
   (Unaudited)         
                 
Statements of Operations:                    
Net revenue  $103,042   $65,009   $38,033    58.5%
Operating expenses:                    
Programming and technical, excluding stock-based compensation   31,165    18,831    12,334    65.5 
Selling, general and administrative, excluding stock-based compensation   38,809    28,331    10,478    37.0 
Corporate selling, general and administrative, excluding stock-based compensation   9,566    7,249    2,317    32.0 
Stock-based compensation   44    937    (893)   (95.3)
Depreciation and amortization   9,685    4,084    5,601    137.1 
   Total operating expenses   89,269    59,432    29,837    50.2 
   Operating income   13,773    5,577    8,196    147.0 
Interest income   22    8    14    175.0 
Interest expense   23,747    19,333    4,414    22.8 
Loss on retirement of debt       7,743    (7,743)   (100.0)
Equity in income of affiliated company       3,079    (3,079)   (100.0)
Other income, net   (7)   (25)   18    72.0 
Loss before provision for income taxes, noncontrolling interests in income of subsidiaries and discontinued operations   (9,945)   (18,387)   8,442    45.9 
Provision for income taxes   65,254    45,619    19,635    43.0 
   Net loss from continuing operations   (75,199)   (64,006)   11,193    17.5 
Income (loss) from discontinued operations, net of tax   14    (36)   50    138.9 
   Consolidated net loss   (75,185)   (64,042)   11,143    17.4 
Net income attributable to noncontrolling interests   4,057    203    3,854    1,898.5 
Net loss attributable to common stockholders  $(79,242)  $(64,245)  $14,997    23.3%

 

57
 

 

Net revenue

 

Three Months Ended March 31,   Increase/(Decrease) 
2012   2011         
$103,042   $65,009   $38,033    58.5%

 

During the three months ended March 31, 2012, we recognized approximately $103.0 million in net revenue compared to approximately $65.0 million during the same period in 2011. These amounts are net of agency and outside sales representative commissions, which were approximately $7.2 million during the three months ended March 31, 2012, compared to approximately $6.8 million during the same period in 2011. We began to consolidate the results of TV One during the second quarter of 2011 and recognized approximately $32.2 million of incremental revenue from our cable television segment during the three months ended March 31, 2012. Net revenue for our radio broadcasting segment increased 9.3% and excluding the timing difference for the Company’s annual Gospel Cruise held in March 2012 versus April 2011, our core radio revenue, including syndicated programming, increased 6.4% for the quarter ended March 31, 2012 compared to the same period in 2011. Based on reports prepared by the independent accounting firm Miller, Kaplan, Arase & Co., LLP, the markets we operate in decreased 1.1% in total revenues. We experienced net revenue growth most significantly in our Atlanta, Cincinnati, Cleveland, Detroit and Raleigh markets, with our Dallas and Houston markets experiencing declines. In addition, the radio segment revenue increased due to the timing of the Company’s annual Gospel Cruise held in March 2012 versus April 2011. Reach Media’s net revenues decreased 8.0% in the first quarter of 2012 compared to the same period in 2011 primarily due to changes to certain of Reach Media’s affiliate agreements that became effective January 1, 2012. The “Tom Joyner Fantastic Voyage” took place during March 2012 and March 2011 and generated revenue of approximately $5.9 million and $6.6 million, respectively, for Reach Media. Net revenues for our internet business increased 64.6% for the three months ended March 31, 2012 compared to the same period in 2011. Our internet business recognized strong revenue growth due to an improved sales effort and strong traffic growth, as well as successful Black History Month campaigns.

 

Operating Expenses

 

Programming and technical, excluding stock-based compensation

 

Three Months Ended March 31,   Increase/(Decrease) 
2012   2011         
$31,165   $18,831   $12,334    65.5%

 

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 three months ended March 31, 2012 compared to the same period in 2011 is primarily related to consolidating the results of TV One, as approximately $11.2 million of our consolidated programming and technical operating expenses were incurred by TV One. Approximately $8.3 million of this amount relates to content amortization. Excluding the impact of consolidating TV One’s operating results, our programming and technical expenses increased by 5.9% for the three months ended March 31, 2012 compared to the same period in 2011, primarily due to increased talent costs.

 

58
 

 

Selling, general and administrative, excluding stock-based compensation

 

Three Months Ended March 31,   Increase/(Decrease) 
2012   2011         
$38,809   $28,331   $10,478    37.0%

 

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. Our cable television segment accounted for approximately $7.0 million of the increase due to the impact of consolidating the results of TV One. Excluding the impact of consolidating the results of TV One, our selling, general and administrative expenses increased by 12.6%. The increased expense for the three months ended March 31, 2012 compared to the same period in 2011 is primarily due to timing of the Company’s annual Gospel Cruise held in March 2012 versus April 2011 as well as increased payroll costs. In addition, Reach Media incurred approximately $4.9 million and $5.0 million of selling, general and administrative expenses associated with the “Tom Joyner Fantastic Voyage,” held during March 2012 and March 2011, respectively.

 

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

 

Three Months Ended March 31,   Increase/(Decrease) 
2012   2011         
$9,566   $7,249   $2,317    32.0%

 

Corporate expenses consist of expenses associated with our corporate headquarters and facilities, including personnel as well as other corporate overhead functions. Our cable television segment accounted for approximately $2.1 million of the increase due to the impact of consolidating TV One results.

 

Stock-based compensation

 

Three Months Ended March 31,   Increase/(Decrease) 
2012   2011         
$44   $937   $(893)   (95.3)%

 

Vesting associated with the 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 March 31,   Increase/(Decrease) 
2012   2011         
$9,685   $4,084   $5,601    137.1%

 

The increase in depreciation and amortization expense for the three months ended March 31, 2012 was due primarily to additional depreciation and amortization expense of approximately $6.7 million resulting from the increase in fixed and intangible assets recorded as part of the consolidation of TV One. This increased expense was offset by the completion of amortization for certain intangible assets and the completion of depreciation and amortization for certain assets across our other segments.

 

Interest expense

 

Three Months Ended March 31,   Increase/(Decrease) 
2012   2011         
$23,747   $19,333   $4,414    22.8%

 

The increase in interest expense for the three months ended March 31, 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, including the TV One Notes.  Higher interest rates associated with the 2011 Credit Agreement were in effect for the three months ended March 31, 2012 compared to the same period in 2011.  Approximately $3.0 million of the increased interest expense relates to the TV One Notes.

 

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Loss on retirement of debt

 

Three Months Ended March 31,   Increase/(Decrease) 
2012   2011         
$   $7,743   $(7,743)   (100.0)%

 

The loss on retirement of debt for the three months ended March 31, 2011 was due to a non-recurring charge related to the retirement of the Amended and Restated 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.

 

Equity in income of affiliated company

 

Three Months Ended March 31,   Increase/(Decrease) 
2012   2011         
$   $3,079   $(3,079)   (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 three months ended March 31, 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

 

Three Months Ended March 31,   Increase/(Decrease) 
2012   2011         
$65,254   $45,619   $19,635    43.0%

 

For the three months ended March 31, 2012, the provision for income taxes was approximately $65.3 million compared to a provision for income taxes of approximately $45.6 million for the same period in 2011. Approximately $18.9 million of the increase is attributable to the increase in the deferred tax liability (“DTL”) for indefinite-lived intangibles and approximately $1.0 million is due to indefinite lived assets of TV One.

 

The Company is estimating an annual effective tax rate of approximately (654.6)% for 2012. The Company continues to maintain a full valuation allowance for entities other than Reach Media for its deferred tax assets (“DTAs”), including the DTA associated with its net operating loss carryforward. As a result, pre-tax book income for the entities other than Reach Media does not generate any tax expense. Instead, the tax expense for these entities is based on the change in the DTL associated with certain indefinite-lived intangibles, which increases as tax amortization on these intangibles is recognized. In addition to the DTL on these intangibles, a portion of the Company’s DTAs from net operating loss carryforwards cannot be offset by the DTL for the partnership interest in TV One and therefore results in a current period expense.

 

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Income (loss) from discontinued operations, net of tax

 

Three Months Ended March 31,   Increase/(Decrease) 
2012   2011         
$14   $(36)  $50    138.9%

 

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 three months ended March 31, 2012 resulted primarily from our remaining station in our Boston market entering into an LMA. The loss from discontinued operations, net of tax, for the three months ended March 31, 2011 resulted from the disposition of an asset. The income (loss) from discontinued operations, net of tax, includes no tax provision for the three months ended March 31, 2012 and 2011.

 

Noncontrolling interests in income of subsidiaries

 

Three Months Ended March 31,   Increase/(Decrease) 
2012   2011         
$4,057   $203   $3,854    1,898.5%

 

The increase in noncontrolling interests in income of subsidiaries is due primarily to the impact of consolidating TV One’s operating results during the three months ended March 31, 2012. This amount is partially offset by a net loss generated by Reach Media for the three months ended March 31, 2012 compared to net income for the same period in 2011.

 

Other Data

 

Station operating income

 

Station operating income increased to approximately $33.1 million for the three months ended March 31, 2012 compared to approximately $17.8 million for the comparable period in 2011, an increase of $15.3 million or 86.0%. This increase was primarily due to the impact of consolidating TV One results, as TV One generated approximately $14.0 million of station operating income during the quarter ended March 31, 2012.

 

Station operating income margin

 

Station operating income margin increased to 32.1% for the three months ended March 31, 2012 from 27.5% 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 43.6% for the three months ended March 31, 2012.

 

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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 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, our 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:

 

(b)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.

 

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As of March 31, 2012, ratios calculated in accordance with the 2011 Credit Agreement, are as follows:

 

   As of
March 31,
2012
   Covenant
Limit
   Excess
Coverage
 
             
Pro Forma Last Twelve Months Covenant EBITDA (In millions)  $85.7           
                
Pro Forma Last Twelve Months Interest Expense (In millions)  $48.7           
                
Senior Debt (In millions)  $359.5           
Total Debt (In millions)  $680.0           
                
Senior Secured Leverage               
Senior Secured Debt / Covenant EBITDA   4.19x   4.75x   0.56x
                
Total Leverage               
Total Debt / Covenant EBITDA   7.93x   9.00x   1.07x
                
Interest Coverage               
Covenant EBITDA / Interest Expense   1.76x   1.25x   0.51x
                
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 March 31, 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 $386.0 million term loan are payable on the last day of each March, June, September and December.

 

As of March 31, 2012, the Company had approximately $23.8 million of borrowing capacity under its revolving credit facility. After taking into consideration the financial covenants under the 2011 Credit Agreement, the full amount was available to be borrowed.

 

As of March 31, 2012, the Company had outstanding approximately $382.1 million on its term credit facility. During the quarter ended March 31, 2012, the Company repaid approximately $1.0 million under the 2011 Credit Agreement. Proceeds from the 2011 Credit Agreement of approximately $378.3 million, net of original issue discount, were used to repay the Amended and Restated Credit Agreement (as defined below) and pay other fees and expenses, with the balance of the proceeds used to fund the TV One capital call. 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.

 

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Period between and including the November 2010 Refinancing Transactions and entering into the 2011 Credit Agreement

 

On November 24, 2010, the Company entered into a credit agreement amendment with its prior syndicate of banks. The credit agreement amendment, which amended and restated the Previous Credit Agreement (as defined below) (as so amended and restated, the “Amended and Restated Credit Agreement”), among other things, replaced the existing amount of outstanding revolving loans with a $323.0 million term loan and provided for three tranches of revolving loans, including a $20.0 million revolver to be used for working capital, capital expenditures, investments, and other lawful corporate purposes, a $5.1 million revolver to be used solely to redeem and retire the 2011 Notes, and a $13.7 million revolver to be used solely to fund a capital call with respect to TV One (the “November 2010 Refinancing Transaction”).

 

The Amended and Restated Credit Agreement provided for maintenance of the following maximum fixed charge coverage ratio as of the last day of each fiscal quarter:

 

Effective Period   Ratio
November 24, 2010 to December 30, 2010   1.05 to 1.00
December 31, 2010 to June 30, 2012   1.07 to 1.00

 

The Amended and Restated Credit Agreement also provided for maintenance of the following maximum total leverage ratios (subject to certain adjustments if subordinated debt is issued or any portion of the $13.7 million revolver was used to fund a TV One capital call):

 

Effective Period   Ratio
November 24, 2010 to December 30, 2010   9.35 to 1.00
December 31, 2010 to December 30, 2011   9.00 to 1.00
December 31, 2011 and thereafter   9.25 to 1.00

 

The Amended and Restated Credit Agreement also provided for maintenance of the following maximum senior leverage ratios (subject to certain adjustments if any portion of the $13.7 million revolver was used to fund a TV One capital call):

 

Beginning   No greater than
November 24, 2010 to December 30, 2010   5.25 to 1.00
December 31, 2010 to March 30, 2011   5.00 to 1.00
March 31, 2011 to September 29, 2011   4.75 to 1.00
September 30, 2011 to December 30, 2011   4.50 to 1.00
December 31, 2011 and thereafter   4.75 to 1.00

 

The Amended and Restated Credit Agreement provided for maintenance of average weekly availability at any time during any period set forth below:

 

Beginning  Average weekly availability no less than 
November 24, 2010 through and including June 30, 2011  $10,000,000 
July 1, 2011 and thereafter  $15,000,000 

 

During the period between and including November 24, 2010, and March 31, 2011, the Company was in compliance with all of its financial covenants under the Amended and Restated Credit Agreement.

 

Under the terms of the Amended and Restated Credit Agreement, interest on both alternate base rate loans and LIBOR loans was payable monthly.  The LIBOR interest rate floor was 1.00% and the alternate base rate was equal to the greater of the prime rate, the Federal Funds Effective Rate plus 0.50% and the LIBOR Rate for a one-month period plus 1.00%.  Interest payable on (i) LIBOR loans were at LIBOR plus 6.25% and (ii) alternate base rate loans was at an alternate base rate plus 5.25% (and, in each case, could have been permanently increased if the Company exceeded certain senior leverage ratio levels, tested quarterly beginning June 30, 2011).  The interest rate paid in excess of LIBOR could have been as high as 7.25% during the last quarter prior to maturity if the Company exceeded the senior leverage ratio levels on each test date. Commencing on September 30, 2011, quarterly installments of 0.25%, or $807,500, of the principal balance on the $323.0 million term loan were payable on the last day of each March, June, September and December.

 

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Under the terms of the Amended and Restated Credit Agreement, quarterly installments of principal on the term loan facility were payable on the last day of each March, June, September and December commencing on September 30, 2007 in a percentage amount of the principal balance of the term loan facility outstanding on September 30, 2007, net of loan repayments, of 1.25% between September 30, 2007 and June 30, 2008, 5.0% between September 30, 2008 and June 30, 2009, and 6.25% between September 30, 2009 and June 30, 2012. Based on the (i) $174.4 million net principal balance of the term loan facility outstanding on September 30, 2008, (ii) a $70.0 million prepayment in March 2009, (iii) a $31.5 million prepayment in May 2009 and (iv) a $5.0 million prepayment in May 2010, quarterly payments of $4.0 million are payable between June 30, 2010 and June 30, 2012.

 

On December 24, 2010, all remaining outstanding 2011 Notes were repurchased pursuant to the indenture governing the 2011 Notes.  We incurred approximately $4.5 million in borrowings under the Amended and Restated Credit Agreement in connection with such repurchase.

 

As a result of our repurchase and refinancing of the 2011 Notes, the expiration of the Amended and Restated Credit Agreement was June 30, 2012.

 

On March 31, 2011, the Company repaid all obligations under, and terminated, the Amended and Restated Credit Agreement with proceeds from a new senior credit facility governed by the 2011 Credit Agreement. During the quarter ended March 31, 2011 the Company did not borrow from the Amended and Restated Credit Agreement and repaid approximately $353.7 million.

 

Pre November 2010 Refinancing Transactions

 

In June 2005, the Company entered into the Credit Agreement with a syndicate of banks (the “Previous Credit Agreement”), and simultaneously borrowed $437.5 million to retire all outstanding obligations under its Previous Credit Agreement. The Previous Credit Agreement was amended in April 2006 and September 2007 to modify certain financial covenants and other provisions. Prior to the November 2010 Refinancing Transaction, the Previous Credit Agreement was to expire the earlier of (a) six months prior to the scheduled maturity date of the 8⅞% Senior Subordinated Notes due July 1, 2011 (January 1, 2011) (unless the 8⅞% Senior Subordinated Notes have been repurchased or refinanced prior to such date) or (b) June 30, 2012. The total amount available under the Credit Agreement was $800.0 million, consisting of a $500.0 million revolving facility and a $300.0 million term loan facility. Borrowings under the credit facilities were subject to compliance with certain provisions including, but not limited, to financial covenants. The Company could use proceeds from the credit facilities 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.

 

During the quarter ended March 31, 2010, we noted that certain of our subsidiaries identified as guarantors in our financial statements did not have requisite guarantees filed with the trustee as required under the terms of the indentures governing the 6⅜% Senior Subordinated Notes due 2013 (the “2013 Notes”) and 2011 Notes (the “Non-Joinder of Certain Subsidiaries”).  The Non-Joinder of Certain Subsidiaries caused a non-monetary, technical default under the terms of the relevant indentures at December 31, 2009, causing a non-monetary, technical cross-default at December 31, 2009 under the terms of our Previous Credit Agreement.  On March 30, 2010, we joined the relevant subsidiaries as guarantors under the relevant indentures (the “Joinder”).  Further, on March 30, 2010, we entered into a third amendment (the “Third Amendment”) to the Previous Credit Agreement.  The Third Amendment provided for, among other things: (i) a $100.0 million revolver commitment reduction (from $500.0 million to $400.0 million) under the bank facilities; (ii) a 1.0% floor with respect to any loan bearing interest at a rate determined by reference to the adjusted LIBOR (iii) certain additional collateral requirements; (iv) certain limitations on the use of proceeds from the revolving loan commitments; (v) the addition of Interactive One, LLC as a guarantor of the loans under the Previous Credit Agreement and under the notes governed by the Company’s 2011 Notes and 2013 Notes; (vi) the waiver of the technical cross-defaults that existed as of December 31, 2009 and through the date of the amendment arising due to the Non-Joinder of Certain Subsidiaries; and (vii) the payment of certain fees and expenses of the lenders in connection with their diligence work on the amendment.

 

Under the terms of the Previous Credit Agreement, upon any breach or default under either the 8⅞% Senior Subordinated Notes due July 2011 or the 6⅜% Senior Subordinated Notes due February 2013, the lenders could among other actions immediately terminate the Previous Credit Agreement and declare the loans then outstanding under the Previous Credit Agreement to be due and payable in whole immediately.  Similarly, under the 8⅞% Senior Subordinated Notes and the 6⅜% Senior Subordinated Notes, a default under the terms of the Previous Credit Agreement would constitute an event of default, and the trustees or the holders of at least 25% in principal amount of the then outstanding notes (under either class) could have declared the principal of such class of note and interest to be due and payable immediately.

 

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As of each of June 30, 2010, July 1, 2010 and September 30, 2010, we were not in compliance with the terms of the Previous Credit Agreement.  More specifically, (i) as of June 30, 2010, we failed to maintain a total leverage ratio of 7.25 to 1.00 (ii) as of each of July 1, 2010 and September 30, 2010, as a result of a step down of the total leverage ratio from no greater than 7.25 to 1.00 to no greater than 6.50 to 1.00 effective for the period July 1, 2010 to September 30, 2011, we also failed to maintain the requisite total leverage ratio and (iii) as of September 30, 2010, we failed to maintain a senior leverage ratio of 4.00 to 1.00.  On July 15, 2010, the Company and its subsidiaries entered into a forbearance agreement (the “Forbearance Agreement”) with Wells Fargo Bank, N.A. (successor by merger to Wachovia Bank, National Association), as administrative agent (the “Agent”), and financial institutions constituting the majority of outstanding loans and commitments (the “Required Lenders”) under the Previous Credit Agreement, relating to the defaults and events of default existing as of June 30, 2010 and July 1, 2010.  On August 13, 2010, we entered into an amendment to the  Forbearance Agreement (the “Forbearance Agreement Amendment”) that, among other things, extended the termination date of the Forbearance Agreement to September 10, 2010, unless terminated earlier by its terms, and provided additional forbearance related to the then anticipated default caused by an opinion of Ernst & Young LLP expressing substantial doubt about the Company’s ability to continue as a going concern as issued in connection with the restatement of our financial statements.  Under the Forbearance Agreement and the Forbearance Agreement Amendment, the Agent and the Required Lenders maintained the right to deliver “payment blockage notices” to the trustees for the holders of the 2011 Notes and/or the 2013 Notes.

 

On August 5, 2010, the Agent delivered a payment blockage notice to the Trustee under the Indenture governing our 2013 Notes.  As a result, neither we nor any of our guaranteeing subsidiaries could make any payment or distribution of any kind or character in respect of obligations under the 2013 Notes, including the interest payment that was scheduled to be made on August 16, 2010.  The 30-day grace period for the nonpayment of interest before such nonpayment constituted an event of default under the 2013 Notes Indenture expired on September 15, 2010.  While the trustee or holders of at least 25% in principal amount of the then outstanding 2013 Notes could have declared the principal amount, and accrued and unpaid interest, on all outstanding 2013 Notes to be due and payable immediately as a result of such event of default, no such remedies were exercised as we continued to negotiate the terms of the amended exchange offer and a new support agreement with the members of the ad hoc group of holders of our 2011 Notes and 2013 Notes.  The event of default under the 2013 Notes Indenture also constituted an event of default under the Previous Credit Agreement.  While the Forbearance Agreement Amendment expired by its terms on September 10, 2010, we and the Agent continued to negotiate the terms of a credit facility amendment and the Agent and the lenders did not exercise additional remedies under the Previous Credit Agreement. The Amended and Restated Credit Agreement cured all of these issues.

 

Senior Subordinated Notes

 

Period after the November 2010 Refinancing Transactions and after the March 2011 Refinancing Transaction

 

On November 24, 2010, we issued $286.8 million of our 12½%/15% Senior Subordinated Notes due May 2016 in a private placement and exchanged and then cancelled approximately $97.0 million of $101.5 million in aggregate principal amount outstanding of our 2011 Notes and approximately $199.3 million of $200.0 million in aggregate principal amount outstanding of our 2013 Notes (the 2013 Notes together with the 2011 Notes, the “Prior Notes”).  We entered 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 and interest on the Prior Notes when due, and eliminated the related events of default. Subsequently, all remaining outstanding 2011 Notes were repurchased pursuant to the indenture governing the 2011 Notes, effective as of December 24, 2010.

 

As of March 31, 2012, the Company had outstanding $747,000 of its 6⅜% Senior Subordinated Notes due February 2013 and $319.8 million of its 12½%/15% Senior Subordinated Notes due May 2016. The 12½%/15% Senior Subordinated Notes due May 2016 had a carrying value of $319.8 million and a fair value of approximately $225.5 million as of March 31, 2012, and the 6⅜% Senior Subordinated Notes due February 2013 had a carrying value of $747,000 and a fair value of approximately $702,000 as of March 31, 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 6⅜% Senior Subordinated Notes are due in February and August.  Based on the $747,000 principal balance of the 6⅜% Senior Subordinated Notes outstanding on March 31, 2012, interest payments of $24,000 are payable each February and August through February 2013.

 

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Interest on the 12½%/15% Senior Subordinated Notes is payable in cash, or at our election, partially in cash and partially through the issuance of additional 12½%/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 may make 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 shall accrue at a rate of 12.5% per annum and shall be 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 12.5% per annum if the interest for such quarterly period is paid fully in cash.  In the event of a PIK Election, including the PIK Election currently in effect, the interest paid in cash and the interest paid-in-kind by issuance of additional Exchange Notes (“PIK Notes”) will accrue 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 12.5% per annum and shall be payable in cash. A PIK Election is currently in effect and will remain in effect through May 15, 2012. After May 15, 2012, interest shall accrue at a rate of 12.5% per annum and shall be payable wholly in cash and the Company will no longer have an option to pay any portion of its interest through the issuance of PIK Notes.

 

During the quarter ended March 31, 2012, the Company paid cash interest in the amount of approximately $15.5 million and issued approximately $7.0 million of additional 12½%/15% Senior Subordinated Notes in accordance with the PIK Election that is currently in effect.

 

The indentures governing the Company’s 12½%/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 12½%/15% Senior Subordinated Notes, the 6⅜% Senior Subordinated Notes and the Company’s obligations under the 2011 Credit Agreement.

 

Period prior to November 2010 Refinancing Transactions

 

Subsequent to December 31, 2009, we noted that certain of our subsidiaries identified as guarantors in our financial statements did not have requisite guarantees filed with the trustee as required under the terms of the indentures (the “Non-Joinder of Certain Subsidiaries”).  The Non-Joinder of Certain Subsidiaries caused a non-monetary, technical default under the terms of the relevant indentures at December 31, 2009, causing a non-monetary, technical cross-default at December 31, 2009 under the terms of our Credit Agreement dated as of June 13, 2005.  We have since joined the relevant subsidiaries as guarantors under the relevant indentures (the “Joinder”).  Further, on March 30, 2010, we entered into a third amendment (the “Third Amendment”) to the Credit Agreement.  The Third Amendment provides for, among other things: (i) a $100.0 million revolver commitment reduction under the bank facilities; (ii) a 1.0% floor with respect to any loan bearing interest at a rate determined by reference to the adjusted LIBOR; (iii) certain additional collateral requirements; (iv) certain limitations on the use of proceeds from the revolving loan commitments; (v) the addition of Interactive One, LLC as a guarantor of the loans under the Credit Agreement and under the notes governed by the Company’s 2001 and 2005 senior subordinated debt documents; (vi) the waiver of the technical cross-defaults that existed as of December 31, 2009 and through the date of the amendment arising due to the Non-Joinder of Certain Subsidiaries; and (vii) the payment of certain fees and expenses of the lenders in connection with their diligence in connection with the amendment.

 

As of each of June 30, 2010, July 1, 2010 and September 30, 2010, we were not in compliance with the terms of our Previous Credit Agreement.  More specifically, (i) as of June 30, 2010, we failed to maintain a total leverage ratio of 7.25 to 1.00 (ii) as of each of July 1, 2010 and September 30, 2010, as a result of a step down of the total leverage ratio from no greater than 7.25 to 1.00 to no greater than 6.50 to 1.00 effective for the period July 1, 2010 to September 30, 2011, we also failed to maintain the requisite total leverage ratio and (iii) as of September 30, 2010, we failed to maintain a senior leverage ratio of 4.00 to 1.00.  On July 15, 2010, the Company and its subsidiaries entered into the Forbearance Agreement with Wells Fargo Bank, N.A. (successor by merger to Wachovia Bank, National Association), as Agent, and the Required Lenders under our Previous Credit Agreement, relating to the defaults and events of default existing as of June 30, 2010 and July 1, 2010.  On August 13, 2010, we entered into an amendment to the  Forbearance Agreement Amendment that, among other things, extended the termination date of the Forbearance Agreement to September 10, 2010, unless terminated earlier by its terms, and provided additional forbearance related to the then anticipated default caused by an opinion of Ernst & Young LLP expressing substantial doubt about the Company’s ability to continue as a going concern as issued in connection with the restatement of our financial statements.  Under the Forbearance Agreement and the Forbearance Agreement Amendment, the Agent and the Required Lenders maintained the right to deliver “payment blockage notices” to the trustees for the holders of the 2011 Notes and/or the 2013 Notes.

 

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On August 5, 2010, the Agent under our Previous Credit Agreement delivered a payment blockage notice to the Trustee under the Indenture governing our 2013 Notes.  As a result, neither we nor any of our guaranteeing subsidiaries could make any payment or distribution of any kind or character in respect of obligations under the 2013 Notes, including the interest payment that was scheduled to be made on August 16, 2010.  The 30-day grace period for the nonpayment of interest before such nonpayment constituted an event of default under the 2013 Notes Indenture expired on September 15, 2010.  While the trustee or holders of at least 25% in principal amount of the then outstanding 2013 Notes could declare the principal amount, and accrued and unpaid interest, on all outstanding 2013 Notes to be due and payable immediately as a result of such event of default, as of the date of this filing, no such remedies were exercised as we continued to negotiate the terms of the amended exchange offer and a new support agreement with the members of the ad hoc group of holders of our 2011 and 2013 Notes.  The event of default under the 2013 Notes Indenture also constituted an event of default under the Previous Credit Agreement.  As of November 24, 2010, as a result of the November 2010 Refinancing Transactions, any and all existing defaults and events of default that had arisen or may have arisen were cured.

 

The following table summarizes the interest rates in effect with respect to our debt as of March 31, 2012:

 

Type of Debt  Amount Outstanding   Applicable
Interest
Rate
 
   (In millions)     
         
Senior bank term debt, net of original issue discount (at variable rates)(1)  $375.7    7.52%
12½ %/15% Senior Subordinated Notes (fixed rate)  $319.8    15.00%
10% Senior Secured TV One Notes due March 2016 (fixed rate)  $119.0    10.00%
6⅜% Senior Subordinated Notes (fixed rate)  $0.7    6.38%

 

(1)Subject to variable Libor and Base Rates plus a spread currently at 6.00% and 5.00%, respectively, 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. As of November 24, 2010 and in connection with the November 2010 Refinancing Transactions, we and the trustee under the indentures governing our Prior Notes entered into supplemental indentures 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 other than the covenants to pay principal of and interest on the Prior Notes when due, and eliminated the related events of default.  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.

 

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The following table provides a comparison of our statements of cash flows for the three months ended March 31, 2012 and 2011:

 

   2012   2011 
   (In thousands) 
         
Net cash flows provided by operating activities  $12,485   $7,711 
Net cash flows provided by (used in) investing activities  $551  $(1,812)
Net cash flows (used in) provided by financing activities  $(5,091)  $18,726 

 

Net cash flows provided by operating activities were approximately $12.5 million for the three months ended March 31, 2012 compared to net cash flows provided by operating activities of approximately $7.7 million for the three months ended March 31, 2011. Cash flows from operating activities for the three months ended March 31, 2012 increased from the prior year primarily due to changes in operating activities resulting from the consolidation of TV One, partially offset by increased payments for content assets.

 

Net cash flows provided by investing activities for the three months ended March 31, 2012 were $551,000 compared to net cash flows used in investing activities of approximately $1.8 million for the three months ended March 31, 2011. Capital expenditures, including digital tower and transmitter upgrades, deposits for station equipment and purchases were approximately $3.0 million and $1.8 million for the three months ended March 31, 2012 and 2011, respectively. Proceeds from sales of investment securities were approximately $3.9 million for the three months ended March 31, 2012.

 

Net cash flows used in financing activities were approximately $5.1 million for the three months ended March 31, 2012 compared to net cash flows provided by financing activities of $18.7 million for the three months ended March 31, 2011. During the three months ended March 31, 2012, the Company had no borrowings from its credit facility, while during the three months ended March 31, 2011, the Company borrowed approximately $378.3 million from its credit facility. During the three months ended March 31, 2012 and 2011, we repaid $965,000 and approximately $353.7 million, respectively, in outstanding debt. During the three months ended March 31, 2012 and 2011, respectively, we capitalized $13,000 and approximately $5.9 million of costs associated with our evaluation of various alternatives associated with our indebtedness and its upcoming maturities. TV One paid approximately $4.1 million in dividends to noncontrolling interest shareholders for the quarter ended March 31, 2012.

 

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.

 

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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 March 31, 2012, we had approximately $677.4 million in broadcast licenses and $272.0 million in goodwill, which totaled $949.4 million, and represented approximately 64.1% 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 did not record any impairment charges for the three months ended March 31, 2012 and 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.

 

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.