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URBAN ONE, INC. - Quarter Report: 2004 June (Form 10-Q)

FORM 10Q
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2004

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

incorporation or organization)

  (I.R.S. Employer Identification No.)

 

5900 Princess Garden Parkway,

7th Floor

Lanham, Maryland 20706

(Address of principal executive offices)

 

(301) 306-1111

Registrant’s telephone number, including area code

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class


  

Outstanding

at July 28,

2004


Class A Common Stock, $.001 Par Value

   22,404,228

Class B Common Stock, $.001 Par Value

   2,867,463

Class C Common Stock, $.001 Par Value

   3,132,458

Class D Common Stock, $.001 Par Value

   76,583,234

 



Table of Contents

RADIO ONE, INC. AND SUBSIDIARIES

 

FORM 10-Q

 

For the Quarter Ended June 30, 2004

 

TABLE OF CONTENTS

 

          Page

PART I.   

FINANCIAL INFORMATION

    
Item 1.   

Financial Statements

   3
    

Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2004 and 2003 (Unaudited)

   4
    

Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003

   5
    

Consolidated Statements of Changes in Stockholders’ Equity for the Year Ended December 31, 2003 and for the Six Months Ended June 30, 2004 (Unaudited)

   6
    

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (Unaudited)

   7
    

Notes to Consolidated Financial Statements

   8
    

Consolidating Financial Statements

   20
    

Consolidating Statement of Operations for the Three Months Ended June 30, 2004 (Unaudited)

   21
    

Consolidating Statement of Operations for the Three Months Ended June 30, 2003 (Unaudited)

   22
    

Consolidating Statement of Operations for the Six Months Ended June 30, 2004 (Unaudited)

   23
    

Consolidating Statement of Operations for the Six Months Ended June 30, 2003 (Unaudited)

   24
    

Consolidating Balance Sheet as of June 30, 2004 (Unaudited)

   25
    

Consolidating Balance Sheet as of December 31, 2003

   26
    

Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2004 (Unaudited)

   27
    

Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2003 (Unaudited)

   28
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   29
Item 4.   

Controls and Procedures

   42
PART II.   

OTHER INFORMATION

    
Item 1.   

Legal Proceedings

   43
Item 4.   

Submission of Matters to a Vote of Security Holders

   43
Item 5.   

Other Information

   44
Item 6.   

Exhibits and Reports on Form 8-K

   45
    

SIGNATURE

   46


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

(See pages 4-28 — This page intentionally left blank.)

 

3


Table of Contents

RADIO ONE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended June 30,

   Six Months Ended June 30,

 
     2004

   2003

   2004

   2003

 
     (Unaudited)    (Unaudited)  
     (In Thousands, Except Shares Outstanding and Per Share Amounts)  

NET BROADCAST REVENUE

   $ 86,210    $ 80,912    $ 155,872    $ 144,342  
    

  

  

  


OPERATING EXPENSES:

                             

Program and technical

     13,587      13,556      27,733      26,172  

Selling, general and administrative

     24,791      24,272      46,703      46,018  

Corporate expenses

     4,118      3,279      7,878      6,912  

Depreciation and amortization

     4,561      4,517      8,991      9,031  
    

  

  

  


Total operating expenses

     47,057      45,624      91,305      88,133  
    

  

  

  


Operating income

     39,153      35,288      64,567      56,209  

INTEREST INCOME

     585      696      1,307      1,363  

INTEREST EXPENSE, including amortization of deferred financing costs

     9,748      10,689      19,723      21,137  

EQUITY IN NET LOSS OF AFFILIATED COMPANY

     1,431      —        3,798      —    

OTHER INCOME (EXPENSE), net

     62      —        144      (2 )
    

  

  

  


Income before provision for income taxes

     28,621      25,295      42,497      36,433  

PROVISION FOR INCOME TAXES

     11,162      9,617      16,247      13,845  
    

  

  

  


Net income

   $ 17,459    $ 15,678    $ 26,250    $ 22,588  

PREFERRED STOCK DIVIDEND

   $ 5,035    $ 5,035    $ 10,070    $ 10,070  
    

  

  

  


NET INCOME APPLICABLE TO COMMON STOCKHOLDERS

   $ 12,424    $ 10,643    $ 16,180    $ 12,518  
    

  

  

  


BASIC AND DILUTED NET INCOME PER COMMON SHARE

   $ 0.12    $ 0.10    $ 0.15    $ 0.12  
    

  

  

  


WEIGHTED AVERAGE SHARES OUTSTANDING:

                             

Basic

     104,953,961      104,605,530      104,906,935      104,590,987  
    

  

  

  


Diluted

     105,545,683      105,140,962      105,553,155      104,987,650  
    

  

  

  


 

 

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

 

4


Table of Contents

RADIO ONE, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

    

June 30,

2004


    December 31,
2003


 
     (Unaudited)        
     (In Thousands, Except Par
Value and Share Amounts)
 
ASSETS                 

CURRENT ASSETS:

                

Cash and cash equivalents

   $ 15,032     $ 38,010  

Short term investments

     32,000       40,700  

Trade accounts receivable, net of allowance for doubtful accounts of $5,180 and $6,179, respectively

     65,668       62,331  

Prepaid expenses and other current assets

     3,087       1,580  

Income tax receivable

     3,650       3,650  

Deferred income tax asset

     5,794       5,794  
    


 


Total current assets

     125,231       152,065  

PROPERTY AND EQUIPMENT, net

     41,179       42,675  

GOODWILL

     114,516       114,516  

RADIO BROADCASTING LICENSES

     1,683,920       1,648,264  

OTHER INTANGIBLE ASSETS, net

     15,176       19,478  

INVESTMENT IN AFFILIATED COMPANY

     30,665       34,396  

OTHER ASSETS

     12,479       6,477  
    


 


Total assets

   $ 2,023,166     $ 2,017,871  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

CURRENT LIABILITIES:

                

Accounts payable

   $ 5,854     $ 7,221  

Accrued interest

     13,940       14,154  

Accrued compensation and related benefits

     15,476       14,038  

Income taxes payable

     4,343       4,389  

Current portion of deferred revenue

     3,435       3,587  

Other accrued expenses

     5,108       5,444  

Fair value of derivative instruments

     1,087       4,236  

Other current liabilities

     573       331  

Current portion of long-term debt

     61,250       52,500  
    


 


Total current liabilities

     111,066       105,900  

LONG-TERM DEBT, net of current portion

     510,030       545,035  

DEFERRED REVENUE, net of current portion

     11,675       13,009  

DEFERRED INCOME TAX LIABILITY

     92,683       75,508  
    


 


Total liabilities

     725,454       739,452  
    


 


STOCKHOLDERS’ EQUITY:

                

Convertible preferred stock, $.001 par value, 1,000,000 shares authorized and 309,820 shares issued and outstanding; liquidation preference of $1,000 per share plus cumulative dividends at 6.5% per year, unpaid dividends were $4,198 as of June 30, 2004 and December 31, 2003

     —         —    

Common stock—Class A, $.001 par value, 30,000,000 shares authorized, 22,404,228 and 22,400,164 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively

     23       23  

Common stock—Class B, $.001 par value, 150,000,000 shares authorized, 2,867,463 shares issued and outstanding at June 30, 2004 and December 31, 2003

     3       3  

Common stock—Class C, $.001 par value, 150,000,000 shares authorized, 3,132,458 shares issued and outstanding at June 30, 2004 and December 31, 2003

     3       3  

Common stock—Class D, $.001 par value, 150,000,000 shares authorized, 76,556,568 and 76,340,899 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively

     76       76  

Accumulated other comprehensive loss

     (668 )     (2,605 )

Stock subscriptions receivable

     (35,867 )     (35,017 )

Additional paid-in capital

     1,412,486       1,410,460  

Accumulated deficit

     (78,344 )     (94,524 )
    


 


Total stockholders’ equity

     1,297,712       1,278,419  
    


 


Total liabilities and stockholders’ equity

   $ 2,023,166     $ 2,017,871  
    


 


 

The accompanying notes are an integral part of these consolidated balance sheets.

 

5


Table of Contents

RADIO ONE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

FOR THE YEAR ENDED DECEMBER 31, 2003 AND FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)

(In Thousands, Except Share Amounts)

 

    Convertible
preferred
stock


  Common
stock
Class A


  Common
stock
Class B


  Common
stock
Class C


  Common
stock
Class D


  Comprehensive
income


  Accumulated
other
comprehensive
income


    Stock
subscriptions
receivable


    Additional
paid-in
capital


  Accumulated
deficit


    Total
stockholders’
equity


 

BALANCE, as of December 31, 2002

    —       23     3     3     76           (3,006 )     (33,344 )     1,408,435     (128,167 )     1,244,023  

Comprehensive income:

                                                                         

Net income

    —       —       —       —       —       53,783     —         —         —       53,783       53,783  

Change in unrealized net loss on derivative and hedging activities, net of taxes

    —       —       —       —       —       401     401       —         —       —         401  
                                 

                                     

Comprehensive income

                                $ 54,184                                      
                                 

                                     

Preferred stock dividends

    —       —       —       —       —             —         —         —       (20,140 )     (20,140 )

Interest on stock subscriptions receivable

    —       —       —       —       —             —         (1,673 )     —       —         (1,673 )

Employee exercise of options for 172,000 shares

    —       —       —       —       —             —         —         1,545     —         1,545  

Tax effect on non-qualified option exercises

    —       —       —       —       —             —         —         480     —         480  
   

 

 

 

 

       


 


 

 


 


BALANCE, as of December 31, 2003

    —       23     3     3     76           (2,605 )     (35,017 )     1,410,460     (94,524 )     1,278,419  

Comprehensive income:

                                                                         

Net income

    —       —       —       —       —       26,250     —         —         —       26,250       26,250  

Change in unrealized net loss on derivative and hedging activities, net of taxes

    —       —       —       —       —       1,937     1,937       —         —       —         1,937  
                                 

                                     

Comprehensive income

                                $ 28,187                                      
                                 

                                     

Vesting of non-employee restricted stock

    —       —       —       —       —             —         —         713     —         713  

Preferred stock dividends

    —       —       —       —       —             —         —         —       (10,070 )     (10,070 )

Interest income on stock subscriptions receivable

    —       —       —       —       —             —         (850 )     —       —         (850 )

Employee exercise of options for 103,321 shares

    —       —       —       —       —             —         —         1,313     —         1,313  
   

 

 

 

 

       


 


 

 


 


BALANCE, as of June 30, 2004

  $ —     $ 23   $ 3   $ 3   $ 76         $ (668 )   $ (35,867 )   $ 1,412,486   $ (78,344 )   $ 1,297,712  
   

 

 

 

 

       


 


 

 


 


 

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

 

6


Table of Contents

RADIO ONE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    

Six Months Ended

June 30,


 
     2004

    2003

 
     (Unaudited, In Thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

                

Net income

   $ 26,250     $ 22,588  

Adjustments to reconcile net income to net cash from operating activities:

                

Depreciation and amortization

     8,991       9,031  

Amortization of debt financing costs

     848       849  

Deferred income taxes

     15,963       13,628  

Equity in net loss of affiliated company

     3,798       —    

Non-cash compensation

     1,517       894  

Loss on retirement of assets

     —         2  

Effect of change in operating assets and liabilities:

                

Trade accounts receivable, net

     (3,337 )     288  

Prepaid expenses and other current assets

     (1,507 )     (105 )

Other assets

     (241 )     136  

Accounts payable

     (1,367 )     629  

Accrued interest

     (214 )     81  

Accrued compensation and related benefits

     634       406  

Income taxes payable

     (46 )     (127 )

Other accrued expenses

     (1,582 )     (2,512 )
    


 


Net cash flows from operating activities

     49,707       45,788  
    


 


CASH FLOWS FROM INVESTING ACTIVITIES:

                

Purchase of property and equipment

     (3,927 )     (6,135 )

Equity investments

     (3,456 )     (1,119 )

Maturity (purchase) of short term investments

     8,700       (1,260 )

Deposits and payments for station purchases

     (38,143 )     (2,160 )
    


 


Net cash flows from investing activities

     (36,826 )     (10,674 )
    


 


CASH FLOWS FROM FINANCING ACTIVITIES:

                

Repayment of debt

     (26,252 )     (26,250 )

Proceeds from exercise of stock options

     1,313       727  

Interest on stock subscription receivable

     (850 )     (862 )

Payment of preferred stock dividends

     (10,070 )     (10,070 )
    


 


Net cash flows from financing activities

     (35,859 )     (36,455 )
    


 


DECREASE IN CASH AND CASH EQUIVALENTS

     (22,978 )     (1,341 )

CASH AND CASH EQUIVALENTS, beginning of period

     38,010       45,415  
    


 


CASH AND CASH EQUIVALENTS, end of period

   $ 15,032     $ 44,074  
    


 


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

                

Cash paid for:

                

Interest

   $ 19,089     $ 20,412  
    


 


Income taxes

   $ 332     $ 345  
    


 


 

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

 

7


Table of Contents

RADIO ONE, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

(a) Organization and Business

 

Radio One, Inc. (a Delaware corporation referred to as Radio One) and subsidiaries (collectively “the Company”) were organized to acquire, operate and maintain radio broadcasting stations. The Company owns and/or operates 67 radio stations in 22 markets throughout the United States.

 

The Company’s operating results are significantly affected by its share of the audience in markets where it owns and/or operates stations. To increase its share, the Company has made and may continue to make significant acquisitions of radio stations, which may require it to incur additional debt. The service of this debt could require the Company to make significant debt service payments.

 

In September 2001, the Company began providing programming services to XM Satellite Radio Inc. (XM). Under its agreement with XM, the Company provided five channels of urban radio programming to XM. Following a change in XM’s programming strategy, this agreement was amended effective April 1, 2004 to allow the Company to provide one channel of urban radio programming to XM.

 

In July 2003, the Company entered into a joint venture with an affiliate of Comcast Corporation and other investors to create TV One, LLC (TV One), an entity formed to operate a cable television network featuring entertainment, opinion and news-related programming targeted primarily towards African-American viewers. The Company expects to make a cash investment of approximately $74.0 million in TV One over four years. The Company also provides advertising and management services to TV One through January 2009, for which the Company received additional equity in TV One.

 

(b) Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of Radio One, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Certain reclassifications have been made to prior period amounts to conform to the June 30, 2004 presentation.

 

(c) Interim Financial Statements

 

The interim consolidated financial statements included herein for Radio One and subsidiaries have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion, the interim financial data presented herein include all adjustments (which include only normal recurring adjustments) necessary for a fair presentation. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.

 

8


Table of Contents

Results for interim periods are not necessarily indicative of results to be expected for the full year. It is suggested that these consolidated financial statements be read in conjunction with the Company’s December 31, 2003 financial statements and notes thereto included in the Company’s annual report on Form 10-K.

 

(d) Cash, Cash Equivalents and Short Term Investments

 

Cash and cash equivalents consist of cash, repurchase agreements and money market accounts at various commercial banks. All cash equivalents have original maturities of 90 days or less. For cash and cash equivalents, cost approximates market value.

 

The Company has evaluated its investment policies consistent with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (SFAS 115) and determined that all of its short term investment securities are to be classified as available-for-sale. Under this requirement, securities are marked to market through stockholders’ equity. The carrying value of the Company’s available-for-sale securities approximates fair value due to the liquidity of the instruments. As a result, the impact on stockholders’ equity is immaterial and has not been recorded. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income on the accompanying statements of operations.

 

The Company had the following balances for cash, cash equivalents and short term investments:

 

    

June 30,

2004


  

December 31,

2003


     (In Thousands)

Cash on deposit

   $ 4,028    $ 22,836

Money market funds

     11,004      15,174

Short term investments

     32,000      40,700

 

(e) Trade Accounts Receivable

 

Trade accounts receivable is recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable losses in the Company’s existing accounts receivable. The Company determines the allowance based on the aging of the receivables, the impact of economic conditions on the advertisers’ ability to pay, and other factors.

 

(f) Equity Method Investment

 

The Company accounts for its investment in TV One under the equity method of accounting in accordance with Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” The Company has recorded an investment in the partnership interest of TV One at cost and has adjusted the carrying amount of the investment to recognize its share of losses of TV One after the date of the initial investment. The Company will review the realizability of its investment if conditions are present or events occur to suggest that an impairment of the investment may exist. The Company has determined that, although TV One is a variable interest entity (as defined by Financial Accounting Standards Board Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”), the Company is not the primary beneficiary of TV One.

 

(g) Goodwill and FCC Licenses

 

Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in business combinations. FCC licenses acquired in business combinations are valued using a discounted cash flow analysis. Prior to January 1, 2002, goodwill and FCC licenses were amortized over a 15-year period (excluding the assets acquired from Blue Chip Broadcasting, Inc. and Sinclair

 

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Telecable, Inc.). Commencing January 1, 2002, goodwill and FCC licenses are not amortized, but are tested annually for impairment at the reporting unit level. Impairment of goodwill is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The implied fair value of goodwill is the amount determined by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit from the estimated fair value of the reporting unit. If the recorded value of goodwill exceeds its implied value, an impairment charge for goodwill is recorded for the excess. The Company conducts its annual test for impairment during the fourth quarter of every year.

 

(h) Impairment of Long-Lived Assets Excluding Goodwill and FCC Licenses

 

The Company accounts for the impairment of long-lived assets, excluding goodwill and FCC licenses, in accordance with Statement of Financial Accounting Standards No. 144 (SFAS No. 144), “Accounting for the Impairment or Disposal of Long-Lived Assets.” Long-lived assets, excluding goodwill and FCC licenses, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration in operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Assets are grouped at the lowest levels for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate of return for a similar investment of like risk.

 

(i) Financial Instruments

 

Financial instruments as of June 30, 2004 and December 31, 2003 consist of cash and cash equivalents, short term investments, trade accounts receivable, accounts payable, accrued expenses and long-term debt. The carrying amounts approximate fair value for each of these financial instruments except for the 8 7/8% Senior Subordinated Notes as of June 30, 2004 and December 31, 2003, which have a fair value of approximately $328.3 million and $331.5 million, respectively, as compared to a carrying value of $300.0 million as of the end of both periods. The fair value is determined based on the fair market value of similar instruments.

 

(j) Derivative Financial Instruments

 

The Company adopted Statement of Financial Accounting Standards No. 133 (SFAS No. 133), “Accounting for Derivative Instruments and Hedging Activities,” as amended by Statement of Financial Accounting Standard No. 137 (SFAS No. 137), “Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133” and “Statement of Financial Accounting Standard No. 138” (SFAS No. 138), Accounting for Certain Derivative Instruments and Certain Hedging Activities on January 1, 2001. This standard requires the Company to recognize all derivatives, as defined in SFAS No. 133, on the balance sheet at fair value. Derivative value changes are recorded in income for any contracts not classified as qualifying cash flow hedges. For derivatives in qualifying cash flow hedge relationships, any change in value is recognized in earnings. The change in derivative fair value depends on the classification of the derivative as a hedging instrument. For derivatives in qualifying cash flow hedge relationships, the effective portion of the derivative value change must be recorded through other comprehensive income, a component of stockholders’ equity, net of tax.

 

(k) Revenue Recognition

 

The Company recognizes revenue for broadcast advertising when the commercial is broadcast and reports revenue net of agency commissions in accordance with Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements”. Agency commissions, when applicable, are calculated based on a stated

 

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percentage applied to gross billing. Generally, clients remit the gross billing amount to the agency and the agency remits the gross billing, less their commission, to the Company. Agency commissions were $12.1 million and $11.1 million during the three months ended June 30, 2004 and 2003, respectively. Agency commissions were $21.3 million and $19.7 million during the six months ended June 30, 2004 and 2003, respectively.

 

(l) Barter Arrangements

 

The Company broadcasts certain customers’ advertising in exchange for equipment, merchandise, equity and services. The estimated fair value of the equipment, merchandise or services received is recorded as an expense or capitalized as they are used, consumed or received. Barter revenue is recognized as the related advertising is aired.

 

(m) Advertising

 

The Company expenses advertising costs as incurred.

 

(n) Income Taxes

 

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The Company provides a valuation allowance on its net deferred tax assets when it is more likely that such assets will not be realized. Deferred income tax expense or benefits are based upon the changes in the asset of liability from period to period.

 

(o) Stock-Based Compensation

 

The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principle Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB 25, compensation expense is based upon the difference, if any, on the date of grant, between the fair value of the Company’s stock and the exercise price.

 

At June 30, 2004, the Company had one stock-based employee compensation plan, which is described more fully in Note 8. The Company accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the determined market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation:

 

    

For the Three Months

Ended June 30,


    For the Six Months
Ended June 30,


 
     2004

    2003

    2004

    2003

 
     (In Thousands, Except Per Share Amounts)  

Net income applicable to common stockholders, as reported:

   $ 12,424     $ 10,643     $ 16,180     $ 12,518  

Add: stock-based employee compensation expense included in net income

     —         —         —         —    

Less: total stock-based employee compensation expense determined under fair value-based method for all awards

     (3,367 )     (2,710 )     (6,820 )     (5,417 )
    


 


 


 


Pro forma net income applicable to common stockholders

   $ 9,057     $ 7,933     $ 9,360     $ 7,101  
    


 


 


 


As reported net income per share—basic and diluted

   $ 0.12     $ 0.10     $ 0.16     $ 0.12  

Pro forma net income per share—basic and diluted

   $ 0.09     $ 0.08     $ 0.09     $ 0.07  

 

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The per share weighted-average fair value of employee options granted during the three months ended June 30, 2004 and 2003 was $9.93 and $10.53, respectively, on the date of grant. The per share weighted-average fair value of employee options granted during the six months ended June 30, 2004 and 2003 was $10.19 and $10.53, respectively, on the date of grant. These fair values were derived using the Black-Scholes Option Pricing Model with the following weighted-average assumptions:

 

    

For the Three Months

Ended

June 30,


   

For the Six Months

Ended

June 30,


 
     2004

    2003

    2003

    2004

 

Average risk-free interest rate

   3.93 %   2.27 %   3.93 %   2.27 %

Expected dividend yield

   0.00 %   0.00 %   0.00 %   0.00 %

Expected lives

   5 years     5 years     5 years     5 years  

Expected volatility

   67 %   77 %   67 %   77 %

 

(p) Comprehensive Income

 

The Company’s comprehensive income consists of net income and other items recorded directly to the equity accounts. The objective is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events during the period, other than transactions with owners. The Company’s other comprehensive income consists of gains and losses on derivative instruments that qualify for cash flow hedge treatment.

 

The following table sets forth the components of comprehensive income:

 

     Three months ended
June 30,


   

Six months ended

June 30,


 
     2004

   2003

    2004

   2003

 
     (in thousands)  

Net income

   $ 17,459    $ 15,678     $ 26,250    $ 22,588  

Other comprehensive income (loss), (net of tax):

                              

Derivative and hedging activities

     2,547      (1,126 )     1,937      (1,650 )
    

  


 

  


Comprehensive income

   $ 20,006    $ 14,552     $ 28,187    $ 20,938  
    

  


 

  


 

(q) Segment Reporting

 

The Company believes it has only one segment, radio broadcasting. The Company came to this conclusion because the Company has one product or service, has the same type of customer and operating strategy in each market, operates in one regulatory environment, has only one management group that manages the entire Company and provides information on the Company’s results as one segment to the key decision-makers. All of the Company’s broadcast revenue is derived from stations located in the United States.

 

(r) Net Income Applicable to Common Stockholders

 

In July 2000, the Company completed a private placement of $310.0 million of 6 1/2% Convertible Preferred Remarketable Term Income Deferrable Equity Securities (HIGH TIDES), at $1,000 per security. Dividends accrue on the HIGH TIDES at 6 1/2% per annum from the date of original issuance. Dividends are paid quarterly in arrears, commencing October 15, 2000. The earnings available for common stockholders for the three months ended June 30, 2004 and 2003, is the net income less the dividends of $5,035,000 payable on the HIGH TIDES. The earnings available for common stockholders for the six months ended June 30, 2004 and 2003, is the net income less the dividends of $10,070,000 payable on the HIGH TIDES.

 

(s) Earnings Per Share

 

Earnings per share (EPS) is based on the weighted average number of common and diluted common equivalent shares for stock options and warrants outstanding during the period the calculation is made, divided

 

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into the earnings available for common stockholders. Diluted common equivalent shares consist of shares issuable upon the exercise of stock options and warrants, using the treasury stock method.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS:

 

In January 2003, the FASB issued Financial Accounting Standards Board Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” This interpretation of ARB No. 51, “Consolidated Financial Statements,” requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 as amended, are effective for the first reporting period ending after March 15, 2004. In December 2003, the FASB published FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46(R)). FIN 46(R), among other things, defers the effective date of implementation for certain entities. The revised interpretation is effective for the first interim or annual reporting period ending after March 15, 2004, with the exception of structures that are commonly referred to as special-purpose entities, for which the statement is effective for periods ending after December 15, 2003. The adoption of Interpretation No. 46 did not have a material impact on the Company’s financial statements.

 

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 requires that contracts with comparable characteristics be accounted for in a similar manner, clarifies the circumstances under which a contract with an initial investment meets the characteristics of a derivative and when a derivative contains a financing component that warrants special reporting in the statements of cash flows. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The provisions of SFAS No. 149 generally are to be applied prospectively only. The adoption of SFAS No. 149 did not have a material impact on the Company’s financial statements.

 

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 addresses the classification and measurement of mandatorially redeemable freestanding financial instruments, including those that comprise more than one option or forward contract, and requires an issuer to classify certain instruments as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial statements.

 

3. ACQUISITIONS:

 

In May 2004, the Company entered into a definitive agreement to acquire the assets of KRTS, LP. The total acquisition price is approximately $72.5 million. KRTS, LP owns KRTS-FM, a radio station located in the Houston, Texas metropolitan area. The Company made a deposit of approximately $3.6 million during the three months ended June 30, 2004 in connection with the planned acquisition.

 

In April 2004, the Company entered into a definitive agreement to acquire all of the outstanding stock of New Mableton Broadcasting Corporation (“NMBC”), the majority shareholder of which is an entity controlled by the Company’s Chief Executive Officer and President. The total acquisition price is approximately $35.0 million. NMBC owns WAMJ-FM, a radio station located in the Atlanta, Georgia metropolitan area which the Company has operated under a local management agreement since August 2001. The Company paid $3.5 million during the three months ended June 30, 2004 in connection with the planned acquisition.

 

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In February 2004, the Company completed the acquisition of the assets of WSNJ-FM, licensed to Bridgeton, New Jersey, from New Jersey Radio Partners, LLC for approximately $35.0 million in cash. Substantially all of the purchase price was allocated to FCC license on the accompanying balance sheet. The FCC has approved changing the station’s community of license to Pennsauken, New Jersey. The Company is currently reviewing its location options to best serve the greater Philadelphia market.

 

In August 2003, the Company made its first capital contribution of approximately $18.5 million to TV One, LLC. On a fully-diluted basis, the Company owns approximately 40% of TV One and is accounting for this investment under the equity method of accounting. Accordingly, the Company is recognizing its ratable share of TV One’s net loss. The Company was not required to make any cash investment during the three or six months ended June 30, 2004. See Note 5 below for further discussion.

 

4. PROPERTY AND EQUIPMENT:

 

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight-line method over the related estimated useful lives. Property and equipment are depreciated as follows:

 

     Estimated
Useful Lives


PROPERTY AND EQUIPMENT:

    

Land and improvements

   —  

Building and improvements

   31 years

Transmitters and towers

   7-15 years

Equipment

   5-7 years

Leasehold improvements

   Lease Term

Construction-in-progress

   —  

 

Depreciation expense was $2,751,000 and $2,616,000 for the three months ended June 30, 2004 and 2003, respectively. Depreciation expense was $5,376,000 and $5,164,000 for the six months ended June 30, 2004 and 2003, respectively.

 

Repairs and maintenance costs are expensed as incurred.

 

5. INVESTMENT IN AFFILIATED COMPANY:

 

In July 2003, the Company entered into a joint venture agreement with an affiliate of Comcast Corporation and other investors to create TV One, an entity formed to operate a cable television network targeted primarily towards African-American viewers. In 2003, the Company made its initial cash investment of $18.5 million and expects to make a total cash investment of $74.0 million over four years. The Company is accounting for this investment using the equity method of accounting, under which the Company initially recorded its investment at cost and has adjusted the carrying amount of the investment to recognize the Company’s share of the losses of TV One after the date of its initial investment. For the three months ended June 30, 2004, the Company’s allocable share of TV One’s losses was approximately $1.4 million. For the six months ended June 30, 2004, the Company’s allocable share of TV One’s losses was approximately $3.8 million.

 

In addition to its cash investment, the Company entered into a network services agreement with TV One. Under the network services agreement, the Company is to provide TV One with administrative and operational support services. The network services agreement expires in January 2009. In exchange for the services to be provided, the Company received an additional equity interest in TV One. Additionally, TV One pays the Company an annual service fee of $500,000 in cash, paid quarterly.

 

In 2003, the Company also entered into an advertising services agreement with TV One. In accordance with the advertising services agreement, the Company is to provide a specified amount of advertising to TV One over

 

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a term of five years ending in January 2009. The Company has determined that the most reliable measure of fair value of the equity received under the advertising services agreement is the advertising time that it is to provide to TV One. As the value of the transaction was based on the value of the services provided and not based on the equity received, there is a single measurement date, which is the date upon which the equity in TV One was conveyed to the Company.

 

The Company accounted for these services transactions in accordance with EITF 00-8, Accounting by a Grantee for an Equity Instrument to Be Received in Conjunction with Providing Goods or Services. Initially, the Company recorded an asset of approximately $17.0 million, which approximates the fair value of the equity consideration received to provide such services. This amount is included in Investment in Affiliated Company with a corresponding deferred revenue liability, on the accompanying balance sheet. The Company will re-measure the fair value of the equity received to complete its obligations under the network services agreement in each subsequent reporting period as the services are provided. Changes in the value will be recorded in the interim period of change.

 

6. LONG-TERM DEBT:

 

Long-term debt consists of the following:

 

    

June 30,

2004


   

December 31,

2003


 
     (In Thousands)  

8 7/8% Senior subordinated notes

   $ 300,000     $ 300,000  

Bank credit facility

     271,250       297,500  

Capital lease obligations

     30       35  
    


 


Total long-term debt

     571,280       597,535  

Less: current portion

     (61,250 )     (52,500 )
    


 


Long term debt, net of current portion

   $ 510,030     $ 545,035  
    


 


 

Senior Subordinated Notes

 

In May 2001, the Company closed a private offering of $300.0 million of 8 7/8% Senior Subordinated Notes due 2011 realizing net proceeds of $291.8 million. The Company recorded $8.2 million in deferred offering costs which are being amortized to interest expense over the life of the notes using the effective interest rate method.

 

Bank Credit Facility

 

In July 2000, the Company established various credit facilities under an agreement with a group of financial institutions whereby the Company may borrow up to $750.0 million. This agreement was subsequently amended on March 18, 2002 (the “Amended and Restated Credit Agreement”) to provide a new facility under which the Company may borrow up to $600.0 million. The bank credit facility contains covenants limiting the Company’s ability to incur additional debt and additional liens, make dividend and other payments with respect to the Company’s equity securities, make new investments and sell assets. This bank credit facility also requires compliance with financial tests based on financial position and results of operations, including a leverage ratio, an interest coverage ratio and a fixed charge coverage ratio, all of which could effectively limit the Company’s ability to borrow or otherwise raise funds in the credit and capital markets.

 

The bank credit facility consists of Term A Loans (the “Loan”) in an amount up to $350.0 million and a credit line (the “Revolver”) in an amount up to $250.0 million that may be borrowed on a revolving basis. The interest rate on the bank credit facility is LIBOR plus a spread based on the Company’s leverage ratio, as defined in the credit agreement. The credit facility requires quarterly interest payments. The credit facility also requires minimum quarterly principal payments, which commenced March 31, 2003 and $250.0 million remained

 

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available (subject to various covenant restrictions) to be drawn down from the Revolver. The loans mature in June 2007. The weighted average interest rate for the bank credit facility was 3.34% and 3.71% during the three months ended June 30, 2004 and 2003, respectively.

 

The Company’s bank credit facility and the agreements governing the other outstanding debt contain covenants that restrict, among other things, the ability of the Company to incur additional debt, pay cash dividends, purchase capital stock, make capital expenditures, make investment 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.

 

Future minimum principal payments of long-term debt as of June 30, 2004 are as follows:

 

     Senior
Subordinated
Notes


   Bank Credit
Facility


   Capital
Leases


     (In Thousands)

July – December, 2004

   $ —      $ 26,250    $ 3

2005

     —        70,000      7

2006

     —        87,500      7

2007

     —        87,500      7

2008

     —        —        6

2009 and thereafter

     300,000      —        —  
    

  

  

Total long-term debt

   $ 300,000    $ 271,250    $ 30
    

  

  

 

7. FAIR VALUE OF FINANCIAL INSTRUMENTS:

 

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2004 and December 31, 2003. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.

 

    

June 30,

2004


  

December 31,

2003


    

Carrying

Amount


  

Fair

Value


  

Carrying

Amount


  

Fair

Value


     (In Thousands)

Financial assets:

                           

Cash and cash equivalents

   $ 15,032    $ 15,032    $ 38,010    $ 38,010

Short term investments

     32,000      32,000      40,700      40,700

Trade accounts receivable

     65,668      65,668      62,331      62,331

Financial liabilities:

                           

Accounts payable

     5,854      5,854      7,221      7,221

Accrued interest

     13,940      13,940      14,154      14,154

Accrued compensation and related benefits

     15,476      15,476      14,038      14,038

Total long-term debt

   $ 571,280    $ 599,600    $ 597,535    $ 629,035

 

The carrying amounts shown in the table are included in the consolidated balance sheets under the indicated captions. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

 

Cash and cash equivalents, short term investments, trade accounts receivable, accounts payable, accrued interest, and accrued compensation and related benefits: The carrying amounts approximate fair value because of the short maturity of these instruments.

 

Long-term debt: The fair value of the Company’s long-term debt is determined by either estimation by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers or by quoted market prices at the reporting date for the traded debt securities.

 

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8. STOCKHOLDERS’ EQUITY:

 

Capitalization

 

As of June 30, 2004, the Company had authorized 30,000,000 shares of Class A common stock, which is entitled to one vote per share; 150,000,000 shares of Class B common stock, which is entitled to ten votes per share; 150,000,000 shares of non-voting Class C common stock; and 150,000,000 shares of non-voting Class D common stock.

 

Also, as of June 30, 2004, the Company had authorized 1,000,000 shares of convertible preferred stock of which 310,000 shares were designated 6.5% Convertible Preferred Stock (“HIGH TIDES”). Dividend on the HIGH TIDES is payable on January 15, April 15, July 15, and October 15 of each year commencing October 15, 2000. Aggregate quarterly dividends on the HIGH TIDES are $5,035,000. The HIGH TIDES are non-voting. Starting in July 2003, and continuing for two years, the Company has the right (but not the requirement) to redeem up to $310.0 million of its HIGH TIDES for cash. Depending on the underlying price of the Company’s Class D common stock at the time of settlement for this redemption (if elected by the Company), the Company would have to fund up to 100% of the amount of the HIGH TIDES to be redeemed in cash, although lesser amounts would be required if certain holders of the HIGH TIDES elect to receive shares of Class D common stock in lieu of cash. Subject to certain restrictions imposed by its bank credit facility, the Company could finance the cash redemption of the HIGH TIDES with borrowings under its bank credit facility, available free cash balances and/or a new preferred and/or common stock issuance. By July 2005, if the Company has not redeemed 100% of its HIGH TIDES for cash and/or stock, the Company must remarket the securities into a similar security priced at the then prevailing market prices for such a security. As of the date of this report, the Company has not elected to redeem its HIGH TIDES.

 

1999 Stock Option and Restricted Stock Grant Plan

 

Effective March 19, 1999, the Company adopted the 1999 Stock Option and Restricted Stock Grant Plan (the “Plan”) under which employees, consultants, and non-employee directors may be granted options to purchase shares of Class A and shares of Class D common stock of the Company. The Company has authorized 1,408,099 shares of Class A common stock and 3,816,198 shares of Class D common stock under the Plan. The options are exercisable in installments determined by the compensation committee of the Company’s board of directors. The options expire as determined by the committee, but no later than ten years from the date of grant. On April 11, 2002, the Company’s board of directors voted to increase the number of shares of Class D stock issuable under the Plan to 5,816,198 and to incorporate all prior amendments into the Plan. This amendment to the Plan was approved by the Company’s stockholders on May 14, 2002. On March 9, 2004, the Company’s board of directors voted to increase the number of shares issuable under the Plan to 10,816,198 and to incorporate all prior amendments to the Plan. This amendment to the Plan was approved by the Company’s stockholders on May 26, 2004.

 

9. RELATED PARTY TRANSACTIONS:

 

The Company leased office space from a partnership in which the Company’s Chief Executive Officer (“CEO”) and Chairperson are partners. Total rent paid to the partnership during the three months ended June 30, 2004 and 2003 was approximately $60,000 and $54,000, respectively. Total rent paid to the partnership during the six months ended June 30, 2004 and 2003 was approximately $119,000 and $107,000, respectively. Effective June 28, 2004, the partnership sold the property to a non-related partnership. On that date, the Company entered into a new lease agreement with the new landlords. The new lease term expires October 31, 2004. The Company does not intend to renew this lease and intends to relocate to a new facility following the expiration of this lease.

 

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 in return for performances by a personality of Music One at the Company’s sponsored events. As of June 30, 2004, the valuation of the Company’s promotion of Music One approximated the valuation of Music One performances at the Company’s sponsored events.

 

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Three officers of the Company, the CEO, Chief Financial Officer (“CFO”) and the General Counsel, purchased 1,500,000 shares of the Company’s Class D common stock, 333,334 shares of the Company’s Class A and 666,666 of the company’s Class D common stock, and 250,000 shares of the Company’s Class D common stock, respectively. The stock was purchased with the proceeds of full recourse loans from the Company in the amounts of $21,105,000, $7,000,000 and $2,005,000, respectively, with accrued interest as of June 30, 2004, of $3,878,000, $1,519,000 and $360,000, and as of December 31, 2003, of $3,275,000, $1,313,000 and $319,000, respectively.

 

The Company also has loans outstanding to the Company’s CEO, CFO and Chief Operating Officer in the amounts of $380,000, $88,000 and $262,000, respectively, with accrued interest as of June 30, 2004, of $148,000, $28,000 and $90,000, and as of December 31, 2003, of $134,000, $25,000 and $80,000, respectively. The loans are due on demand and bear interest at 5.6%.

 

In February 2002, the Company’s CFO exercised a contractual right to receive a non-interest-bearing loan in the amount of $750,000. The loan is due in January 2005 or 60 days after termination of the CFO’s employment, whichever is earlier.

 

In August 2001, the Company entered into a local management agreement (“LMA”) with a company in which the Company’s CEO has a majority ownership interest. Total fees paid under this agreement were approximately $43,000 and $65,000 for the three months ended June 30, 2004 and 2003, respectively. Total fees paid under this agreement were approximately $154,000 and $128,000 for the six months ended June 30, 2004 and 2003, respectively. Additionally, the Company had a receivable from this company of approximately $630,000 as of June 30, 2004 and 2003. In April 2004, the Company announced its acquisition of the station to which the LMA relates.

 

10. COMMITMENT AND CONTINGENCIES:

 

FCC Broadcast Licenses

 

Each of the Company’s radio stations operates pursuant to one or more licenses issued by the Federal Communications Commission (FCC) that have a maximum term of eight years prior to renewal. The Company’s FCC broadcast licenses expire at various times from August 1, 2004 to April 1, 2012. Although the Company may apply to renew its FCC broadcast licenses, third parties may challenge the Company’s renewal applications. The Company is not aware of any facts or circumstances that would prevent the Company from having its current licenses renewed.

 

Network Organization and Affiliation Agreement

 

Pursuant to the network organization agreement, on July 18, 2003 the Company and certain other investors formed a limited liability company TV One, LLC (“TV One”) for the purpose of developing and distributing a new television programming service in the United States. The Company is committed to provide funding of $74 million to TV One over four years. As of June 30, 2004, the Company had made payments of $18.5 million under this agreement.

 

Royalty Agreements

 

The Company has entered into fixed fee and variable revenue share payment agreements with performance rights organizations that expire as late as 2006. During the three months ended June 30, 2004 and 2003, the Company incurred expenses of $2.4 million and $2.8 million, respectively, in relation to these agreements. During the six months ended June 30, 2004 and 2003, the Company incurred expenses of $4.8 million and $5.0 million, respectively, in relation to these agreements.

 

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Leases

 

The Company has noncancelable operating leases for office space, studio space, broadcast towers and transmitter facilities and noncancelable capital leases for equipment that expire over the next twenty years. The future minimum lease payments and rentals under noncancelable leases as of June 30, 2004 are:

 

     Capital
Lease
Payments


   Operating
Lease
Payments


     (In Thousands)

July – December, 2004

   $ 3    $ 3,849

2005

     8      4,909

2006

     8      4,501

2007

     7      4,325

2008

     6      4,293

Thereafter

     —        11,938
    

  

Total

   $ 32    $ 33,815
           

Less amount representing interest

     2       
    

      

Present value of net minimum lease payments

   $ 30       

Less current maturities

     —         
    

      

Long-term obligations

   $ 30       
    

      

 

Rent expense for the three months ended June 30, 2004 and 2003 was $1,549,000 and $1,440,000, respectively. The total cost of assets under capital lease as of June 30, 2004 was approximately $35,000. Rent expense for the six months ended June 30, 2004 and 2003 was $3,058,000 and $2,878,000, respectively.

 

Other contingencies

 

The Company has been named as a defendant in several legal actions occurring 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.

 

11. SUBSEQUENT EVENT:

 

In July 2004, the Company entered into a definitive agreement to acquire the assets of radio station WABZ-FM, licensed to Albermarle, North Carolina. The total acquisition price is approximately $11.5 million. The Company intends to relocate radio station WABZ-FM to the Company’s existing facilities in the Charlotte, North Carolina market and, upon completion of this acquisition during the fourth quarter, the Company expects to change call sign and format of the radio station.

 

19


Table of Contents

CONSOLIDATING FINANCIAL STATEMENTS

 

The Company conducts a portion of its business through its subsidiaries. All of the Company’s restricted subsidiaries (Subsidiary Guarantors) have fully and unconditionally guaranteed the Company’s 8 7/8% Senior Subordinated Notes due 2011.

 

Set forth below are consolidating financial statements for the Company and the Subsidiary Guarantors as of June 30, 2004 and 2003, and for the three- and six-month periods then ended. 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.

 

20


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

 

FOR THE THREE MONTHS ENDED JUNE 30, 2004

(unaudited)

 

     Combined
Guarantor
Subsidiaries


   Radio
One, Inc.


    Eliminations

    Consolidated

     (In Thousands)

NET BROADCAST REVENUE

   $ 42,844    $ 43,366     $ —       $ 86,210
    

  


 


 

OPERATING EXPENSES:

                             

Program and technical, exclusive of depreciation and amortization shown below

     6,761      6,826       —         13,587

Selling, general and administrative

     13,710      11,081       —         24,791

Corporate expenses

     —        4,118       —         4,118

Depreciation and amortization

     2,989      1,572       —         4,561
    

  


 


 

Total operating expenses

     23,460      23,597       —         47,057
    

  


 


 

Operating income

     19,384      19,769       —         39,153

INTEREST INCOME

     10      575       —         585

INTEREST EXPENSE, including amortization of deferred financing costs

     19      9,729       —         9,748

EQUITY IN NET LOSS OF AFFILIATED COMPANY

     —        1,431       —         1,431

OTHER INCOME (EXPENSE), net

     61      1       —         62
    

  


 


 

Income before provision for income taxes

     19,436      9,185       —         28,621

PROVISION FOR INCOME TAXES

     —        11,162       —         11,162
    

  


 


 

Net income (loss) before equity in income of subsidiaries

     19,436      (1,977 )     —         17,459

EQUITY IN INCOME OF SUBSIDIARIES

     —        19,436       (19,436 )     —  
    

  


 


 

Net income

   $ 19,436    $ 17,459     $ (19,436 )   $ 17,459
    

          


     

PREFERRED STOCK DIVIDEND

            5,035               5,035
           


         

NET INCOME APPLICABLE TO COMMON STOCKHOLDERS

          $ 12,424             $ 12,424
           


         

 

 

 

The accompanying notes are an integral part of this consolidating statement.

 

21


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

 

FOR THE THREE MONTHS ENDED JUNE 30, 2003

(unaudited)

 

    

Combined
Guarantor

Subsidiaries


   Radio One, Inc.

   Eliminations

    Consolidated

     (In Thousands)

NET BROADCAST REVENUE

   $ 40,677    $ 40,235    $ —       $ 80,912
    

  

  


 

OPERATING EXPENSES:

                            

Program and technical, exclusive of depreciation and amortization shown below

     6,949      6,607      —         13,556

Selling, general and administrative

     13,947      10,325      —         24,272

Corporate expenses

     —        3,279      —         3,279

Depreciation and amortization

     3,035      1,482      —         4,517
    

  

  


 

Total operating expenses

     23,931      21,693      —         45,624
    

  

  


 

Operating income

     16,746      18,542      —         35,288

INTEREST INCOME

     2      694      —         696

INTEREST EXPENSE, including amortization of deferred financing costs

     198      10,491      —         10,689
    

  

  


 

Income before provision for income taxes

     16,550      8,745      —         25,295

PROVISION FOR INCOME TAXES

     —        9,617      —         9,617

EQUITY IN INCOME OF SUBSIDIARIES

     —        16,550      (16,550 )     —  
    

  

  


 

Net income

   $ 16,550    $ 15,678    $ (16,550 )   $ 15,678
    

         


     

PREFERRED STOCK DIVIDEND

            5,035              5,035
           

          

NET INCOME APPLICABLE TO COMMON STOCKHOLDERS

          $ 10,643            $ 10,643
           

          

 

 

 

The accompanying notes are an integral part of this consolidating statement.

 

22


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CONSOLIDATING STATEMENT OF OPERATIONS

 

FOR THE SIX MONTHS ENDED JUNE 30, 2004

(unaudited)

 

    

Combined

Guarantor

Subsidiaries


   Radio One, Inc.

    Eliminations

    Consolidated

     (In Thousands)

NET BROADCAST REVENUE

   $ 77,991    $ 77,881     $ —       $ 155,872
    

  


 


 

OPERATING EXPENSES:

                             

Program and technical, exclusive of depreciation and amortization shown below

     13,759      13,974       —         27,733

Selling, general and administrative

     26,155      20,548       —         46,703

Corporate expenses

     —        7,878       —         7,878

Depreciation and amortization

     5,954      3,037       —         8,991
    

  


 


 

Total operating expenses

     45,868      45,437       —         91,305
    

  


 


 

Operating income

     32,123      32,444       —         64,567

INTEREST INCOME

     12      1,295       —         1,307

INTEREST EXPENSE, including amortization of deferred financing costs

     64      19,659       —         19,723

EQUITY IN NET LOSS OF AFFILIATED COMPANY

     —        3,798       —         3,798

OTHER INCOME (EXPENSE), net

     61      83       —         144
    

  


 


 

Income before provision for income taxes

     32,132      10,365       —         42,497

PROVISION FOR INCOME TAXES

     —        16,247       —         16,247
    

  


 


 

Net income (loss) before equity in income of subsidiaries

     32,132      (5,882 )     —         26,250

EQUITY IN INCOME OF SUBSIDIARIES

     —        32,132       (32,132 )     —  
    

  


 


 

Net income

   $ 32,132    $ 26,250     $ (32,132 )   $ 26,250
    

          


     

PREFERRED STOCK DIVIDEND

            10,070               10,070
           


         

NET INCOME APPLICABLE TO COMMON STOCKHOLDERS

          $ 16,180             $ 16,180
           


         

 

 

The accompanying notes are an integral part of this consolidating statement.

 

23


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

 

FOR THE SIX MONTHS ENDED JUNE 30, 2003

(unaudited)

 

    

Combined
Guarantor

Subsidiaries


   Radio
One, Inc.


    Eliminations

    Consolidated

 
     (In Thousands)  

NET BROADCAST REVENUE

   $ 72,242    $ 72,100     $ —       $ 144,342  
    

  


 


 


OPERATING EXPENSES:

                               

Program and technical, exclusive of depreciation and amortization shown below

     13,333      12,839       —         26,172  

Selling, general and administrative

     26,518      19,500       —         46,018  

Corporate expenses

     —        6,912       —         6,912  

Depreciation and amortization

     6,075      2,956       —         9,031  
    

  


 


 


Total operating expenses

     45,926      42,207       —         88,133  
    

  


 


 


Operating income

     26,316      29,893       —         56,209  

INTEREST INCOME

     3      1,360       —         1,363  

INTEREST EXPENSE, including amortization of deferred financing costs

     307      20,830       —         21,137  

OTHER INCOME (EXPENSE), net

     —        (2 )     —         (2 )
    

  


 


 


Income before provision for income taxes

     26,012      10,421       —         36,433  

PROVISION FOR INCOME TAXES

     —        13,845       —         13,845  
    

  


 


 


Net income (loss) before equity in income of subsidiaries

     26,012      (3,424 )     —         22,588  

EQUITY IN INCOME OF SUBSIDIARIES

     —        26,012       (26,012 )     —    
    

  


 


 


Net income (loss)

   $ 26,012      22,588     $ (26,012 )     22,588  
    

          


       

PREFERRED STOCK DIVIDEND

            10,070               10,070  
           


         


NET INCOME APPLICABLE TO COMMON STOCKHOLDERS

          $ 12,518             $ 12,518  
           


         


 

The accompanying notes are an integral part of this consolidating statement.

 

24


Table of Contents

CONSOLIDATING BALANCE SHEET

 

AS OF JUNE 30, 2004

(unaudited)

 

     Combined
Guarantor
Subsidiaries


   Radio One, Inc.

    Eliminations

    Consolidated

 
     (In Thousands)  

ASSETS

                               

CURRENT ASSETS:

                               

Cash and cash equivalents

   $ 263    $ 14,769     $ —       $ 15,032  

Short-term investments

     —        32,000       —         32,000  

Trade accounts receivable, net of allowance for doubtful accounts

     32,194      33,474       —         65,668  

Prepaid expenses and other current assets

     773      2,314       —         3,087  

Income tax receivable

     —        3,650       —         3,650  

Deferred tax asset

     2,282      3,512       —         5,794  
    

  


 


 


Total current assets

     35,512      89,719       —         125,231  

PROPERTY AND EQUIPMENT, net

     27,200      13,979       —         41,179  

INTANGIBLE ASSETS, net

     1,797,005      16,607       —         1,813,612  

INVESTMENT IN SUBSIDIARIES

     —        1,832,989       (1,832,989 )     —    

INVESTMENT IN AFFILIATED COMPANY

     —        30,665       —         30,665  

OTHER ASSETS

     4,375      8,104       —         12,479  
    

  


 


 


Total assets

   $ 1,864,092    $ 1,992,063     $ (1,832,989 )   $ 2,023,166  
    

  


 


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                               

CURRENT LIABILITIES:

                               

Accounts payable

   $ 591    $ 5,263     $ —       $ 5,854  

Accrued expenses

     6,403      32,464       —         38,867  

Fair value of derivative instruments

     —        1,087       —         1,087  

Other current liabilities

     345      3,663       —         4,008  

Current portion of long-term debt

     —        61,250       —         61,250  
    

  


 


 


Total current liabilities

     7,339      103,727       —         111,066  

LONG-TERM DEBT, net of current portion

     30      510,000       —         510,030  

DEFERRED REVENUE, net of current portion

     —        11,675       —         11,675  

DEFERRED INCOME TAX LIABILITY

     23,734      68,949       —         92,683  
    

  


 


 


Total liabilities

     31,103      694,351       —         725,454  
    

  


 


 


STOCKHOLDERS’ EQUITY:

                               

Common stock

     —        105       —         105  

Accumulated other comprehensive loss

     —        (668 )     —         (668 )

Stock subscriptions receivable

     —        (35,867 )     —         (35,867 )

Additional paid-in capital

     1,195,727      1,412,486       (1,195,727 )     1,412,486  

Accumulated deficit

     637,262      (78,344 )     (637,262 )     (78,344 )
    

  


 


 


Total stockholders’ equity

     1,832,989      1,297,712       (1,832,989 )     1,297,712  
    

  


 


 


Total liabilities and stockholders’ equity

   $ 1,864,092    $ 1,992,063     $ (1,832,989 )   $ 2,023,166  
    

  


 


 


 

The accompanying notes are an integral part of this consolidating balance sheet.

 

25


Table of Contents

CONSOLIDATING BALANCE SHEET

 

AS OF DECEMBER 31, 2003

 

     Combined
Guarantor
Subsidiaries


   Radio One, Inc.

    Eliminations

    Consolidated

 
     (In Thousands)  
     (Unaudited)    (Unaudited)     (Unaudited)        

ASSETS

                               

CURRENT ASSETS:

                               

Cash and cash equivalents

   $ 414    $ 37,596     $ —       $ 38,010  

Short term investments

     —        40,700       —         40,700  

Trade accounts receivable, net of allowance for doubtful accounts

     29,930      32,401       —         62,331  

Prepaid expenses and other current assets

     605      975       —         1,580  

Income tax receivable

     —        3,650       —         3,650  

Deferred income tax asset

     2,282      3,512       —         5,794  
    

  


 


 


Total current assets

     33,231      118,834       —         152,065  

PROPERTY AND EQUIPMENT, net

     27,974      14,701       —         42,675  

INTANGIBLE ASSETS, net

     1,763,295      18,963       —         1,782,258  

INVESTMENT IN SUBSIDIARIES

     —        1,793,927       (1,793,927 )     —    

INVESTMENT IN AFFILIATED COMPANY

     —        34,396       —         34,396  

OTHER ASSETS

     963      5,514       —         6,477  
    

  


 


 


Total assets

   $ 1,825,463    $ 1,986,335     $ (1,793,927 )   $ 2,017,871  
    

  


 


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                               

CURRENT LIABILITIES:

                               

Accounts payable

   $ 821    $ 6,400     $ —       $ 7,221  

Accrued expenses

     6,798      31,227       —         38,025  

Fair value of derivative

     —        4,236       —         4,236  

Other current liabilities

     148      3,770       —         3,918  

Current portion of long-term debt

     —        52,500       —         52,500  
    

  


 


 


Total current liabilities

     7,767      98,133       —         105,900  

LONG-TERM DEBT AND DEFERRED INTEREST, net of current portion

     34      545,001       —         545,035  

DEFERRED REVENUE, net of current portion

     —        13,009       —         13,009  

DEFERRED INCOME TAX LIABILITY

     23,735      51,773       —         75,508  
    

  


 


 


Total liabilities

     31,536      707,916       —         739,452  
    

  


 


 


STOCKHOLDERS’ EQUITY:

                               

Common stock

     —        105       —         105  

Accumulated other comprehensive loss

     —        (2,605 )     —         (2,605 )

Stock subscriptions receivable

     —        (35,017 )     —         (35,017 )

Additional paid-in capital

     1,188,797      1,410,460       (1,188,797 )     1,410,460  

Accumulated deficit

     605,130      (94,524 )     (605,130 )     (94,524 )
    

  


 


 


Total stockholders’ equity

     1,793,927      1,278,419       (1,793,927 )     1,278,419  
    

  


 


 


Total liabilities and stockholders’ equity

   $ 1,825,463    $ 1,986,335     $ (1,793,927 )   $ 2,017,871  
    

  


 


 


 

The accompanying notes are an integral part of this consolidating balance sheet.

 

26


Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS

 

FOR THE SIX MONTHS ENDED JUNE 30, 2004

(unaudited)

 

    

Combined
Guarantor

Subsidiaries


    Radio One, Inc.

    Eliminations

    Consolidated

 
     (In Thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

                                

Net income

   $ 32,132     $ 26,250     $ (32,132 )   $ 26,250  

Adjustments to reconcile loss to net cash from operating activities:

                                

Depreciation and amortization

     5,954       3,037       —         8,991  

Amortization of debt financing costs, unamortized discount and deferred interest

     —         848       —         848  

Deferred income taxes

     (1 )     15,963       —         15,962  

Equity in net losses of affiliated company

     —         3,798       —         3,798  

Non-cash compensation

     —         1,517       —         1,517  

Effect of change in operating assets and liabilities-

                                

Trade accounts receivable, net

     (2,264 )     (1,073 )     —         (3,337 )

Due to Corporate/from Subsidiaries

     4,317       (4,317 )     —         —    

Prepaid expenses and other

     (168 )     (1,338 )     —         (1,506 )

Other assets

     88       (329 )     —         (241 )

Accounts payable

     (230 )     (1,138 )     —         (1,368 )

Accrued expenses and other

     (205 )     (1,002 )     —         (1,207 )
    


 


 


 


Net cash flows from operating activities

     39,623       42,216       (32,132 )     49,707  
    


 


 


 


CASH FLOWS FROM INVESTING ACTIVITIES:

                                

Purchase of property and equipment

   $ (1,935 )   $ (1,992 )   $ —       $ (3,927 )

Equity investments

     (3,500 )     44       —         (3,456 )

Purchase of short-term investments

     —         8,700       —         8,700  

Investment in Subsidiaries

     —         (32,132 )     32,132       —    

Deposits and payments for station purchases

     (34,341 )     (3,802 )     —         (38,143 )
    


 


 


 


Net cash flows from investing activities

     (39,776 )     (29,182 )     32,132       (36,826 )
    


 


 


 


CASH FLOWS FROM FINANCING ACTIVITIES:

                                

Repayment of debt

     —         (26,252 )     —         (26,252 )

Proceeds from exercise of stock options

     —         1,313       —         1,313  

Interest on stock subscription receivable

     —         (850 )     —         (850 )

Payment of preferred stock dividends

             (10,070 )             (10,070 )
    


 


 


 


Net cash flows from financing activities

     —         (35,859 )     —         (35,859 )
    


 


 


 


DECREASE IN CASH AND CASH EQUIVALENTS

     (153 )     (22,825 )     —         (22,978 )

CASH AND CASH EQUIVALENTS, beginning of period

     414       37,596       —         38,010  
    


 


 


 


CASH AND CASH EQUIVALENTS, end of period

   $ 261     $ 14,771     $ —       $ 15,032  
    


 


 


 


 

The accompanying notes are an integral part of this consolidating statement.

 

27


Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS

 

FOR THE SIX MONTHS ENDED JUNE 30, 2003

(unaudited)

 

    

Combined
Guarantor

Subsidiaries


    Radio One, Inc.

    Eliminations

    Consolidated

 
     (In Thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

                                

Net income

   $ 26,012     $ 22,588     $ (26,012 )   $ 22,588  

Adjustments to reconcile loss to net cash from operating activities:

                                

Depreciation and amortization

     6,075       2,956       —         9,031  

Amortization of debt financing costs

     —         849       —         849  

Deferred income taxes

     —         13,628       —         13,628  

Non-cash compensation

     —         894       —         894  

Loss on retirement of assets

     2       —         —         2  

Effect of change in operating assets and liabilities-

                                

Trade accounts receivable, net

     (485 )     773       —         288  

Due to Corporate/from Subsidiaries

     (24,434 )     24,434       —         —    

Prepaid expenses and other

     206       (311 )     —         (105 )

Other assets

     (657 )     793       —         136  

Accounts payable

     84       545       —         629  

Accrued expenses and other

     144       (2,296 )     —         (2,152 )
    


 


 


 


Net cash flows from operating activities

     6,947       64,853       (26,012 )     45,788  
    


 


 


 


CASH FLOWS FROM INVESTING ACTIVITIES:

                                

Purchase of property and equipment

   $ (3,877 )   $ (2,258 )   $ —       $ (6,135 )

Equity investments

     —         (1,119 )     —         (1,119 )

Purchase of intangible assets

     (1,260 )     —         —         (1,260 )

Investment in subsidiary

     —         (26,012 )     26,012       —    

Deposits and payments for station purchases

     (1,669 )     (491 )     —         (2,160 )
    


 


 


 


Net cash flows from investing activities

     (6,806 )     (29,880 )     26,012       (10,674 )
    


 


 


 


CASH FLOWS FROM FINANCING ACTIVITIES:

                                

Repayment of debt

     —         (26,250 )     —         (26,250 )

Proceeds from exercise of stock options

     —         727       —         727  

Interest on stock subscription receivable

     —         (862 )     —         (862 )

Payment of preferred stock dividends

             (10,070 )             (10,070 )
    


 


 


 


Net cash flows from financing activities

     —         (36,455 )     —         (36,455 )
    


 


 


 


INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     141       (1,482 )     —         (1,341 )

CASH AND CASH EQUIVALENTS, beginning of period

     423       44,992       —         45,415  
    


 


 


 


CASH AND CASH EQUIVALENTS, end of period

   $ 564     $ 43,510     $ —       $ 44,074  
    


 


 


 


 

The accompanying notes are an integral part of this consolidating statement.

 

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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 Discussion and Analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2003.

 

Executive Summary

 

The second quarter of 2004 was a good quarter for Radio One. In addition to growing revenue faster than the radio industry, the Company performed well relative to virtually all metrics of performance including revenue growth, cost containment and station operating income margin expansion. Overall, we showed positive revenue growth in a majority of our markets. Specifically, Radio One’s net broadcast revenue grew approximately 7% in the second quarter of 2004. This growth was broad-based with particular strength in Atlanta, Baltimore, Dallas, Los Angeles and Washington, D.C. Our revenue growth was balanced, with local and national advertising revenue increasing at the same rate while particular categories of strength included industries as diverse as financial, entertainment, travel and transportation, government/public and services. On the expense side, we have continued to manage our cost structure, which enhanced our results for the second quarter.

 

During the second quarter of 2004, we reduced our leverage by repaying approximately $13.1 million of outstanding debt, utilizing our cash flow from operations. We expect that this reduced leverage will improve our borrowing capacity for future growth opportunities, including potential acquisitions. Additionally, our affiliated company, TV One, has been launched and is off to a good start. It benefited from increased TV advertiser demand which, coupled with its cost controls, resulted in a lower loss during the second quarter as compared to the first quarter of 2004.

 

Radio One continues to be well positioned with radio stations in some of the largest markets in the U.S., many of which have experienced good ratings trends. As in past periods, we will continue to focus on acquiring underperforming or strategic stations as well as seeking to build clusters of stations within certain markets to capitalize on our existing infrastructure. During the second quarter of 2004, we announced our acquisition of the stock of New Mableton Broadcast Corporation (“NMBC”) for approximately $35.0 million. NMBC owns WAMJ-FM, a station located in the Atlanta, Georgia metropolitan area which we have operated under a local management agreement since August 2001. Also during the second quarter, we announced our intention to acquire the assets of KRTS-FM, a station located in the Houston, Texas metropolitan area for approximately $72.5 million. We expect to remain focused on ensuring that the price we pay for any acquisitions is fair and that these acquisitions are financed in such a manner that will not jeopardize our ability to manage and grow the business in times of uncertainty.

 

Introduction

 

Revenue and Expenses

 

We derive revenue from sales of advertisements and program sponsorships on our stations to local and national advertisers and, to a much lesser extent, tower rental income, independent promotion agreements, ticket and other revenue related to special events we sponsor throughout the year and, beginning in the third quarter of 2003, management fees from our affiliated company, TV One LLC (“gross broadcast revenue”). 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.

 

Approximately 71% of our net revenue was generated from local advertising while approximately 27% was generated from national spot advertising, including network advertising during the three months ended June 30,

 

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2004 and 2003. Approximately 70% of our net revenue was generated from local advertising while approximately 27% was generated from national spot advertising, including network advertising during the six months ended June 30, 2004 and 2003. The balance of revenue was generated primarily from tower rental income, ticket sales and revenue related to our sponsored events and other revenues.

 

In the broadcasting industry, radio stations often utilize trade or barter agreements to reduce cash expenses by exchanging advertising time for goods or services. In order to maximize cash revenue from our spot inventory, we monitor the use of trade agreements.

 

Expenses

 

Our significant broadcast expenses are (i) employee salaries and commissions, (ii) programming expenses, (iii) advertising and promotion expenses, (iv) rental of premises for studios, (v) rental of transmission tower space and (vi) music license royalty fees. We strive to control these expenses by centralizing certain functions such as finance, accounting, legal, human resources and management information systems and the overall programming management function. We also use our multiple stations, market presence and purchasing power to negotiate favorable rates with certain vendors and national representative selling agencies.

 

We generally incur advertising and promotional expenses to increase our audiences. However, because Arbitron reports ratings quarterly, any changed ratings and therefore the effect on advertising revenues tends to lag behind the incurrence of advertising and promotional expenditures.

 

Measurement of Performance

 

We monitor the growth and operational results of our business using net income and the following key metrics:

 

(a) Net Broadcast 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 broadcast revenue. Net broadcast revenue consists of gross broadcast revenue net of local and national agency commissions consistent with industry practice. Net broadcast revenue is recognized in the period in which advertisements are broadcast. Net broadcast revenue also includes advertising aired in exchange for goods and services (barter), which is recorded at fair value.

 

(b) Station Operating Income: Operating income before depreciation and amortization, corporate expenses and non-cash compensation expenses is commonly referred to in our business as station operating income. Station operating income is not a measure of financial performance under generally accepted accounting principles. Nevertheless we believe station operating income is often a useful measure of a broadcasting company’s operating performance and is a significant basis used by our management to measure the operating performance of our stations within the various markets because station operating income provides helpful information about our results of operations apart from expenses associated with our physical plant, overhead and non-cash compensation. Station operating income is frequently used as one of the bases for comparing businesses in our industry, although our measure of station operating income may not be comparable to similarly titled measures of other companies. Station operating income does not purport to represent operating loss or cash flow from operating activities, as those terms are defined under generally accepted accounting principles, and should not be considered as an alternative to those measurements as an indicator of our performance.

 

(c) Station Operating Income Margin: Station operating income margin represents station operating income as a percentage of net broadcast revenue. Station operating income margin is not a measure of financial performance under generally accepted accounting principles. Nevertheless, we believe that station operating income margin is a useful measure of our performance because it provides helpful information about our profitability as a percentage of our net broadcasting revenue.

 

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(d) EBITDA: Net income or loss before interest income, interest expense, income taxes, depreciation and amortization is commonly referred to in our business as “EBITDA.” EBITDA is not a measure of financial performance under generally accepted accounting principles. We believe 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 EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our acquisitions and debt financings, and our provision for tax expense. Accordingly, we believe that EBITDA provides helpful information about the operating performance of our business, apart from the expenses associated with our physical plant or capital structure. EBITDA is frequently used as one of the bases for comparing businesses in our industry, although our measure of EBITDA may not be comparable to similarly titled measures of other companies. EBITDA does not purport to represent operating loss or cash flow from operating activities, as those terms are defined under generally accepted accounting principles, and should not be considered as an alternative to those measurements as an indicator of our performance.

 

Summary of Performance

 

The table below provides a summary of our performance based on the metrics described above:

 

    

Three Months Ended

June 30,


   

Six Months Ended

June 30,


 
     2004

    2003

    2004

    2003

 
     (in thousands, except margin data)  

Net Broadcast Revenue

   $ 86,210     $ 80,912     $ 155,872     $ 144,342  

Station Operating Income(1)

   $ 48,025     $ 43,084     $ 82,149     $ 75,152  

Station Operating Income Margin

     56 %     53 %     53 %     50 %

EBITDA(2)

   $ 42,345     $ 39,805     $ 69,904     $ 65,238  

Net Income

   $ 17,459     $ 15,678     $ 26,250     $ 22,588  

 


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

 

    

Three Months Ended

June 30,


  

Six Months Ended

June 30,


     2004

   2003

   2004

   2003

     (in thousands)

Operating income as reported

   $ 39,156    $ 35,288    $ 64,567    $ 56,209

Add back non-station operating income items included in operating income:

                           

Corporate expenses, excluding non-cash compensation

     3,716      2,853      7,074      6,018

Non-cash compensation

     593      426      1,517      894

Depreciation and amortization

     4,560      4,517      8,991      9,031
    

  

  

  

Station operating income

   $ 48,025    $ 43,084    $ 82,149    $ 72,152
    

  

  

  


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

 

    

Three Months Ended

June 30,


   

Six Months Ended

June 30,


 
     2004

    2003

    2004

    2003

 
     (in thousands)  

Net income as reported

   $ 17,459     $ 15,678     $ 26,250     $ 22,588  

Add back non-EBITDA items included in net income:

                                

Interest income

     (585 )     (696 )     (1,307 )     (1,363 )

Interest expense

     9,748       10,689       19,723       21,137  

Income taxes

     11,162       9,617       16,247       13,845  

Depreciation and amortization

     4,561       4,517       8,991       9,031  
    


 


 


 


EBITDA

   $ 42,345     $ 39,805     $ 69,904     $ 65,238  
    


 


 


 


 

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RADIO ONE, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

 

The following table summarizes our historical consolidated results of operations:

 

    

Three Months Ended

June 30,


  

Six Months Ended

June 30,


 
     2004

   2003

   2004

   2003

 
     (in thousands)  

Statements of Operations:

                             

Net broadcast revenue

   $ 86,210    $ 80,912    $ 155,872    $ 144,342  

Operating expenses:

                             

Programming and technical, excluding non-cash compensation

     13,395      13,556      27,020      26,172  

Selling, general and administrative

     24,791      24,272      46,703      46,018  

Corporate expenses, excluding non-cash compensation

     3,716      2,853      7,074      6,018  

Non-cash compensation

     594      426      1,517      894  

Depreciation and amortization

     4,561      4,517      8,991      9,031  
    

  

  

  


Operating income

     39,153      35,288      64,567      56,209  

Interest income

     585      696      1,307      1,363  

Interest expense

     9,748      10,689      19,723      21,137  

Other income (expense), net

     62      —        144      (2 )

Equity in net loss of affiliated company

     1,431      —        3,798      —    
    

  

  

  


Income before provision for income taxes

     28,621      25,295      42,497      36,433  

Income tax benefit provision

     11,162      9,617      16,247      13,845  
    

  

  

  


Net income

   $ 17,459    $ 15,678    $ 26,250    $ 22,588  

Preferred stock dividend

     5,035      5,035      10,070      10,070  
    

  

  

  


Net income applicable to common stockholders

   $ 12,424    $ 10,643    $ 16,180    $ 12,518  
    

  

  

  


 

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

 

Net Broadcast Revenue. Net broadcast revenue is derived primarily from sales of advertisements and program sponsorships on our stations to local and national advertisers. Net broadcast revenue is recognized in the period in which advertisements are broadcast. Net broadcast revenue includes advertising aired in exchange for goods and services (barter), which is recorded at fair value. Other sources of net broadcast revenue include tower rental income, independent promotion agreements, tickets, other revenue related to special events sponsored by us and, beginning in 2003, management fees from TV One. Net broadcast revenue is presented net of local and national agency commissions in the results of operations, which is consistent with industry practice. For the three months ended June 30, 2004, we recognized $86.2 million in net broadcast revenue compared to $80.9 million during the three months ended June 30, 2003, an increase of $5.3 million or 7%. These amounts are net of agency commissions, which were $12.1 million during the three months ended June 30, 2004, compared to $11.1 million during the three months ended June 30, 2003, an increase of $1.0 million or 9%. The increase in net broadcast revenue is due primarily to increased demand for advertising on our stations that results from our increased listenership, audience reach and ratings. The net revenue growth in several of our markets, including Atlanta, Baltimore, Dallas, Los Angeles and Washington, D.C. was partially offset by revenue declines in other markets, including Houston, Louisville and Richmond. We expect net broadcast revenue to increase during the remainder of 2004 due to improved ratings growth in some of our underdeveloped markets, increased growth in corporate sales, and an improved outlook in general economic conditions.

 

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Operating Expenses

 

Summary.

 

Programming and technical costs, selling general and administrative costs, corporate expenses, non-cash compensation, and depreciation and amortization were $47.0 million for the three months ended June 30, 2004 compared to $45.6 million in the three months ended June 30, 2003, an increase of $1.4 million or 3%. The increase was due primarily to increases of $0.5 million in selling, general and administrative costs, $0.2 million in non-cash compensation, and $0.9 million in corporate expenses, offset by a decrease of $0.2 million in programming and technical costs.

 

Programming and technical.

 

Programming and technical costs include costs associated with our on-air talent, music royalties, and the rental and maintenance of our tower facilities. Programming and technical costs also include expenses associated with our research activities and the management and maintenance of the systems, software, hardware, and studios used in the creation, distribution and broadcast of our service. Programming and technical costs were $13.4 million for the three months ended June 30, 2004, compared to $13.6 million for the three months ended June 30, 2003, a decrease of $0.2 million or 1%. This decrease resulted primarily from a reduction in expenses associated with broadcast rights and royalties during the three months ended June 30, 2004. Programming and technical costs are expected to increase during the remainder of 2004 due to the operations of our broadcast systems infrastructure and additional costs for our on-air talent.

 

Selling, general and administrative.

 

Selling, general and administrative costs, which include sales force compensation (primarily commissions), marketing costs, expenses for office and studio facilities, and back office expenses, were $24.8 million for the three months ended June 30, 2004, compared with $24.3 million for the three months ended June 30, 2003, an increase of $0.5 million or 2%. This increase resulted primarily from expenses associated with sales force compensation associated with increased revenue. Selling, general and administrative costs also include costs related to the advertising traffic (scheduling and insertion) functions. These costs are expected to increase during the remainder of 2004 due to the variable cost of increased revenue.

 

Corporate expenses.

 

Corporate expenses consist of costs associated with managing and maintaining our corporate headquarters and facilities, primarily corporate personnel costs. These expenses were $3.7 million for the three months ended June 30, 2004, compared with $2.8 million for the three months ended June 30, 2003, an increase of $0.9 million or 32%. This increase resulted primarily from additional professional fees and other expenses incurred to ensure compliance with new regulatory requirements, including increased headcount. These costs are expected to increase during the remainder of 2004 as we continue the implementation of new regulatory requirements associated with being a public company.

 

Non-cash compensation.

 

Non-cash compensation expenses were $0.6 million for the three months ended June 30, 2004, compared with $0.4 million for the three months ended June 30, 2003, an increase of $0.2 million or 50%. This increase resulted from the recognition of additional charges related to the grant of restricted stock to certain on-air talent during the first quarter of 2004.

 

Depreciation and amortization.

 

Depreciation and amortization expense was $4.6 million for the three months ended June 30, 2004 compared with $4.5 million for the three months ended June 30, 2003, an increase of $0.1 million or 2%.

 

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Operating Income. Operating income for the three months ended June 30, 2004 was $39.2 million compared with $35.3 million for the three months ended June 30, 2003, an increase of $3.9 million or 11%. This increase was primarily attributable to an increase in net broadcast revenue of $5.3 million offset by an increase of $1.4 million in operating expenses.

 

Interest Income. Interest income was $0.6 million for the three months ended June 30, 2004 compared with $0.7 million for the three months ended June 30, 2003, a decrease of $0.1 million or 14%.

 

Interest Expense. Interest expense was $9.7 million for the three months ended June 30, 2004 compared with $10.7 million for the three months ended June 30, 2003, a decrease of $1.0 million or 9%. This decrease resulted from a consistent reduction in our outstanding debt balance since 2003 and lower interest rates applicable to our outstanding debt as a result of declining leverage throughout 2003 and into the second quarter of 2004.

 

Other Income. Other income was $62,000 and $0 for the three months ended June 30, 2004 and 2003, respectively.

 

Equity in Net Loss of Affiliated Company. During the three months ended June 30, 2004, we recorded losses of $1.4 million for our share of the net losses of our affiliated company, TV One. In July 2003, we entered into an agreement with certain other investors to form TV One for the purpose of distributing a new television programming service. See “Liquidity and Capital Resources” section below for further discussion.

 

Net Income. Net income increased to $17.5 million for the three months ended June 30, 2004 compared with $15.7 million for the three months ended June 30, 2003 an increase of $1.8 million or 11%. This resulted primarily from an increase of $3.9 million in operating income and a decrease of $1.0 million in interest expense, offset by increases of $1.5 million in the provision for income taxes and $1.4 million for equity in the net loss of our affiliated company, TV One.

 

Net Income Applicable to Common Stockholders. Net income applicable to common stockholders was $12.4 million for the three months ended June 30, 2004 compared with a net income applicable to common stockholders of $10.6 million for the three months ended June 30, 2003, an increase of $1.8 million or 17%. The increase was directly attributable to higher operating income due to higher revenue and lower interest expense, partially offset by equity in net loss of our affiliated company during the three months ended June 30, 2004, as described above. Dividends on our 6 1/2% Convertible Preferred Remarketable Term Income Deferrable Equity Securities (“HIGH TIDES”) remained unchanged at $5.0 million for the three months ended June 30, 2004 and 2003.

 

Other Data

 

Station operating income. Station operating income consists of operating income before depreciation and amortization, corporate expenses and non-cash compensation expenses. Station operating income is not a measure of financial performance under generally accepted accounting principles. Station operating income increased to $48.0 million for the three months ended June 30, 2004 compared with $43.1 million for the three months ended June 30, 2003, an increase of $4.9 million or 11%. This increase was primarily attributable to an increase in net broadcast revenue, partially offset by higher operating expenses as described above. The reconciliation of operating income to station operating income is provided on page 31.

 

Station operating income margin. Station operating income margin represents station operating income as a percentage of net broadcast revenue. Station operating income margin is not a measure of financial performance under generally accepted accounting principles. Our station operating income margin increased to 56% for the three months ended June 30, 2004 from 53% for the three months ended June 30, 2003. Our station operating income was $48.0 million and $43.1 million for the three months ended June 30, 2004 and 2003, respectively while our net broadcast revenue was $86.2 million and $80.9 million for the three months ended June 30, 2004 and 2003, respectively.

 

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EBITDA. EBITDA represents net income or loss before interest income, interest expense, income taxes, depreciation and amortization. EBITDA is not a measure of financial performance under generally accepted accounting principles. EBITDA was $42.3 million for the three months ended June 30, 2004 compared with $39.8 million for the three months ended June 30, 2003, an increase of $2.5 million or 6%. The reconciliation of net income to EBITDA is provided on page 31.

 

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

 

Net Broadcast Revenue. Net broadcast revenue is derived primarily from sales of advertisements and program sponsorships on our stations to local and national advertisers. Net broadcast revenue is recognized in the period in which advertisements are broadcast. Net broadcast revenue includes advertising aired in exchange for goods and services (barter), which is recorded at fair value. Other sources of net broadcast revenue include tower rental income, independent promotion agreements, tickets, other revenue related to special events sponsored by us and, beginning in 2003, management fees from TV One. Net broadcast revenue is presented net of local and national agency commissions in the results of operations, which is consistent with industry practice. For the six months ended June 30, 2004, we recognized $155.9 million in net broadcast revenue compared to $144.3 million during the six months ended June 30, 2003, an increase of $11.6 million or 8%. These amounts are net of agency commissions, which were $21.3 million during the six months ended June 30, 2004, compared to $19.7 million during the six months ended June 30, 2003, an increase of $1.6 million or 8%. The increase in net broadcast revenue is due primarily to increased demand for advertising on our stations that results from our increased listenership, audience reach and ratings. The net revenue growth in several of our markets, including Atlanta, Baltimore, Dallas, Los Angeles and Washington, D.C. was partially offset by revenue declines in other markets, including Houston, Louisville and Richmond. We expect net broadcast revenue to increase during the remainder of 2004 due to improved ratings growth in some of our underdeveloped markets, increased growth in corporate sales, and an improved outlook in general economic conditions.

 

Operating Expenses

 

Summary.

 

Programming and technical costs, selling general and administrative costs, corporate expenses, non-cash compensation, and depreciation and amortization were $91.3 million for the six months ended June 30, 2004 compared to $88.1 million in the six months ended June 30, 2003, an increase of $3.2 million or 4%. The increase was due primarily to increases of $0.8 million in programming and technical costs, $0.7 million in selling, general and administrative costs, $0.6 million in non-cash compensation, and $1.1 million in corporate expenses.

 

Programming and technical.

 

Programming and technical costs include costs associated with our on-air talent, music royalties, and the rental and maintenance of our tower facilities. Programming and technical costs also include expenses associated with our research activities and the management and maintenance of the systems, software, hardware, and studios used in the creation, distribution and broadcast of our service. Programming and technical costs were $27.0 million for the six months ended June 30, 2004, compared to $26.2 million for the six months ended June 30, 2003, an increase of $0.8 million or 3%. This increase resulted primarily from expenses associated with the renewal of existing agreements and a new agreement signed with on-air talent during the six months ended June 30, 2004. Programming and technical costs are expected to increase during the remainder of 2004 due to the operations of our broadcast systems infrastructure and additional costs for our on-air talent.

 

Selling, general and administrative.

 

Selling, general and administrative costs, which include sales force compensation (primarily commissions), marketing costs, expenses for office and studio facilities, and back office expenses, were $46.7 million for the six months ended June 30, 2004, compared with $46.0 million for the six months ended June 30, 2003, an increase

 

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of $0.7 million or 2%. This increase resulted primarily from expenses associated with sales force compensation associated with increased revenue. Selling, general and administrative costs also include costs related to the advertising traffic (scheduling and insertion) functions. These costs are expected to increase during the remainder of 2004 due to the variable cost of increased revenue.

 

Corporate expenses.

 

Corporate expenses consist of costs associated with managing and maintaining our corporate headquarters and facilities, primarily corporate personnel costs. These expenses were $7.1 million for the six months ended June 30, 2004, compared with $6.0 million for the six months ended June 30, 2003, an increase of $1.1 million or 18%. This increase resulted primarily from additional professional fees and other expenses incurred, to ensure compliance with new regulatory requirements, including headcount. These costs are expected to increase during the remainder of 2004 as we continue the implementation of new regulatory requirements associated with being a public company.

 

Non-cash compensation.

 

Non-cash compensation expenses were $1.5 million for the six months ended June 30, 2004, compared with $0.9 million for the six months ended June 30, 2003, an increase of $0.6 million or 67%. This increase resulted from the recognition of additional charges related to the grant of restricted stock to certain on-air talent during the first six months of 2004.

 

Depreciation and amortization.

 

Depreciation and amortization expense was $9.0 million for each of the six months ended June 30, 2004 and 2003.

 

Operating Income. Operating income for the six months ended June 30, 2004 was $64.6 million compared with $56.2 million for the six months ended June 30, 2003, an increase of $8.4 million or 15%. This increase was primarily attributable to an increase in net broadcast revenue of $11.6 million offset by an increase of $3.2 million in operating expenses.

 

Interest Income. Interest income was at $1.3 million for the six months ended June 30, 2004 and $1.4 million for the six months ended June 30, 2003, a decrease of $0.1 million or 7%.

 

Interest Expense. Interest expense was $19.7 million for the six months ended June 30, 2004 compared with $21.1 million for the six months ended June 30, 2003, a decrease of $1.4 million or 7%. This decrease resulted from a consistent reduction in our outstanding debt balance since 2003 and lower interest rates applicable to our outstanding debt as a result of declining leverage throughout 2003 and into the second quarter of 2004.

 

Other Income (Expense). Other income was $144,000 for the six months ended June 30, 2004 compared with other expense of $2,000 for the six months ended June 30, 2003, an increase of $146,000.

 

Equity in Net Loss of Affiliated Company. During the six months ended June 30, 2004, we recorded losses of $3.8 million for our share of the net losses of our affiliated company, TV One. In July 2003, we entered into an agreement with certain other investors to form TV One for the purpose of distributing a new television programming service. See “Liquidity and Capital Resources” section below for further discussion.

 

Net Income. Net income increased to $26.3 million for the six months ended June 30, 2004 compared with $22.6 million for the six months ended June 30, 2003 an increase of $3.7 million or 16%. This resulted primarily from an increase of $8.4 million in operating income and a decrease of $1.4 million in interest expense, offset by increases of $2.4 million in the provision for income taxes and $3.8 million for equity in the net loss of our affiliated company, TV One.

 

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Net Income Applicable to Common Stockholders. Net income applicable to common stockholders was $16.2 million for the six months ended June 30, 2004 compared with a net income applicable to common stockholders of $12.5 million for the six months ended June 30, 2003, an increase of $3.7 million or 30%. The increase was directly attributable to higher operating income due to higher revenue and lower interest expense, partially offset by equity in net loss of our affiliated company during the six months ended June 30, 2004, as described above. Dividends on our 6 1/2% Convertible Preferred Remarketable Term Income Deferrable Equity Securities (“HIGH TIDES”) remained unchanged at $5.0 million for the six months ended June 30, 2004 and 2003.

 

Other Data

 

Station operating income. Station operating income consists of operating income before depreciation and amortization, corporate expenses and non-cash compensation expenses. Station operating income is not a measure of financial performance under generally accepted accounting principles. Station operating income increased to $82.1 million for the six months ended June 30, 2004 compared with $72.2 million for the six months ended June 30, 2003, an increase of $9.9 million or 14%. This increase was primarily attributable to an increase in net broadcast revenue, partially offset by higher operating expenses as described above. The reconciliation of operating income to station operating income is provided on page 31.

 

Station operating income margin. Station operating income margin represents station operating income as a percentage of net broadcast revenue. Station operating income margin is not a measure of financial performance under generally accepted accounting principles. Our station operating income margin increased to 53% for the six months ended June 30, 2004 from 50% for the six months ended June 30, 2003. Our station operating income was $82.1 million and $72.2 million for the six months ended June 30, 2004 and 2003, respectively while our net broadcast revenue was $155.9 million and $144.3 million for the six months ended June 30, 2004 and 2003, respectively.

 

EBITDA. EBITDA represents net income or loss before interest income, interest expense, income taxes, depreciation and amortization. EBITDA is not a measure of financial performance under generally accepted accounting principles. EBITDA was $69.9 million for the six months ended June 30, 2004 compared with $65.2 million for the six months ended June 30, 2003, an increase of $4.7 million or 7%. The reconciliation of net income to EBITDA is provided on page 31.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary source of liquidity is cash provided by operations and, to the extent necessary, commitments available under our amended and restated bank credit facility and other debt or equity financing. We have used, and will continue to use, a significant portion of our capital resources to consummate acquisitions. These acquisitions were or may be funded from:

 

  our bank credit facility;

 

  the proceeds of the historical offerings of our common stock and preferred stock;

 

  the proceeds of future common and/or preferred stock, and/or debt offerings; and

 

  internally generated cash flow.

 

We entered into our amended and restated bank credit facility as of July 17, 2000. Under the credit facility, we have borrowed $350.0 million in term loans and may borrow up to $250.0 million on a revolving basis. Historically, we have drawn down funds from the credit facility as capital was required, primarily for acquisitions. As of June 30, 2004, we have repaid $78.7 million, leaving an outstanding balance of $271.3 million of term loans, and are able to borrow up to $250.0 million on a revolving basis, subject to the applicable covenant restrictions under our credit facility. Both the term loan and the revolving commitment under our credit facility bear interest, at our option, at a rate equal to either LIBOR plus a spread that ranges from 0.625% to 2.00% or the prime rate plus a spread of up to 1.00%, depending on our leverage ratio. Under the bank

 

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credit facility, we may be required from time to time to protect ourselves from interest rate fluctuations using interest rate hedge agreements. As a result, we have entered into various fixed rate swap agreements designed to mitigate our exposure to higher floating interest rates. These swap agreements require that we pay a fixed rate of interest on the notional amount to a bank and that the bank pays to us a variable rate equal to three-month LIBOR. We currently have swap agreements in place for a total notional amount of $200.0 million. As of June 30, 2004, the periods remaining on the swap agreements range in duration from five to 27 months.

 

Our credit exposure under these swap agreements is limited to the cost of replacing an agreement in the event of non-performance by our counter-party; however, we do not anticipate non-performance. All of the swap agreements are tied to the three-month LIBOR interest rate, which may fluctuate significantly on a daily basis. The valuation of each of these swap agreements is affected by the change in the three-month LIBOR rates and the remaining term of the agreement. Any increase in the three-month LIBOR rate results in a more favorable valuation, while a decrease in the three-month LIBOR rate results in a less favorable valuation. The following table summarizes the interest rates in effect with respect to certain of our debt as of June 30, 2004:

 

Type of debt


  

Amount outstanding

(millions)


  

Applicable

interest rate


 

Senior bank term debt (swap matures 10/5/2006)(1)(2)

   $ 100.0    4.02 %

Senior bank term debt (swap matures 12/5/2005)(1)(2)

     50.0    3.64  

Senior bank term debt (swap matures 12/5/2004)(1)(2)

     50.0    3.18  

Senior bank term debt (subject to variable interest rate)(3)

     71.3    1.99  

8 7/8% senior subordinated notes (fixed rate)

     300.0    8.88  

(1) A total of $200 million is subject to fixed rate swap agreements that became effective on December 2, 2002.
(2) Under our fixed rate swap agreements, we pay a fixed rate plus a spread based on our leverage ratio, as defined in our credit agreement. That spread is currently set at 0.63% and is incorporated into the applicable interest rates outlined above.
(3) Subject to rolling 90-day LIBOR plus a spread currently at 0.63% and incorporated into the applicable interest rate outlined above.

 

In May 2001, we closed a private offering of $300.0 million of our 8 7/8% Senior Subordinated Notes due 2011 realizing net proceeds of $291.8 million. The net proceeds of the offering were primarily used to repay amounts owed on our bank credit facility and previously outstanding senior subordinated notes.

 

Our credit facility and the indenture for our senior notes require that we comply with certain financial covenants limiting our ability to incur additional debt. Such terms also place restrictions on us with respect to the sale of assets, liens, investments, dividends, debt repayments, capital expenditures, transactions with affiliates, consolidation and mergers, and the issuance of equity interests, among other things. Our credit facility also requires compliance with financial tests based on financial position and results of operations, including a leverage ratio, an interest coverage ratio and a fixed charge coverage ratio, all of which could effectively limit our ability to borrow under the credit facility or to otherwise raise funds in the debt market. On March 18, 2002, we entered into an amendment with our lenders under our bank facility that modified the financial condition covenants to terms more favorable to us. We believe that we are in compliance in all material respects with all the covenants of our credit facility and the indenture for our senior notes.

 

The following table provides a comparison of our statements of cash flows for the six months ended June 30, 2004 and 2003:

 

     2004

    2003

 
     (in thousands)  

Net cash flows from operating activities

   $ 49,707     $ 45,788  

Net cash flows used in investing activities

     (36,826 )     (10,674 )

Net cash flows used in financing activities

     (35,859 )     (36,455 )

 

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Net cash flows from operating activities were approximately $49.7 million and $45.8 million for the six months ended June 30, 2004 and 2003, respectively. For the six months ended June 30, 2004, net cash from operating activities increased $3.9 million compared to the six months ended June 30, 2003, primarily due to an increase in operating income, reduced leverage and changes in other working capital components.

 

Net cash flows used in investing activities were $36.8 million and $10.7 million for the six months ended June 30, 2004 and 2003, respectively. During the six months ended June 30, 2004, we completed the acquisition of the assets of WSNJ-FM in the Philadelphia market for approximately $35.0 million, made a deposit of approximately $3.6 million for the proposed acquisition of KRTS-FM in the Houston market, paid $3.5 million pursuant to our proposed agreement to purchase all of the outstanding stock of New Mableton Broadcasting Corporation (“NMBC’) for approximately $35.0 million and sold approximately $8.7 million of short-term marketable securities. Capital expenditures were approximately $3.9 million for the six months ended June 30, 2004. During the six months ended June 30, 2003, we completed the acquisition of the assets of WBLO-FM in the Louisville market for approximately $2.0 million and purchased short term marketable securities for approximately $1.3 million. Capital expenditures were approximately $6.1 million for the six months ended June 30, 2003.

 

Net cash flows used in financing activities were $35.9 million for the six months ended June 30, 2004 compared to net cash flows used in financing activities of $36.5 million for the six months ended June 30, 2003. We repaid approximately $26.3 million of our term loans and also paid preferred dividends of approximately $10.1 million during each of the six-month periods ended June 30, 2004 and 2003.

 

In July 2004, we entered into a definitive agreement to acquire the assets of radio station WABZ-FM, licensed to Albermarle, North Carolina. The total acquisition price is approximately $11.5 million. We expect to complete this acquisition during the fourth quarter.

 

In May 2004, we entered into a definitive agreement to acquire the assets of KRTS, LP. KRTS, LP owns and operates KRTS-FM, a radio station located in the Houston, Texas metropolitan area. The total acquisition price is approximately $72.5 million. We expect to complete this acquisition during the third quarter of 2004.

 

In April 2004, we entered into a definitive agreement to acquire all of the outstanding stock of New Mableton Broadcasting Corporation (“NMBC”), the majority shareholder of which is an entity controlled by our Chief Executive Officer and President. The total acquisition price is approximately $35.0 million. NMBC owns WAMJ-FM, a radio station located in the Atlanta, Georgia metropolitan area which we have operated under a local management agreement since August 2001. We expect to complete this acquisition during the fourth quarter of 2004.

 

We continuously review opportunities to acquire additional radio stations, primarily in the top 60 African-American markets, and to make strategic investments. As of the date of this report, other than our agreement with an affiliate of Comcast Corporation and other investors to fund our affiliate TV One over the next four years (the balance of our commitment is $55.5 million at June 30, 2004), our agreement to purchase all of the outstanding stock of NMBC for approximately $35.0 million, our agreement to acquire the assets of KRTS-FM for approximately $72.5 million and our agreement to acquire the assets of WABZ-FM for approximately $11.5 million, we have no definitive agreements to make acquisitions of additional radio stations or to make strategic investments. We anticipate that these and any future acquisitions and strategic investments will be financed through funds generated from operations, cash on hand, equity financings, permitted debt financings, debt financings through unrestricted subsidiaries or a combination of these sources. However, there can be no assurance that financing from any of these sources, if available, will be available on favorable terms.

 

As of June 30, 2004, we obtained two standby letters of credit in the amounts of $275,000 and $270,000 in connection with our annual insurance policy renewals. To date, there has been no activity on these standby letters of credit.

 

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For the remainder of 2004, we must make minimum principal payments on the term loans in the amount of approximately $26.3 million in equal quarterly installments of approximately $13.1 million. We expect that we will meet the quarterly debt commitments through one or more of the following: (1) cash on hand; (2) cash flow from operations; (3) additional permitted borrowings; or (4) other debt or equity financings.

 

Our ability to meet our debt service obligations and reduce our total debt, and our ability to refinance the 8 7/8 % senior subordinated notes at or prior to their scheduled maturity date in 2011, will depend upon our future performance which, in turn, will be subject to general economic conditions and to financial, business and other factors, including factors beyond our control. In addition to principal payments during the remainder of 2004 of approximately $26.3 million, dividends of approximately $10.1 million related to our preferred stock, our obligation to close on the purchase of the outstanding stock of New Mableton Broadcasting Corporation, our obligations to close on the acquisition of the assets of KRTS-FM and WABZ-FM and to meet capital calls by TV One, our principal liquidity requirements will be for working capital, continued business development, strategic investment opportunities and for general corporate purposes, including capital expenditures.

 

Starting in July 2003, and continuing for two years, we have the right (but not the requirement) to redeem up to $310.0 million of our designated 6.5% Convertible Preferred Stock (“HIGH TIDES”) for cash. Depending on the underlying price of our Class D common stock at the time of settlement for this redemption (if elected by us), we would need to fund up to 100% of the amount of securities to be redeemed in cash, although lesser amounts would be required if certain holders of the HIGH TIDES elect to receive shares of Class D common stock in lieu of cash. Subject to certain restrictions imposed on our bank credit facility, we could finance the cash redemption of the HIGH TIDES with borrowings under our bank credit facility, available free cash balances and/or a new preferred and/or common stock issuance. By July 2005, if we have not redeemed 100% of our HIGH TIDES for cash and/or stock, we must remarket the HIGH TIDES into a similar security priced at the then prevailing market prices for such a security. As of the date of this report, we have not elected to redeem our HIGH TIDES.

 

We believe that, based on current levels of operations and anticipated internal growth, for the foreseeable future, cash flow from operations together with other available sources of funds will be adequate to make required payments of interest on our indebtedness, to fulfill our commitment to fund TV One, to fund potential acquisitions, to pay dividends on our preferred stock, to fund anticipated capital expenditures and working capital requirements and to enable us to comply with the terms of our debt agreements. However, in order to finance future acquisitions or investments, if any, we may require additional financing and there can be no assurance that we will be able to obtain such financing on terms acceptable to us.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

There have been no material changes to our disclosure of recent accounting pronouncements provided in Management’s Discussion and Analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2003.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our accounting policies are described in Note 1 of the Consolidated Financial Statements. We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. In Management’s Discussion and Analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2003, 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 on such policies or estimates since we filed our Annual Report on Form 10-K for the year ended December 31, 2003.

 

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CAPITAL AND COMMERCIAL COMMITMENTS

 

Long-term debt

 

We have raised funds from the following issuances of long-term debt:

 

  In May 2001, we closed a private offering of $300.0 million of our 8 7/8% Senior Subordinated Notes due 2011 realizing net proceeds of $291.8 million. The net proceeds of the offering were primarily used to repay amounts owed on our bank credit facility and previously outstanding senior subordinated notes.

 

  In July 2000, we established various credit facilities under an agreement with a group of financial institutions whereby we may borrow up to $750.0 million. This agreement was subsequently amended on March 18, 2002 (“the Amended and Restated Credit Agreement”) to provide a new facility under which we may borrow up to $600.0 million.

 

The bank credit facility consists of Term A Loans (the “Loan”) in an amount up to $350.0 million, and a credit line (the “Revolver”) in an amount up to $250.0 million that may be borrowed on a revolving basis. The interest rate on the bank credit facility is LIBOR plus a spread based on the Company’s leverage ratio, as defined in the credit agreement. The credit facility requires quarterly interest payments. The credit facility also requires minimum quarterly principal payments, which commenced March 31, 2003. The loans mature in June 2007. As of June 30, 2004, we had $271.3 million outstanding on the Loan and $250.0 million remained available (subject to various covenant restrictions) to be drawn down from the Revolver.

 

Lease obligations

 

We have non-cancelable operating leases for office space, studio space, broadcast towers and transmitter facilities and non-cancelable capital leases for equipment that expire over the next 20 years.

 

Contractual Obligations Schedule

 

The following table represents our contractual obligations as of June 30, 2004:

 

    

Payments Due by Period(1)

(in thousands)


Contractual Obligations


  

July –
December

2004


   2005

   2006

   2007

   2008

   2009 and
Beyond


   Total

8 7/8% Senior subordinated notes

   $ —      $ —      $ —      $ —      $ —      $ 300,000    $ 300,000

Bank credit facility

     26,250      70,000      87,500      87,500      —        —        271,250

Capital Lease Obligations

     3      7      7      7      6      —        30

Dividends on Preferred Stock

     10,070      20,140      20,140      20,140      20,140      20,140      110,770

Other Operating Contracts/ Agreements(2)

     14,457      16,919      6,839      1,670      194      306      40,386

Operating Lease Obligations

     2,584      4,909      4,501      4,325      4,293      11,938      32,550
    

  

  

  

  

  

  

Total

   $ 53,364    $ 111,976    $ 118,987    $ 113,642    $ 24,633    $ 332,384    $ 754,986
    

  

  

  

  

  

  


(1) The above amounts do not include interest, which in some cases is variable in amount.
(2) Other operating contracts/agreements include employment contracts, severance obligations, on-air talent contracts and other programming agreements.

 

In addition to the obligations above, as of June 30, 2004, we had swap agreements in place for a total notional amount of $200.0 million. The periods remaining on the swap agreements range in duration from five to 27 months. If we terminate our interest swap agreements before they expire, we will be required to pay early

 

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termination fees. Our credit exposure under these agreements is limited to the cost of replacing an agreement in the event of non-performance by our counter-party, however, we do not anticipate non-performance.

 

We anticipate that we will fund our obligations and commitments through one or more of the following: (1) cash on hand; (2) cash flow from operations; (3) additional permitted borrowings; or (4) other debt or equity financings.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are not historical facts, but rather reflect our current expectations concerning future results and events. You can identify these forward-looking statements by our use of words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “likely,” “may,” “estimates” and similar expressions. We cannot guarantee that we will achieve these plans, intentions or expectations. Because these statements apply to future events, they are subject to risks and uncertainties that could cause actual results to differ materially from those forecast or anticipated in the forward-looking statements. These risks, uncertainties and factors include, but are not limited to:

 

  economic conditions, both generally and relative to the radio broadcasting industry;

 

  risks associated with our acquisition strategy;

 

  the highly competitive nature of the broadcast industry;

 

  our high degree of leverage; and

 

  other factors described in our reports on Form 10-K and Form 10-Q.

 

You should not place undue reliance on these forward-looking statements, which reflect our view as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise.

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

We have carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO concluded that as of such date, our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Changes in internal control over financial reporting

 

During the second quarter of 2004, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

In November 2001, Radio One and certain of its officers and directors were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of New York, now captioned, In re Radio One, Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-10160. Similar complaints were filed in the same court against hundreds of other public companies (“Issuers”) that conducted initial public offerings of their common stock in the late 1990s (the “IPO Lawsuits”). In the complaint filed against Radio One (as amended), the plaintiffs claim that Radio One, certain of its officers and directors, and the underwriters of certain of its public offerings violated Section 11 of the Securities Act of 1933 based on allegations that its registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices of, the underwriters. The complaint also contains a claim for violation of Section 10(b) of the Securities Exchange Act of 1934 based on allegations that this omission constituted a deceit on investors. The plaintiffs seek unspecified monetary damages and other relief.

 

In July 2002, Radio One joined in a global motion, filed by the Issuers, to dismiss the IPO Lawsuits. In October 2002, the court entered an order dismissing the Radio One’s named officers and directors from the IPO Lawsuits without prejudice, pursuant to an agreement tolling the statute of limitations for refilling the dismissed claims until September 2003. In February 2003, the court issued a decision denying the motion to dismiss the Section 11 and Section 10(b) claims against Radio One and most of the Issuers.

 

In July 2003, a Special Litigation Committee of Radio One’s Board of Directors agreed to participate in a settlement with the plaintiffs and almost all of the Issuers. Among other things, the terms of the settlement provide for dismissal with prejudice of all claims against the participating Issuers and their officers and directors, and the assignment to plaintiffs of certain potential claims that the Issuers may have against their underwriters. The tentative settlement also provides that, in the event that plaintiffs ultimately recover less than a guaranteed sum from the underwriters, plaintiffs would be entitled to payment by each participating Issuer’s insurer of a pro rata share of any shortfall in the plaintiffs’ guaranteed recovery. In September 2003, in connection with the proposed settlement, Radio One’s named officers and directors extended the tolling agreement so that it would not expire prior to any settlement being finalized. Although the plaintiffs and all participating Issuer defendants have executed the settlement agreement, it remains subject to a number of procedural conditions, as well as formal approval by the court. Other than legal fees incurred to date, Radio One expects that the expenses of settlement, if any, will be paid by its insurance carriers. Until such settlement is finalized, Radio One and its officers and directors intend to continue to defend this action vigorously.

 

We are involved from time to time in various routine legal and administrative proceedings and threatened legal and administrative proceedings incidental to the ordinary course of our business. We believe the resolution of such matters will not have a material adverse effect on our business, financial condition or results of operations.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

On May 26, 2004, the Company held its Annual Meeting of its holders of common stock pursuant to a Notice of Annual Meeting of Stockholders and Proxy Statement dated April 26, 2004, a copy of which has been previously filed with the Securities and Exchange Commission. Stockholders were asked to vote upon the following proposals:

 

  1) The election of Terry L. Jones and Brian W. McNeill as class A directors to serve until the 2005 annual meeting of stockholders or until their successors are duly elected and qualified.

 

  2) The election of Catherine L. Hughes, Alfred C. Liggins, III, D. Geoffrey Armstrong, L. Ross Love and Ronald E. Blaylock as directors to serve until the 2005 annual meeting of stockholders or until their successors are duly elected and qualified.

 

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  3) The approval of the amendment and restatement of the 1999 Stock Option and Restricted Stock Plan increasing the number of shares of Class D common stock reserved for issuance under the plan from 5,186,198 shares to 10,816,198 shares.

 

  4) The ratification of the appointment of Ernst & Young, LLP as independent auditors for the Company for the year ending December 31, 2004.

 

          Number of Votes

          Class A

   Class B

Proposal 1

              

Jones

  

For

   13,359,082     
    

Withhold Authority

   120,667     

McNeill

  

For

   13,359,082     
    

Withhold Authority

   120,667     

Proposal 2

              

Hughes

  

For

   11,205,015    28,618,430
    

Withhold Authority

   2,274,734     

Liggins

  

For

   11,205,015    28,618,430
    

Withhold Authority

   2,274,734     

Armstrong

  

For

   13,359,082    28,618,430
    

Withhold Authority

   120,667     

Love

  

For

   11,205,056    28,618,430
    

Withhold Authority

   2,274,693     

Blaylock

  

For

   13,359,082    28,618,430
    

Withhold Authority

   120,667     

Proposal 3

              
    

For

   1,306,050    28,618,430
    

Against

   7,158,938     
    

Abstain

   3,673     

Proposal 4

              
    

For

   13,478,643    28,618,430
    

Against

   695     
    

Abstain

   9     

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits and Reports on Form 8-K

 

(a)    EXHIBITS

 

The following exhibits are filed as part of this report, except for Exhibits 32.1 and 32.2, which are furnished, but not filed, with this report.

 

3.1    Amended and Restated Certificate of Incorporation of Radio One, Inc. (dated as of May 4, 2000), as filed with the State of Delaware on May 9, 2000 (incorporated by reference to Radio One’s Quarterly Report on Form 10-Q for the period ended March 31, 2000 (File No. 000-25969; Film No. 631638)).
3.1.1    Certificate of Amendment (dated as of September 21, 2000) of the Amended and Restated Certificate of Incorporation of Radio One, Inc. (dated as of May 4, 2000), as filed with the State of Delaware on September 21, 2000 (incorporated by reference to Radio One’s Current Report on Form 8-K filed October 6, 2000 (File No. 000-25969; Film No. 736375)).
3.2    Amended and Restated By-laws of Radio One, Inc., amended as of June 5, 2001 (incorporated by reference to Radio One’s Quarterly Report on Form 10-Q filed August 14, 2001 (File No. 000-25969; Film No. 1714323)).
3.3    Certificate Of Designations, Rights and Preferences of the 6 1/2% Convertible Preferred Securities Remarketable Term Income Deferrable Equity Securities (HIGH TIDES) of Radio One, Inc., as filed with the State of Delaware on July 13, 2000 (incorporated by reference to Radio One’s Quarterly Report on Form 10-Q for the period ended June 30, 2000 (File No. 000-25969; Film No. 698190)).
10.12    Third Amendment to Second Amended and Restated Credit Agreement, dated April 16, 2004, by and among Radio One, Inc., Bank of America, N.A. and the other lender parties thereto (incorporated by reference to Radio One’s Quarterly Report on Form 10-Q for the period ended March 31, 2004 (File No. 000-25969)).
10.13    Stock Purchase Agreement, dated as of April 27, 2004, by and between, Mableton Investment Group, LLC, as Seller and Radio One, Inc., as Buyer in respect of New Mableton Broadcasting Corporation.
31.1    Certification of Chief Executive Officer required by Rule 13a-14 or Rule 15d-14, as created by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer required by Rule 13a-14 or Rule 15d-14, as created by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)    REPORTS ON FORM 8-K

 

The Company filed an Item 12 Form 8-K dated April 30, 2004 for the purpose of releasing financial results for the first quarter of 2004 and announcing its intention to acquire New Mableton Broadcasting Corporation.

 

The Company filed an Item 12 Form 8-K dated July 29, 2004 for the purpose of releasing financial results for the second quarter of 2004.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    RADIO ONE, INC.
   

/s/    SCOTT R. ROYSTER        


July 30, 2004

  Scott R. Royster
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

 

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