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URBAN ONE, INC. - Quarter Report: 2011 September (Form 10-Q)

Unassociated Document
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

Form 10-Q

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

Commission File No. 0-25969
 

RADIO ONE, INC.
(Exact name of registrant as specified in its charter)
  

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

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   þ   No   ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   o     Accelerated filer   o     Non-accelerated filer   þ

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.  Yes  o No  þ

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

Class
  Outstanding at October 31, 2011  
Class A Common Stock, $.001 Par Value
   
2,736,360
 
Class B Common Stock, $.001 Par Value
    2,861,843  
Class C Common Stock, $.001 Par Value
    3,121,048  
Class D Common Stock, $.001 Par Value
   
41,916,603
 

 
 

 

TABLE OF CONTENTS

     
Page
     
PART I. FINANCIAL INFORMATION
   
     
Item 1.
Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2011 and 2010 (Unaudited)
 
4
 
Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010
 
5
 
Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2011 (Unaudited)
  6
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)
  7
 
Notes to Consolidated Financial Statements (Unaudited)
  8
 
Consolidating Financial Statements
  45
 
Consolidating Statement of Operations for the Three Months Ended September 30, 2011 (Unaudited)
  45
 
Consolidating Statement of Operations for the Three Months Ended September 30, 2010 (Unaudited)
  46
 
Consolidating Statement of Operations for the Nine Months Ended September 30, 2011 (Unaudited)
  47
 
Consolidating Statement of Operations for the Nine Months Ended September 30, 2010 (Unaudited)
  48
 
Consolidating Balance Sheet as of September 30, 2011 (Unaudited)
  49
 
Consolidating Balance Sheet as of December 31, 2010
  50
 
Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2011 (Unaudited)
  51
 
Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2010 (Unaudited)
  52
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  54
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
  87
Item 4.
Controls and Procedures
  87
     
PART II. OTHER INFORMATION
   
     
Item 1.
Legal Proceedings
 
88
Item 1A.
Risk Factors
  89
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  89
Item 3.
Defaults Upon Senior Securities
  89
Item 4.
Submission of Matters to a Vote of Security Holders
  89
Item 5.
Other Information
  89
Item 6.
Exhibits
  89
 
SIGNATURES
  90

 
2

 

CERTAIN DEFINITIONS

Unless otherwise noted, throughout this report, the terms “Radio One,” “the Company,” “we,” “our” and “us” refer to Radio One, Inc. together with its subsidiaries.
 
Cautionary Note Regarding Forward-Looking Statements
 
This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements do not relay historical facts, but rather reflect our current expectations concerning future operations, results and events. All statements other than statements of historical fact are “forward-looking statements” including any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. You can identify some of these forward-looking statements by our use of words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “likely,” “may,” “estimates” and similar expressions.  You can also identify a forward-looking statement in that such statements discuss matters in a way that anticipates operations, results or events that have not already occurred but rather will or may occur in future periods.  We cannot guarantee that we will achieve any forward-looking plans, intentions, results, operations or expectations.  Because these statements apply to future events, they are subject to risks and uncertainties, some of which are beyond our control that could cause actual results to differ materially from those forecasted or anticipated in the forward-looking statements.  These risks, uncertainties and factors include (in no particular order), but are not limited to:
   
the effects of global financial and economic conditions, credit and equity market volatility and continued fluctuations in the U.S. and global economies may continue to have on our business and financial condition and the business and financial condition of our advertisers;

continued fluctuations in the U.S. and global economies could negatively impact our ability to meet our cash needs and our ability to maintain compliance with our debt covenants;

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

our relationship with a significant customer has changed and we no longer have a guaranteed level of revenue from that customer;

risks associated with the implementation and execution of our business diversification strategy including our ownership of a significant interest in TV One, LLC;

increased competition in our markets and in the radio broadcasting and media industries;

changes in media audience ratings and measurement technologies and methodologies;

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

changes in our key personnel and on-air talent;

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

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

increased competition from new media and technologies;

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

other factors mentioned in our filings with the Securities and Exchange Commission (“SEC”) including the factors discussed in detail in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010.

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

 
3

 

 RADIO ONE, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
 
   
(As
Adjusted –
See Note 1)
   
(As Adjusted
– See Note 1)
 
       
   
(In thousands, except share data)
 
                         
NET  REVENUE
  $ 104,445     $ 74,430     $ 266,516     $ 208,557  
OPERATING EXPENSES:
                               
Programming and technical
    32,742       18,762       82,291       56,592  
Selling, general and administrative, including stock-based compensation of $157 and $151 and $533 and $833 respectively
    36,035       27,487       96,336       78,216  
Corporate selling, general and administrative, including stock-based compensation of $602 and $757, and $2,362 and $4,044, respectively
    11,044       6,245       27,576       24,581  
Depreciation and amortization
    11,504       4,610       25,825       14,156  
Total operating expenses
    91,325       57,104       232,028       173,545  
Operating income
    13,120       17,326       34,488       35,012  
INTEREST INCOME
    103       28       120       95  
INTEREST EXPENSE
    22,973       12,122       65,222       31,059  
LOSS ON RETIREMENT OF DEBT
                7,743        
GAIN ON INVESTMENT IN AFFILIATED COMPANY
                146,879        
EQUITY IN INCOME OF AFFILIATED COMPANY
          1,784       3,287       3,832  
OTHER (INCOME) EXPENSE, net
    (19 )     50       3       2,934  
(Loss) income before provision for income taxes, noncontrolling interests in income of subsidiaries and income (loss) from discontinued operations
    (9,731 )     6,966       111,806       4,946  
(BENEFIT FROM) PROVISION FOR INCOME TAXES
    (2,325 )     4,760       81,905       4,685  
Net (loss) income from continuing operations
    (7,406 )     2,206       29,901       261  
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
    11       (158 )     (71 )     (316 )
CONSOLIDATED NET (LOSS) INCOME
    (7,395 )     2,048       29,830       (55 )
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
    2,483       1,010       5,403       1,427  
CONSOLIDATED NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ (9,878 )   $ 1,038     $ 24,427     $ (1,482 )
                                 
BASIC NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
                               
Continuing operations
  $ (0.20 )   $ 0.02     $ 0.48     $ (0.02 )
Discontinued operations, net of tax
    (0.00 )     (0.00 )     (0.00 )     (0.01 )
Net (loss) income attributable to common stockholders
  $ (0.20 )   $ 0.02     $ 0.48     $ (0.03 )
                                 
DILUTED NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
                               
Continuing operations
  $ (0.20 )   $ 0.02     $ 0.46     $ (0.02 )
Discontinued operations, net of tax
    0.00       (0.00 )     (0.00 )     (0.01 )
Net (loss) income attributable to common stockholders
  $ (0.20 )   $ 0.02     $ 0.46     $ (0.03 )
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING:
                               
Basic
    50,270,550       52,064,108       51,072,480       51,316,498  
Diluted
    50,270,550       54,262,885       52,943,536       51,316,498  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
4

 

RADIO ONE, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS

   
As of
 
   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
   
(As Adjusted – See Note 1)
 
   
(In thousands, except share data)
 
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 33,171     $ 9,192  
Short-term investments
    903        
Trade accounts receivable, net of allowance for doubtful accounts of $4,082 and $3,023, respectively
    86,284       58,427  
Prepaid expenses
    6,157       6,809  
Current portion of content assets
    31,288        
Other current assets
    1,059       1,564  
Current assets from discontinued operations
    105       159  
Total current assets
    158,967       76,151  
PREPAID PROGRAMMING AND DEPOSITS
    4,140        
CONTENT ASSETS, net
    33,024        
PROPERTY AND EQUIPMENT, net
    32,745       33,041  
GOODWILL
    285,932       121,502  
RADIO BROADCASTING LICENSES
    677,407       677,407  
LAUNCH ASSETS, net
    34,925        
OTHER INTANGIBLE ASSETS, net
    279,992       40,036  
LONG-TERM INVESTMENTS
    9,096        
INVESTMENT IN AFFILIATED COMPANY
          47,470  
OTHER ASSETS
    3,300       1,981  
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS
    1,493       1,624  
Total assets
  $ 1,521,021     $ 999,212  
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
               
CURRENT LIABILITIES:
               
Accounts payable
  $ 7,282     $ 3,009  
Accrued interest
    6,479       4,558  
Accrued compensation and related benefits
    11,012       10,721  
Current portion of content payables
    22,764        
Income taxes payable
    2,274       1,671  
Other current liabilities
    10,428       11,704  
Current portion of long-term debt
    4,860       18,402  
Current liabilities from discontinued operations
    87       34  
Total current liabilities
    65,186       50,099  
LONG-TERM DEBT, net of current portion and original issue discount
    798,795       623,820  
CONTENT PAYABLES, net of current portion
    16,645        
OTHER LONG-TERM LIABILITIES
    19,551       10,894  
DEFERRED TAX LIABILITIES
    169,307       89,392  
NON-CURRENT LIABILITIES FROM DISCONTINUED OPERATIONS
    31       37  
Total liabilities
    1,069,515       774,242  
                 
REDEEMABLE NONCONTROLLING INTERESTS
    29,711       30,635  
                 
STOCKHOLDERS’ EQUITY:
               
Convertible preferred stock, $.001 par value, 1,000,000 shares authorized; no shares outstanding at September 30, 2011 and December 31, 2010
           
Common stock — Class A, $.001 par value, 30,000,000 shares authorized; 2,757,110 and 2,863,912 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively
    3       3  
Common stock — Class B, $.001 par value, 150,000,000 shares authorized; 2,861,843 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively
    3       3  
Common stock — Class C, $.001 par value, 150,000,000 shares authorized; 3,121,048 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively
    3       3  
Common stock — Class D, $.001 par value, 150,000,000 shares authorized; 42,185,133 and 45,541,082 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively
    42       45  
Accumulated other comprehensive loss
    (164 )     (1,424 )
Additional paid-in capital
    990,656       994,750  
Accumulated deficit
    (774,618 )     (799,045 )
Total stockholders’ equity
    215,925       194,335  
Noncontrolling interest
    205,870        
Total equity
    421,795       194,335  
Total liabilities, redeemable noncontrolling interests and equity
  $ 1,521,021     $ 999,212  

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

 
5

 
 
RADIO ONE, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 (UNAUDITED)
    
    
Radio One, Inc. Stockholders
       
   
Convertible
Preferred
Stock
   
Common
Stock
Class A
   
Common
Stock
Class B
   
Common
Stock
Class C
   
Common
Stock
Class D
   
Comprehensive
Income
   
Accumulated
Other
Comprehensive
(Loss) Income
   
Additional
Paid-In
Capital
   
Accumulated
Deficit
   
Noncontrolling
Interest
   
Total
Equity
 
   
(In thousands)
 
BALANCE, as of December 31, 2010
  $     $ 3     $ 3     $ 3     $ 45           $ (1,424 )   $ 994,750     $ (799,045 )   $     $ 194,335  
Consolidated net income
                                $ 29,830                   24,427       3,870       28,297  
Conversion of 76,486 shares of Class A common stock to Class D common stock
                                                                 
Repurchase of 29,316 shares of Class A common stock
                                              (41 )                 (41 )
Repurchase of 3,493,435 shares of Class D common stock
                            (3 )                 (8,472 )                 (8,475 )
Recognition of noncontrolling interest in connection with consolidation of TV One
                                                          209,410       209,410  
Net change in unrealized loss on investment activities
                                  (164 )     (164 )                       (164 )
Change in unrealized loss on derivative and hedging activities, net of taxes
                                        158                         158  
Termination of interest rate swap
                                        1,266                         1,266  
Comprehensive income
                                          $ 29,666                                          
Adjustment of redeemable noncontrolling interests to estimated redemption value
                                                1,524                   1,524  
Stock-based compensation expense
                                                2,895                   2,895  
Dividends paid to noncontrolling interest                                                             (7,410 )     (7,410 )
BALANCE, as of September 30, 2011
  $     $ 3     $ 3     $ 3     $ 42             $ (164 )   $ 990,656     $ (774,618 )   $ 205,870     $ 421,795  

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

 
6

 

RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
    
   
Nine Months Ended September 30,
 
   
2011
   
2010
 
          (As Adjusted
– See Note 1)
 
   
(Unaudited)
 
   
(In thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Consolidated net income (loss)
  $ 29,830     $ (55 )
Adjustments to reconcile net income (loss) to net cash from operating activities:
               
Depreciation and amortization
    25,825       14,156  
Amortization of debt financing costs
    3,040       1,694  
Amortization of content assets
    20,564        
Write off of debt financing costs
          3,055  
Deferred income taxes
    79,937       2,611  
Gain on investment in affiliated company
    (146,879 )      
Equity in income of affiliated company
    (3,287 )     (3,832 )
Stock-based compensation
    2,895       4,877  
Non-cash interest
    19,123        
Loss on retirement of debt
    7,743        
Effect of change in operating assets and liabilities, net of assets acquired:
               
Trade accounts receivable
    (27,857 )     (13,808 )
Prepaid expenses and other assets
    1,157       203  
Other assets
    3,402       6,866  
Accounts payable
    4,271       (1,826 )
Accrued interest
    1,921       856  
Accrued compensation and related benefits
    292       1,834  
Income taxes payable
    603       911  
Other liabilities
    6,241       (359 )
Net cash flows provided by (used in) operating activities of discontinued operations
    290       (408 )
Net cash flows provided by operating activities
    29,111       16,775  
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property and equipment
    (5,410 )     (3,251 )
Net cash and investments acquired in connection with TV One consolidation
    65,245        
Purchase of content assets
    (12,761 )      
Purchase of other intangible assets
          (341 )
Net cash flows provided by (used in) investing activities
    47,074       (3,592 )
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from credit facility
    378,280       12,000  
Repayment of credit facility
    (355,611 )     (12,396 )
Debt refinancing and modification costs
    (6,197 )     (11,179 )
Repurchase of noncontrolling interests
    (54,595 )      
Proceeds from noncontrolling interest member
    2,776        
Payment of dividends to noncontrolling interest shareholders of Reach Media
    (933 )      
Payment of dividends to noncontrolling interest members of TV One
    (7,410 )      
Repurchase of common stock
    (8,516 )      
Net cash flows used in financing activities
    (52,206 )     (11,575 )
INCREASE IN CASH AND CASH EQUIVALENTS
    23,979       1,608  
CASH AND CASH EQUIVALENTS, beginning of period
    9,192       19,963  
CASH AND CASH EQUIVALENTS, end of period
  $ 33,171     $ 21,571  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for:
               
Interest
  $ 40,498     $ 28,510  
Income taxes
  $ 2,004     $ 1,160  

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

 
7

 

RADIO ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

(a)  Organization

 Radio One, Inc. (a Delaware corporation referred to as “Radio One”) and its subsidiaries (collectively, the “Company”) is an urban-oriented, multi-media company that primarily targets African-American and urban consumers. Our core business is our radio broadcasting franchise that is the largest radio broadcasting operation that primarily targets African-American and urban listeners. As of September 30, 2011, we owned and operated 52 broadcast stations located in 15 urban markets in the United States.  While our primary source of revenue is the sale of local and national advertising for broadcast on our radio stations, our operating strategy is to operate the premier multi-media entertainment and information content provider targeting African-American and urban consumers. Thus, we have diversified our revenue streams by making acquisitions and investments in other complementary media properties. Our other media interests include our approximately 50.9% (See Note 2 - Acquisitions) controlling ownership interest in TV One, LLC (“TV One”), an African-American targeted cable television network; our 53.5% ownership interest in Reach Media, Inc. (“Reach Media”), which operates the Tom Joyner Morning Show; our ownership of Interactive One, LLC (“Interactive One”), an online platform serving the African-American community through social content, news, information, and entertainment, which operates a number of branded sites, including News One, UrbanDaily and HelloBeautiful; and our ownership of Community Connect, LLC (formerly Community Connect Inc.) (“CCI”), an online social networking company, which operates a number of branded websites, including BlackPlanet, MiGente and Asian Avenue.  Through our national multi-media presence, we provide advertisers with a unique and powerful delivery mechanism to the African-American and urban audience.

In December 2009, the Company ceased publication of our urban-themed lifestyle periodical Giant Magazine.  Further, as of June 2011, our remaining Boston radio station was made the subject of a local marketing agreement (“LMA”) whereby we have made available, for a fee, air time on this station to another party. The remaining assets and liabilities of Giant Magazine as well as stations sold or the subject of an LMA have been classified as discontinued operations as of September 30, 2011 and December 31, 2010, and Giant Magazine’s and the Boston station’s results from operations for the three months and nine months ended September 30, 2011 and 2010, have been classified as discontinued operations in the accompanying consolidated financial statements.
 
As part of our consolidated financial statements, consistent with our financial reporting structure and how the Company currently manages its businesses, we have provided selected financial information on the Company’s three reportable segments: (i) Radio Broadcasting; (ii) Internet; and (iii) Cable Television (See Note 11 – Segment Information.)

(b)  Interim Financial Statements
 
The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In management’s opinion, the interim financial data presented herein include all adjustments (which include only normal recurring adjustments) necessary for a fair presentation. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.
 
Results for interim periods are not necessarily indicative of results to be expected for the full year. This Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s 2010 Annual Report on Form 10-K.
 
Certain reclassifications associated with accounting for discontinued operations have been made to the accompanying prior period financial statements to conform to the current period presentation. These reclassifications had no effect on previously reported net income or loss, or any other previously reported statements of operations, balance sheet or cash flow amounts (See Note 3 — Discontinued Operations.)

 
8

 

(c)  Financial Instruments
 
Financial instruments as of September 30, 2011 and December 31, 2010 consisted of cash and cash equivalents, investments, trade accounts receivable, accounts payable, accrued expenses, note payable, long-term debt and redeemable noncontrolling interests. The carrying amounts approximated fair value for each of these financial instruments as of September 30, 2011 and December 31, 2010, except for the Company’s outstanding senior subordinated notes. The 6% Senior Subordinated Notes due February 2013 had a carrying value of $747,000 and a fair value of approximately $710,000 as of September 30, 2011, and a carrying value of $747,000 and a fair value of approximately $672,000 as of December 31, 2010. The 12½%/15% Senior Subordinated Notes due May 2016 had a carrying value of $305.9 million and a fair value of approximately $275.3 million as of September 30, 2011, and a carrying value of $286.8 million and a fair value of approximately $278.2 million as of December 31, 2010. The fair values were determined based on the trading values of these instruments as of the reporting date.

(d)  Revenue Recognition

Within our radio broadcasting segment, the Company recognizes revenue for broadcast advertising when a commercial is broadcast and is reported, net of agency and outside sales representative commissions, in accordance with Accounting Standards Codification (“ASC”) 605, “Revenue Recognition.”  Agency and outside sales representative commissions are calculated based on a stated percentage applied to gross billing. Generally, clients remit the gross billing amount to the agency or outside sales representative, and the agency or outside sales representative remits the gross billing, less their commission, to the Company. For our radio broadcasting segment, agency and outside sales representative commissions were approximately $8.4 million and $8.3 million for the three months ended September 30, 2011 and 2010, respectively.  For our radio broadcasting segment, agency and outside sales representative commissions were approximately $23.9 million and $23.4 million for the nine months ended September 30, 2011 and 2010, respectively.
 
Interactive One, the primary driver of revenue in our Internet segment, generates the majority of the Company’s internet revenue, and derives such revenue principally from advertising services, including advertising aimed at diversity recruiting. Advertising services include the sale of banner and sponsorship advertisements.  Advertising revenue is recognized either as impressions (the number of times advertisements appear in viewed pages) are delivered, when “click through” purchases or leads are reported, or ratably over the contract period, where applicable. Interactive One has a diversity recruiting relationship with Monster, Inc. (“Monster”).  Monster posts job listings and advertising on Interactive One’s websites and Interactive One earns revenue for displaying the images on its websites.  CCI’s operations are included within the operations of Interactive One for all reporting purposes.

TV One, the driver of revenues in our Cable Television segment, derives advertising revenue from the sale of television air time to advertisers and recognizes revenue when the advertisements are run.  TV One also receives affiliate fees and records revenue during the term of various affiliation agreements at levels appropriate for the most recent subscriber counts reported by the applicable affiliate.
 
(e)  Barter Transactions
 
The Company provides advertising time in exchange for programming content and certain services and accounts for these exchanges in accordance with ASC 605, “Revenue Recognition.” The terms of these exchanges generally permit the Company to preempt such time in favor of advertisers who purchase time in exchange for cash. The Company includes the value of such exchanges in both net revenue and station operating expenses. The valuation of barter time is based upon the fair value of the network advertising time provided for the programming content and services received. For the three months ended September 30, 2011 and 2010, barter transaction revenues were $856,000 and $794,000, respectively. For the nine months ended September 30, 2011 and 2010, barter transaction revenues were approximately $2.5 million and $2.4 million, respectively. Additionally, barter transaction costs were reflected in programming and technical expenses and selling, general and administrative expenses of $810,000 and $741,000 and $46,000 and $53,000, for the three months ended September 30, 2011 and 2010, respectively.  For the nine months ended September 30, 2011 and 2010, barter transaction costs were reflected in programming and technical expenses and selling, general and administrative expenses of $2.3 million and $2.2 million and $188,000 and $184,000, respectively.

 
9

 

(f)  Comprehensive (Loss) income
 
The Company’s comprehensive (loss) income consists of net (loss) income and other items recorded directly to the equity accounts. The objective is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events during the period, other than transactions with owners. The Company’s other comprehensive (loss) income consists of income on derivative instruments that qualify for cash flow hedge treatment (See Note 7 - Derivative Instruments and Hedging Activities) and income on investment activities (See Note 6 – Investments).
 
The following table sets forth the components of comprehensive (loss) income:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
 
   
(In thousands)
 
       
Consolidated net (loss) income
  $ (7,395 )   $ 2,048     $ 29,830     $ (55 )
Other comprehensive (loss) income (net of tax benefit of $0 for all periods):
                               
Investment activities
    (220 )           (164 )      
Derivative and hedging activities
          5             401  
Comprehensive (loss) income
    (7,615 )     2,053       29,666       346  
Comprehensive income attributable to the noncontrolling interests
    2,483       1,010       5,403       1,427  
Comprehensive (loss) income attributable to common stockholders
  $ (10,098 )   $ 1,043     $ 24,263     $ (1,081 )

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

 
10

 

The following table sets forth the calculation of basic and diluted earnings per share (in thousands, except share and per share data):
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
 
Numerator:
     
Consolidated net (loss) income attributable to common stockholders
  $ (9,878 )   $ 1,038     $ 24,427     $ (1,482 )
Denominator:
                               
Denominator for basic net income (loss) per share ¾ weighted average outstanding shares
    50,270,550       52,064,108       51,072,480       51,316,498  
Effect of dilutive securities:
                               
Stock options and restricted stock
    -       2,198,777       1,871,056       -  
Denominator for diluted net income (loss) per share ¾ weighted-average outstanding shares
    50,270,550       54,262,885       52,943,536       51,316,498  
                                 
Net (loss) income attributable to common stockholders per share ¾ basic
  $ (0.20 )   $ 0.02     $ 0.48     $ (0.03 )
Net (loss) income attributable to common stockholders per share ¾ diluted
  $ (0.20 )   $ 0.02     $ 0.46     $ (0.03 )

All stock options and restricted stock were excluded from the diluted calculation for the three months ended September 30, 2011 and the nine months ended September 30, 2010, as their inclusion would have been anti-dilutive.  The following table summarizes the potential common shares excluded from the diluted calculation.
 
   
Three
Months
Ended
September 30,
2011
   
Nine Months
Ended
September 30,
2010
 
   
(Unaudited)
 
   
(In thousands)
 
             
Stock options
    5,129       5,090  
Restricted stock
    1,137       2,185  

 
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(h) Fair Value Measurements
 
We report our financial and non-financial assets and liabilities measured at fair value on a recurring and non-recurring basis under the provisions of ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
 
The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
 
Level 1: Inputs are unadjusted quoted prices in active markets for identical assets and liabilities that can be accessed at measurement date.
 
Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
 
Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
 
As of September 30, 2011 and December 31, 2010, the fair values of our financial assets and liabilities are categorized as follows:

   
Total
   
Level 1
   
Level 2
   
Level 3
 
    (Unaudited)  
    (In thousands)  
                         
As of September 30, 2011
                       
Assets subject to fair value measurement:
                       
Fixed maturity securities – available for sale:
                       
Corporate debt securities
  $ 8,861     $ 8,861     $     $  
Government sponsored enterprise mortgage-backed securities
    1,138             1,138        
Total fixed maturity securities (a)
    9,999       8,861       1,138        
Total
  $ 9,999     $ 8,861     $ 1,138     $  
                                 
Liabilities subject to fair value measurement:
                               
Incentive award plan (b)
  $ 6,428     $     $     $ 6,428  
Employment agreement award (c)
    10,362                   10,362  
Total
  $ 16,790     $     $     $ 16,790  
                                 
Mezzanine equity subject to fair value measurement:
                               
Redeemable noncontrolling interests (d)
  $ 29,711     $     $     $ 29,711  
                                 
As of December 31, 2010
                               
Liabilities subject to fair value measurement:
                               
Interest rate swaps (e)
  $ 1,426     $     $ 1,426     $  
Employment agreement award (b)
    6,824                   6,824  
Total
  $ 8,250     $     $ 1,426     $ 6,824  
                                 
Mezzanine equity subject to fair value measurement:
                               
Redeemable noncontrolling interests (c)
  $ 30,635     $     $     $ 30,635  

 
12

 

(a)  Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  If quoted market prices are not available, fair values are estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.  In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

(b)   These balances are measured based on the estimated enterprise fair value of TV One.  For the period ended September 30, 2011, the Company determined the enterprise fair value of TV One based on the price paid to repurchase interests from certain investors. There have not been any significant changes in TV One’s business since the buyout of these investors.

(c)  Pursuant to an employment agreement (the “Employment Agreement”) executed in April 2008, the Chief Executive Officer (“CEO”) is eligible to receive an award amount equal to 8% of any proceeds from distributions or other liquidity events in excess of the return of the Company’s aggregate investment in TV One. The Company reviews the factors underlying this award at the end of each quarter including the valuation of TV One and an assessment of the probability that the employment agreement will be renewed and contain this provision. The Company’s obligation to pay the award will be triggered only after the Company’s recovery of the aggregate amount of its capital contribution in TV One and only upon actual receipt of distributions of cash or marketable securities or proceeds from a liquidity event with respect to the Company’s membership interest in TV One. The CEO was fully vested in the award upon execution of the Employment Agreement, and the award lapses upon expiration of the Employment Agreement, or earlier if the CEO voluntarily left the Company or was terminated for cause. In calculating the fair value of the award, the Company utilized the value assessed for TV One in connection with the buyout of financial investors. (See Note 7 – Derivative Instruments and Hedging Activities.) There have not been any significant changes in TV One’s business since the buyout of these investors. The Company is currently in negotiations with the Company’s CEO for a new employment agreement. Until such time as his new employment agreement is executed, the terms of his April 2008 employment agreement remain in effect including eligibility for the TV One award.

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

(e)  Based on London Interbank Offered Rate (“LIBOR”).

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

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

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

 
13

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

(i) Impact of Recently Issued Accounting Pronouncements
 
In June 2009, the FASB issued ASC 105, “Generally Accepted Accounting Principles,” which establishes the ASC as the source of authoritative non-SEC U.S. GAAP for non-governmental entities. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of ASC 105 did not have a material impact on the Company’s consolidated financial statements.
        
In May 2009, the FASB issued ASC 855, “Subsequent Events,” which addresses accounting and disclosure requirements related to subsequent events. It requires management to evaluate subsequent events through the date the financial statements are either issued or available to be issued. In February 2010, the FASB issued ASU 2010-09, which amends ASC 855 to remove all requirements for SEC filers to disclose the date through which subsequent events are considered. The amendment became effective upon issuance. The Company has provided the required disclosures regarding subsequent events in Note 15 – Subsequent Events.
 
The provisions under ASC 825, “Financial Instruments,” requiring disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements became effective for the Company during the quarter ended June 30, 2009. The additional disclosures required under ASC 825 are included in Note 1 – Organization and Summary of Significant Accounting Policies.
 
Effective January 1, 2009, the provisions under ASC 350, “Intangibles - Goodwill and Other,” related to the determination of the useful life of intangible assets and requiring additional disclosures related to renewing or extending the terms of recognized intangible assets became effective for the Company. The adoption of these provisions did not have a material effect on the Company’s consolidated financial statements.
 
Effective January 1, 2009, the Company adopted an accounting standard update from the Emerging Issues Task Force consensus regarding the accounting for contingent consideration agreements of an equity method investment and the requirement for the investor to recognize its share of any impairment charges recorded by the investee.  This update to ASC 323, “Investments – Equity Method and Joint Ventures,” requires the investor to record share issuances by the investee as if it has sold a portion of its investment with any resulting gain or loss being reflected in earnings. The adoption of this update did not have any impact on the Company’s consolidated financial statements.
 
In December 2010, the FASB issued ASU 2010-29, which specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period.  ASU 2010-29 is effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.
 
In September 2011, the FASB issued ASU 2011-08, which provides companies with an option to perform a qualitative assessment that may allow them to skip the two-step impairment test.  ASU 2011-08 amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If this is the case, companies will need to perform a more detailed two-step goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The Company does not expect such adoption will have a material impact on the Company’s consolidated financial statements.

 
14

 

(j) Liquidity and Uncertainties Related to Going Concern
 
On March 31, 2011, the Company entered into a new senior credit facility (the “2011 Credit Agreement”).  Under the 2011 Credit Agreement, beginning June 30, 2011, we became required to maintain compliance with certain financial ratios (as detailed in Note 8 Long-Term Debt below).  Based on our current projections, we expect to be in compliance with these financial ratios and other covenants over the next twelve months.
 
(k)  Major Customer
 
Under agreements between the Company’s owned radio stations and Radio Networks, and in accordance with ASC 605, “Revenue Recognition,” the Company generated revenue through barter agreements whereby advertising time was exchanged for programming content.
 
In November 2009, Reach Media entered into a new sales representation agreement (the “New Sales Representation Agreement”) with Radio Networks whereby Radio Networks serves as the sales representative for the out of show portions of Reach Media’s advertising inventory for the period beginning January 1, 2010 through December 31, 2012.  Under the New Sales Representation Agreement, which is now commissioned based, there are no minimum guarantees on revenue.  Since January 1, 2010, total revenue generated from Radio Networks has not exceeded 10% of our total revenues and we believe it is unlikely to exceed 10% of our total revenues in future periods.  Under the terms of the agreement, Reach Media had the option to terminate the agreement effective December 31, 2011 by giving at least 90 days written notice prior to this date.  In September 2011, Reach Media exercised its option and gave notice of its intention to terminate the agreement effective December 31, 2011.  Reach Media is in the process of negotiating a new agreement.
 
(l) Redeemable noncontrolling interests
 
Redeemable noncontrolling interests are interests in subsidiaries that are redeemable outside of the Company’s control either for cash or other assets.  These interests are classified as mezzanine equity and measured at the greater of estimated redemption value at the end of each reporting period or the historical cost basis of the noncontrolling interests adjusted for cumulative earnings allocations.  The resulting increases or decreases in the estimated redemption amount are affected by corresponding charges against retained earnings, or in the absence of retained earnings, additional paid-in-capital.
 
(m) Investments
 
Investment Securities
 
Investments consist primarily of corporate fixed maturity securities and mortgage-backed securities.
 
Investments with original maturities in excess of three months and less than one year are classified as short-term investments.  Long-term investments have original maturities in excess of one year.
 
Debt securities are classified as “available-for-sale” and reported at fair value.  Investments in available-for-sale fixed maturity securities are classified as either current or noncurrent assets based on their contractual maturities.  Fixed maturity securities are carried at estimated fair value based on quoted market prices for the same or similar instruments.  Investment income is recognized when earned and reported net of investment expenses.  Unrealized gains and losses are excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) until realized, unless the losses are deemed to be other than temporary.  Realized gains or losses, including any provision for other-than-temporary declines in value, are included in the statements of income.  For purposes of computing realized gains and losses, the specific-identification method of determining cost was used.

 
15

 

Evaluating Investments for Other than Temporary Impairments
 
The Company periodically performs evaluations, on a lot-by-lot and security-by-security basis, of its investment holdings in accordance with its impairment policy to evaluate whether any declines in the fair value of investments are other than temporary.  This evaluation consists of a review of several factors, including but not limited to:  length of time and extent that a security has been in an unrealized loss position, the existence of an event that would impair the issuer’s future earnings potential, and the near-term prospects for recovery of the market value of a security.  The FASB has issued guidance for recognition and presentation of other than temporary impairment (“OTTI”), or FASB OTTI guidance.  Accordingly, any credit-related impairment of fixed maturity securities that the Company does not intend to sell, and is not likely to be required to sell, is recognized in the consolidated statements of income, with the noncredit-related impairment recognized in other comprehensive income.
 
For fixed maturity securities where fair value is less than amortized cost, and where the securities are not deemed to be credit-impaired, the Company has asserted that it has no intent to sell and that it believes it is more likely than not that it will not be required to sell the investment before recovery of its amortized cost basis.  If such an assertion had not been made, the security’s decline in fair value would be deemed to be other than temporary and the entire difference between fair value and amortized cost would be recognized in the statements of income.
 
For fixed maturity securities, a critical component of the evaluation for OTTI is the identification of credit-impaired securities, where the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. The difference between the present value of projected future cash flows expected to be collected and the amortized cost basis is recognized as credit-related OTTI in the statements of income.  If fair value is less than the present value of projected future cash flows expected to be collected, the portion of OTTI related to other than credit factors is reduced in accumulated other comprehensive income.
 
In order to determine the amount of credit loss for a fixed maturity security, the Company calculates the recovery value by performing a discounted cash flow analysis based on the present value of future cash flows expected to be received.  The discount rate is generally the effective interest rate of the fixed maturity security prior to impairment.
 
When determining the collectability and the period over which the fixed maturity security is expected to recover, the Company considers the same factors utilized in its overall impairment evaluation process described above.
 
The Company believes that it has adequately reviewed its investment securities for OTTI and that its investment securities are carried at fair value.  However, over time, the economic and market environment (including any ratings change for any such securities, including US treasuries and corporate bonds) may provide additional insight regarding the fair value of certain securities, which could change management’s judgment regarding OTTI.  This could result in realized losses relating to other than temporary declines being charged against future income. Given the judgments involved, there is a continuing risk that further declines in fair value may occur and material OTTI may be recorded in future periods.
 
(n) Launch Support
 
TV One has entered into certain affiliate agreements requiring various payments for launch support.  Launch assets are assets used to initiate carriage under new affiliation agreements and are amortized over the term of the respective contracts.  Amortization is recorded as a reduction to revenue to the extent that revenue is recognized from the vendor, and any excess amortization is recorded as launch support amortization expense.  The weighted-average amortization period for launch support is approximately 3.6 years.  For the three and nine months ended September 30, 2011, launch asset amortization of approximately $2.5 million and $4.6 million, respectively was recorded as a reduction of revenue.

 
16

 

(o) Content Assets

TV One has entered into contracts to acquire entertainment programming rights and programs from distributors and producers.  The license periods granted in these contracts generally run from one year to perpetuity.  Contract payments are made in installments over terms that are generally shorter than the contract period.  In accordance with ASC 920, Entertainment-Broadcasters, each contract is recorded as an asset and a liability at an amount equal to its gross contractual commitment when the license period begins and the program is available for its first airing.

Program rights are recorded at the lower of amortized cost or estimated net realizable value.  Program rights are amortized based on the greater of the usage of the program or term of license.  Estimated net realizable values are based on the estimated revenues directly associated with the program materials and related expenses.  The Company recorded an additional $965,000 and approximately $1.3 million of amortization expense as a result of evaluating its contracts for recoverability for the three and nine months ended September 30, 2011, respectively. All produced and co-produced content is classified as a long-term asset. The portion of the unamortized licensed content balance that will be amortized within one year is classified as a current asset.

(p) Prepaid Programming and Deposits

Prepaid programming and deposits represent deposits made for the acquisition of TV One programming rights that have not been recorded as content assets because they do not meet the criteria as set forth by ASC 920.

2.  ACQUISITIONS:
 
In February 2005, the Company acquired approximately 51% of the common stock of Reach Media for approximately $55.8 million in a combination of approximately $30.4 million of cash and 1,809,648 shares of the Company’s Class D common stock valued at approximately $25.4 million. A subsidiary of Citadel, Reach Media’s sales representative and an investor in the company, owned a noncontrolling interest in Reach Media. In November 2009, that subsidiary sold its ownership interest to Reach Media in exchange for a $1.0 million note due in December 2011 (See Note 8 – Long-Term Debt) as an inducement for Reach Media to execute a new sales representation agreement. This transaction increased Radio One’s common stock interest in Reach Media to 53.5%.
 
On February 25, 2011, TV One completed a privately placed debt offering of $119 million (the “Redemption Financing”). The Redemption Financing is structured as senior secured notes bearing a 10% coupon and is due in 2016.  Subsequently, on February 28, 2011, TV One utilized $82.4 million of the Redemption Financing to repurchase 15.4% of its outstanding membership interests from certain financial investors and 2.0% of its outstanding membership interests held by TV One management (representing approximately 50% of interests held by management).  Beginning on April 14, 2011, the Company began to account for TV One on a consolidated basis after having executed an amendment to the TV One operating agreement with the remaining members of TV One concerning certain governance issues.   The Company’s preliminary purchase price allocation consisted of approximately $61.2 million to current assets, $39.0 million to launch assets, $2.4 million to fixed assets, $204.1 million to indefinite-lived intangibles (goodwill and TV One brand), $287.3 million to definite-lived intangibles (content assets, acquired advertising contracts, advertiser relationships, affiliation agreements, etc.), $225.7 million to liabilities (including the $119.0 million in debt discussed above) and $203.0 million in noncontrolling interests.  Finally, on April 25, 2011, TV One utilized the balance of the Redemption Financing to repurchase 12.4% of its outstanding membership interests from DIRECTV.  These redemptions by TV One increased Radio One’s ownership interest in TV One from 36.8% to approximately 50.9% as of April 25, 2011.

 
17

 

The following unaudited pro forma summary presents consolidated information of the Company as if the consolidation of TV One had occurred on January 1, 2010. The pro forma financial information gives effect to the Company’s consolidation of TV One by the application of the pro forma adjustments to the historical consolidated financial statements of the Company.  Such unaudited pro forma financial information is based on the historical financial statements of the Company and TV One and certain adjustments, which the Company believes to be reasonable based on current available information, to give effect to these transactions.  Pro forma adjustments were made from January 1, 2010 up to the date of the consolidation with the actual results reflected thereafter in the pro forma financial information.
 
The unaudited pro forma condensed consolidated financial data does not purport to represent what the Company’s results of operations actually would have been if the consolidation of TV One had occurred on January 1, 2010, or what such results will be for any future periods.  The actual results in the periods following the consolidation date may differ significantly from that reflected in the unaudited pro forma condensed consolidated financial data for a number of reasons including, but not limited to, differences between the assumptions used to prepare the unaudited pro forma condensed consolidated financial data and the actual amounts.

The financial information of TV One has been derived from the historical financial statements of TV One, which were prepared in accordance with US GAAP.
 
Unaudited adjustments have been made to adjust the results of TV One to reflect additional amortization expense that would have been incurred assuming the fair value adjustments to intangible assets as well as additional interest expense on the debt assumed had been applied from January 1, 2010, as well as additional pro forma adjustments, to give effect to these transactions occurring on January 1, 2010.

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
 
   
(In thousands)
 
                         
Net revenue
  $ 104,445     $ 103,975     $ 301,801     $ 298,553  
Costs and expenses, net
    120,026       111,236       376,194       216,120  
Net (loss) income
    (15,581 )     (7,261 )     (74,393 )     82,433  

3.  DISCONTINUED OPERATIONS:

In December 2009, the Company ceased publication of Giant Magazine.  Further, as of June 2011, our remaining Boston radio station was made the subject of an LMA whereby we have made available, for a fee, air time on this station to another party. The remaining assets and liabilities of Giant Magazine as well as stations sold or made subject to an LMA have been classified as discontinued operations as of September 30, 2011 and December 31, 2010, and Giant Magazine and stations sold or made subject to an LMA results from operations for the three months and nine months ended September 30, 2011 and 2010, have been classified as discontinued operations in the accompanying consolidated financial statements.
 
The following table summarizes the operating results for Giant Magazine and all of the stations sold or made subject to a LMA and classified as discontinued operations for all periods presented:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
 
   
(In thousands)
 
                         
Net revenue
  $     $ 61     $ 59     $ 144  
Station operating expenses
    (30 )     192       96       403  
Depreciation and amortization
    19       15       54       42  
Loss (gain) on sale of assets
          12       (20 )     15  
Income (loss) before income taxes
    11       (158 )     (71 )     (316 )
Income (loss) from discontinued operations, net of tax
  $ 11     $ (158 )   $ (71 )   $ (316 )

 
18

 

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

   
As of
 
   
September
30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(As Adjusted –
See Note 1)
 
   
(In thousands)
 
Currents assets:
           
Accounts receivable, net of allowance for doubtful accounts
  $ 105     $ 159  
Total current assets
    105       159  
Intangible assets, net
    1,202       1,202  
Property and equipment, net
    291       422  
Total assets
  $ 1,598     $ 1,783  
Current liabilities:
               
Other current liabilities
  $ 87     $ 34  
Total current liabilities
    87       34  
Long-term liabilities
    31       37  
Total liabilities
  $ 118     $ 71  

4.  GOODWILL, RADIO BROADCASTING LICENSES AND OTHER INTANGIBLE ASSETS

Impairment Testing
 
In the past, we have made acquisitions whereby a significant amount of the purchase price was allocated to radio broadcasting licenses, goodwill and other intangible assets. Effective January 1, 2002, in accordance with ASC 350, “Intangibles - Goodwill and Other,” we do not amortize our radio broadcasting licenses and goodwill. Instead, we perform a test for impairment annually or on an interim basis when events or changes in circumstances or other conditions suggest impairment may have occurred. Other intangible assets continue to be amortized on a straight-line basis over their useful lives. We perform our annual impairment test as of October 1 of each year.
 
Valuation of Broadcasting Licenses
 
We utilize the services of a third-party valuation firm to provide independent analysis when evaluating the fair value of our radio broadcasting licenses and reporting units. Fair value is estimated to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Effective January 1, 2002, we began using the income approach to test for impairment of radio broadcasting licenses. We believe this method of valuation to be consistent with ASC 805-20-S-99-3, “Use of the Residual Method to Value Acquired Assets Other Than Goodwill.” A projection period of 10 years is used, as that is the time horizon in which operators and investors generally expect to recover their investments. When evaluating our radio broadcasting licenses for impairment, the testing is done at the unit of accounting level as determined by ASC 350, “Intangibles - Goodwill and Other.” In our case, each unit of accounting is a clustering of radio stations into one of our 15 geographical radio markets.  Broadcasting license fair values are based on the estimated after-tax discounted future cash flows of the applicable unit of accounting assuming an initial hypothetical start-up operation which possesses FCC licenses as the only asset. Over time, it is assumed the operation acquires other tangible assets such as advertising and programming contracts, employment agreements and going concern value, and matures into an average performing operation in a specific radio market. The income approach model incorporates several variables, including, but not limited to: (i) radio market revenue estimates and growth projections; (ii) estimated market share and revenue for the hypothetical participant; (iii) likely media competition within the market; (iv) estimated start-up costs and losses incurred in the early years; (v) estimated profit margins and cash flows based on market size and station type; (vi) anticipated capital expenditures; (vii) probable future terminal values; (viii) an effective tax rate assumption; and (ix) a discount rate based on the weighted-average cost of capital for the radio broadcast industry. In calculating the discount rate, we considered: (i) the cost of equity, which includes estimates of the risk-free return, the long-term market return, small stock risk premiums and industry beta; (ii) the cost of debt, which includes estimates for corporate borrowing rates and tax rates; and (iii) estimated average percentages of equity and debt in capital structures. Since our annual October 2010 assessment, we have not made any changes to the methodology for valuing broadcasting licenses.

 
19

 
 
During the second quarter of 2011, the total market revenue growth for certain markets was below that used in our 2010 annual impairment testing. We deemed that to be an impairment indicator that warranted interim impairment testing of certain of our radio broadcasting licenses, which we performed as of May 31, 2011. During the third quarter, there was further deterioration of revenue growth in certain markets, and as such, we deemed that to be an impairment indicator that warranted interim testing of certain radio broadcasting licenses as of September 30, 2011.  The Company concluded that our radio broadcasting licenses were not impaired during the second or third quarters of 2011. Below are some of the key assumptions used in the income approach model for estimating broadcasting licenses fair values for all annual and interim impairment assessments performed since January 2010.

Radio Broadcasting Licenses
 
October 1, 2010
   
May 31, 2011 (a)
   
September 30, 2011 (a)
 
   
(In millions)
       
                   
Pre-tax impairment charge
  $ 19.9     $     $  
                         
Discount Rate
    10 %     10 %     9.5 %
Year 1 Market Revenue Growth or Decline
                       
Rate or Range
    1.0% -3.0 %     1.3% -2.8 %     1.5% -2.0 %
Long-term Market Revenue Growth Rate
                       
Range (Years 6 – 10)
    1.0% - 2.5 %     1.5% - 2.0 %     1.5% - 2.0 %
Mature Market Share Range
    0.8% - 28.3 %     9.0% - 22.5 %     9.3% - 22.4 %
Operating Profit Margin Range
    19.0% - 47.3 %     32.7% - 40.8 %     32.7% - 33.0 %
 
(a) Reflects changes only to the key assumptions used in the second and third quarter interim testing for certain reporting units.
 
 
20

 

Valuation of Goodwill
 
The impairment testing of goodwill is performed at the reporting unit level. We had 19 reporting units as of our October 2010 annual impairment assessment. For the purpose of evaluating goodwill for impairment, the 19 reporting units consisted of the 16 radio markets and three other business divisions. Due to the consolidation of TV One and with the transition of our Boston station into discontinued operations during the quarter ended June 30, 2011, the Company now has 19 reporting units, consisting of the 15 radio markets and four business divisions. In testing for the impairment of goodwill, with the assistance of a third-party valuation firm, we primarily rely on the income approach. The approach involves a 10-year model with similar variables as described above for broadcasting licenses, except that the discounted cash flows are generally based on the Company’s estimated and projected market revenue, market share and operating performance for its reporting units, instead of those for a hypothetical participant. We follow a two-step process to evaluate if a potential impairment exists for goodwill. The first step of the process involves estimating the fair value of each reporting unit. If the reporting unit’s fair value is less than its carrying value, a second step is performed as per the guidance of ASC 805-10, “Business Combinations,” to allocate the fair value of the reporting unit to the individual assets and liabilities of the reporting unit in order to determine the implied fair value of the reporting unit’s goodwill as of the impairment assessment date. Any excess of the carrying value of the goodwill over the implied fair value of the goodwill is written off as a charge to operations. We have not made any changes to the methodology for determining the fair value of our reporting units.
 
In February, May and August of 2010, the Company performed interim impairment testing on the valuation of goodwill associated with Reach Media. Reach Media net revenues and cash flows declined for 2010 and full year internal projections were revised.  The revenues declined following the December 31, 2009 expiration of a sales representation agreement with Citadel Broadcasting Corporation (“Citadel”) whereby a minimum level of revenue was guaranteed over the term of the agreement.  Effective January 1, 2010, Reach Media’s newly established sales organization began selling its inventory on the Tom Joyner Morning Show and under a new commission-based sales representation agreement with Citadel, which sells certain inventory owned by Reach Media in connection with its 106 radio station affiliate agreements. Management revised its internal projections for Reach Media by lowering the Year 1 revenue growth rate to 2.5% in May and August 2010, versus 16.5% assumed in the previous annual assessment. Given changes in the credit markets, the discount rate was lowered to 13.5% for both the February and May 2010 assessments and again lowered to 13.0% for the August 2010 assessment. As part of the year end impairment testing, the discount rate was increased to 13.5% and we reduced our operating cash flow projections and assumptions compared to the interim assessments based on declining revenue projections and actual results which did not meet budget. The Company recorded an impairment charge of $16.1 million for Reach Media for the quarter ended December 31, 2010.
 
Below are some of the key assumptions used in the income approach model for estimating the fair value for Reach Media for all interim, annual and year end assessments since January 2010. When compared to the discount rates used for assessing radio market reporting units, the higher discount rates used in these assessments reflect a premium for a riskier and broader media business, with a heavier concentration and significantly higher amount of programming content related intangible assets that are highly dependent on the on-air personality Tom Joyner. As a result of the February, May and August 2010 interim assessments, the Company concluded no impairment to the carrying value of Reach Media had occurred. During the fourth quarter of 2010, Reach Media’s operating performance continued to decline, but at a decreasing rate.  We believe this represented an impairment indicator and as a result, we performed a year end impairment assessment at December 31, 2010.  We performed interim impairment assessments at March 31, 2011, June 30, 2011 and September 30, 2011 as Reach Media did not meet its budgeted operating cash flow for the first, second and third quarters. However, upon review of the results of the March 2011, June 2011 and September 2011 interim impairment tests, the Company concluded that the carrying value of goodwill attributable to Reach Media had not been impaired.
 
Reach Media Goodwill
                                         
(Reporting Unit Within the
                                         
Radio Broadcasting
                                         
Segment)
 
February 28, 2010
   
May 31, 2010
   
August 31, 2010
   
December 31, 2010
   
March 31, 2011
   
June 30, 2011
   
September 30, 2011
 
         
(In millions)
                         
Pre-tax impairment charge
  $     $     $     $ 16.1     $     $     $  
                                                         
Discount Rate
    13.5 %     13.5 %     13.0 %     13.5 %     13.5 %     13.0 %     12.0 %
Year 1 Revenue Growth Rate
    8.5 %     2.5 %     2.5 %     2.5 %     2.5 %     2.5 %     2.5 %
Long-term Revenue Growth
                                                       
Rate Range
    2.5% – 3.0 %     2.5% – 2.9 %     2.5% – 3.3 %     (2.6)% - 4.4 %     (1.3)% - 4.9 %     (0.2)% - 3.9 %     (2.0)% - 3.5 %
                                                         
Operating Profit Margin Range
    22.7% - 31.4 %     23.3% - 31.5 %     25.5% - 31.2 %     15.5% - 25.9 %     16.2% - 27.4 %     17.6% - 22.6 %     18.8 - 21.7 %
  
 
21

 
 
During the second and third quarters of 2011, the operating performance and current projections for the remainder of the year for specific radio markets were below that used in our 2010 annual impairment testing. We deemed that to be an impairment indicator that warranted interim impairment testing of goodwill associated with specific radio markets, which we performed as of May 31, 2011 and as of September 30, 2011. The Company concluded that goodwill had not been impaired during the second and third quarters of 2011. Below are some of the key assumptions used in the income approach model for estimating goodwill fair values for the annual and interim impairments assessments performed since October 1, 2010.

         
May 31, 2011
   
September 30,
 
Goodwill (Radio Market Reporting Units)
 
October 1, 2010
   
(a)
   
2011 (a)
 
   
(In millions)
             
                   
Pre-tax impairment charge
  $     $     $  
                         
Discount Rate
    10 %     10 %     9.5 %
Year 1 Market Revenue Growth or Decline Rate or Range
    1.5% -3.0 %     1.5% -3.0 %     1.5 %
Long-term Market Revenue Growth Rate Range (Years 6 – 10)
    1.5% - 2.5 %     1.5% - 2.0 %     1.5 %
Mature Market Share Range
    7.0% - 23.0 %     7.0% - 23.0 %     13.8 %
Operating Profit Margin Range
    27.5% - 58.0 %     30.0% - 56.0 %     36.0 %

(a)
Reflects changes only to the key assumptions used in the second and third quarter interim testing for certain reporting units.
 
Goodwill Valuation Results
 
The table below presents the changes in the carrying amount of goodwill by segment during the nine month period ended September 30, 2011. The goodwill balances for each reporting unit are not disclosed so as to not make publicly available sensitive information that could potentially be competitively harmful to the Company.
   
   
Goodwill Carrying Balances
 
   
As of
         
As of
 
Segment
 
December 31,
2010
   
Change
   
September
30, 2011
 
         
(In millions)
       
                   
Radio Broadcasting Segment
  $ 99.7     $     $ 99.7  
Internet Segment
    21.8             21.8  
Cable Television Segment
          164.4       164.4  
Total
  $ 121.5     $ 164.4     $ 285.9  

 
22

 

  Intangible Assets Excluding Goodwill and Radio Broadcasting Licenses

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

   
As of
     
   
September 30, 2011
   
December 31, 2010
   
Period of
Amortization
   
(Unaudited)
           
   
(In thousands)
     
                 
Trade names
  $ 17,126     $ 17,138    
2-5 Years
Talent agreement
    19,549       19,549    
10 Years
Debt financing and modification costs
    16,059       19,374    
Term of debt
Intellectual property
    14,151       14,151    
4-10 Years
Affiliate agreements
    186,755       7,769    
1-10 Years
Acquired income leases
    1,282       1,282    
3-9 Years
Non-compete agreements
    1,260       1,260    
1-3 Years
Advertiser agreements
    47,688       6,613    
2-12 Years
Favorable office and transmitter leases
    3,358       3,358    
2-60 Years
Brand names
    2,539       2,539    
2.5 Years
Brand name - unamortized
    39,688          
Indefinite
Other intangibles
    3,661       1,258    
1-5 Years
      353,116       94,291      
Less: Accumulated amortization
    (73,124 )     (54,255 )    
Other intangible assets, net
  $ 279,992     $ 40,036      
 
Amortization expense of intangible assets for the three months ended September 30, 2011 and 2010 was approximately $8.7 million and $1.8 million, respectively, and for the nine months ended September 30, 2011 and 2010 was approximately $17.7 million and $5.4 million, respectively. The amortization of deferred financing costs was charged to interest expense for all periods presented. The amount of deferred financing costs included in interest expense for the three months ended September 30, 2011 and 2010 was approximately $1.0 million and $527,000, respectively, and for the nine month periods ended September 30, 2011 and 2010 was approximately $3.7 million and $1.7 million, respectively.
 
The following table presents the Company’s estimate of amortization expense for the remainder of 2011 and years 2012 through 2016 for intangible assets, excluding deferred financing costs:

   
(In thousands)
 
       
2011 (October through December)
  $ 8,700  
2012
  $ 31,072  
2013
  $ 30,519  
2014
  $ 29,921  
2015
  $ 26,043  
2016
  $ 25,886  

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

 
23

 

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

   
September 30, 2011
    Weighted Average Period of Amortization  
   
(Unaudited)
(In thousands)
         
               
Launch assets
  $ 39,543      
3.6 Years
 
Less: Accumulated amortization
    (4,618 )        
Launch assets, net
  $ 34,925          

Future estimated launch support amortization expense or revenue reduction related to launch assets for the remainder of 2011 and years 2012 through 2015 is as follows:

 
 
(In thousands)
 
 
 
 
 
2011 (October through December)
 
$
2,530
 
2012
 
$
9,947
 
2013
 
$
9,947
 
2014
 
$
9,902
 
2015
 
$
2,599
 

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

   
September 30, 2011
    Period of Amortization  
   
(Unaudited)
         
   
(In thousands)
         
               
Content assets
  $ 84,876      
1-8 Years
 
Less: Accumulated amortization
    (20,564 )        
Content assets, net
  $ 64,312          
 
Future estimated content amortization expense related to agreements entered into as of September 30, 2011 for the remainder of 2011 and years 2012 through 2016 is as follows:

   
(In thousands)
 
       
2011 (October through December)
 
$
9,080
 
2012
 
$
28,198
 
2013
 
$
16,598
 
2014
 
$
6,430
 
2015
 
$
1,149
 
2016
 
$
969
 
 
 
24

 

5.  INVESTMENT IN AFFILIATED COMPANY:
 
In January 2004, the Company, together with an affiliate of Comcast Corporation and other investors, launched TV One, an entity formed to operate a cable television network featuring lifestyle, entertainment and news-related programming targeted primarily towards African-American viewers. At that time, we committed to make a cumulative cash investment of $74.0 million in TV One, of which $60.3 million had been funded as of April 30, 2007. Since December 31, 2006, the initial four year commitment period for funding the capital had been extended on a quarterly basis due in part to TV One’s lower than anticipated capital needs. In connection with the Redemption Financing (as defined in Note 2 — Acquisitions), we funded our remaining capital commitment amount of approximately $13.7 million on April 19, 2011 and currently anticipate no further capital commitment. In December 2004, TV One entered into a distribution agreement with DIRECTV and certain affiliates of DIRECTV became investors in TV One.
 
On February 25, 2011, TV One completed its $119 million Redemption Financing. The Redemption Financing is structured as senior secured notes bearing a 10% coupon and is due in 2016.  Subsequently, on February 28, 2011, TV One utilized $82.4 million of the Redemption Financing to repurchase 15.4% of its outstanding membership interests from certain financial investors and 2.0% of its outstanding membership interests held by TV One management (representing approximately 50% of interests held by management).  Beginning on April 14, 2011, the Company began to account for TV One on a consolidated basis after having executed an amendment to the TV One operating agreement with the remaining members of TV One concerning certain governance issues.   Finally, on April 25, 2011, TV One utilized the balance of the Redemption Financing to repurchase 12.4% of its outstanding membership interests from DIRECTV.  These redemptions by TV One, increased Radio One’s holding in TV One from 36.8% to approximately 50.9% as of April 25, 2011.
 
Prior to the consolidation date, the Company recorded its investment at cost and had adjusted its carrying amount of the investment to recognize the change in the Company’s claim on the net assets of TV One resulting from operating income or losses of TV One as well as other capital transactions of TV One using a hypothetical liquidation at book value approach. At December 31, 2010, the carrying value of the Company’s investment in TV One was approximately $47.5 million and is presented on the consolidated balance sheet as investment in affiliated company.  On April 14, 2011, the Company began to account for TV One on a consolidated basis and the basis of the assets and liabilities of TV One at that date were recorded at fair value. For the three months ended September 30, 2011 and 2010, the Company’s allocable share of TV One’s operating income was $0 and approximately $1.8 million, respectively.  For the nine months ended September 30, 2011 and 2010, the Company’s allocable share of TV One’s operating income was approximately $3.3 million and $3.8 million, respectively.
 
We entered into separate network services and advertising services agreements with TV One in 2003. Under the network services agreement, we provided TV One with administrative and operational support services and access to Radio One personalities. In consideration of providing these services, we received equity in TV One, and received an annual cash fee of $500,000 for providing services under the network services agreement.  The network services agreement, originally scheduled to expire in January 2009 was extended to January 2011, at which time it expired.
 
Under an advertising services agreement, we provided a specified amount of advertising to TV One. Prior to the consolidation date, the Company was accounting for the services provided to TV One under the advertising services agreement in accordance with ASC 505-50-30, “Equity.”  As services were provided to TV One, the Company recorded revenue based on the fair value of the most reliable unit of measurement in these transactions. The most reliable unit of measurement had been determined to be the value of underlying advertising time that was provided to TV One. The Company recognized $363,000 and $42,000 in revenue relating to this agreement for the three months ended September 30, 2011 and 2010, respectively.  The Company recognized $1.2 million and $1.0 million in revenue relating to this agreement for the nine months ended September 30, 2011 and 2010, respectively. This agreement was also originally scheduled to expire in January 2009 and was extended to January 2011, at which time it expired. However, we entered into a new advertising services agreement with TV One with an effective date of January 2011.  Under the new advertising services agreement, we (i) provide advertising services to TV One on certain of our media properties and (ii) act as media placement agent for TV One in certain instances.  In return for such services, TV One pays us for such advertising time and services and, where we act as media placement agent, pays us a media placement fee equal to the lesser of 15% of media placement costs or a market rate, in addition to reimbursing us (or paying in advance) for all actual costs associated with the media placement services.

 
25

 

6. INVESTMENTS

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

   
Amortized Cost
Basis
   
Gross
Unrealized
Losses
   
Gross
Unrealized
Gains
   
Fair
Value
 
September 30, 2011
                       
Corporate debt securities
  $ 8,932     $ (154 )   $ 83     $ 8,861  
Government sponsored enterprise mortgage-backed securities
    1,134       (1 )     5       1,138  
Total investments
  $ 10,066     $ (155 )   $ 88     $ 9,999  

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

   
Fair
Value
< 1 Year
   
Unrealized
Losses
< 1 Year
   
Fair
Value
> 1 Year
   
Unrealized
Losses
> 1 Year
   
Total
Unrealized
Losses
 
September 30, 2011
                             
Corporate debt securities
  $ 1,830     $ (48 )   $ 4,527     $ (106 )   $ (154 )
Government sponsored enterprise mortgage-backed securities
    0       0       251       (1 )     (1 )
Total investments
  $ 1,830     $ (48 )   $ 4,778     $ (107 )   $ (155 )

The Company’s investments in debt securities are sensitive to interest rate fluctuations, which impact the fair value of individual securities. Unrealized losses on the Company’s investments in debt securities have occurred due to volatility and liquidity concerns within the capital markets during the quarter ended September 30, 2011.

The amortized cost and estimated fair value of debt securities at September 30, 2011, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

   
Amortized Cost
Basis
   
Fair Value
 
             
Within 1 year
  $ 927     $ 924  
After 1 year through 5 years
    4,653       4,599  
After 5 years through 10 years
    2,256       2,268  
After 10 years
    1,096       1,070  
Mortgage-backed securities
    1,134       1,138  
Total
  $ 10,066     $ 9,999  
 
 
26

 

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

   
Three Months Ended
September 30, 2011
   
Nine Months Ended
September 30, 2011
 
             
Proceeds from sales
  $ 1,045     $ 3,575  
Gross realized gains
    2       8  
Gross realized losses
    (1 )     (66 )

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

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

   
Liability Derivatives
 
   
As of September 30, 2011
 
As of December 31, 2010
 
   
(Unaudited)
     
   
(In thousands)
 
       
   
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Derivatives designated as hedging instruments:
                 
Interest rate swaps
 
Other Long-Term Liabilities
     
Other Long-Term Liabilities
    1,426  
                       
Derivatives not designated as hedging instruments:
                     
Employment agreement award
 
Other Long-Term Liabilities
    10,362  
Other Long-Term Liabilities
    6,824  
Total derivatives
      $ 10,362       $ 8,250  
 
 
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The effect and the presentation of the Company’s derivative instruments on the consolidated statements of operations are as follows:
 
Derivatives in
Cash Flow
Hedging
Relationships
 
Amount of Gain in Other
Comprehensive Loss on
Derivative (Effective Portion)
 
Loss Reclassified from
Accumulated Other Comprehensive
Loss into Income (Effective Portion)
 
Gain (Loss) in Income (Ineffective
Portion and Amount Excluded from
Effectiveness Testing)
 
   
Amount
 
Location
 
Amount
 
Location
 
Amount
 
Three Months Ended September 30,
 
(Unaudited)
 
(In thousands)
 
   
   
2011
   
2010
     
2011
   
2010
     
2011
   
2010
 
Interest rate swaps
  $     $ 5  
Interest expense
  $     $ (254 )
Interest expense
  $     $  
 
Derivatives in
Cash Flow
Hedging
Relationships
 
Amount of Gain in Other
Comprehensive Loss on
Derivative (Effective Portion)
 
Loss Reclassified from
Accumulated Other Comprehensive
Loss into Income (Effective Portion)
 
Gain (Loss) in Income (Ineffective
Portion and Amount Excluded from
Effectiveness Testing)
 
   
Amount
 
Location
 
Amount
 
Location
 
Amount
 
Nine Months Ended September 30,
 
(Unaudited)
 
(In thousands)
 
   
   
2011
   
2010
     
2011
   
2010
     
2011
   
2010
 
Interest rate swaps
  $     $ 401  
Interest expense
  $ (258 )   $ (1,243 )
Interest expense
  $     $  

Derivatives Not Designated
as Hedging Instruments
 
Location of Gain (Loss)
in Income of Derivative
 
Amount of Gain (Loss) in Income of Derivative
 
       
Three Months Ended September 30,
 
       
2011
   
2010
 
       
(Unaudited)
 
       
(In thousands)
 
           
Employment agreement award
 
Corporate selling, general and administrative expense
  $ (3,068 )   $ (131 )


Derivatives Not Designated
as Hedging Instruments
 
Location of Gain (Loss)
in Income on Derivative
 
Amount of Gain (Loss) in Income of Derivative
 
       
Nine Months Ended September 30,
 
       
2011
   
2010
 
       
(Unaudited)
 
       
(In thousands)
 
           
Employment agreement award
 
Corporate selling, general and administrative expense
  $ (3,538 )   $ (1,076 )
 
 
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Hedging Activities
   
In June 2005, pursuant to our Previous Credit Agreement (as defined in Note 8 — Long-Term Debt), the Company entered into four fixed rate swap agreements to reduce interest rate fluctuations on certain floating rate debt commitments. One of the four $25.0 million swap agreements expired in each of June 2007 and 2008, and 2010, respectively. The remaining $25.0 million swap agreement was terminated on March 31, 2011 in conjunction with the March 31, 2011 retirement of our Previous Credit Agreement. We have no swap agreements in connection with our current credit facilities.

Each swap agreement had been accounted for as a qualifying cash flow hedge of the Company’s senior bank debt, in accordance with ASC 815, “Derivatives and Hedging,” whereby changes in the fair market value are reflected as adjustments to the fair value of the derivative instruments as reflected on the accompanying consolidated financial statements.

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

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

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

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

Other Derivative Instruments
   
The Company recognizes all derivatives at fair value, whether designated in hedging relationships or not, on the balance sheet as either an asset or liability. The accounting for changes in the fair value of a derivative, including certain derivative instruments embedded in other contracts, depends on the intended use of the derivative and the resulting designation. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item are recognized in the statement of operations. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the statement of operations when the hedged item affects net income. If a derivative does not qualify as a hedge, it is marked to fair value through the statement of operations.
         
 
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As of September 30, 2011, the Company was party to an Employment Agreement executed in April 2008 with the CEO, which called for an award that has been accounted for as a derivative instrument without a hedging relationship in accordance with the guidance under ASC 815, “Derivatives and Hedging.” Pursuant to the Employment Agreement, the CEO is eligible to receive an award amount equal to 8% of any proceeds from distributions or other liquidity events in excess of the return of the Company’s aggregate investment in TV One. The Company reassessed the estimated fair value of the award at September 30, 2011 to be approximately $10.4 million, and accordingly, adjusted its liability to this amount. The Company’s obligation to pay the award will be triggered only after the Company’s recovery of the aggregate amount of its capital contribution in TV One and only upon actual receipt of distributions of cash or marketable securities or proceeds from a liquidity event with respect to the Company’s membership interest in TV One. The CEO was fully vested in the award upon execution of the Employment Agreement, and the award lapses upon expiration of the Employment Agreement, or earlier if the CEO voluntarily left the Company, or was terminated for cause. The Company is currently in negotiations with the Company’s CEO for a new employment agreement. Until such time as his new employment agreement is executed, the terms of his April 2008 employment agreement remain in effect including eligibility for the TV One award.

8. LONG-TERM DEBT:

Long-term debt consists of the following:

   
September 30,
2011
   
December
31, 2010
 
   
(Unaudited)
       
   
(In thousands)
 
             
Senior bank term debt
  $ 384,070     $ 346,681  
Senior bank revolving debt
          7,000  
6% Senior Subordinated Notes due February 2013
    747       747  
12½%/15% Senior Subordinated Notes due May 2016
    305,917       286,794  
10% Senior Secured Notes due March 2016
    119,000        
Note payable
    1,000       1,000  
Total debt
    810,734       642,222  
Less: current portion
    4,860       18,402  
Less: original issue discount
    7,079        
Long-term debt, net
  $ 798,795     $ 623,820  

Credit Facilities

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

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

(b)   maintaining a senior secured leverage ratio of no greater than:
 
§
5.25 to 1.00 on June 30, 2011;
 
§
5.00 to 1.00 on September 30, 2011 and December 31, 2011;
 
§
4.75 to 1.00 on March 31, 2012;
 
§
4.50 to 1.00 on June 30, 2012, September 30, 2012 and December 31, 2012;
 
§
4.00 to 1.00 on March 31, 2013 and the last day of each fiscal quarter through September 30, 2013;
 
§
3.75 to 1.00 on December 31, 2013 and the last day of each fiscal quarter through September 30, 2014;
 
§
3.25 to 1.00 on December 31, 2014 and the last day of each fiscal quarter through September 30, 2015; and
 
§
2.75 to 1.00 on December 31, 2015 and the last day of each fiscal quarter thereafter.

(c)   maintaining a total leverage ratio of no greater than:
 
§
9.25 to 1.00 on June 30, 2011 and the last day of each fiscal quarter through December 31, 2011;
 
§
9.00 to 1.00 on March 31, 2012;
 
§
8.75 to 1.00 on June 30, 2012;
 
§
8.50 to 1.00 on September 30, 2012 and December 31, 2012;
 
§
8.00 to 1.00 on March 31, 2013 and the last day of each fiscal quarter through September 30, 2013;
 
§
7.50 to 1.00 on December 31, 2013 and the last day of each fiscal quarter through September 30, 2014;
 
§
6.50 to 1.00 on December 31, 2014 and the last day of each fiscal quarter through September 30, 2015; and
 
§
6.00 to 1.00 on December 31, 2015 and the last day of each fiscal quarter thereafter.

(d) limitations on:
 
§
liens;
 
§
sale of assets;
 
§
payment of dividends; and
 
§
mergers.

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

   
As of
September
30, 2011
   
Covenant
Limit
   
Excess
Coverage
 
                   
Pro Forma Last Twelve Months Covenant EBITDA (In millions)
  $ 81.1              
                     
Pro Forma Last Twelve Months Interest Expense (In millions)
  $ 47.6              
                     
Senior Debt (In millions)
  $ 372.4              
Total Debt (In millions)
  $ 679.0              
                     
Senior Secured Leverage
                   
Senior Secured Debt / Covenant EBITDA
    4.59 x     5.00 x     0.41 x
                         
Total Leverage
                       
Total Debt / Covenant EBITDA
    8.37 x     9.25 x     0.88 x
                         
Interest Coverage
                       
Covenant EBITDA / Interest Expense
    1.71 x     1.25 x     0.46 x
                         
EBITDA - Earnings before interest, taxes, depreciation and amortization
                       
 
 
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In accordance with the 2011 Credit Agreement, the calculations for the ratios above do not include the operating results and related debt of Reach Media and TV One.

As of September 30, 2011, the Company was in compliance with all of its financial covenants under the 2011 Credit Agreement. Measurement of interest coverage, senior secured leverage, and total leverage ratios began on June 30, 2011.

Under the terms of the 2011 Credit Agreement, interest on base rate loans is payable quarterly and interest on LIBOR loans is payable monthly or quarterly. The base rate is equal to the greater of the prime rate, the Federal Funds Effective Rate plus 0.50% and the LIBOR Rate for a one-month period plus 1.00%. The applicable margin on the 2011 Credit Agreement is between (i) 4.50% and 5.50% on the revolving portion of the facility and (ii) 5.00% (with a base rate floor of 2.5% per annum) and 6.00% (with a LIBOR floor of 1.5% per annum) on the term portion of the facility. Commencing on June 30, 2011, quarterly installments of 0.25%, or $965,000, of the principal balance on the $386.0 million term loan are payable on the last day of each March, June, September and December.

As of September 30, 2011, the Company had approximately $23.8 million of borrowing capacity under its revolving credit facility. Taking into consideration the financial covenants under the 2011 Credit Agreement, approximately $23.8 million of the revolving credit facility was available to be borrowed.

As of September 30, 2011, the Company had outstanding approximately $384.1 million on its term credit facility. During the quarter ended September 30, 2011, the Company repaid approximately $1.0 million under the 2011 Credit Agreement. Proceeds from the 2011 Credit Agreement of approximately $378.3 million, net of original issue discount, were used to repay the Amended and Restated Credit Agreement (as defined below) and pay other fees and expenses, with the balance of the proceeds to be used to fund the TV One capital call. The original issue discount is being reflected as an adjustment to the carrying amount of the debt obligation and amortized to interest expense over the term of the credit facility.

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

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

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

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

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

Effective Period
 
Ratio
November 24, 2010 to December 30, 2010
 
9.35 to 1.00
December 31, 2010 to December 30, 2011
 
9.00 to 1.00
December 31, 2011 and thereafter
 
9.25 to 1.00
 
 
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 The Amended and Restated Credit Agreement also provided for maintenance of the following maximum senior leverage ratios (subject to certain adjustments if any portion of the $13.7 million revolver was used to fund a TV One capital call):

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

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

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

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

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

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

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

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

On March 31, 2011, the Company repaid all obligations under, and terminated, the Amended and Restated Credit Agreement. During the quarter ended March 31, 2011, the Company did not borrow from the Amended and Restated Credit Agreement and repaid approximately $353.7 million.
 
 
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Pre November 2010 Refinancing Transactions
 
In June 2005, the Company entered into the Credit Agreement with a syndicate of banks (the “Previous Credit Agreement”), and simultaneously borrowed $437.5 million to retire all outstanding obligations under its Previous Credit Agreement. The Previous Credit Agreement was amended in April 2006 and September 2007 to modify certain financial covenants and other provisions. Prior to the November 2010 Refinancing Transaction, the Previous Credit Agreement was to expire the earlier of (a) six months prior to the scheduled maturity date of the 8% Senior Subordinated Notes due July 1, 2011 (January 1, 2011) (unless the 8% Senior Subordinated Notes have been repurchased or refinanced prior to such date) or (b) June 30, 2012. The total amount available under the Credit Agreement was $800.0 million, consisting of a $500.0 million revolving facility and a $300.0 million term loan facility. Borrowings under the credit facilities were subject to compliance with certain provisions including, but not limited, to financial covenants. The Company could use proceeds from the credit facilities for working capital, capital expenditures made in the ordinary course of business, its common stock repurchase program, permitted direct and indirect investments and other lawful corporate purposes.
 
During the quarter ended March 31, 2010, we noted that certain of our subsidiaries identified as guarantors in our financial statements did not have requisite guarantees filed with the trustee as required under the terms of the indentures governing the 6⅜% Senior Subordinated Notes due 2013 (the “2013 Notes”) and 2011 Notes (the “Non-Joinder of Certain Subsidiaries”). The Non-Joinder of Certain Subsidiaries caused a non-monetary, technical default under the terms of the relevant indentures at December 31, 2009, causing a non-monetary, technical cross-default at December 31, 2009 under the terms of our Previous Credit Agreement. On March 30, 2010, we joined the relevant subsidiaries as guarantors under the relevant indentures (the “Joinder”). Further, on March 30, 2010, we entered into a third amendment (the “Third Amendment”) to the Previous Credit Agreement. The Third Amendment provided for, among other things: (i) a $100.0 million revolver commitment reduction (from $500.0 million to $400.0 million) under the bank facilities; (ii) a 1.0% floor with respect to any loan bearing interest at a rate determined by reference to the adjusted LIBOR (iii) certain additional collateral requirements; (iv) certain limitations on the use of proceeds from the revolving loan commitments; (v) the addition of Interactive One, LLC as a guarantor of the loans under the Previous Credit Agreement and under the notes governed by the Company’s 2011 Notes and 2013 Notes; (vi) the waiver of the technical cross-defaults that existed as of December 31, 2009 and through the date of the amendment arising due to the Non-Joinder of Certain Subsidiaries; and (vii) the payment of certain fees and expenses of the lenders in connection with their diligence work on the amendment.
 
Under the terms of the Previous Credit Agreement, upon any breach or default under either the 8% Senior Subordinated Notes due July 2011 or the 6% Senior Subordinated Notes due February 2013, the lenders could among other actions immediately terminate the Previous Credit Agreement and declare the loans then outstanding under the Previous Credit Agreement to be due and payable in whole immediately. Similarly, under the 8% Senior Subordinated Notes and the 6% Senior Subordinated Notes, a default under the terms of the Previous Credit Agreement would constitute an event of default, and the trustees or the holders of at least 25% in principal amount of the then outstanding notes (under either class) may declare the principal of such class of note and interest to be due and payable immediately.

As of each of June 30, 2010, July 1, 2010 and September 30, 2010, we were not in compliance with the terms of the Previous Credit Agreement. More specifically, (i) as of June 30, 2010, we failed to maintain a total leverage ratio of 7.25 to 1.00 (ii) as of each of July 1, 2010 and September 30, 2010, as a result of a step down of the total leverage ratio from no greater than 7.25 to 1.00 to no greater than 6.50 to 1.00 effective for the period July 1, 2010 to September 30, 2011, we also failed to maintain the requisite total leverage ratio and (iii) as of September 30, 2010, we failed to maintain a senior leverage ratio of 4.00 to 1.00. On July 15, 2010, the Company and its subsidiaries entered into a forbearance agreement (the “Forbearance Agreement”) with Wells Fargo Bank, N.A. (successor by merger to Wachovia Bank, National Association), as administrative agent (the “Agent”), and financial institutions constituting the majority of outstanding loans and commitments (the “Required Lenders”) under the Previous Credit Agreement, relating to the defaults and events of default existing as of June 30, 2010 and July 1, 2010. On August 13, 2010, we entered into an amendment to the  Forbearance Agreement (the “Forbearance Agreement Amendment”) that, among other things, extended the termination date of the Forbearance Agreement to September 10, 2010, unless terminated earlier by its terms, and provided additional forbearance related to the then anticipated default caused by an opinion of Ernst & Young LLP expressing substantial doubt about the Company’s ability to continue as a going concern as issued in connection with the restatement of our financial statements. Under the Forbearance Agreement and the Forbearance Agreement Amendment, the Agent and the Required Lenders maintained the right to deliver “payment blockage notices” to the trustees for the holders of the 2011 Notes and/or the 2013 Notes.
 
 
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On August 5, 2010, the Agent delivered a payment blockage notice to the Trustee under the Indenture governing our 2013 Notes. As a result, neither we nor any of our guaranteeing subsidiaries could make any payment or distribution of any kind or character in respect of obligations under the 2013 Notes, including the interest payment that was scheduled to be made on August 16, 2010. The 30-day grace period for the nonpayment of interest before such nonpayment constituted an event of default under the 2013 Notes Indenture expired on September 15, 2010. While the trustee or holders of at least 25% in principal amount of the then outstanding 2013 Notes could have declared the principal amount, and accrued and unpaid interest, on all outstanding 2013 Notes to be due and payable immediately as a result of such event of default, no such remedies were exercised as we continued to negotiate the terms of the amended exchange offer and a new support agreement with the members of the ad hoc group of holders of our 2011 Notes and 2013 Notes. The event of default under the 2013 Notes Indenture also constituted an event of default under the Previous Credit Agreement. While the Forbearance Agreement Amendment expired by its terms on September 10, 2010, we and the Agent continued to negotiate the terms of a credit facility amendment and the Agent and the lenders did not exercise additional remedies under the Previous Credit Agreement. The Amended and Restated Credit Agreement cured all of these issues.
 
Senior Subordinated Notes

Period after the November 2010 Refinancing Transactions and after the March 2011 Refinancing Transaction
  
On November 24, 2010, we issued $286.8 million of our 12½%/15% Senior Subordinated Notes due May 2016 in a private placement and exchanged and then cancelled approximately $97.0 million of $101.5 million in aggregate principal amount outstanding of our 2011 Notes and approximately $199.3 million of $200.0 million in aggregate principal amount outstanding of our 2013 Notes (the 2013 Notes together with the 2011 Notes, the “Prior Notes”). We entered into supplemental indentures in respect of each of the Prior Notes which waived any and all existing defaults and events of default that had arisen or may have arisen that may be waived and eliminated substantially all of the covenants in each indenture governing the Prior Notes, other than the covenants to pay principal and interest on the Prior Notes when due, and eliminated or modified the related events of default. Subsequently, all remaining outstanding 2011 Notes were repurchased pursuant to the indenture governing the 2011 Notes, effective as of December 24, 2010.
    
As of September 30, 2011, the Company had outstanding $747,000 of its 6% Senior Subordinated Notes due February 2013 and $305.9 million of our 12½%/15% Senior Subordinated Notes due May 2016. During the year ended December 31, 2010, pursuant to the debt exchange, the Company repurchased $101.5 million of the 8% Senior Subordinated Notes at par and $199.3 million of the 6% Senior Subordinated Notes at an average discount of 5.0%, and recorded a gain on the retirement of debt of approximately $6.6 million, net of the write-off of deferred financing costs of approximately $3.3 million. The 12½%/15% Senior Subordinated Notes due May 2016 had a carrying value of $305.9 million and a fair value of approximately $275.3 million as of September 30, 2011, and the 6% Senior Subordinated Notes due February 2013 had a carrying value of $747,000 and a fair value of approximately $710,000 as of September 30, 2011. The fair values were determined based on the trading value of the instruments as of the reporting date.
 
Interest payments under the terms of the 6% Senior Subordinated Notes are due in February and August. Based on the $747,000 principal balance of the 6% Senior Subordinated Notes outstanding on September 30, 2011, interest payments of $24,000 are payable each February and August through February 2013.

Interest on the 12½%/15% Senior Subordinated Notes will be payable in cash, or at our election, partially in cash and partially through the issuance of additional 12½%/15% Senior Subordinated Notes (a “PIK Election”) on a quarterly basis in arrears on February 15, May 15, August 15 and November 15, commencing on February 15, 2011. We may make a PIK Election only with respect to interest accruing up to but not including May 15, 2012, and with respect to interest accruing from and after May 15, 2012 such interest shall accrue at a rate of 12.5% per annum and shall be payable in cash.

Interest on the Exchange Notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest will accrue for each quarterly period at a rate of 12.5% per annum if the interest for such quarterly period is paid fully in cash. In the event of a PIK Election, including the PIK Election currently in effect, the interest paid in cash and the interest paid-in-kind by issuance of additional Exchange Notes (“PIK Notes”) will accrue for such quarterly period at 6.0% cash per annum and 9.0% PIK per annum, respectively.

In the absence of an election for any interest period, interest on the Exchange Notes shall be payable according to the election for the previous interest period, provided that interest accruing from and after May 15, 2012 shall accrue at a rate of 12.5% per annum and shall be payable in cash. A PIK Election is currently in effect and the Company anticipates it remaining in effect through May 15, 2012.
 
 
35

 
  
During the quarter ended September 30, 2011, the Company paid cash interest in the amount of approximately $4.5 million and issued approximately $6.7 million of additional 12½%/15% Senior Subordinated Notes in accordance with the PIK Election that is currently in effect. During the nine months ended September 30, 2011, the Company paid cash interest in the amount of approximately $12.8 million and issued approximately $19.1 million of additional 12½%/15% Senior Subordinated Notes in accordance with the PIK Election that is currently in effect. The Company currently anticipates that the PIK election will remain in effect through May 15, 2012.

The indentures governing the Company’s 12½%/15% Senior Subordinated Notes also contained covenants that restrict, among other things, the ability of the Company to incur additional debt, purchase common stock, make capital expenditures, make investments or other restricted payments, swap or sell assets, engage in transactions with related parties, secure non-senior debt with assets, or merge, consolidate or sell all or substantially all of its assets.

The Company conducts a portion of its business through its subsidiaries. Certain of the Company’s subsidiaries have fully and unconditionally guaranteed the Company’s 12½%/15% Senior Subordinated Notes, the 6% Senior Subordinated Notes and the Company’s obligations under the 2011 Credit Agreement.

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

On August 5, 2010, the Agent under our Previous Credit Agreement delivered a payment blockage notice to the Trustee under the Indenture governing our 2013 Notes. As a result, neither we nor any of our guaranteeing subsidiaries may make any payment or distribution of any kind or character in respect of obligations under the 2013 Notes, including the interest payment that was scheduled to be made on August 16, 2010. The 30-day grace period for the nonpayment of interest before such nonpayment constituted an event of default under the 2013 Notes Indenture expired on September 15, 2010. While the trustee or holders of at least 25% in principal amount of the then outstanding 2013 Notes could have declared the principal amount, and accrued and unpaid interest, on all outstanding 2013 Notes to be due and payable immediately as a result of such event of default, no such remedies were exercised as we continued to negotiate the terms of the amended exchange offer and a new support agreement with the members of the ad hoc group of holders of our 2011 and 2013 Notes. The event of default under the 2013 Notes Indenture also constituted an event of default under the Previous Credit Agreement. As of November 24, 2010, any and all existing defaults and events of default that had arisen or may have arisen were cured.
 
 
36

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

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

Senior Secured Notes

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

Note Payable

Reach Media issued a $1.0 million promissory note payable in November 2009 to a subsidiary of Citadel, which was acquired by Cumulus Media Inc. in September 2011. As noted above, the note was issued in connection with Reach Media reacquiring Citadel’s noncontrolling stock ownership in Reach Media as well as entering into a new sales representation agreement with Radio Networks, a subsidiary of Citadel. The note bears interest at 7.0% per annum, which is payable quarterly, and the entire principal amount is due on December 31, 2011.
 
 
37

 

Future scheduled minimum principal payments of debt as of September 30, 2011 are as follows:
   
Senior
Subordinated Notes
   
Credit
Facilities
   
Senior Secured
Notes
   
Note
Payable
 
   
(Unaudited)
 
   
(In thousands)
 
                         
October – December 2011
  $     $ 965     $     $ 1,000  
2012
          3,860              
2013
    747       3,860              
2014
          3,860              
2015
          3,860              
2016 and thereafter
    305,917       367,665       119,000        
Total Debt
  $ 306,664     $ 384,070     $ 119,000     $ 1,000  

9. INCOME TAXES:

The effective tax rate from continuing operations for the nine months ended September 30, 2011 was 73.3%, when combined with the recognition of $882,000 of tax expense for certain discrete items. This rate is principally due to an estimated annual effective tax rate of 73.4% for Radio One, which has a full valuation allowance for its deferred tax assets (“DTAs”). This rate is blended with an estimated annual effective tax rate of 33.4% for Reach Media, which does not have a valuation allowance.

For the nine months ended September 30, 2010, the effective tax rate was 94.7%. This rate is based on the blending of an estimated annual effective tax rate of 136.5% for Radio One, which has a full valuation allowance for its deferred tax assets (“DTAs”), with an estimated annual effective tax rate of 36.3% for Reach Media, which does not have a valuation allowance.  The Radio One annual effective tax rate calculation for 2010 is due primarily to the increase in the deferred tax liability (“DTL”) of approximately $3.8 million associated with the amortization for tax purposes of certain of the Company’s radio broadcasting licenses. A tax expense of $759,000 was recognized for Reach Media and $83,000 was recognized for discrete items for Radio One, which resulted in a consolidated net tax expense of $4.8 million for the nine months ended September 30, 2010.

The Company maintains a full valuation allowance on its deferred tax assets, except as it relates to the deferred tax assets attributable to Reach Media. As part of its assessment of realizability, the Company also determined that it was not appropriate under generally accepted accounting principles to benefit its DTAs based on DTLs related to indefinite-lived intangibles, consisting principally of certain of the Company’s radio broadcasting licenses, which cannot be scheduled to reverse in the same period. Because the DTL in this case would not reverse until some future indefinite period when the intangibles are either sold or impaired, any resulting temporary differences cannot be considered a source of future taxable income to support realization of the DTAs. For the nine months ended September 30, 2011, an additional valuation allowance for the current year anticipated increase to DTAs related to net operating loss carryforwards from the amortization of indefinite-lived intangibles was included in the annual effective tax rate calculation.

The Company recorded a non-cash pre-tax gain of approximately $146.9 million resulting from its increased ownership and controlling interest in TV One during the nine months ended September 30, 2011. The consolidation of TV One included an adjustment to the DTL related to the partnership investment in TV One. The Company evaluated the DTL and concluded that a portion will not reverse within the requisite period since it relates to indefinite-lived assets and cannot be offset against the DTAs. This item generated a tax expense of approximately $41.9 million for the nine months ended September 30, 2011 and contributed 37.4% to the effective tax rate. The DTL on the indefinite-lived intangibles of Radio One generated a tax expense of approximately $38.2 million for the nine months ended September 30, 2011 and contributed 34.2% to the effective tax rate. The remaining portion of the tax expense of approximately $1.8 million for the nine months ended September 30, 2011 consisted principally of discrete items of $882,000, certain state taxes for Radio One which are based on gross receipts of $342,000 and the provision for Reach Media of $586,000.

The Company recognizes the impact of a tax position in the financial statements if it is more likely than not that the position would be sustained on audit based on the technical merits of the position. The nature of any uncertainties pertaining to our income tax position is primarily due to various state tax positions. As of September 30, 2011, we had approximately $5.8 million in unrecognized tax benefits. Accrued interest and penalties related to unrecognized tax benefits is recognized as a component of tax expense. During the nine months ended September 30, 2011, the Company recorded an expense for interest and penalties of $40,000. As of September 30, 2011, the Company had a liability of $305,000 for unrecognized tax benefits for interest and penalties. The Company estimates the possible change in unrecognized tax benefits prior to September 30, 2012 which could range from $0 to a reduction of $16,000, due to expiring statutes.
 
 
38

 

10. STOCKHOLDERS’ EQUITY:

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

Stock Repurchase Program

In April 2011, the Company’s board of directors authorized a repurchase of shares of the Company’s Class A and Class D common stock (the “2011 Repurchase Authorization”). Under the 2011 Repurchase Authorization, the Company is authorized, but is not obligated, to repurchase up to $15 million worth of its Class A and/or Class D common stock prior to April 13, 2013. Repurchases will be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws and regulations. The timing and extent of any repurchases will depend upon prevailing market conditions, the trading price of the Company’s Class A and/or Class D common stock and other factors, and subject to restrictions under applicable law. The Company expects to implement this stock repurchase program in a manner consistent with market conditions and the interests of the stockholders, including maximizing stockholder value. For the three months ended September 30, 2011, the Company repurchased 29,316 shares of Class A common stock in the amount of approximately $41,000 at an average price of $1.39 per share and 706,093 shares of Class D common stock in the amount of approximately $965,000 at an average price of $1.37 per share. The Company continues to have an open stock repurchase authorization with respect to its Class A and D stock and continued to make purchases subsequent to September 30, 2011 (See Note 15 – Subsequent Events).

Stock Option and Restricted Stock Grant Plan

Under the Company’s 1999 Stock Option and Restricted Stock Grant Plan (“Plan”), the Company had the authority to issue up to 10,816,198 shares of Class D common stock and 1,408,099 shares of Class A common stock. The Plan expired March 10, 2009. The options previously issued under this plan are exercisable in installments determined by the compensation committee of the Company’s board of directors at the time of grant. These options expire as determined by the compensation committee, but no later than ten years from the date of the grant. The Company uses an average life for all option awards. The Company settles stock options upon exercise by issuing stock.

A new stock option and restricted stock plan (the “2009 Stock Plan”) was approved by the stockholders at the Company’s annual meeting on December 16, 2009. The terms of the 2009 Stock Plan are substantially similar to the prior Plan. The Company has the authority to issue up to 8,250,000 shares of Class D common stock under the 2009 Stock Plan. As of September 30, 2011, 4,820,717 shares of Class D common stock were available for grant under the 2009 Stock Plan.

The compensation committee and the non-executive members of the Board of Directors have approved a long-term incentive plan (the “2009 LTIP”) for certain “key” employees of the Company. The purpose of the 2009 LTIP is to retain and incent these “key” employees in light of sacrifices they have made as a result of the cost savings initiatives in response to economic conditions. These sacrifices included not receiving performance-based bonuses in 2008 and salary reductions and shorter work weeks in 2009 in order to provide expense savings and financial flexibility to the Company. The 2009 LTIP is comprised of 3,250,000 shares (the “LTIP Shares”) of the 2009 Stock Plan’s 8,250,000 shares of Class D common stock. Awards of the LTIP Shares were granted in the form of restricted stock and allocated among 31 employees of the Company, including the named executive officers. The named executive officers were allocated LTIP Shares as follows: (i) Chief Executive Officer (“CEO”) (1.0 million shares); (ii) the Chairperson (300,000 shares); (iii) the Chief Financial Officer (“CFO”) (225,000 shares); (iv) the Chief Administrative Officer (“CAO”) (225,000 shares); and (v) the President of the Radio Division (“PRD”) (130,000 shares). The remaining 1,370,000 shares were allocated among 26 other “key” employees. All awards will vest in three installments. The awards were granted effective January 5, 2010, the first installment of 33% vested on June 5, 2010 and the second installment vested on June 5, 2011. The remaining installment will vest on June 5, 2012. Pursuant to the terms of the 2009 Stock Plan, subject to the Company’s insider trading policy, a portion of each recipient’s vested shares may be sold into the open market for tax purposes on or about the vesting dates.
 
 
39

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

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

Stock-based compensation expense for the three months ended September 30, 2011 and 2010 was approximately $760,000 and $908,000 respectively and for the nine months ended September 30, 2011 and 2010 was approximately $2.9 million and $4.9 million, respectively.

The Company did not grant any stock options during the three months ended September 30, 2011 and 2010, respectively. The Company granted 181,520 and 39,430 stock options during the nine months ended September 30, 2011 and 2010, respectively.

 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Average risk-free interest rate
                2.23 %     3.28 %
Expected dividend yield
                0.00 %     0.00 %
Expected lives
             
6.00 Years
   
6.25 Years
 
Expected volatility
                120.7 %     111.3 %

Transactions and other information relating to stock options for the nine months ended September 30, 2011 are summarized below:

   
Number of
Options
   
Weighted-
Average
Exercise
Price
   
Weighted-
Average
Remaining
Contractual
Term (In
Years)
   
Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2010
    4,999,000     $ 9.40              
Grants
    182,000     $ 1.38              
Exercised
                       
Forfeited/cancelled/expired
    (52,000 )     15.81              
Balance as of September 30, 2011
    5,129,000     $ 9.05       4.51       11,500  
Vested and expected to vest at September 30, 2011
    5,116,000     $ 9.07       4.49       11,000  
Unvested at September 30, 2011
    128,000     $ 1.75       9.36       4,600  
Exercisable at September 30, 2011
    5,001,000     $ 9.24       4.38       6,900  
 
 
40

 

The aggregate intrinsic value in the table above represents the difference between the Company’s stock closing price on the last day of trading during the nine months ended September 30, 2011 and the exercise price, multiplied by the number of shares that would have been received by the holders of in-the-money options had all the option holders exercised their options on September 30, 2011. This amount changes based on the fair market value of the Company’s stock. There were no options exercised during the three and nine months ended September 30, 2011 and 2010. There were no options that vested during the three months ended September 30, 2011 and 2010. The number of options that vested during the nine months ended September 30, 2011 and 2010 were 725,794 and 693,156, respectively.

As of September 30, 2011, approximately $139,000 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 10.7 months. The stock option weighted-average fair value per share was $3.94 at September 30, 2011.

The Company granted 60,000 shares of restricted stock during the three months ended September 30, 2011 and did not issue any shares of restricted stock during the three months ended September 30, 2010. The Company granted 60,000 and 3,250,000 shares of restricted stock during the nine months ended September 30, 2011 and 2010, respectively.

Transactions and other information relating to restricted stock grants for the nine months ended September 30, 2011 are summarized below:

   
Shares
   
Average
Fair Value
at Grant
Date
 
Unvested at December 31, 2010
    2,310,000     $ 2.92  
Grants
    60,000     $ 1.19  
Vested
    (1,221,000 )   $ 2.85  
Forfeited/cancelled/expired
    (12,000 )   $ 3.17  
Unvested at September 30, 2011
    1,137,000     $ 2.91  

The restricted stock grants were included in the Company’s outstanding share numbers on the effective date of grant. As of September 30, 2011, approximately $2.3 million of total unrecognized compensation cost related to restricted stock grants is expected to be recognized over the next 9.3 months.

11. SEGMENT INFORMATION:

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

The Radio Broadcasting segment consists of all broadcast and Reach Media results of operations. The Internet segment includes the results of our online business, including the operations of Interactive One and CCI. The Cable Television segment consists of TV One results of operations. Corporate/Eliminations/Other represents financial activity associated with our corporate staff and offices, intercompany activity between the three segments and activity associated with a small film venture.

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

The accounting policies described in the summary of significant accounting policies in Note 1 – Organization and Summary of Significant Accounting Policies are applied consistently across the three segments.
 
 
41

 

Detailed segment data for the three and nine month periods ended September 30, 2011 and 2010 is presented in the following tables:

   
Three Months Ended September 30,
 
   
2011
   
2010
 
   
(Unaudited)
 
   
(In thousands)
 
Net Revenue:
           
Radio Broadcasting
  $ 72,160     $ 71,998  
Internet
    4,884       4,382  
Cable Television
    29,545        
Corporate/Eliminations/Other
    (2,144 )     (1,950 )
Consolidated
  $ 104,445     $ 74,430  
                 
Operating Expenses (excluding depreciation, amortization and impairment charges and including stock-based compensation):
               
Radio Broadcasting
  $ 45,607     $ 44,283  
Internet
    5,086       5,663  
Cable Television
    23,303        
Corporate/Eliminations/Other
    5,825       2,548  
Consolidated
  $ 79,821     $ 52,494  
                 
Depreciation and Amortization:
               
Radio Broadcasting
  $ 2,645     $ 3,116  
Internet
    838       1,222  
Cable Television
    7,779        
Corporate/Eliminations/Other
    242       272  
Consolidated
  $ 11,504     $ 4,610  
                 
Operating income (loss):
               
Radio Broadcasting
  $ 23,908     $ 24,599  
Internet
    (1,040 )     (2,503 )
Cable Television
    (1,537 )      
Corporate/Eliminations/Other
    (8,211 )     (4,770 )
Consolidated
  $ 13,120     $ 17,326  

   
September 30,
2011
   
December 31, 2010
 
   
(Unaudited)
       
   
(In thousands)
 
Total Assets:
           
Radio Broadcasting
  $ 886,793     $ 894,160  
Internet
    32,968       33,698  
Cable Television
    575,334        
Corporate/Eliminations/Other
    25,926       71,354  
Consolidated
  $ 1,521,021     $ 999,212  
 
 
42

 

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
   
(Unaudited)
 
   
(In thousands)
 
Net Revenue:
           
Radio Broadcasting
  $ 205,080     $ 201,953  
Internet
    12,705       12,330  
Cable Television
    54,711        
Corporate/Eliminations/Other
    (5,980 )     (5,726 )
Consolidated
  $ 266,516     $ 208,557  
                 
Operating Expenses (excluding depreciation, amortization and impairment charges and including stock-based compensation):
               
Radio Broadcasting
  $ 136,062     $ 128,874  
Internet
    14,983       17,801  
Cable Television
    40,805        
Corporate/Eliminations/Other
    14,353       12,714  
Consolidated
  $ 206,203     $ 159,389  
                 
Depreciation and Amortization:
               
Radio Broadcasting
  $ 8,052     $ 9,452  
Internet
    2,875       3,853  
Cable Television
    14,208        
Corporate/Eliminations/Other
    690       851  
Consolidated
  $ 25,825     $ 14,156  
                 
Operating income (loss):
               
Radio Broadcasting
  $ 60,966     $ 63,627  
Internet
    (5,153 )     (9,324 )
Cable Television
    (302 )      
Corporate/Eliminations/Other
    (21,023 )     (19,291 )
Consolidated
  $ 34,488     $ 35,012  
 
 
43

 

12. RELATED PARTY TRANSACTIONS:

The Company’s CEO and Chairperson own a music company called Music One, Inc. (“Music One”). The Company sometimes engages in promoting the recorded music product of Music One. Based on the cross-promotional value received by the Company, we believe that the provision of such promotion is fair. During the three and nine months ended September 30, 2011 and 2010, Radio One paid $0 and $5,000 and $0 and $6,000, respectively, to or on behalf of Music One, primarily for market talent event appearances, travel reimbursement and sponsorships. For the three and nine months ended September 30, 2011 and 2010, the Company provided no advertising services to Music One. There were no cash, trade or no-charge orders placed by Music One for the three and nine months ended September 30, 2011 and 2010.

The office space and administrative support transactions between Radio One and Music One are conducted at cost and all expenses associated with the transactions are passed through at actual costs. Costs associated with office space on behalf of Music One are calculated based on square footage used by Music One, multiplied by Radio One’s actual per square foot lease costs for the appropriate time period. Administrative services are calculated based on the approximate hours provided by each Radio One employee to Music One, multiplied by such employee’s applicable hourly rate and related benefits allocation. Advertising spots are priced at an average unit rate. Based on the cross-promotional nature of the activities provided by Music One and received by the Company, we believe that these methodologies of charging average unit rates or passing through the actual costs incurred are fair and reflect terms no more favorable than terms generally available to a third-party.
 
 
44

 

13. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS:
            
The Company conducts a portion of its business through its subsidiaries. All of the Company’s Subsidiary Guarantors have fully and unconditionally guaranteed the Company’s 6% Senior Subordinated Notes due February 2013, the 12½%/15% Senior Subordinated Notes due May 2016, and the Company’s obligations under the 2011 Credit Agreement.

Set forth below are consolidated balance sheets for the Company and the Subsidiary Guarantors as of September 30, 2011 and December 31, 2010, and related consolidated statements of operations and cash flows for each of the three and nine months ended September 30, 2011 and 2010. The equity method of accounting has been used by the Company to report its investments in subsidiaries. Separate financial statements for the Subsidiary Guarantors are not presented based on management’s determination that they do not provide additional information that is material to investors.

RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 30, 2011

   
Combined
                   
   
Guarantor
   
Radio
             
   
Subsidiaries
   
One, Inc.
   
Eliminations
   
Consolidated
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
(In thousands)
 
                         
NET REVENUE
  $ 35,403     $ 69,042     $     $ 104,445  
OPERATING EXPENSES:
                               
Programming and technical
    7,995       24,747             32,742  
Selling, general and administrative, including stock-based compensation
    14,531       21,504             36,035  
Corporate selling, general and administrative, including stock-based compensation
          11,044             11,044  
Depreciation and amortization
    1,930       9,574             11,504  
Total operating expenses
    24,456       66,869             91,325  
Operating income
    10,947       2,173             13, 120  
INTEREST INCOME
          103             103  
INTEREST EXPENSE
          22,973             22,973  
OTHER (INCOME) EXPENSE, net
          (19 )           (19 )
Income (loss) before benefit from income taxes, noncontrolling interests in income of subsidiaries and discontinued operations
    10,947       (20,678 )           (9,731 )
BENEFIT FROM INCOME TAXES
          (2,325 )           (2,325 )
Net income (loss) before equity in income of subsidiaries and discontinued operations
    10,947       (18,353 )           (7,406 )
EQUITY IN INCOME OF SUBSIDIARIES
          10,959       (10,959 )      
Net income (loss) from continuing operations
    10,947       (7,394 )     (10,959 )     (7,406 )
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
    12       (1 )           11  
CONSOLIDATED NET INCOME (LOSS)
    10,959       (7,395 )     (10,959 )     (7,395 )
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
          2,483             2,483  
CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ 10,959     $ (9,878 )   $ (10,959 )   $ (9,878 )
 
 
45

 

RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 30, 2010

   
Combined
                   
   
Guarantor
   
Radio
             
   
Subsidiaries
   
One, Inc.
   
Eliminations
   
Consolidated
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
(As Adjusted - See Note 1)
 
   
(In thousands)
 
                         
NET REVENUE
  $ 35,479     $ 38,951     $     $ 74,430  
OPERATING EXPENSES:
                               
Programming and technical
    8,582       10,180             18,762  
Selling, general and administrative, including stock-based compensation
    15,283       12,204             27,487  
Corporate selling, general and administrative, including stock-based compensation
          6,245             6,245  
Depreciation and amortization
    2,421       2,189             4,610  
Total operating expenses
    26,286       30,818             57,104  
Operating income
    9,193       8,133             17,326  
INTEREST INCOME
          28             28  
INTEREST EXPENSE
          12,122             12,122  
EQUITY IN INCOME OF AFFILIATED COMPANY
          1,784             1,784  
OTHER (INCOME) EXPENSE, net
    (1 )     51             50  
Income (loss) before provision for income taxes, noncontrolling interests in income of subsidiaries and discontinued operations
    9,194       (2,228 )           6,966  
PROVISION FOR INCOME TAXES
          4,760             4,760  
Net income (loss) before equity in income of subsidiaries and discontinued operations
    9,194       (6,988 )           2,206  
EQUITY IN INCOME OF SUBSIDIARIES
          9,068       (9,068 )      
Net income (loss) from continuing operations
    9,194       2,080       (9,068 )     2,206  
LOSS FROM DISCONTINUED OPERATIONS, net of tax
    (126 )     (32 )           (158 )
CONSOLIDATED NET INCOME (LOSS)
    9,068       2,048       (9,068 )     2,048  
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
          1,010             1,010  
CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ 9,068     $ 1,038     $ (9,068 )   $ 1,038  
 
 
46

 

RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2011

   
Combined
Guarantor
Subsidiaries
   
Radio One, Inc.
   
Eliminations
   
Consolidated
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
(In thousands)
 
                         
NET REVENUE
  $ 97,241     $ 169,275     $     $ 266,516  
OPERATING EXPENSES:
                               
Programming and technical
    24,191       58,100             82,291  
Selling, general and administrative, including stock-based compensation
    40,419       55,917             96,336  
Corporate selling, general and administrative, including stock-based compensation
          27,576             27,576  
Depreciation and amortization
    6,140       19,685             25,825  
Total operating expenses
    70,750       161,278             232,028  
Operating income
    26,491       7,997             34,488  
INTEREST INCOME
          120             120  
INTEREST EXPENSE
          65,222             65,222  
GAIN ON INVESTMENT IN AFFILIATED COMPANY
          146,879             146,879  
EQUITY IN INCOME OF AFFILIATED COMPANY
          3,287             3,287  
LOSS ON RETIREMENT OF DEBT
          7,743             7,743  
OTHER EXPENSE, NET
          3             3  
Income before provision for income taxes, noncontrolling interests in income of subsidiaries and discontinued operations
    26,491       85,315             111,806  
PROVISION FOR INCOME TAXES
          81,905             81,905  
Net income before equity in income of subsidiaries and discontinued operations
    26,491       3,410             29,901  
EQUITY IN INCOME OF SUBSIDIARIES
          26,421       (26,421 )      
Net income (loss) from continuing operations
    26,491       29,831       (26,421 )     29,901  
(LOSS) INCOME FROM DISCONTINUED OPERATIONS, net of tax
    (70 )     (1 )           (71 )
CONSOLIDATED NET INCOME (LOSS)
    26,421       29,830       (26,421 )     29,830  
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
          5,403             5,403  
CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ 26,421     $ 24,427     $ (26,421 )   $ 24,427  
 
 
47

 

RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2010

   
Combined
Guarantor
Subsidiaries
   
Radio One, Inc.
   
Eliminations
   
Consolidated
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
(As Adjusted - See Note 1)
 
   
(In thousands)
 
                         
NET REVENUE
  $ 99,804     $ 108,753     $     $ 208,557  
OPERATING EXPENSES:
                               
Programming and technical
    25,666       30,926             56,592  
Selling, general and administrative, including stock-based compensation
    44,145       34,071             78,216  
Corporate selling, general and administrative, including stock-based compensation
          24,581             24,581  
Depreciation and amortization
    7,560       6,596             14,156  
Total operating expenses
    77,371       96,174             173,545  
Operating income
    22,433       12,579             35,012  
INTEREST INCOME
          95             95  
INTEREST EXPENSE
          31,059             31,059  
EQUITY IN INCOME OF AFFILIATED COMPANY
          3,832             3,832  
OTHER (INCOME) EXPENSE, NET
    (115 )     3,049             2,934  
Income (loss) before provision for income taxes, noncontrolling interests in income of subsidiaries and discontinued operations
    22,548       (17,602 )           4,946  
PROVISION FOR INCOME TAXES
          4,685             4,685  
Net income (loss) before equity in income of subsidiaries and discontinued operations
    22,548       (22,287 )           261  
EQUITY IN INCOME OF SUBSIDIARIES
          22,433       (22,433 )      
Net income (loss) from continuing operations
    22,548       146       (22,433 )     261  
LOSS FROM DISCONTINUED OPERATIONS, net of tax
    (115 )     (201 )           (316 )
CONSOLIDATED NET INCOME (LOSS)
    22,433       (55 )     (22,433 )     (55 )
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
          1,427             1,427  
CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ 22,433     $ (1,482 )   $ (22,433 )   $ (1,482 )
 
 
48

 

RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
As of September 30, 2011

   
Combined
                   
   
Guarantor
   
Radio One,
             
   
Subsidiaries
   
Inc.
   
Eliminations
   
Consolidated
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
(In thousands)
 
                         
ASSETS
 
CURRENT ASSETS:
                       
Cash and cash equivalents
  $ 132     $ 33,039     $     $ 33,171  
Short-term investments
          903             903  
Trade accounts receivable, net of allowance for doubtful accounts
    31,225       55,059             86,284  
Prepaid expenses and other current assets
    996       6,220             7,216  
Current portion of content assets
          31,288             31,288  
Current assets from discontinued operations
    (24 )     129             105  
Total current assets
    32,329       126,638             158,967  
PREPAID PROGRAMMING AND DEPOSITS
          4,140             4,140  
PROPERTY AND EQUIPMENT, net
    17,458       15,287             32,745  
INTANGIBLE ASSETS, net
    566,215       712,041             1,278,256  
CONTENT ASSETS, net
          33,024             33,024  
LONG-TERM INVESTMENTS
          9,096             9,096  
INVESTMENT IN SUBSIDIARIES
          605,064       (605,064 )      
OTHER ASSETS
    271       3,029             3,300  
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS
    1,493                   1,493  
Total assets
  $ 617,766     $ 1,508,319     $ (605,064 )   $ 1,521,021  
                                 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
 
   
CURRENT LIABILITIES:
                               
Accounts payable
  $ 1,002     $ 6,280     $     $ 7,282  
Accrued interest
          6,479             6,479  
Accrued compensation and related benefits
    1,876       9,136             11,012  
Current portion of content payables
          22,764             22,764  
Income taxes payable
          2,274             2,274  
Other current liabilities
    8,354       2,074             10,428  
Current portion of long-term debt
          4,860             4,860  
Current liabilities from discontinued operations
    57       30             87  
Total current liabilities
    11,289       53,897             65,186  
LONG-TERM DEBT, net of current portion and original issue discount
          798,795             798,795  
CONTENT PAYABLES, net of current portion
          16,645             16,645  
OTHER LONG-TERM LIABILITIES
    1,382       18,169             19,551  
DEFERRED TAX LIABILITIES
          169,307             169,307  
NON-CURRENT LIABILITIES FROM DISCONTINUED OPERATIONS
    31                   31  
Total liabilities
    12,702       1,056,813             1,069,515  
                                 
REDEEMABLE NONCONTROLLING INTERESTS
          29,711             29,711  
                                 
STOCKHOLDERS’ EQUITY:
                               
Common stock
          51             51  
Accumulated other comprehensive income
          (164 )           (164 )
Additional paid-in capital
    206,959       990,656       (206,959 )     990,656  
Retained earnings (accumulated deficit)
    398,105       (774,618 )     (398,105 )     (774,618 )
Total stockholders’ equity
    605,064       215,925       (605,064 )     215,925  
Noncontrolling interest
          205,870             205,870  
Total Equity
    605,064       421,795       (605,064 )     421,795  
Total liabilities, redeemable noncontrolling interests and equity
  $ 617,766     $ 1,508,319     $ (605,064 )   $ 1,521,021  
 
 
49

 

RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
As of December 31, 2010

   
Combined
                   
   
Guarantor
   
Radio One,
             
   
Subsidiaries
   
Inc.
   
Eliminations
   
Consolidated
 
   
(As Adjusted - See Note 1)
 
   
(In thousands)
 
   
ASSETS
 
CURRENT ASSETS:
                       
Cash and cash equivalents
  $ 1,043     $ 8,149     $     $ 9,192  
Trade accounts receivable, net of allowance for doubtful accounts
    30,427       28,000             58,427  
Prepaid expenses and other current assets
    1,323       7,050             8,373  
Current assets from discontinued operations
    31       128             159  
Total current assets
    32,824       43,327             76,151  
PROPERTY AND EQUIPMENT, net
    19,392       13,649             33,041  
INTANGIBLE ASSETS, net
    567,600       271,345             838,945  
INVESTMENT IN SUBSIDIARIES
          609,199       (609,199 )      
INVESTMENT IN AFFILIATED COMPANY
          47,470             47,470  
OTHER ASSETS
    497       1,484             1,981  
NON-CURRENT ASSESTS FROM DISCONTINUED OPERATIONS
    1,624                   1,624  
Total assets
  $ 621,937     $ 986,474     $ (609,199 )   $ 999,212  
                                 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS' EQUITY
 
                                 
CURRENT LIABILITIES:
                               
Accounts payable
  $ 411     $ 2,598     $     $ 3,009  
Accrued interest
          4,558             4,558  
Accrued compensation and related benefits
    2,332       8,389             10,721  
Income taxes payable
          1,671             1,671  
Other current liabilities
    8,383       3,321             11,704  
Current portion of long-term debt
          18,402             18,402  
Current liabilities from discontinued operations
    44       (10 )           34  
Total current liabilities
    11,170       38,929             50,099  
LONG-TERM DEBT, net of current portion
          623,820             623,820  
OTHER LONG-TERM LIABILITIES
    1,531       9,363             10,894  
DEFERRED TAX LIABILITIES
          89,392             89,392  
NON-CURRENT LIABILITIES FROM DISCONTINUED OPERATIONS
    37                   37  
Total liabilities
    12,738       761,504             774,242  
                                 
REDEEMABLE NONCONTROLLING INTERESTS
          30,635             30,635  
                                 
STOCKHOLDERS’ EQUITY:
                               
Common stock
          54             54  
Accumulated comprehensive income adjustments
          (1,424 )           (1,424 )
Additional paid-in capital
    237,515       994,750       (237,515 )     994,750  
Retained earnings (accumulated deficit)
    371,684       (799,045 )     (371,684 )     (799,045 )
Total stockholders’ equity
    609,199       194,335       (609,199 )     194,335  
Total liabilities, redeemable noncontrolling interests and stockholders' equity
  $ 621,937     $ 986,474     $ (609,199 )   $ 999,212  
 
 
50

 
 
RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2011

   
Combined
                   
   
Guarantor
   
Radio
             
   
Subsidiaries
   
One, Inc.
   
Eliminations
   
Consolidated
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
(In thousands)
 
       
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Consolidated net income (loss)
  $ 26,421     $ 29,830     $ (26,421 )   $ 29,830  
Adjustments to reconcile net income (loss) to net cash from operating activities:
                               
Depreciation and amortization
    6,140       19,685             25,825  
Amortization of debt financing costs
          3,040             3,040  
Amortization of content assets
          20,564             20,564  
Deferred income taxes
          79,937             79,937  
Gain on investment in affiliated company
          (146,879 )           (146,879 )
Equity in income of affiliated company
          (3,287 )           (3,287 )
Stock-based compensation and other non-cash compensation
          2,895             2,895  
Non-cash interest
          19,123             19,123  
Loss on retirement of debt
          7,743             7,743  
Effect of change in operating assets and liabilities, net of assets acquired:
                               
Trade accounts receivable, net
    (798 )     (27,059 )           (27,857 )
Prepaid expenses and other current assets
    327       830             1,157  
Other assets
    226       3,176             3,402  
Accounts payable
    591       3,680             4,271  
Due to corporate/from subsidiaries
    (33,184 )     33,184              
Accrued interest
          1,921             1,921  
Accrued compensation and related benefits
    (456 )     748             292  
Income taxes payable
          603             603  
Other liabilities
    (178 )     6,419             6,241  
Net cash flows provided by operating activities from discontinued operations
          290             290  
Net cash flows (used in) provided by operating activities
    (911 )     56,443       (26,421 )     29,111  
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Purchase of property and equipment
          (5,410 )           (5,410 )
Net cash and investments acquired in connection with TV One consolidation
          65,245             65,245  
Investment in subsidiaries
          (26,421 )     26,421        
Purchase of other intangible assets
          (12,761 )           (12,761 )
Net cash flows provided by investing activities
          20,653       26,421       47,074  
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Proceeds from credit facility
          378,280             378,280  
Repayment of credit facility
          (355,611 )           (355,611 )
Debt refinancing and modification costs
          (6,197 )           (6,197 )
Repurchase of noncontrolling interest
          (54,595 )           (54,595 )
Proceeds from noncontrolling interest member
          2,776             2,776  
Payment of dividends to noncontrolling interest shareholders of Reach Media
          (933 )           (933 )
Payment of dividends to noncontrolling interest members of TV One
          (7,410           (7,410
Repurchase of common stock
          (8,516 )           (8,516 )
Net cash flows used in financing activities
          (52,206 )           (52,206 )
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (911 )     24,890             23,979  
CASH AND CASH EQUIVALENTS, beginning of period
    1,043       8,149             9,192  
CASH AND CASH EQUIVALENTS, end of period
  $ 132     $ 33,039     $     $ 33,171  
 
 
51

 

RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2010

   
Combined
                   
   
Guarantor
   
Radio
             
   
Subsidiaries
   
One, Inc.
   
Eliminations
   
Consolidated
 
   
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
 
   
(As Adjusted - See Note 1)
 
   
(In thousands)
 
       
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Consolidated net income (loss)
  $ 22,433     $ (55 )   $ (22,433 )   $ (55 )
Adjustments to reconcile net income (loss) to net cash from operating activities:
                               
Depreciation and amortization
    7,560       6,596             14,156  
Amortization of debt financing costs
          1,694             1,694  
Write off of debt financing costs
          3,055             3,055  
Deferred income taxes
          2,611             2,611  
Equity in income of affiliated company
          (3,832 )           (3,832 )
Stock-based compensation and other non-cash compensation
          4,877             4,877  
Effect of change in operating assets and liabilities, net of assets acquired:
                               
Trade accounts receivable, net
    (2,517 )     (11,291 )           (13,808 )
Prepaid expenses and other current assets
    (171 )     374             203  
Other assets
    182       6,684             6,866  
Accounts payable
    (285 )     (1,541 )           (1,826 )
Due to corporate/from subsidiaries
    (22,982 )     22,982              
Accrued interest
          856             856  
Accrued compensation and related benefits
    259       1,575             1,834  
Income taxes payable
          911             911  
Other liabilities
    111       (470 )           (359 )
Net cash flows used in operating activities from discontinued operations
    (64 )     (344 )           (408 )
Net cash flows provided by (used in) operating activities
    4,526       34,682       (22,433 )     16,775  
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Purchase of property and equipment
    (2,608 )     (643 )           (3,251 )
Investment in subsidiaries
          (22,433 )     22,433        
Purchase of other intangible assets
          (341 )           (341 )
Net cash flows (used in) provided by investing activities
    (2,608 )     (23,417 )     22,433       (3,592 )
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Proceeds from credit facility
          12,000             12,000  
Repayment of credit facility
          (12,396 )           (12,396 )
Debt refinancing and modification costs
          (11,179 )           (11,179 )
Net cash flows used in financing activities
          (11,575 )           (11,575 )
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    1,918       (310 )           1,608  
CASH AND CASH EQUIVALENTS, beginning of period
    127       19,836             19,963  
CASH AND CASH EQUIVALENTS, end of period
  $ 2,045     $ 19,526     $     $ 21,571  

 
52

 

14.  COMMITMENTS AND CONTINGENCIES:

Royalty Agreements
 
Effective December 31, 2009, our radio music license agreements with the two largest performance rights organizations, American Society of Composers, Authors and Publishers (“ASCAP”) and Broadcast Music, Inc. (“BMI”) expired. The Radio Music License Committee (“RMLC”), which negotiates music licensing fees for most of the radio industry with ASCAP and BMI, has reached an agreement with these organizations on a temporary fee schedule that reflects a provisional discount of 7.0% against 2009 fee levels. The temporary fee reductions became effective in January 2010. Absent an agreement on long-term fees between the RMLC and ASCAP and BMI, the U.S. District Court in New York has the authority to make an interim and permanent fee ruling for the new contract period. In May 2010 and June 2010, the U.S. District Court’s judge charged with determining the licenses fees ruled to further reduce interim fees paid to ASCAP and BMI, respectively, down approximately another 11.0% from the previous temporary fees negotiated with the RMLC.
 
The Company has entered into other fixed and variable fee music license agreements with other performance rights organizations, which expire as late as December 2015. In connection with these agreements,  the Company incurred expenses of approximately $3.1 million and $9.4 million for the three and nine month periods ended September 30, 2011, respectively, and approximately $2.8 million and $8.7 million, respectively, for the three and nine month periods ended September 30, 2010.

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

Off-Balance Sheet Arrangements
 
As of September 30, 2011, we had four standby letters of credit totaling approximately $1.2 million in connection with our annual insurance policy renewals and real estate leases.  In addition, Reach Media had a letter of credit of $500,000 outstanding as of September 30, 2011.

Noncontrolling Interest Shareholders’ Put Rights
 
Beginning on February 28, 2012, the noncontrolling interest shareholders of Reach Media have an annual right to require Reach Media to purchase all or a portion of their shares at the then current fair market value for such shares. Beginning in 2012, this annual right can be exercised for a 30-day period beginning February 28 of each year. The purchase price for such shares may be paid in cash and/or registered Class D Common Stock of Radio One, at the discretion of Radio One. As a result, our ability to fund business operations, new acquisitions or new business initiatives could be limited.

15.  SUBSEQUENT EVENTS:
 
On October 20, 2011, we entered into a local marketing agreement (“LMA”) with WGPR, Inc. (“WGPR”). Pursuant to the LMA, beginning as of October 24, 2011, we are permitted to broadcast programs produced, owned or acquired by Radio One on WGPR’s Detroit radio station, WGPR-FM. We are required to pay certain operating costs of WGPR-FM, and in exchange we will retain all revenues from the sale of the advertising within the programming we provide. The LMA continues until December 31, 2014 and we have two successive 1-year options for a fourth year and a fifth year that would extend the term until December 31, 2015 and December 31, 2016, respectively.  Under the terms of the LMA, WGPR has also agreed to grant us certain rights of first negotiation and first refusal, with respect to the sale of WGPR-FM by WGPR and with respect to any potential time brokerage agreement for WGPR-FM covering any time period subsequent to the term of the LMA.

Since October 1, 2011 and through November 14, 2011, the Company repurchased 332,908 shares of Class D common stock in the amount of $417,996 at an average price of $1.26 per share and 23,450 shares of Class A common stock in the amount of $29,766 at an average price of $1.27 per share. As of November 14, 2011, the Company had approximately $6.0 million in capacity available under its share repurchase program.

On November 14, 2011, KROI-FM/Houston began its programming as a full service news station.

 
53

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following information should be read in conjunction with “Selected Financial Data” and the Consolidated Financial Statements and Notes thereto included elsewhere in this report and the audited financial statements and Management’s Discussion and Analysis contained in our Annual Report on Form 10-K  for the year ended December 31, 2010.

Introduction

Revenue

We primarily derive revenue from the sale of advertising time and program sponsorships to local and national advertisers on our radio stations. Advertising revenue is affected primarily by the advertising rates our radio stations are able to charge, as well as the overall demand for radio advertising time in a market. These rates are largely based upon a radio station’s audience share in the demographic groups targeted by advertisers, the number of radio stations in the related market, and the supply of, and demand for, radio advertising time. Advertising rates are generally highest during morning and afternoon commuting hours.

During the three months ended September 30, 2011 and 2010, approximately 57.1% and 79.2%, respectively, of our net revenue was generated from the sale of advertising in our core radio business, excluding Reach Media. During the nine months ended September 30, 2011 and 2010, approximately 63.9% and 82.7%, respectively, of our net revenue was generated from the sale of advertising in our core radio business, excluding Reach Media. During the three and nine months ended September 30, 2011, approximately 43.5% and 46.7%, respectively, of our total net revenue was generated from local advertising and approximately 32.7% and 32.8%, respectively, was generated from national advertising, including network advertising. In comparison, during the three and nine months ended September 30, 2010, approximately 54.6% and 56.8%, respectively, of our net revenue was generated from local advertising and approximately 35.5% and 35.8%, respectively, was generated from national advertising, including network advertising. National advertising also includes advertising revenue generated from our internet segments. The balance of revenue was generated from tower rental income, ticket sales and revenue related to our sponsored events, management fees and other revenue.
   
In the broadcasting industry, radio stations and television stations often utilize trade or barter agreements to reduce cash expenses by exchanging advertising time for goods or services. In order to maximize cash revenue for our spot inventory, we closely monitor the use of trade and barter agreements.
 
Interactive One currently generates the majority of the Company’s internet revenue, and derives its revenue principally from advertising services, including diversity recruiting advertising. Advertising services include the sale of banner and sponsorship advertisements. Advertising revenue is recognized either as impressions (the number of times advertisements appear in viewed pages) are delivered, when “click through” purchases or leads are reported, or ratably over the contract period, where applicable. Interactive One has a diversity recruiting relationship with Monster, Inc. (“Monster”). Monster posts job listings and advertising on Interactive One websites and Interactive One earns revenue for displaying the images on its websites.
 
TV One generates the Company’s cable television revenue, and derives its revenue principally from advertising and affiliate revenue.  Advertising revenue is derived from the sale of television air time to advertisers and is recognized when the advertisements are run.  TV One also receives affiliate fees and records revenue during the term of various affiliation agreements at levels appropriate for the most recent subscriber counts reported by the applicable affiliate.
 
 
54

 

Expenses
 
Our significant radio broadcast expenses are: (i) employee salaries and commissions; (ii) programming expenses; (iii) marketing and promotional expenses; (iv) rental of premises for office facilities and studios; (v) rental of transmission tower space; and (vi) music license royalty fees. We strive to control these expenses by centralizing certain functions such as finance, accounting, legal, human resources and management information systems and, in certain markets, the programming management function. We also use our multiple stations, market presence and purchasing power to negotiate favorable rates with certain vendors and national representative selling agencies.
 
We generally incur marketing and promotional expenses to increase our radio and cable television audiences. However, because Arbitron reports ratings either monthly or quarterly, depending on the particular market, any changed ratings and the effect on advertising revenue tends to lag behind both the reporting of the ratings and the incurrence of advertising and promotional expenditures.
 
In addition to salaries and commissions, major expenses for our internet business include membership traffic acquisition costs, software product design, post application software development and maintenance, database and server support costs, the help desk function, data center expenses connected with internet service provider (“ISP”) hosting services and other internet content delivery expenses.

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

Measurement of Performance

We monitor and evaluate the growth and operational performance of our business using net income and the following key metrics:
 
(a) Net revenue:  The performance of an individual radio station or group of radio stations in a particular market is customarily measured by its ability to generate net revenue. Net revenue consists of gross revenue, net of local and national agency and outside sales representative commissions consistent with industry practice. Net revenue is recognized in the period in which advertisements are broadcast. Net revenue also includes advertising aired in exchange for goods and services, which is recorded at fair value, revenue from sponsored events and other revenue. Net revenue is recognized for our online business as impressions are delivered, as “click throughs” are reported or ratably over contract periods, where applicable.  Net revenue is recognized for our cable television business as advertisements are run, and during the term of the affiliation agreements at levels appropriate for the most recent subscriber counts reported by the affiliate.
 
(b) Station operating income*:  Net income (loss) before depreciation and amortization, income taxes, interest income, interest expense, equity in income of affiliated company, noncontrolling interests in income (loss) of subsidiaries, gain/loss on retirement of debt, other expense, corporate expenses, stock-based compensation expenses, impairment of long-lived assets and gain or loss from discontinued operations, net of tax, is commonly referred to in our industry as station operating income. Station operating income is not a measure of financial performance under generally accepted accounting principles in the United States (“GAAP”). Nevertheless, 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. Station operating income provides helpful information about our results of operations, apart from expenses associated with our fixed and long-lived intangible assets, income taxes, investments, impairment charges, debt financings and retirements, corporate overhead, stock-based compensation and discontinued operations. Station operating income is frequently used as a basis 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 represent operating loss or cash flow from operating activities, as those terms are defined under GAAP, and should not be considered as an alternative to those measurements as an indicator of our performance.
 
(c) Station operating income margin*:  Station operating income margin represents station operating income as a percentage of net revenue. Station operating income margin is not a measure of financial performance under GAAP. Nevertheless, we believe that station operating income margin is a useful measure of our performance because it provides helpful information about our profitability as a percentage of our net revenue.

* Station operating income and margin includes results from all three segments (Radio Broadcasting, Internet and Cable Television).

 
55

 

 Summary of Performance

The tables below provide a summary of our performance based on the metrics described above:
 
  
 
Three Months Ended 
September 30,
   
Nine Months Ended 
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
         
(As Adjusted – See Note 1
of our
Consolidated Financial
Statements)
         
(As Adjusted – See Note 1
of our
Consolidated Financial
Statements)
 
  
 
(In thousands, except margin data)
 
                         
Net revenue
  $ 104,445     $ 74,430     $ 266,516     $ 208,557  
Station operating income
    35,825       28,332       88,422       74,582  
Station operating income margin
    34.3 %     38.1 %     33.2 %     35.8 %
Consolidated net (loss) income attributable to common stockholders
  $ (9,878 )   $ 1,038     $ 24,427     $ (1,482 )
 
The reconciliation of net income (loss) to station operating income is as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
  
 
2010
   
2011
  
 
2010
 
     
  
 
(As Adjusted
– See Note 1
of our
Consolidated
Financial
Statements)
     
  
 
(As Adjusted
– See Note 1
of our
Consolidated
Financial
Statements)
 
   
(In thousands)
 
Consolidated net (loss) income attributable to common stockholders
 
$
(9,878
)
 
$
1,038
   
$
24,427
   
$
(1,482
)
Add back non-station operating income items included in consolidated net income (loss):
                               
Interest income
   
(103
)
   
(28
)
   
(120
)
   
(95
)
Interest expense
   
22,973
     
12,122
     
65,222
     
31,059
 
(Benefit from) provision for income taxes
   
(2,325
)    
4,760
     
81,905
     
4,685
 
Corporate selling, general and administrative, excluding stock-based compensation
   
10,442
     
5,488
     
25,214
     
20,537
 
Stock-based compensation
   
759
     
908
     
2,895
     
4,877
 
Equity in income of affiliated company
   
     
(1,784
)
   
(3,287
)
   
(3,832
)
Loss on retirement of debt
   
     
     
7,743
     
 
Gain on investment in affiliated company
   
     
     
(146,879
)
   
 
Other (income) expense, net
   
(19
)
   
50
     
3
     
2,934
 
Depreciation and amortization
   
11,504
     
4,610
     
25,825
     
14,156
 
Noncontrolling interests in income of subsidiaries
   
2,483
     
1,010
     
5,403
     
1,427
 
(Income) loss from discontinued operations, net of tax
   
(11
)
   
158
     
71
     
316
 
Station operating income
 
$
35,825
   
$
28,332
   
$
88,422
   
$
74,582
 

 
56

 

RADIO ONE, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
  
The following table summarizes our historical consolidated results of operations:

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010 (In thousands)

   
Three Months Ended September 30,
             
   
2011
   
2010
   
Increase/(Decrease)
 
   
(Unaudited)
             
         
(As Adjusted
– See Note 1
of our
Consolidated Financial
Statements)
             
                         
Statements of Operations:
                       
Net revenue
  $ 104,445     $ 74,430     $ 30,015       40.3 %
Operating expenses:
                               
Programming and technical, excluding stock-based compensation
    32,742       18,762       13,980       74.5  
Selling, general and administrative, excluding stock-based compensation
    35,878       27,336       8,542       31.2  
Corporate selling, general and administrative, excluding stock-based compensation
    10,442       5,488       4,954       90.3  
Stock-based compensation
    759       908       (149 )     (16.4 )
Depreciation and amortization
    11,504       4,610       6,894       149.5  
Total operating expenses
    91,325       57,104       34,221       59.9  
Operating income
    13,120       17,326       (4,206 )     (24.3 )
Interest income
    103       28       75       267.9  
Interest expense
    22,973       12,122       10,851       89.5  
Equity in income of affiliated company
          1,784       (1,784 )     (100.0 )
Other (income) expense, net
    (19 )     50       (69 )     (138.0 )
(Loss) income before (benefit from) provision for income taxes, noncontrolling interests in income of subsidiaries and discontinued operations
    (9,731 )     6,966       (16,697 )     (239.7 )
(Benefit from) provision for income taxes
    (2,325 )     4,760       (7,085 )     (148.8 )
Net (loss) income from continuing operations
    (7,406 )     2,206       (9,612 )     (435.7 )
Income (loss) from discontinued operations, net of tax
    11       (158 )     169       107.0  
Consolidated net (loss) income
    (7,395 )     2,048       (9,443 )     (461.1 )
Net income attributable to noncontrolling interests
    2,483       1,010       1,473       145.8  
Net (loss) income attributable to common stockholders
  $ (9,878 )   $ 1,038     $ (10,916 )     (1,051.6 )%

 
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 Net revenue

Three Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
   
 
 
$ 104,445     $ 74,430     $ 30,015       40.3 %

During the three months ended September 30, 2011, we recognized approximately $104.4 million in net revenue compared to approximately $74.4 million during the same period in 2010. These amounts are net of agency and outside sales representative commissions, which were approximately $8.4 million during the three months ended September 30, 2011, compared to approximately $8.3 million for the comparable period in 2010. We began to consolidate the results of TV One during the quarter ended June 30, 2011 and recognized approximately $29.5 million of revenue from our new cable television segment during the three months ended September 30, 2011.  Our radio stations’ net revenues increased 0.3%, and based on reports prepared by the independent accounting firm Miller, Kaplan, Arase & Co., LLP (“Miller Kaplan”), the radio markets we operate in grew 1.7% in total revenues, led primarily by growth in digital revenues, while national revenue and local revenue in our radio markets were relatively flat for the quarter. Net revenue growth for our radio stations was led by our Atlanta, Charlotte, Cincinnati, Raleigh and St. Louis clusters, while our Columbus, Dallas, Indianapolis and Washington D.C. markets experienced the most significant declines. Excluding Reach Media, net revenue for our radio division increased 1.4%. Reach Media net revenue declined 4.7% for the three months ended September 30, 2011 compared to the same period in 2010. Net revenue for our internet business increased 11.5% for the three months ended September 30, 2011 compared to the same period in 2010.
 
Operating Expenses

Programming and technical, excluding stock-based compensation

Three Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 32,742     $ 18,762     $ 13,980       74.5 %
 
Programming and technical expenses include expenses associated with on-air talent and the management and maintenance of the systems, tower facilities, and studios used in the creation, distribution and broadcast of programming content on our radio stations. Programming and technical expenses for radio also include expenses associated with our programming research activities and music royalties. For our internet business, programming and technical expenses include software product design, post-application software development and maintenance, database and server support costs, the help desk function, data center expenses connected with ISP hosting services and other internet content delivery expenses. For our cable television segment, programming and technical expenses include expenses associated with the technical, programming, production, and content management.  The increase for the three months ended September 30, 2011 compared to the same period in 2010 is primarily related to the consolidation of TV One as approximately $13.7 million of the total of these expenses incurred during the three months ended September 30, 2011 was incurred by TV One. Approximately $11.2 million of this amount relates to content amortization. Excluding the impact of consolidating TV One’s operating results, our programming and technical expenses increased by 1.6% for the quarter compared to the same period in 2010.

Selling, general and administrative, excluding stock-based compensation

Three Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 35,878     $ 27,336     $ 8,542       31.2 %
 
Selling, general and administrative expenses include expenses associated with our sales departments, offices and facilities and personnel (outside of our corporate headquarters), marketing and promotional expenses, special events and sponsorships and back office expenses. Expenses to secure ratings data for our radio stations and visitors’ data for our websites are also included in selling, general and administrative expenses. In addition, selling, general and administrative expenses for radio and internet include expenses related to the advertising traffic (scheduling and insertion) functions. Selling, general and administrative expenses also include membership traffic acquisition costs for our online business. Our cable television segment accounted for approximately $8.2 million of the increase due to the impact of consolidating TV One results.  Excluding the impact of consolidating TV One’s operating results, our selling, general and administrative expenses increased by 1.1% for the quarter compared to the same period in 2010.
 
 
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Corporate selling, general and administrative, excluding stock-based compensation

Three Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 10,442     $ 5,488     $ 4,954       90.3 %

Corporate expenses consist of expenses associated with our corporate headquarters and facilities, including personnel. Our cable television segment accounted for approximately $1.4 million of the increase due to the impact of consolidating TV One results.  In addition, there was a non-cash increase of approximately $2.9 million in compensation expense for the Chief Executive Officer in connection with the valuation of the potential payment for the TV One award element in his employment Agreement.

Stock-based compensation

Three Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 759     $ 908     $ (149 )     (16.4 )%
 
Stock-based compensation expense is due to a long-term incentive plan whereby officers and certain key employees were granted a total of 3,250,000 shares of restricted stock in January of 2010. Stock-based compensation requires measurement of compensation costs for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The decrease in stock-based compensation expense was due to one-time accelerated vesting being recorded for the three months ended September 30, 2010 versus a more normalized vesting for the same period in 2011.

Depreciation and amortization

Three Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 11,504     $ 4,610     $ 6,894       149.5 %
 
The increase in depreciation and amortization expense for the three months ended September 30, 2011 was due primarily to additional depreciation and amortization expense of approximately $7.8 million resulting from fixed and intangible assets recorded as part of the consolidation of TV One.  This increased expense was offset by the completion of amortization for certain Interactive One intangible assets and the completion of depreciation and amortization for certain assets.

Interest expense

Three Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 22,973     $ 12,122     $ 10,851       89.5 %
 
The increase in interest expense for the three months ended September 30, 2011 was due to our entry into the 2011 Credit Agreement on March 31, 2011 and Amended Exchange Offer on November 24, 2010, as well as the consolidation of TV One, including its $119.0 million senior secured notes due in 2016 (the “TV One Notes”).  Higher interest rates associated with the 2011 Credit Agreement and Amended Exchange Offer were in effect for the three months ended September 30, 2011 compared to the same period in 2010.  The overall effective rate of borrowing for the three months ended September 30, 2011 increased approximately 4.0% compared to the three months ended September 30, 2010.  Approximately $3.0 million of the increased interest expense relates to the TV One Notes.

 
59

 

Equity in income of affiliated company

Three Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$     $ 1,784     $ (1,784 )     (100.0 )%
 
Equity in income of affiliated company primarily reflects our estimated equity in the net income of TV One. The decrease to equity in income of affiliated company for the three months ended September 30, 2011 was due to the consolidation of TV One during the quarter ended June 30, 2011.  Previously, the Company’s share of the net income was driven by TV One’s current capital structure and the Company’s percentage ownership of the equity securities of TV One. Beginning on April 14, 2011, the Company began to account for TV One on a consolidated basis.

(Benefit from) provision for income taxes

Three Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ (2,325 )   $ 4,760     $ (7,085 )     (148.8 )%

For the three months ended September 30, 2011 and 2010, the benefit from income taxes was approximately $2.3 million compared to a provision for income taxes of approximately $4.8 million for the same period in 2010. A tax benefit of approximately $2.6 million was recognized for the partnership interest in TV One. A tax benefit of $301,000 was recognized for the change in the deferred tax liability (“DTL”) related to indefinite lived intangibles and a state tax expense of $16,000.  The remaining tax consists of discrete items of $72,000, and the tax expense for Reach Media of $508,000.  The 2010 provision for income taxes was due to an increase in the DTL for indefinite-lived intangibles.

The Company is estimating an annual effective tax rate of approximately 73.3% for 2011. The Company continues to maintain a full valuation allowance for entities other than Reach Media for its deferred tax assets (“DTAs”), including the DTA associated with its net operating loss carryforward. As a result, pre-tax book income for the entities other than Reach Media does not generate any tax expense. Instead, the tax expense for these entities is based on the change in the DTL associated with certain indefinite-lived intangibles, which increases as tax amortization on these intangibles is recognized and decreases as impairments for book purposes are recorded on these assets. In addition to the DTL on these intangibles, a portion of the DTL for the partnership interest in TV One cannot be offset by the DTAs from the net operating loss carryforward.
 
 
60

 

Income (loss) from discontinued operations, net of tax

Three Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
   
 
 
$ 11     $ (158 )   $ 169       107.0 %
  
Included in the income (loss) from discontinued operations, net of tax, are the results from operations for  radio station clusters sold or made the subject of an LMA. Discontinued operations also include the results from operations for Giant Magazine, which ceased publication in December 2009. The loss from discontinued operations, net of tax, for the three months ended September 30, 2010 resulted from legal and litigation expenses incurred as a result of ongoing legal activity for certain station sales. The income from discontinued operations, net of tax, for the three months ended September 30, 2011 resulted primarily from the remaining Boston radio station entering into an LMA in June 2011. The income (loss) from discontinued operations, net of tax, also includes a tax provision of zero for the three months ended September 30, 2011 and 2010.

Noncontrolling interests in income of subsidiaries

Three Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
   
 
 
$ 2,483     $ 1,010     $ 1,473       145.8 %
  
 The increase in noncontrolling interests in income of subsidiaries is due primarily to the impact of consolidating TV One’s operating results during the three months ended September 30, 2011.  This amount is partially offset by lower net income generated by Reach Media for the three months ended September 30, 2011 compared to the same period in 2010.

Other Data
 
Station operating income
 
Station operating income increased to approximately $35.8 million for the three months ended September 30, 2011 compared to approximately $28.3 million for the comparable period in 2010, an increase of $7.5 million or 26.4%. This increase was primarily due to the impact of consolidating TV One results, as TV One generated approximately $7.6 million of station operating income during the quarter ended September 30, 2011.

Station operating income margin
 
Station operating income margin decreased to 34.3% for the three months ended September 30, 2011 from 38.1% for the comparable period in 2010. The margin decrease was primarily attributable to the impact of consolidating TV One results as described above.

 
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RADIO ONE, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
 
The following table summarizes our historical consolidated results of operations:

Nine Months Ended September 30, 2011, Compared to Nine Months Ended September 30, 2010 (In thousands)

   
Nine Months Ended
September 30,
       
   
2011
   
2010
   
Increase/(Decrease)
 
   
(Unaudited)
       
         
(As Adjusted
– See Note 1
of  our
Consolidated
Financial
Statements)
       
   
 
   
 
   
 
   
 
 
Statements of Operations:
                       
Net revenue
  $ 266,516     $ 208,557     $ 57,959       27.8 %
Operating expenses:
                               
Programming and technical, excluding stock-based compensation
    82,291       56,592       25,699       45.4  
Selling, general and administrative, excluding stock-based compensation
    95,803       77,383       18,420       23.8  
Corporate selling, general and administrative, excluding stock-based compensation
    25,214       20,537       4,677       22.8  
Stock-based compensation
    2,895       4,877       (1,982 )     (40.6 )
Depreciation and amortization
    25,825       14,156       11,669       82.4  
Total operating expenses
    232,028       173,545       58,483       33.7  
Operating income
    34,488       35,012       (524 )     (1.5 )
Interest income
    120       95       25       26.3  
Interest expense
    65,222       31,059       34,163       110.0  
Loss on retirement of debt
    7,743             7,743       100.0  
Gain on investment in affiliated company
    146,879             146,879       100.0  
Equity in income of affiliated company
    3,287       3,832       (545 )     (14.2 )
Other expense, net
    3       2,934       (2,931 )     (99.9 )
Income before provision for income taxes, noncontrolling interests in income of subsidiaries and discontinued operations
    111,806       4,946       106,860       2,160.5  
Provision for income taxes
    81,905       4,685       77,220       1,648.2  
Net income from continuing operations
    29,901       261       29,640       11,356.3  
Loss from discontinued operations, net of tax
    (71 )     (316 )     (245 )     (77.5 )
Consolidated net income (loss)
    29,830       (55 )     29,885       54,336.4  
Net income attributable to noncontrolling interests
    5,403       1,427       3,976       278.6  
Net income (loss) attributable to common stockholders
  $ 24,427     $ (1,482 )   $ 25,909       1,748.2 %

 
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Net revenue

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 266,516     $ 208,557     $ 57,959       27.8 %

During the nine months ended September 30, 2011, we recognized approximately $266.5 million in net revenue compared to approximately $208.6 million during the same period in 2010. These amounts are net of agency and outside sales representative commissions, which were approximately $23.9 million during the nine months ended 2011, compared to approximately $23.4 million during the same period in 2010. We began to consolidate the results of TV One during the quarter ended June 30, 2011 and recognized approximately $54.7 million of revenue from our cable television segment during the nine months ended September 30, 2011.  Our radio stations’ net revenue declined 1.9% for the nine months ended September 30, 2011, and based on reports prepared by Miller Kaplan, the radio markets we operate in increased 2.5% in total revenues, led primarily by growth in local revenues of 2.1%. Our Atlanta, Charlotte, Cincinnati, Raleigh and St. Louis markets experienced the most significant net revenue growth, while our Baltimore, Columbus, Indianapolis and Dallas markets experienced the most significant declines. Reach Media net revenue increased 16.6% for the nine months ended September 30, 2011 compared to the same period in 2010 due primarily from assuming operational and financial control and responsibility for the ongoing cruise event, the “Tom Joyner Fantastic Voyage.” The “Tom Joyner Fantastic Voyage” took place in March 2011 and generated approximately $6.6 million of revenue for Reach Media. Net revenue for our internet business increased 3.0% for the nine months ended September 30, 2011 compared to the same period in 2010.

Operating Expenses

Programming and technical, excluding stock-based compensation

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 82,291     $ 56,592     $ 25,699       45.4 %
 
Programming and technical expenses include expenses associated with on-air talent and the management and maintenance of the systems, tower facilities, and studios used in the creation, distribution and broadcast of programming content on our radio stations. Programming and technical expenses for radio also include expenses associated with our programming research activities and music royalties. For our internet business, programming and technical expenses include software product design, post-application software development and maintenance, database and server support costs, the help desk function, data center expenses connected with ISP hosting services and other internet content delivery expenses. For our cable television segment, programming and technical expenses include expenses associated with the technical, programming, production, and content management.  The increase for the nine months ended September 30, 2011 compared to the same period in 2010 is primarily related to consolidating the results of TV One, as approximately $25.5 million of our consolidated programming and technical operating expenses were incurred by TV One. Approximately $20.6 million of this amount relates to content amortization. Excluding the impact of consolidating TV One’s operating results, our programming and technical expenses increased by 0.4% for the nine months ended September 30, 2011 compared to the same period in 2010.

 
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Selling, general and administrative, excluding stock-based compensation

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
   
 
 
$ 95,803     $ 77,383     $ 18,420       23.8 %
 
Selling, general and administrative expenses include expenses associated with our sales departments, offices and facilities and personnel (outside of our corporate headquarters), marketing and promotional expenses, special events and sponsorships and back office expenses. Expenses to secure ratings data for our radio stations and visitors’ data for our websites are also included in selling, general and administrative expenses. In addition, selling, general and administrative expenses for radio and internet include expenses related to the advertising traffic (scheduling and insertion) functions. Selling, general and administrative expenses also include membership traffic acquisition costs for our online business. Our cable television segment accounted for approximately $14.0 million of the increase due to the impact of consolidating the results of TV One.  Excluding the impact of consolidating the results of TV One, our selling, general and administrative expenses increased by 5.6%.  The remaining increase in expense for the nine months ended September 30, 2011 compared to the same period in 2010 is due to Reach Media events spending associated with Reach assuming operational and financial control and responsibility for the “Tom Joyner Fantastic Voyage,” held in March 2011. Reach Media incurred over $5.0 million of selling, general and administrative expenses associated with the “Tom Joyner Fantastic Voyage,” held in March 2011.

Stock-based compensation

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 2,895     $ 4,877     $ (1,982 )     (40.6 )%
 
Stock-based compensation expense is due to a long-term incentive plan whereby officers and certain key employees were granted a total of 3,250,000 shares of restricted stock in January of 2010. Stock-based compensation requires measurement of compensation costs for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The decrease in stock-based compensation expense was due to accelerated vesting being recorded for the nine months ended September 30, 2010 versus a more normalized vesting for the same period in 2011.

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

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 25,214     $ 20,537     $ 4,677       22.8 %
 
Corporate expenses consist of expenses associated with our corporate headquarters and facilities, including personnel. Our cable television segment accounted for approximately $1.3 million of the increase due to the impact of consolidating TV One results.  In addition, there was a non-cash increase of approximately $2.5 million in compensation expense for the Chief Executive Officer in connection with the valuation of the potential payment for the TV One award element in his employment Agreement.

Depreciation and amortization

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 25,825     $ 14,156     $ 11,669       82.4 %
 
The increase in depreciation and amortization expense for the nine months ended September 30, 2011 was due primarily to additional depreciation and amortization expense of approximately $14.2 million resulting from fixed and intangible assets recorded as part of the consolidation of TV One.  This increased expense was offset by the completion of amortization for certain Interactive One intangible assets and the completion of depreciation and amortization for certain assets.

 
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Interest expense

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 65,222     $ 31,059     $ 34,163       110.0 %
 
The increase in interest expense for the nine months ended September 30, 2011 was due to our entry into the 2011 Credit Agreement on March 31, 2011 and Amended Exchange Offer on November 24, 2010, as well as the consolidation of TV One, including the TV One Notes.  Higher interest rates associated with the 2011 Credit Agreement and Amended Exchange Offer were in effect for the nine months ended September 30, 2011 compared to the same period in 2010.  The overall effective rate of borrowing for the nine months ended September 30, 2011 increased approximately 4.5% compared to the six months ended September 30, 2010. Approximately $6.2 million of the increased interest expense relates to the TV One Notes.

Loss on retirement of debt

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 7,743     $     $ 7,743       100.0 %
 
The loss on retirement of debt for the nine months ended September 30, 2011 was due to a charge related to the retirement of the 2011 Credit Facility on March 31, 2011.  This amount includes a write-off of approximately $6.5 million of capitalized debt financing costs associated with the Amended and Restated Credit Facility and a write-off of approximately $1.2 million associated with the termination of the Company’s interest rate swap agreement.

Gain on investment in affiliated company

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 146,879     $     $ 146,879       100.0 %

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

Equity in income of affiliated company

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 3,287     $ 3,832     $ (545 )     (14.2 )%
 
Equity in income of affiliated company primarily reflects our estimated equity in the net income of TV One. The decrease to equity in income of affiliated company for the nine months ended September 30, 2011 was due to the consolidation of TV One during the quarter ended June 30, 2011.  Previously, the Company’s share of the net income was driven by TV One’s current capital structure and the Company’s percentage ownership of the equity securities of TV One.  Beginning on April 14, 2011, the Company began to account for TV One on a consolidated basis.

Other expense, net

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 3     $ 2,934     $ (2,931 )     (99.9 )%

The other expense for the nine months ended September 30, 2010 was principally due to the write off of a portion of deferred financing costs due to a reduction in the revolver commitment and the write off of certain deferred financing costs related to the Abandoned Second Lien Notes. There were costs associated with lowering the revolver commitment under the Company’s bank facilities from $500.0 million to $400.0 million, resulting from entering into a third amendment to our Credit Agreement in March 2010. In addition, there were costs written off in connection with the Company’s offering of the Abandoned Second Lien Notes.

 
65

 

Provision for income taxes

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 81,905     $ 4,685     $ 77,220       1,648.2 %

For the nine months ended September 30, 2011, the provision for income taxes was approximately $81.9 million compared to a provision of approximately $4.7 million for the same period in 2010.  Approximately $41.9 million of the increase is due to the deferred tax liability for the partnership interest in TV One and $34.5 million of the increase is due to the increase in the deferred tax liability for indefinite-lived intangibles related to radio broadcasting. The remaining increase consists of $799,000 for discrete items and $262,000 for state taxes which were offset by a decrease of $173,000 for Reach Media.

For the nine months ended September 30, 2011 a tax expense of approximately $41.9 million was recognized for the partnership interest in TV One and approximately $38.2 million was recognized for the change in the DTL on indefinite-lived intangibles.   State taxes on Radio One were $342,000 and discrete items were $882,000.  The tax expense for Reach Media was $586,000.

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

For 2010, no tax expense was recognized for the partnership interest in TV One as there was no significant change in the basis difference during that period.  The tax expense for 2010 for indefinite-lived intangibles was approximately $3.8 million and state taxes were $81,000.  The tax expense for 2010 for Reach Media was $759,000 and discrete items were $83,000.

The consolidated effective tax rate for the nine months ended September 30, 2011 and 2010 was 73.3% and 94.7%, respectively.
 
Loss from discontinued operations, net of tax

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ (71 )   $ (316 )   $ (245 )     (77.5 )%
  
 Included in the loss from discontinued operations, net of tax, are the results from operations for  radio station clusters sold or made the subject of an LMA. Discontinued operations also include the results from operations for Giant Magazine, which ceased publication in December 2009. The loss incurred for the nine months ended September 30, 2010 was due to legal and litigation spending from ongoing litigation for certain previous station sales. This spending was partially offset by the assumption of Giant Magazines subscriber liability by another publisher. The loss from discontinued operations, net of tax, for the nine months ended September 30, 2011 resulted primarily from our remaining station in our Boston market entering into an LMA. The loss from discontinued operations, net of tax, also includes a provision for zero for the nine months ended September 30, 2011 and 2010.

 
66

 

Noncontrolling interests in income of subsidiaries

Nine Months Ended September 30,
   
Increase/(Decrease)
 
2011
   
2010
       
$ 5,403     $ 1,427     $ 3,976       278.6 %

The increase in noncontrolling interests in income of subsidiaries is due primarily to the impact of consolidating TV One’s operating results during the nine months ended September 30, 2011.  The increase also relates to greater net income by Reach Media during the nine months ended September 30, 2011 compared to the same period in 2010.

 Other Data

Station operating income
 
Station operating income increased to approximately $88.4 million for the nine months ended September 30, 2011 compared to approximately $74.6 million for the comparable period in 2010, an increase of $13.8 million or 18.6%. This increase was primarily due to consolidating TV One results, as TV One generated approximately $15.2 million of station operating income during the nine months ended September 30, 2011.

Station operating income margin
 
Station operating income margin decreased to 33.2% for the nine months ended September 30, 2011 from 35.8% for the comparable period in 2010. The margin decrease was primarily attributable to the impact of consolidating TV One results as described above.

LIQUIDITY AND CAPITAL RESOURCES

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

Credit Facilities

March 2011 Refinancing Transaction
 
On March 31, 2011, the Company entered into a new senior secured credit facility (the “2011 Credit Agreement”) with a syndicate of banks, and simultaneously borrowed $386.0 million to retire all outstanding obligations under the Company’s previous amended and restated credit agreement and to fund our obligation with respect to the TV One capital call.  The total amount available under the 2011 Credit Agreement is $411.0 million, consisting of a $386.0 term loan facility that matures on March 31, 2016 and a $25.0 million revolving loan facility that matures on March 31, 2015. Borrowings under the credit facilities are subject to compliance with certain covenants including, but not limited to, certain financial covenants. Proceeds from the credit facilities can be used for working capital, capital expenditures made in the ordinary course of business, its common stock repurchase program, permitted direct and indirect investments and other lawful corporate purposes.
 
 
67

 

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

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

(b)   maintaining a senior secured leverage ratio of no greater than:
 
§
5.25 to 1.00 on June 30, 2011;
 
§
5.00 to 1.00 on September 30, 2011 and December 31, 2011;
 
§
4.75 to 1.00 on March 31, 2012;
 
§
4.50 to 1.00 on June 30, 2012, September 30, 2012 and December 31, 2012;
 
§
4.00 to 1.00 on March 31, 2013 and the last day of each fiscal Quarter through September 30, 2013;
 
§
3.75 to 1.00 on December 31, 2013 and the last day of each fiscal quarter through September 30, 2014;
 
§
3.25 to 1.00 on December 31, 2014 and the last day of each fiscal quarter through September 30, 2015; and
 
§
2.75 to 1.00 on December 31, 2015 and the last day of each fiscal quarter thereafter.

(c)   maintaining a total leverage ratio of no greater than:
 
§
9.25 to 1.00 on June 30, 2011 and the last day of each fiscal quarter through December 31, 2011;
 
§
9.00 to 1.00 on March 31, 2012;
 
§
8.75 to 1.00 on June 30, 2012;
 
§
8.50 to 1.00 on September 30, 2012 and December 31, 2012;
 
§
8.00 to 1.00 on March 31, 2013 and the last day of each fiscal quarter through September 30, 2013;
 
§
7.50 to 1.00 on December 31, 2013 and the last day of each fiscal quarter through September 30, 2014;
 
§
6.50 to 1.00 on December 31, 2014 and the last day of each fiscal quarter through September 30, 2015; and
 
§
6.00 to 1.00 on December 31, 2015 and the last day of each fiscal quarter thereafter.

 (d) limitations on:
 
§
liens;
 
§
sale of assets;
 
§
payment of dividends; and
 
§
mergers.
 
As of September 30, 2011, approximate ratios calculated in accordance with the 2011 Credit Agreement, are as follows:

  
  
As of 
September 
30, 2011
  
Covenant 
Limit
  
Excess 
Coverage
  
               
Pro Forma Last Twelve Months Covenant EBITDA (In millions)
 
$
81.1
         
                 
Pro Forma Last Twelve Months Interest Expense (In millions)
 
$
47.6
         
                 
Senior Debt (In millions)
 
$
372.4
         
Total Debt (In millions)
 
$
679.0
         
                 
Senior Secured Leverage 
               
Senior Secured Debt / Covenant EBITDA 
   
4.59
5.00
0.41
                 
Total Leverage
               
Total Debt / Covenant EBITDA
   
8.37
x
   9.25
x
   0.88
x
         
    
 
    
 
Interest Coverage
       
    
 
    
 
Covenant EBITDA / Interest Expense
   
1.71
x
   1.25
x
   0.46
x
         
    
 
    
 
EBITDA - Earnings before interest, taxes, depreciation and amortization 
       
    
 
    
 

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

As of September 30, 2011, the Company was in compliance with all of its financial covenants under the 2011 Credit Agreement.  Measurement of interest coverage, senior secured leverage, and total leverage ratios began on June 30, 2011.
 
Under the terms of the 2011 Credit Agreement, interest on base rate loans is payable quarterly and interest on LIBOR loans is payable monthly or quarterly. The base rate is equal to the greater of the prime rate, the Federal Funds Effective Rate plus 0.50% and the LIBOR Rate for a one-month period plus 1.00%.  The applicable margin on the 2011 Credit Agreement is between (i) 4.50% and 5.50% on the revolving portion of the facility and (ii) 5.00% (with a base rate floor of 2.5% per annum) and 6.00% (with a LIBOR floor of 1.5% per annum) on the term portion of the facility. Commencing on June 30, 2011, quarterly installments of 0.25%, or $965,000, of the principal balance on the $386.0 million term loan are payable on the last day of each March, June, September and December.
 
As of September 30, 2011, the Company had approximately $23.8 million of borrowing capacity under its revolving credit facility. Taking into consideration the financial covenants under the 2011 Credit Agreement, approximately $23.8 million of the revolving credit facility was available to be borrowed.
 
As of September 30, 2011, the Company had outstanding approximately $384.1 million on its term credit facility. During the quarter ended September 30, 2011, the Company repaid approximately $1.0 million under the 2011 Credit Agreement. Proceeds from the 2011 Credit Agreement of approximately $378.3 million, net of original issue discount, were used to repay the Amended and Restated Credit Agreement and pay other fees and expenses, with the balance of the proceeds used to fund the TV One capital call. The original issue discount is being reflected as an adjustment to the carrying amount of the debt obligation and amortized to interest expense over the term of the credit facility.
 
Period between and including the November 2010 Refinancing Transactions and entering into the 2011 Credit Agreement
 
On November 24, 2010, the Company entered into a credit agreement amendment with its prior syndicate of banks. The credit agreement amendment, which amended and restated the Previous Credit Agreement (as so amended and restated, the “Amended and Restated Credit Agreement”), among other things, replaced the existing amount of outstanding revolving loans with a $323.0 million term loan and provided for three tranches of revolving loans, including a $20.0 million revolver to be used for working capital, capital expenditures, investments, and other lawful corporate purposes, a $5.1 million revolver to be used solely to redeem and retire the 2011 Notes, and a $13.7 million revolver to be used solely to fund a capital call with respect to TV One (the “November 2010 Refinancing Transaction”).  
 
The Amended and Restated Credit Agreement provided for maintenance of the following maximum fixed charge coverage ratio as of the last day of each fiscal quarter:
 
Effective Period
 
Ratio
November 24, 2010 to December 30, 2010
 
1.05 to 1.00
December 31, 2010 to June 30, 2012
 
1.07 to 1.00
 
The Amended and Restated Credit Agreement also provided for maintenance of the following maximum total leverage ratios (subject to certain adjustments if subordinated debt is issued or any portion of the $13.7 million revolver was used to fund a TV One capital call):
 
Effective Period
 
Ratio
November 24, 2010 to December 30, 2010
 
9.35 to 1.00
December 31, 2010 to December 30, 2011
 
9.00 to 1.00
December 31, 2011 and thereafter
 
9.25 to 1.00
 
 
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 The Amended and Restated Credit Agreement also provided for maintenance of the following maximum senior leverage ratios (subject to certain adjustments if any portion of the $13.7 million revolver was used to fund a TV One capital call):
 
Beginning
 
No greater than
November 24, 2010 to December 30, 2010
 
5.25 to 1.00
December 31, 2010 to March 30, 2011
 
5.00 to 1.00
March 31, 2011 to September 29, 2011
 
4.75 to 1.00
September 30, 2011 to December 30, 2011
 
4.50 to 1.00
December 31, 2011 and thereafter
 
4.75 to 1.00
 
The Amended and Restated Credit Agreement provided for maintenance of average weekly availability at any time during any period set forth below:
 
Beginning
 
Average weekly availability no less than
 
November 24, 2010 through and including June 30, 2011
  $ 10,000,000  
July 1, 2011 and thereafter
  $ 15,000,000  
 
During the period between November 24, 2010, and as of March 31, 2011, the Company was in compliance with all of its financial covenants under the Amended and Restated Credit Agreement.
  
Under the terms of the Amended and Restated Credit Agreement, interest on both alternate base rate loans and LIBOR loans was payable monthly.  The LIBOR interest rate floor was 1.00% and the alternate base rate was equal to the greater of the prime rate, the Federal Funds Effective Rate plus 0.50% and the LIBOR Rate for a one-month period plus 1.00%.  Interest payable on (i) LIBOR loans were at LIBOR plus 6.25% and (ii) alternate base rate loans was at an alternate base rate plus 5.25% (and, in each case, could have been permanently increased if the Company exceeded certain senior leverage ratio levels, tested quarterly beginning June 30, 2011).  The interest rate paid in excess of LIBOR could have been as high as 7.25% during the last quarter prior to maturity if the Company exceeded the senior leverage ratio levels on each test date. Commencing on September 30, 2011, quarterly installments of 0.25%, or $807,500, of the principal balance on the $323.0 million term loan were payable on the last day of each March, June, September and December.
 
Under the terms of the Amended and Restated Credit Agreement, quarterly installments of principal on the term loan facility were payable on the last day of each March, June, September and December commencing on September 30, 2007 in a percentage amount of the principal balance of the term loan facility outstanding on September 30, 2007, net of loan repayments, of 1.25% between September 30, 2007 and June 30, 2008, 5.0% between September 30, 2008 and June 30, 2009, and 6.25% between September 30, 2009 and June 30, 2012. Based on the (i) $174.4 million net principal balance of the term loan facility outstanding on September 30, 2008, (ii) a $70.0 million prepayment in March 2009, (iii) a $31.5 million prepayment in May 2009 and (iv) a $5.0 million prepayment in May 2010, quarterly payments of $4.0 million are payable between June 30, 2010 and June 30, 2012.
 
On December 24, 2010, all remaining outstanding 2011 Notes were repurchased pursuant to the indenture governing the 2011 Notes.  We incurred approximately $4.5 million in borrowings under the Amended and Restated Credit Agreement in connection with such repurchase.
 
As a result of our repurchase and refinancing of the 2011 Notes, the expiration of the Amended and Restated Credit Agreement was June 30, 2012.
 
On March 31, 2011, the Company repaid all obligations under, and terminated, the Amended and Restated Credit Agreement. During the quarter ended March 31, 2011, the Company did not borrow from the Amended and Restated Credit Agreement and repaid approximately $353.7 million.

 
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Pre November 2010 Refinancing Transactions
 
In June 2005, the Company entered into the Credit Agreement with a syndicate of banks (the “Previous Credit Agreement”), and simultaneously borrowed $437.5 million to retire all outstanding obligations under its Previous Credit Agreement. The Previous Credit Agreement was amended in April 2006 and September 2007 to modify certain financial covenants and other provisions. Prior to the November 2010 Refinancing Transaction, the Previous Credit Agreement was to expire the earlier of (a) six months prior to the scheduled maturity date of the 8% Senior Subordinated Notes due July 1, 2011 (January 1, 2011) (unless the 8% Senior Subordinated Notes have been repurchased or refinanced prior to such date) or (b) June 30, 2012. The total amount available under the Credit Agreement was $800.0 million, consisting of a $500.0 million revolving facility and a $300.0 million term loan facility. Borrowings under the credit facilities were subject to compliance with certain provisions including, but not limited, to financial covenants. The Company could use proceeds from the credit facilities for working capital, capital expenditures made in the ordinary course of business, its common stock repurchase program, permitted direct and indirect investments and other lawful corporate purposes.
 
During the quarter ended March 31, 2010, we noted that certain of our subsidiaries identified as guarantors in our financial statements did not have requisite guarantees filed with the trustee as required under the terms of the indentures governing the 6⅜% Senior Subordinated Notes due 2013 (the “2013 Notes”) and 2011 Notes (the “Non-Joinder of Certain Subsidiaries”).  The Non-Joinder of Certain Subsidiaries caused a non-monetary, technical default under the terms of the relevant indentures at December 31, 2009, causing a non-monetary, technical cross-default at December 31, 2009 under the terms of our Previous Credit Agreement.  On March 30, 2010, we joined the relevant subsidiaries as guarantors under the relevant indentures (the “Joinder”).  Further, on March 30, 2010, we entered into a third amendment (the “Third Amendment”) to the Previous Credit Agreement.  The Third Amendment provided for, among other things: (i) a $100.0 million revolver commitment reduction (from $500.0 million to $400.0 million) under the bank facilities; (ii) a 1.0% floor with respect to any loan bearing interest at a rate determined by reference to the adjusted LIBOR (iii) certain additional collateral requirements; (iv) certain limitations on the use of proceeds from the revolving loan commitments; (v) the addition of Interactive One, LLC as a guarantor of the loans under the Previous Credit Agreement and under the notes governed by the Company’s 2011 Notes and 2013 Notes; (vi) the waiver of the technical cross-defaults that existed as of December 31, 2009 and through the date of the amendment arising due to the Non-Joinder of Certain Subsidiaries; and (vii) the payment of certain fees and expenses of the lenders in connection with their diligence work on the amendment. 
 
Under the terms of the Previous Credit Agreement, upon any breach or default under either the 8% Senior Subordinated Notes due July 2011 or the 6% Senior Subordinated Notes due February 2013, the lenders could among other actions immediately terminate the Previous Credit Agreement and declare the loans then outstanding under the Previous Credit Agreement to be due and payable in whole immediately.  Similarly, under the 8% Senior Subordinated Notes and the 6% Senior Subordinated Notes, a default under the terms of the Previous Credit Agreement would constitute an event of default, and the trustees or the holders of at least 25% in principal amount of the then outstanding notes (under either class) may declare the principal of such class of note and interest to be due and payable immediately.
 
As of each of June 30, 2010, July 1, 2010 and September 30, 2010, we were not in compliance with the terms of the Previous Credit Agreement.  More specifically, (i) as of June 30, 2010, we failed to maintain a total leverage ratio of 7.25 to 1.00 (ii) as of each of July 1, 2010 and September 30, 2010, as a result of a step down of the total leverage ratio from no greater than 7.25 to 1.00 to no greater than 6.50 to 1.00 effective for the period July 1, 2010 to September 30, 2011, we also failed to maintain the requisite total leverage ratio and (iii) as of September 30, 2010, we failed to maintain a senior leverage ratio of 4.00 to 1.00.  On July 15, 2010, the Company and its subsidiaries entered into a forbearance agreement (the “Forbearance Agreement”) with Wells Fargo Bank, N.A. (successor by merger to Wachovia Bank, National Association), as administrative agent (the “Agent”), and financial institutions constituting the majority of outstanding loans and commitments (the “Required Lenders”) under the Previous Credit Agreement, relating to the defaults and events of default existing as of June 30, 2010 and July 1, 2010.  On August 13, 2010, we entered into an amendment to the  Forbearance Agreement (the “Forbearance Agreement Amendment”) that, among other things, extended the termination date of the Forbearance Agreement to September 10, 2010, unless terminated earlier by its terms, and provided additional forbearance related to the then anticipated default caused by an opinion of Ernst & Young LLP expressing substantial doubt about the Company’s ability to continue as a going concern as issued in connection with the restatement of our financial statements.  Under the Forbearance Agreement and the Forbearance Agreement Amendment, the Agent and the Required Lenders maintained the right to deliver “payment blockage notices” to the trustees for the holders of the 2011 Notes and/or the 2013 Notes.
 
 
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On August 5, 2010, the Agent delivered a payment blockage notice to the Trustee under the Indenture governing our 2013 Notes.  As a result, neither we nor any of our guaranteeing subsidiaries could make any payment or distribution of any kind or character in respect of obligations under the 2013 Notes, including the interest payment that was scheduled to be made on August 16, 2010.  The 30-day grace period for the nonpayment of interest before such nonpayment constituted an event of default under the 2013 Notes Indenture expired on September 15, 2010.  While the trustee or holders of at least 25% in principal amount of the then outstanding 2013 Notes could have declared the principal amount, and accrued and unpaid interest, on all outstanding 2013 Notes to be due and payable immediately as a result of such event of default, no such remedies were exercised as we continued to negotiate the terms of the amended exchange offer and a new support agreement with the members of the ad hoc group of holders of our 2011 Notes and 2013 Notes.  The event of default under the 2013 Notes Indenture also constituted an event of default under the Previous Credit Agreement.  While the Forbearance Agreement Amendment expired by its terms on September 10, 2010, we and the Agent continued to negotiate the terms of a credit facility amendment and the Agent and the lenders did not exercise additional remedies under the Previous Credit Agreement. The Amended and Restated Credit Agreement cured all of these issues.
 
Senior Subordinated Notes

Period after the November 2010 Refinancing Transactions and after the March 2011 Refinancing Transaction
 
On November 24, 2010, we issued $286.8 million of our 12½%/15% Senior Subordinated Notes due May 2016 in a private placement and exchanged and then cancelled approximately $97.0 million of $101.5 million in aggregate principal amount outstanding of our 2011 Notes and approximately $199.3 million of $200.0 million in aggregate principal amount outstanding of our 2013 Notes (the 2013 Notes together with the 2011 Notes, the “Prior Notes”).  We entered into supplemental indentures in respect of each of the Prior Notes which waived any and all existing defaults and events of default that had arisen or may have arisen that may be waived and eliminated substantially all of the covenants in each indenture governing the Prior Notes, other than the covenants to pay principal and interest on the Prior Notes when due, and eliminated or modified the related events of default. Subsequently, all remaining outstanding 2011 Notes were repurchased pursuant to the indenture governing the 2011 Notes, effective as of December 24, 2010.
 
As of September 30, 2011, the Company had outstanding $747,000 of its 6% Senior Subordinated Notes due February 2013 and $305.9 million of our 12½%/15% Senior Subordinated Notes due May 2016. During the year ended December 31, 2010, pursuant to the debt exchange, the Company repurchased $101.5 million of the 8% Senior Subordinated Notes at par and $199.3 million of the 6% Senior Subordinated Notes at an average discount of 5.0%, and recorded a gain on the retirement of debt of approximately $6.6 million, net of the write-off of deferred financing costs of approximately $3.3 million. The 12½%/15% Senior Subordinated Notes due May 2016 had a carrying value of $305.9 million and a fair value of approximately $275.3 million as of September 30, 2011, and the 6% Senior Subordinated Notes due February 2013 had a carrying value of $747,000 and a fair value of approximately $710,000 as of September 30, 2011. The fair values were determined based on the trading value of the instruments as of the reporting date.
 
Interest payments under the terms of the 6% Senior Subordinated Notes are due in February and August.  Based on the $747,000 principal balance of the 6% Senior Subordinated Notes outstanding on September 30, 2011, interest payments of $24,000 are payable each February and August through February 2013.
 
Interest on the 12½%/15% Senior Subordinated Notes will be payable in cash, or at our election, partially in cash and partially through the issuance of additional 12½%/15% Senior Subordinated Notes (a “PIK Election”) on a quarterly basis in arrears on February 15, May 15, August 15 and November 15, commencing on February 15, 2011.  We may make a PIK Election only with respect to interest accruing up to but not including May 15, 2012, and with respect to interest accruing from and after May 15, 2012 such interest shall accrue at a rate of 12.5% per annum and shall be payable in cash.
 
Interest on the Exchange Notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid.  Interest will accrue for each quarterly period at a rate of 12.5% per annum if the interest for such quarterly period is paid fully in cash.  In the event of a PIK Election, including the PIK Election currently in effect, the interest paid in cash and the interest paid-in-kind by issuance of additional Exchange Notes (“PIK Notes”) will accrue for such quarterly period at 6.0% cash per annum and 9.0% PIK per annum.
 
In the absence of an election for any interest period, interest on the Exchange Notes shall be payable according to the election for the previous interest period, provided that interest accruing from and after May 15, 2012 shall accrue at a rate of 12.5% per annum and shall be payable in cash. A PIK Election is currently in effect and the Company anticipates it remaining in effect through May 15, 2012.

 
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During the quarter ended September 30, 2011, the Company paid cash interest in the amount of approximately $4.5 million and issued approximately $6.7 million of additional 12½%/15% Senior Subordinated Notes in accordance with the PIK Election that is currently in effect. During the nine months ended September 30, 2011, the Company paid cash interest in the amount of approximately $12.8 million and issued approximately $19.1 million of additional 12½%/15% Senior Subordinated Notes in accordance with the PIK Election that is currently in effect.
 
The indentures governing the Company’s 12½%/15% Senior Subordinated Notes also contained covenants that restrict, among other things, the ability of the Company to incur additional debt, purchase common stock, make capital expenditures, make investments or other restricted payments, swap or sell assets, engage in transactions with related parties, secure non-senior debt with assets, or merge, consolidate or sell all or substantially all of its assets.
 
The Company conducts a portion of its business through its subsidiaries. Certain of the Company’s subsidiaries have fully and unconditionally guaranteed the Company’s 12½%/15% Senior Subordinated Notes, the 6% Senior Subordinated Notes and the Company’s obligations under the 2011 Credit Agreement.

Period prior to November 2010 Refinancing Transactions
 
Subsequent to December 31, 2009, we noted that certain of our subsidiaries identified as guarantors in our financial statements did not have requisite guarantees filed with the trustee as required under the terms of the indentures (the “Non-Joinder of Certain Subsidiaries”).  The Non-Joinder of Certain Subsidiaries caused a non-monetary, technical default under the terms of the relevant indentures at December 31, 2009, causing a non-monetary, technical cross-default at December 31, 2009 under the terms of our Credit Agreement dated as of June 13, 2005.  We have since joined the relevant subsidiaries as guarantors under the relevant indentures (the “Joinder”).  Further, on March 30, 2010, we entered into a third amendment (the “Third Amendment”) to the Credit Agreement.  The Third Amendment provides for, among other things: (i) a $100.0 million revolver commitment reduction under the bank facilities; (ii) a 1.0% floor with respect to any loan bearing interest at a rate determined by reference to the adjusted LIBOR; (iii) certain additional collateral requirements; (iv) certain limitations on the use of proceeds from the revolving loan commitments; (v) the addition of Interactive One, LLC as a guarantor of the loans under the Credit Agreement and under the notes governed by the Company’s 2001 and 2005 senior subordinated debt documents; (vi) the waiver of the technical cross-defaults that existed as of December 31, 2009 and through the date of the amendment arising due to the Non-Joinder of Certain Subsidiaries; and (vii) the payment of certain fees and expenses of the lenders in connection with their diligence in connection with the amendment.    
 
On August 5, 2010, the Agent under our Previous Credit Agreement delivered a payment blockage notice to the Trustee under the Indenture governing our 2013 Notes. As a result, neither we nor any of our guaranteeing subsidiaries may make any payment or distribution of any kind or character in respect of obligations under the 2013 Notes, including the interest payment that was scheduled to be made on August 16, 2010.  The 30-day grace period for the nonpayment of interest before such nonpayment constituted an event of default under the 2013 Notes Indenture expired on September 15, 2010. While the trustee or holders of at least 25% in principal amount of the then outstanding 2013 Notes could have declared the principal amount, and accrued and unpaid interest, on all outstanding 2013 Notes to be due and payable immediately as a result of such event of default, no such remedies were exercised as we continued to negotiate the terms of the amended exchange offer and a new support agreement with the members of the ad hoc group of holders of our 2011 and 2013 Notes. The event of default under the 2013 Notes Indenture also constituted an event of default under the Previous Credit Agreement. As of November 24, 2010, any and all existing defaults and events of default that had arisen or may have arisen were cured.

 
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As of each of June 30, 2010, July 1, 2010 and September 30, 2010, we were not in compliance with the terms of our Previous Credit Agreement. More specifically, (i) as of June 30, 2010, we failed to maintain a total leverage ratio of 7.25 to 1.00 (ii) as of each of July 1, 2010 and September 30, 2010, as a result of a step down of the total leverage ratio from no greater than 7.25 to 1.00 to no greater than 6.50 to 1.00 effective for the period July 1, 2010 to September 30, 2011, we also failed to maintain the requisite total leverage ratio and (iii) as of September 30, 2010, we failed to maintain a senior leverage ratio of 4.00 to 1.00. On July 15, 2010, the Company and its subsidiaries entered into the Forbearance Agreement with Wells Fargo Bank, N.A. (successor by merger to Wachovia Bank, National Association), as Agent, and the Required Lenders under our Previous Credit Agreement, relating to the defaults and events of default existing as of June 30, 2010 and July 1, 2010. On August 13, 2010, we entered into an amendment to the Forbearance Agreement Amendment that, among other things, extended the termination date of the Forbearance Agreement to September 10, 2010, unless terminated earlier by its terms, and provided additional forbearance related to the then anticipated default caused by an opinion of Ernst & Young LLP expressing substantial doubt about the Company’s ability to continue as a going concern as issued in connection with the restatement of our financial statements. Under the Forbearance Agreement and the Forbearance Agreement Amendment, the Agent and the Required Lenders maintained the right to deliver “payment blockage notices” to the trustees for the holders of the 2011 Notes and/or the 2013 Notes.
 
 On August 5, 2010, the Agent under our Previous Credit Agreement delivered a payment blockage notice to the Trustee under the Indenture governing our 2013 Notes.  As a result, neither we nor any of our guaranteeing subsidiaries could make any payment or distribution of any kind or character in respect of obligations under the 2013 Notes, including the interest payment that was scheduled to be made on August 16, 2010.  The 30-day grace period for the nonpayment of interest before such nonpayment constituted an event of default under the 2013 Notes Indenture expired on September 15, 2010.  While the trustee or holders of at least 25% in principal amount of the then outstanding 2013 Notes could declare the principal amount, and accrued and unpaid interest, on all outstanding 2013 Notes to be due and payable immediately as a result of such event of default, as of the date of this filing, no such remedies were exercised as we continued to negotiate the terms of the amended exchange offer and a new support agreement with the members of the ad hoc group of holders of our 2011 and 2013 Notes.  The event of default under the 2013 Notes Indenture also constituted an event of default under the Previous Credit Agreement.  As of November 24, 2010, as a result of the November 2010 Refinancing Transactions, any and all existing defaults and events of default that had arisen or may have arisen were cured.
 
The following table summarizes the interest rates in effect with respect to our debt as of September 30, 2011:

Type of Debt
 
Amount Outstanding
   
Applicable
Interest
Rate
 
   
(In millions)
       
             
Senior bank term debt, net of original issue discount (at variable rates)(1)
  $ 377.0       7.50 %
12½ %/15% Senior Subordinated Notes (fixed rate)
  $ 305.9       15.00 %
Note payable (fixed rate)
  $ 1.0       7.00 %
Senior Secured Notes (fixed rate)
  $ 119.0       10.00 %
6% Senior Subordinated Notes (fixed rate)
  $ 0.7       6.38 %
 
(1)  Subject to variable Libor Rate plus a spread currently at 6.00% and incorporated into the applicable interest rate set forth above.
 
The indentures governing our Prior Notes and our 2016 Notes require that we comply with certain financial covenants limiting our ability to incur additional debt. Such terms also place restrictions on us with respect to the sale of assets, liens, investments, dividends, debt repayments, capital expenditures, transactions with affiliates, consolidation and mergers, and the issuance of equity interests, among other things. As of November 24, 2010 and in connection with the November 2010 Refinancing Transactions, we and the trustee under the indentures governing our Prior Notes entered into supplemental indentures which waived any and all existing defaults and events of default that had arisen or may have arisen that may be waived and eliminated substantially all of the covenants in each indenture other than the covenants to pay principal of and interest on the Prior Notes when due, and eliminated or modified the related events of default.  Our 2011 Credit Agreement also requires compliance with financial tests based on financial position and results of operations, including an interest coverage, senior secured leverage, and total leverage ratios, all of which could effectively limit our ability to borrow under the 2011 Credit Agreement.
 
 
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TV One issued $119.0 million in senior secured notes on February 25, 2011. The notes were issued in connection with the repurchase of its equity interest from certain financial investors and TV One management. The notes bear interest at 10.0% per annum, which is payable monthly, and the entire principal amount is due on March 15, 2016.
  
Reach Media issued a $1.0 million promissory note payable in November 2009 to a subsidiary of Citadel, which was acquired by Cumulus Media Inc. in September 2011. The note was issued in connection with Reach Media entering into a new sales representation agreement with Radio Networks. The note bears interest at 7.0% per annum, which is payable quarterly, and the entire principal amount is due on December 31, 2011.
 
The following table provides a comparison of our statements of cash flows for the nine months ended September 30, 2011 and 2010:
 
   
2011
   
2010
 
   
(In thousands)
 
             
Net cash flows provided by operating activities
  $ 29,111     $ 16,775  
Net cash flows provided by (used in) investing activities
  $ 47,074     $ (3,592 )
Net cash flows used in financing activities
  $ (52,206 )   $ (11,575 )
 
Net cash flows provided by operating activities were approximately $29.1 million and $16.8 million for the nine months ended September 30, 2011 and 2010, respectively.  Cash flow from operating activities for the nine months ended September 30, 2011 decreased from the prior year primarily due to changes in operating assets and liabilities.

Net cash flows provided by investing activities were approximately $47.1 million for the nine months ended September 30, 2011 compared to net cash flows used in investing activities of $3.6 million for the nine months ended September 30, 2010, respectively. Cash flow from investing activities for the nine months ended September 30, 2011 increased from the prior year primarily due to the net cash and investments acquired in connection with the TV One consolidation of approximately $65.2 million. Capital expenditures, including digital tower and transmitter upgrades, content assets, and deposits for station equipment and purchases were approximately $18.2 million and $3.6 million for the nine months ended September 30, 2011 and 2010, respectively.

Net cash flows used in financing activities were approximately $52.2 million and $11.6 million for the nine months ended September 30, 2011 and 2010, respectively. During the nine months ended September 30, 2011 and 2010, the Company borrowed approximately $378.3 million and $12.0 million, respectively, from its credit facility and repaid approximately $355.6 million and $12.4 million, respectively, in outstanding debt.  During the nine months ended September 30, 2011, we repurchased a noncontrolling interest in TV One for approximately $54.6 million. During the nine months ended September 30, 2011 and 2010, respectively, we capitalized approximately $6.2 million and $11.2 million of costs associated with our evaluation of various alternatives associated with our indebtedness and its upcoming maturities.  In addition, during the nine months ended September 30, 2011, we repurchased $41,000 of our Class A Common Stock and approximately $8.5 million of our Class D Common Stock.
 
Credit Rating Agencies
 
Our corporate credit ratings by Standard & Poor's Rating Services and Moody's Investors Service are speculative-grade and have been downgraded and upgraded at various times during the last several years. Any reductions in our credit ratings could increase our borrowing costs, reduce the availability of financing to us or increase our cost of doing business or otherwise negatively impact our business operations.  
 
 
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Our significant accounting policies are described in Note 1 - Organization and Summary of Significant Accounting Policies of the consolidated financial statements in our Annual Report on Form 10-K. 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, 2010, we summarized the policies and estimates that we believe to be most critical in understanding the judgments involved in preparing our financial statements and the uncertainties that could affect our results of operations, financial condition and cash flows. There have been no material changes to our existing accounting policies or estimates since we filed our Annual Report on Form 10-K for the year ended December 31, 2010.  We obtained a controlling interest in TV One as of April 14, 2011, and as such, have included new accounting policies related to our cable television segment as of September 30, 2011.
 
Stock-Based Compensation
 
The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation - Stock Compensation.” Under the provisions of ASC 718, stock-based compensation cost is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes (“BSM”) valuation option-pricing model and is recognized as expense ratably over the requisite service period.  The BSM incorporates various highly subjective assumptions including expected stock price volatility, for which historical data is heavily relied upon, expected life of options granted, forfeiture rates and interest rates. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that previously recorded.

Goodwill and Radio Broadcasting Licenses

Impairment Testing
 
We have made several radio station acquisitions in the past for which a significant portion of the purchase price was allocated to goodwill and radio broadcasting licenses. Goodwill exists whenever the purchase price exceeds the fair value of tangible and identifiable intangible net assets acquired in business combinations. As of September 30, 2011, we had approximately $677.4 million in broadcast licenses and $285.9 million in goodwill, which totaled $963.3 million, and represented approximately 63.3% of our total assets. Therefore, we believe estimating the fair value of goodwill and radio broadcasting licenses is a critical accounting estimate because of the significance of their carrying values in relation to our total assets. We did not record any impairment charges for the three or nine months ended September 30, 2011 and 2010.
 
Effective January 1, 2002, in accordance with ASC 350, “Intangibles – Goodwill and Other,” we discontinued amortizing radio broadcasting licenses and goodwill and instead, began testing for impairment annually, or when events or changes in circumstances or other conditions suggest impairment may have occurred. Our annual impairment testing is performed for assets owned as of October 1. Impairment exists when the carrying value of these assets exceeds its respective fair value. When the carrying value exceeds fair value, an impairment amount is charged to operations for the excess.

 
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Valuation of Broadcasting Licenses
 
We utilize the services of a third-party valuation firm to provide independent analysis when evaluating the fair value of our radio broadcasting licenses and reporting units. The testing for radio broadcasting licenses is performed at the unit of accounting level as determined by ASC 350, “Intangibles - Goodwill and Other.” In our case, each unit of accounting is a clustering of radio stations into one geographical market. We use the income approach to value broadcasting licenses, which involves a 10-year model that incorporates several variables, including, but not limited to: (i) estimated discounted cash flows of a hypothetical market participant; (ii) estimated radio market revenue and growth projections; (iii) estimated market share and revenue for the hypothetical participant; (iv) likely media competition within the market; (v) estimated start-up costs and losses incurred in the early years; (vi) estimated profit margins and cash flows based on market size and station type; (vii) anticipated capital expenditures; (viii) probable future terminal values; (ix) an effective tax rate assumption; and (x) a discount rate based on the weighted-average cost of capital for the radio broadcast industry. In calculating the discount rate, we considered: (i) the cost of equity, which includes estimates of the risk-free return, the long-term market return, small stock risk premiums and industry beta; (ii) the cost of debt, which includes estimates for corporate borrowing rates and tax rates; and (iii) estimated average percentages of equity and debt in capital structures. Since our October 2010 annual assessment, we have not made any changes to the methodology for valuing broadcasting licenses.
 
During the second quarter of 2011, the total market revenue growth for certain markets was below that used in our 2010 annual impairment testing. We deemed that to be an impairment indicator that warranted interim impairment testing of certain of our radio broadcasting licenses, which we performed as of May 31, 2011. During the third quarter, there was further deterioration of revenue growth in certain markets, and as such, we deemed that to be an impairment indicator that warranted interim testing of certain radio broadcasting licenses as of September 30, 2011. Below are some of the key assumptions used in the income approach model for estimating broadcasting licenses fair values for all annual and interim impairments assessments performed since January 2010.  The Company concluded that our radio broadcasting licenses were not impaired during the second or third quarters of 2011.

Radio Broadcasting Licenses
 
October 1, 2010
   
May 31, 2011 (a)
   
September 30, 2011 (a)
 
   
(In millions)
       
                   
Pre-tax impairment charge
  $ 19.9     $     $  
                         
Discount Rate
    10 %     10 %     9.5 %
Year 1 Market Revenue Growth or Decline
                       
Rate or Range
    1.0% -3.0 %     1.3% -2.8 %     1.5% -2.0 %
Long-term Market Revenue Growth Rate
                       
Range (Years 6 – 10)
    1.0% - 2.5 %     1.5% - 2.0 %     1.5% - 2.0 %
Mature Market Share Range
    0.8% - 28.3 %     9.0% - 22.5 %     9.3% - 22.4 %
Operating Profit Margin Range
    19.0% - 47.3 %     32.7% - 40.8 %     32.7% - 33.0 %

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

Valuation of Goodwill
 
The impairment testing of goodwill is performed at the reporting unit level. We had 19 reporting units as of our October 2010 annual impairment assessment. For the purpose of evaluating goodwill for impairment, the 19 reporting units consisted of the 16 radio markets and three other business divisions. Due to the consolidation of TV One and with the transition of our Boston station into discontinued operations during the quarter ended June 30, 2011, the Company now has 19 reporting units, consisting of the 15 radio markets and four business divisions. In testing for the impairment of goodwill, with the assistance of a third-party valuation firm, we primarily rely on the income approach. The approach involves a 10-year model with similar variables as described above for broadcasting licenses, except that the discounted cash flows are generally based on the Company’s estimated and projected market revenue, market share and operating performance for its reporting units, instead of those for a hypothetical participant. We follow a two-step process to evaluate if a potential impairment exists for goodwill. The first step of the process involves estimating the fair value of each reporting unit. If the reporting unit’s fair value is less than its carrying value, a second step is performed as per the guidance of ASC 805-10, “Business Combinations,” to allocate the fair value of the reporting unit to the individual assets and liabilities of the reporting unit in order to determine the implied fair value of the reporting unit’s goodwill as of the impairment assessment date. Any excess of the carrying value of the goodwill over the implied fair value of the goodwill is written off as a charge to operations. Since our October 2010 annual assessment, we have not made any changes to the methodology of valuing or allocating goodwill when determining the carrying values of the radio markets, Reach Media or Interactive One.
 
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In February, May and August of 2010, the Company performed interim impairment testing on the valuation of goodwill associated with Reach Media. Reach Media net revenues and cash flows declined for 2010 and full year internal projections were revised.  The revenues declined following the December 31, 2009 expiration of a sales representation agreement with Citadel Broadcasting Corporation (“Citadel”) whereby a minimum level of revenue was guaranteed over the term of the agreement.  Effective January 1, 2010, Reach Media’s newly established sales organization began selling its inventory on the Tom Joyner Morning Show and under a new commission-based sales representation agreement with Citadel, which sells certain inventory owned by Reach Media in connection with its 106 radio station affiliate agreements.  Management revised its internal projections for Reach Media by lowering the Year 1 revenue growth rate to 2.5% in May and August 2010, versus 16.5% assumed in the previous annual assessment. Given the relative improvement in the credit markets since late 2009, the discount rate was lowered to 13.5% for both the February and May 2010 assessments and again lowered to 13.0% for the August 2010 assessment.  As part of the year end impairment testing, the discount rate was increased to 13.5% and we reduced our operating cash flow projections and assumptions compared to the interim assessments based on declining revenue projections and actual results which did not meet budget.
 
Below are some of the key assumptions used in the income approach model for estimating the fair value for Reach Media for all interim, annual and year end assessments since January 2010. When compared to the discount rates used for assessing radio market reporting units, the higher discount rates used in these assessments reflect a premium for a riskier and broader media business, with a heavier concentration and significantly higher amount of programming content related intangible assets that are highly dependent on the on-air personality Tom Joyner. As a result of the February, May and August 2010 interim assessments, the Company concluded no impairment to the carrying value of Reach Media had occurred. During the fourth quarter, Reach Media’s operating performance continued to decline, but at a decreasing rate.  We believe this represented an impairment indicator and as a result, we performed a year end impairment assessment at December 31, 2010. We recorded an impairment charge of $16.1 million during the quarter ended December 31, 2010 in connection with this assessment. We performed interim impairment assessments at March 31, 2011, June 30, 2011 and September 30, 2011, as Reach Media did not meet its budgeted operating cash flow for the first, second and third quarters. As a result of the March 2011, June 2011 and September 2011 interim impairment tests, the Company concluded that the carrying value of goodwill attributable to Reach Media had not been impaired.

Reach Media Goodwill
                                         
(Reporting Unit Within the
                                         
Radio Broadcasting
                                         
Segment)
 
February 28, 2010
   
May 31, 2010
   
August 31, 2010
   
December 31, 2010
   
March 31, 2011
   
June 30, 2011
   
September 30, 2011
 
         
(In millions)
                         
Pre-tax impairment charge
  $     $     $     $ 16.1     $     $     $  
                                                         
Discount Rate
    13.5 %     13.5 %     13.0 %     13.5 %     13.5 %     13.0 %     12.0 %
Year 1 Revenue Growth Rate
    8.5 %     2.5 %     2.5 %     2.5 %     2.5 %     2.5 %     2.5 %
Long-term Revenue Growth
                                                       
Rate Range
    2.5% – 3.0 %     2.5% – 2.9 %     2.5% – 3.3 %     (2.6)% - 4.4 %     (1.3)% - 4.9 %     (0.2)% - 3.9 %     (2.0)% - 3.5 %
                                                         
Operating Profit Margin Range
    22.7% - 31.4 %     23.3% - 31.5 %     25.5% - 31.2 %     15.5% - 25.9 %     16.2% - 27.4 %     17.6% - 22.6 %     18.8 - 21.7 %
  
In addition to assessing the fair value of Reach Media as of March 2011, June 2011 and September 2011, we performed a sensitivity analysis showing the impact resulting from: (i) a 1% or 100 basis point decrease in Reach Media growth rates; (ii) a 1% or 100 basis point decrease in cash flow margins; (iii) a 1% or 100 basis point increase in the discount rate; and (iv) both a 5% and 10% reduction in the fair values of Reach Media. A hypothetical change in all of the stated factors did not result in any impairment.

 
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During the second and third quarters of 2011, the operating performance and current projections for the remainder of the year for specific radio markets were below that used in our 2010 annual impairment testing. We deemed that to be an impairment indicator that warranted interim impairment testing of goodwill associated with specific radio markets, which we performed as of May 31, 2011 and as of September 30, 2011. Below are some of the key assumptions used in the income approach model for estimating goodwill fair values for the annual and interim impairments assessments performed since October 1, 2010.  The Company concluded that goodwill had not been impaired during the second or third quarters of 2011.

Goodwill (Radio Market Reporting Units)
 
October 1, 2010
   
May 31, 2011
(a)
   
September 30,
2011 (a)
 
   
(In millions)
             
                   
Pre-tax impairment charge
  $     $     $  
                         
Discount Rate
    10 %     10 %     9.5 %
Year 1 Market Revenue Growth or Decline Rate or Range
    1.5% -3.0 %     1.5% -3.0 %     1.5 %
Long-term Market Revenue Growth Rate Range (Years 6 – 10)
    1.5% - 2.5 %     1.5% - 2.0 %     1.5 %
Mature Market Share Range
    7.0% - 23.0 %     7.0% - 23.0 %     13.8 %
Operating Profit Margin Range
    27.5% - 58.0 %     30.0% - 56.0 %     36.0 %

(a) Reflects changes only to the key assumptions used in the second and third quarter interim testing for certain reporting units.
 
As part of our annual testing, when arriving at the estimated fair values for radio broadcasting licenses and goodwill, we also performed a reasonableness test by comparing our overall average implied multiple based on our cash flow projections and fair values to recently completed sales transactions, and by comparing our fair value estimates to the market capitalization of the Company. The results of these comparisons confirmed that the fair value estimates resulting from our annual assessment for 2010 were reasonable.

Sensitivity Analysis
 
We believe both the estimates and assumptions we utilized when assessing the potential for impairment are individually and in aggregate reasonable; however, our estimates and assumptions are highly judgmental in nature. Further, there are inherent uncertainties related to these estimates and assumptions and our judgment in applying them to the impairment analysis. While we believe we have made reasonable estimates and assumptions to calculate the fair values, changes in any one estimate, assumption or a combination of estimates and assumptions, or changes in certain events or circumstances (including uncontrollable events and circumstances resulting from deterioration in the economy or credit markets) could require us to assess recoverability of broadcasting licenses and goodwill at times other than our annual  October 1 assessments, and could result in changes to our estimated fair values and further write-downs to the carrying values of these assets. Impairment charges are non-cash in nature, and as with past impairment charges, any future impairment charges will not impact our cash needs or liquidity or our bank covenant compliance.

 
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As of September 30, 2011, we had a total goodwill carrying value of approximately $285.9 million across 13 of our 19 reporting units. The below table indicates the long-term cash flow growth rates assumed in our impairment testing and the long-term cash flow growth/decline rates that would result in additional goodwill impairment. For four of the reporting units, given each of their significant fair value over carrying value excess, any future goodwill impairment is not likely. However, should our estimates and assumptions for assessing the fair values of the remaining reporting units with goodwill worsen to reflect the below or lower cash flow growth/decline rates, additional goodwill impairments may be warranted in the future.

Reporting Unit
 
Long-Term Cash Flow Growth Rate Used
   
Long-Term Cash Flow Growth/Decline Rate That Would Result
in Impairment (a)
 
             
21
 
Not tested
   
Impairment not likely
 
2
    2.0 %  
Impairment not likely
 
16
    2.0 %  
Impairment not likely
 
11
    1.5 %  
Impairment not likely
 
5
    1.5 %     0.0 %
7
    1.5 %     0.2 %
12
    2.0 %     0.5 %
19
    2.5 %     (2.1 )%
1
    2.0 %     (2.7 )%
6
    1.5 %     (5.0 )%
10
    2.5 %     (6.8 )%
13
    2.0 %     (14.8 )%
18
    3.0 %     (24.0 )%

(a)  
The long-term cash flow growth/decline rate that would result in additional goodwill impairment applies only to further goodwill impairment and not to any future license impairment that would result from lowering the long-term cash flow growth rates used.
 
Several of the licenses in our units of accounting have no or limited excess of fair values over their respective carrying values. Should our estimates, assumptions, or events or circumstances for any upcoming valuations worsen in the units with no or limited fair value cushion, additional license impairments may be needed in the future.
 
Impairment of Intangible Assets Excluding Goodwill and Radio Broadcasting Licenses
 
Intangible assets, excluding goodwill and radio broadcasting 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 of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, we will evaluate 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 level for which there is identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the assets are impaired, the impairment is measured by the amount by which the carrying amount exceeds the fair value of the assets determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of like risk. There were no impairment triggering events for these assets for the three or nine month periods ended September 30, 2011 and 2010.

Allowance for Doubtful Accounts
 
We must make estimates of the uncollectability of our accounts receivable. We specifically review historical write-off activity by market, large customer concentrations, customer credit worthiness and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In the past four years, including the quarter ended September 30, 2011, our historical bad debt results have averaged approximately 5.2% of our outstanding trade receivables and have been a reliable method to estimate future allowances. If the financial condition of our customers or markets were to deteriorate, adversely affecting their ability to make payments, additional allowances could be required.
 
 
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Revenue Recognition
 
We recognize revenue for broadcast advertising when the commercial is broadcast and we report revenue net of agency and outside sales representative commissions in accordance with ASC 605, “Revenue Recognition.”   When applicable, agency and outside sales representative commissions are calculated based on a stated percentage applied to gross billing. Generally, advertisers remit the gross billing amount to the agency or outside sales representative, and the agency or outside sales representative remits the gross billing, less their commission, to us.
 
Our online business recognizes its advertising revenue as impressions (the number of times advertisements appear in viewed pages) are delivered, when “click through” purchases or leads are reported, or ratably over the contract period, where applicable.
 
TV One derives advertising revenue from the sale of television air time to advertisers and recognizes revenue when the advertisements are run.  TV One also receives affiliate fees and records revenue during the term of various affiliation agreements at levels appropriate for the most recent subscriber counts reported by the applicable affiliate.

Equity Accounting
 
Effective April 14, 2011, the Company began to account for TV One on a consolidated basis. Prior to that, we accounted for our investment in TV One under the equity method of accounting in accordance with ASC 323, “Investments – Equity Method and Joint Ventures.”  We had recorded our investment at cost and had adjusted the carrying amount of the investment to recognize the change in Radio One’s claim on the net assets of TV One resulting from net income or losses of TV One as well as other capital transactions of TV One using a hypothetical liquidation at book value approach.

Contingencies and Litigation
 
We regularly evaluate our exposure relating to any contingencies or litigation and record a liability when available information indicates that a liability is probable and estimable. We also disclose significant matters that are reasonably possible to result in a loss, or are probable but for which an estimate of the liability is not currently available. To the extent actual contingencies and litigation outcomes differ from amounts previously recorded, additional amounts may need to be reflected.
 
Estimate of Effective Tax Rates
 
We estimate the provision for income taxes, income tax liabilities, deferred tax assets and liabilities, and any valuation allowances in accordance with ASC 740, “Income Taxes,” as it relates to accounting for income taxes in interim periods.  We estimate effective tax rates based on local tax laws and statutory rates, apportionment factors, taxable income for our filing jurisdictions and disallowable items, among other factors. Audits by the Internal Revenue Service or state and local tax authorities could yield different interpretations from our own, and differences between taxes recorded and taxes owed per our filed returns could cause us to record additional taxes.
 
The Company recognizes the impact of a tax position in the financial statements if it is more likely than not that the position would be sustained on audit based on the technical merits of the position. As of September 30, 2011, we had approximately $5.8 million in unrecognized tax benefits. Future outcomes of our tax positions may be more or less than the currently recorded liability, which could result in recording additional taxes, or reversing some portion of the liability, and recognizing a tax benefit once it is determined the liability is either inadequate or no longer necessary as potential issues get resolved, or as statutes of limitations in various tax jurisdictions close.
 
 
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Realizability of Deferred Tax Balances
 
Except for DTAs that may be benefited by future reversing deferred tax liabilities (“DTLs”) and DTAs related to Reach Media, the Company maintains a full valuation allowance for its DTAs, mainly NOLs, as it was determined that more likely than not, the DTAs would not be realized. The Company reached this determination based on its then cumulative loss position and the uncertainty of future taxable income. Consistent with that prior realizability assessment, the Company has recorded a full valuation allowance for additional NOLs generated from the tax deductible amortization of indefinite-lived assets, as well as DTAs created by impairment charges. For remaining DTAs that are not fully reserved, we believe that these assets will be realized; however, if we do not generate the projected levels of future taxable income in those specific jurisdictions, an additional valuation allowance may need to be recorded in the future.

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

Fair Value Measurements
 
The Company has accounted for an award called for in the CEO’s employment agreement (the “Employment Agreement”) as a derivative instrument in accordance with ASC 815, “Derivatives and Hedging.” According to the Employment Agreement, which was executed in April 2008, the CEO is eligible to receive an award amount equal to 8% of any proceeds from distributions or other liquidity events in excess of the return of the Company’s aggregate investment in TV One. The Company’s obligation to pay the award will be triggered only after the Company’s recovery of the aggregate amount of its capital contribution in TV One and only upon actual receipt of distributions of cash or marketable securities or proceeds from a liquidity event with respect to the Company’s membership interest in TV One. The CEO was fully vested in the award upon execution of the agreement, and the award lapses upon expiration of the Employment Agreement, or earlier, if the CEO voluntarily left the Company or was terminated for cause.  The Company is currently in negotiations with the Company’s CEO for a new employment agreement. Until such time as his new employment agreement is executed, the terms of his April 2008 employment agreement remain in effect including eligibility for the TV One award.
 
The Company reassessed the estimated fair value of the award as of September 30, 2011 at approximately $10.4 million and, accordingly, recorded compensation expense and a liability for that amount. The fair value of the award as of December 31, 2010 was approximately $6.8 million. The fair valuation incorporated a number of assumptions and estimates, including but not limited to TV One’s future financial projections, probability factors and the likelihood of various scenarios that would trigger payment of the award. As the Company will measure changes in the fair value of this award at each reporting period as warranted by certain circumstances, different estimates or assumptions may result in a change to the fair value of the award amount previously recorded.
 
With the assistance of a third-party valuation firm, the Company assesses the fair value of the redeemable noncontrolling interest in Reach Media as of the end of each reporting period.  The fair value of the redeemable noncontrolling interests as of September 30, 2011 was approximately $29.7 million.  The determination of fair value incorporated a number of assumptions and estimates including, but not limited to, forecasted operating results, discount rates and a terminal value.  Different estimates and assumptions may result in a change to the fair value of the redeemable noncontrolling interests amount previously recorded.
 
The TV One incentive award plan balance is measured based on the estimated enterprise fair value of TV One.  For the period ended September 30, 2011, the Company determined the enterprise fair value of TV One based on the price paid to repurchase interests from certain investors.  There have not been any significant changes in TV Ones business since the buyout of these investors.  As the Company will measure changes in the fair value of these balances at each reporting period as warranted by certain circumstances, different estimates or assumptions may result in a change to the fair value of the amounts previously recorded.
 
 
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Content Assets
 
TV One has entered into contracts to acquire entertainment programming rights and programs from distributors and producers.  The license periods granted in these contracts generally run from one year to perpetuity.  Contract payments are made in installments over terms that are generally shorter than the contract period.  In accordance with ASC 920, Entertainment-Broadcasters, each contract is recorded as an asset and a liability at an amount equal to its gross contractual commitment when the license period begins and the program is available for its first airing. Program rights are recorded at the lower of amortized cost or estimated net realizable value.  Program rights are amortized based on the greater of the usage of the program or term of license.  Estimated net realizable values are based on the estimated revenues directly associated with the program materials and related expenses.

RECENT ACCOUNTING PRONOUNCEMENTS
 
In June 2009, the FASB issued ASC 105, “Generally Accepted Accounting Principles,” which establishes the ASC as the source of authoritative non-SEC U.S. generally accepted accounting principles (“GAAP”) for non-governmental entities. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of ASC 105 did not have a material impact on the Company’s consolidated financial statements.
 
In May 2009, the FASB issued ASC 855, “Subsequent Events,” which addresses accounting and disclosure requirements related to subsequent events. It requires management to evaluate subsequent events through the date the financial statements are either issued or available to be issued. In February 2010, the FASB issued ASU 2010-09, which amends ASC 855 to remove all requirements for SEC filers to disclose the date through which subsequent events are considered. The amendment became effective upon issuance. The Company has provided the required disclosures regarding subsequent events in Note 15 – Subsequent Events.
 
The provisions under ASC 825, “Financial Instruments,” requiring disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements became effective for the Company during the quarter ended June 30, 2009. The additional disclosures required under ASC 825 are included in Note 1 – Organization and Summary of Significant Accounting Policies.
 
Effective January 1, 2009, the provisions under ASC 350, “Intangibles - Goodwill and Other,” related to the determination of the useful life of intangible assets and requiring additional disclosures related to renewing or extending the terms of recognized intangible assets became effective for the Company. The adoption of these provisions did not have a material effect on the Company’s consolidated financial statements.
 
Effective January 1, 2009, the Company adopted an accounting standard update from the Emerging Issues Task Force consensus regarding the accounting for contingent consideration agreements of an equity method investment and the requirement for the investor to recognize its share of any impairment charges recorded by the investee.  This update to ASC 323, “Investments – Equity Method and Joint Ventures,” requires the investor to record share issuances by the investee as if it has sold a portion of its investment with any resulting gain or loss being reflected in earnings. The adoption of this update did not have any impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, which specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period.  ASU 2010-29 is effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.
 
In September 2011, the FASB issued ASU 2011-08, which provides companies with an option to perform a qualitative assessment that may allow them to skip the two-step impairment test.  ASU 2011-08 amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If this is the case, companies will need to perform a more detailed two-step goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect such adoption will have a material impact on the Company’s consolidated financial statements.

 
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CAPITAL AND COMMERICAL COMMITMENTS:

Radio Broadcasting Licenses
 
Each of the Company’s radio stations operates pursuant to one or more licenses issued by the Federal Communications Commission that have a maximum term of eight years prior to renewal. The Company’s radio broadcasting licenses expire at various times beginning October 1, 2011 through August 1, 2014. Although the Company may apply to renew its radio broadcasting licenses, third parties may challenge the Company’s renewal applications. The Company is not aware of any facts or circumstances that would prevent the Company from having its current licenses renewed.
 
Indebtedness
 
We have several debt instruments outstanding within our corporate structure.  The total amount available under our 2011 Credit Agreement is $411.0 million, consisting of a $386.0 million term loan facility that matures on March 31, 2016 and a $25.0 million revolving loan facility that matures on March 31, 2015. We also have outstanding $747,000 in 6% Senior Subordinated Notes due February 2013 and $305.9 million in our 12½%/15% Senior Subordinated Notes due May 2016.  In addition, Reach Media issued a $1.0 million promissory note payable in November 2009 to a subsidiary of Citadel, which was acquired by Cumulus Media Inc. in September 2011. The note was issued in connection with Reach Media reacquiring Citadel’s noncontrolling stock ownership in Reach Media as well as entering into a new sales representation agreement with Radio Networks, a subsidiary of Citadel. The note bears interest at 7.0% per annum, which is payable quarterly, and the entire principal amount is due on December 31, 2011. Finally, TV One issued $119.0 million in senior secured notes on February 25, 2011. The notes were issued in connection with the repurchase of its equity interest from certain financial investors and TV One management. The notes bear interest at 10.0% per annum, which is payable monthly, and the entire principal amount is due on March 15, 2016. See “Liquidity and Capital Resources.”

 
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Royalty Agreements
 
Effective December 31, 2009, our radio music license agreements with the two largest performance rights organizations, American Society of Composers, Authors and Publishers (“ASCAP”) and Broadcast Music, Inc. (“BMI”) expired. The Radio Music License Committee (“RMLC”), which negotiates music licensing fees for most of the radio industry with ASCAP and BMI, has reached an agreement with these organizations on a temporary fee schedule that reflects a provisional discount of 7.0% against 2009 fee levels. The temporary fee reductions became effective in January 2010. Absent an agreement on long-term fees between the RMLC and ASCAP and BMI, the U.S. District Court in New York has the authority to make an interim and permanent fee ruling for the new contract period. In May 2010 and June 2010, the U.S. District Court’s judge charged with determining the licenses fees ruled to further reduce interim fees paid to ASCAP and BMI, respectively, down approximately another 11.0% from the previous temporary fees negotiated with the RMLC.
 
The Company has entered into other fixed and variable fee music license agreements with other performance rights organizations, which expire as late as December 2015. In connection with these agreements,  the Company incurred expenses of approximately $3.1 million and $9.4 million for the three and nine month periods ended September 30, 2011, respectively, and approximately $2.8 million and $8.7 million, respectively, for the three and nine month periods ended September 30, 2010.

Lease obligations
 
We have non-cancelable operating leases for office space, studio space, broadcast towers and transmitter facilities that expire over the next 19 years.
 
Operating Contracts and Agreements
 
We have other operating contracts and agreements including employment contracts, on-air talent contracts, severance obligations, retention bonuses, consulting agreements, equipment rental agreements, programming related agreements, and other general operating agreements that expire over the next seven years.

Reach Media Noncontrolling Interest Shareholders’ Put Rights
 
Beginning on February 28, 2012, the noncontrolling interest shareholders of Reach Media have an annual right to require Reach Media to purchase all or a portion of their shares at the then current fair market value for such shares.   Beginning in 2012, this annual right can be exercised for a 30-day period beginning February 28 of each year. The purchase price for such shares may be paid in cash and/or registered Class D Common Stock of Radio One, at the discretion of Radio One. As a result, our ability to fund business operations, new acquisitions or new business initiatives could be limited.

Contractual Obligations Schedule
 
The following table represents our contractual obligations as of September 30, 2011:

    
Payments Due by Period
 
Contractual Obligations
 
2011
   
2012
   
2013
   
2014
   
2015
   
2016 and Beyond
   
Total
 
   
(In thousands)
 
6 Senior Subordinated Notes(1)
  $ 12     $ 48     $ 753     $     $     $     $ 813  
12½%/15%  Senior Subordinated Notes(1)
    11,644       43,838       40,879       40,879       40,879       339,980       518,099  
Credit facilities(2)
    8,389       32,699       32,409       32,120       31,830       374,658       512,105  
Note payable(3)
    1,018                                     1,018  
Other operating contracts / agreements(4)
    21,379       52,633       21,372       14,986       662       1,211       112,243  
Operating lease obligations
    2,271       8,720       7,697       6,863       5,763       16,307       47,621  
Senior Secured Notes(5)
    2,975       11,900       11,900       11,900       11,900       121,777       172,352  
Total
  $ 47,688     $ 149,838     $ 115,010     $ 106,748     $ 91,034     $ 853,933     $ 1,364,251  
 
 
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(1)
Includes interest obligations based on current effective interest rate on senior subordinated notes outstanding as of September 30, 2011.

(2)
Includes interest obligations based on current effective interest rate and projected interest expense on credit facilities outstanding as of September 30, 2011.

(3)
Represents a $1.0 million promissory note payable issued in November 2009 by Reach Media to a subsidiary of Citadel. The note was issued in connection with Reach Media reacquiring Citadel’s noncontrolling stock ownership in Reach Media as well as entering into a new sales representation agreement with Radio Networks, a subsidiary of Citadel. The note bears interest at 7.0% per annum, which is payable quarterly, and the entire principal amount is due on December 31, 2011.

(4)
Includes employment contracts, severance obligations, on-air talent contracts, consulting agreements, equipment rental agreements, programming related agreements, and other general operating agreements.  Also includes contracts that TV One has entered into to acquire entertainment programming rights and programs from distributors and producers.  These contracts relate to their content assets as well as prepaid programming related agreements.

(5)
Represents $119.0 million issued by TV One in senior secured notes on February 25, 2011.  The notes were issued in connection with the repurchase of its equity interest from certain financial investors and TV One management.  The notes bear interest at 10.0% per annum, which is payable monthly, and the entire principal amount is due on March 15, 2016.
 
As of December 31, 2010, we had a swap agreement in place for a total notional amount of $25.0 million. At that point, the period remaining on the swap agreement was 18 months. The remaining $25.0 million swap agreement was terminated in conjunction with the March 31, 2011 retirement of our Previous Credit Agreement.
 
Other Contingencies
 
The Company has been named as a defendant in several legal actions arising in the ordinary course of business. It is management’s opinion, after consultation with its legal counsel, that the outcome of these claims will not have a material adverse effect on the Company’s financial position or results of operations.
 
Off-Balance Sheet Arrangements
 
As of September 30, 2011, we had four standby letters of credit totaling approximately $1.2 million in connection with our annual insurance policy renewals and real estate leases. In addition, Reach Media had a letter of credit of $500,000 outstanding as of September 30, 2011.
 
RELATED PARTY TRANSACTIONS
 
The Company’s CEO and Chairperson own a music company called Music One, Inc. (“Music One”). The Company sometimes engages in promoting the recorded music product of Music One. Based on the cross-promotional value received by the Company, we believe that the provision of such promotion is fair.  During the three and nine months ended September 30, 2011 and 2010, Radio One paid $0 and $5,000 and $0 and $6,000, respectively, to or on behalf of Music One, primarily for market talent event appearances, travel reimbursement and sponsorships. For the three and nine months ended September 30, 2011 and 2010, the Company provided no advertising services to Music One. There were no cash, trade or no-charge orders placed by Music One for the three and nine months ended September 30, 2011 and 2010.

The office space and administrative support transactions between Radio One and Music One are conducted at cost and all expenses associated with the transactions are passed through at actual costs.  Costs associated with office space on behalf of Music One are calculated based on square footage used by Music One, multiplied by Radio One’s actual per square foot lease costs for the appropriate time period.  Administrative services are calculated based on the approximate hours provided by each Radio One employee to Music One, multiplied by such employee’s applicable hourly rate and related benefits allocation.  Advertising spots are priced at an average unit rate. Based on the cross-promotional nature of the activities provided by Music One and received by the Company, we believe that these methodologies of charging average unit rates or passing through the actual costs incurred are fair and reflect terms no more favorable than terms generally available to a third-party.

 
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Item 3:  Quantitative and Qualitative Disclosures About Market Risk
 
For quantitative and qualitative disclosures about market risk affecting Radio One, see Item 7A: “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K, for the fiscal year ended December 31, 2010.  Our exposure related to market risk has not changed materially since December 31, 2010.

Item 4.  Controls and Procedures

Evaluation of disclosure controls and procedures
 
We have carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO concluded that as of such date, our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure controls objectives. Our management, including our CEO and CFO, has concluded that our disclosure controls and procedures are effective in reaching that level of reasonable assurance.

Changes in internal control over financial reporting
 
During the three months ended September 30, 2011, 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, captioned, In re Radio One, Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-10160. Similar complaints were filed in the same court against hundreds of other public companies (Issuers) that conducted initial public offerings of their common stock in the late 1990s (“the IPO Cases”). In the complaint filed against Radio One (as amended), the plaintiffs claimed that Radio One, certain of its officers and directors, and the underwriters of certain of its public offerings violated Section 11 of the Securities Act. The plaintiffs’ claim was based on allegations that Radio One’s registration statement and prospectus failed to disclose material facts regarding the compensation to be received by the underwriters, and the stock allocation practices of the underwriters. The complaint also contains a claim for violation of Section 10(b) of the Securities Exchange Act of 1934 based on allegations that these omissions constituted a deceit on investors. The plaintiffs seek unspecified monetary damages and other relief.
 
In July 2002, Radio One joined in a global motion, filed by the Issuers, to dismiss the IPO Lawsuits. In October 2002, the court entered an order dismissing the Company’s named officers and directors from the IPO Lawsuits without prejudice, pursuant to an agreement tolling the statute of limitations with respect to Radio One’s officers and directors until September 30, 2003. In February 2003, the court issued a decision denying the motion to dismiss the Section 11 and Section 10(b) claims against Radio One and most of the Issuers.
 
In July 2003, a Special Litigation Committee of Radio One’s board of directors approved in principle a tentative settlement with the plaintiffs. The proposed settlement would have provided for the dismissal with prejudice of all claims against the participating Issuers and their officers and directors in the IPO Cases and the assignment to plaintiffs of certain potential claims that the Issuers may have against their underwriters. In September 2003, in connection with the proposed settlement, Radio One’s named officers and directors extended the tolling agreement so that it would not expire prior to any settlement being finalized. In June 2004, Radio One executed a final settlement agreement with the plaintiffs. In 2005, the court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the settlement. On February 24, 2006, the court dismissed litigation filed against certain underwriters in connection with the claims to be assigned to the plaintiffs under the settlement. On April 24, 2006, the court held a Final Fairness Hearing to determine whether to grant final approval of the settlement. On December 5, 2006, the Second Circuit Court of Appeals vacated the district court’s earlier decision certifying as class actions the six IPO Cases designated as “focus cases.” Thereafter, the district court ordered a stay of all proceedings in all of the IPO Cases pending the outcome of plaintiffs’ petition to the Second Circuit for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Second Circuit denied plaintiffs’ rehearing petition, but clarified that the plaintiffs may seek to certify a more limited class in the district court. Accordingly, the settlement was terminated pursuant to stipulation of the parties and did not receive final approval.
 
Plaintiffs filed amended complaints in the six “focus cases” on or about August 14, 2007. Radio One is not a defendant in the focus cases. In September 2007, Radio One’s named officers and directors again extended the tolling agreement with plaintiffs. On or about September 27, 2007, plaintiffs moved to certify the classes alleged in the “focus cases” and to appoint class representatives and class counsel in those cases. The focus cases issuers filed motions to dismiss the claims against them in November 2007 and an opposition to plaintiffs’ motion for the class certification in December 2007. On March 16, 2008, the district court denied the motions to dismiss in the focus cases.  In August 2008, the parties to the IPO Cases began mediation toward a global settlement of the IPO Cases.  In September 2008, Radio One’s board of directors approved in principle participation in a tentative settlement with the plaintiffs.  On October 2, 2008, the plaintiffs withdrew their class certification motion.  In April 2009, a global settlement was reached in the IPO Cases and submitted to the district court for approval.   On June 9, 2009, the court granted preliminary approval of the proposed settlement and ordered that notice of the settlement be published and mailed to class members.   On September 10, 2009, the court held a Final Fairness Hearing.  On October 6, 2009, the court certified the settlement class in each IPO Case and granted final approval of the settlement.  On or about October 23, 2009, three shareholders filed a Petition for Permission To Appeal Class Certification Order, challenging the court’s certification of the settlement classes.  On or about October 29, 2009, a number of shareholders also filed direct appeals, objecting to final approval of the settlement.  All but one of the appeals were eventually dismissed and the appeals court thereafter remanded one matter to the district court for a determination whether the final shareholder was a class member with standing to appeal.  In August 2011, the district court determined that the final shareholder was not a member of the class.  In September 2011, the shareholder filed an appeal to the district court’s determination.  If that determination is affirmed on appeal, or if the shareholder is found not to have standing and the settlement is thereafter affirmed on appeal, the settlement will result in the dismissal of all claims against the Company and its officers and directors with prejudice, and the Company’s pro rata share of the settlement fund will be fully funded by insurance.

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

Item 1A.  Risk Factors
 
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”), which could materially affect our business, financial condition or future results. The risks described in our 2010 Annual Report, as updated by our quarterly reports on Form 10-Q, are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also materially adversely affect our business, financial condition and/or operating results.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
Item 3.  Defaults Upon Senior Securities

None.
 
Item 4.  Removed and Reserved

Item 5.  Other Information

 None.
 
Item 6.  Exhibits

Exhibit
Number
 
Description
     
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
 
Financial information from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL.
 
 
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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/ PETER D. THOMPSON
   
 
Peter D. Thompson
 
Executive Vice President and
 
Chief Financial Officer
 
(Principal Accounting Officer)
   
November 14, 2011
 
 
 
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