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 March 31, 2005
Commission File No. 0-25969
RADIO ONE, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5900 Princess Garden Parkway,
7th Floor
Lanham, Maryland 20706
(Address of principal executive offices)
(301) 306-1111
Registrant’s telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding as of May 6, 2005
Class A Common Stock, $.001 Par Value
Class B Common Stock, $.001 Par Value
Class C Common Stock, $.001 Par Value
Class D Common Stock, $.001 Par Value
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(See pages 4-21 — This page intentionally left blank).
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RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
NET BROADCAST REVENUE
OPERATING EXPENSES:
Program and technical
Selling, general and administrative
Corporate expenses
Depreciation and amortization
Total operating expenses
Operating income
INTEREST INCOME
INTEREST EXPENSE, including amortization of deferred financing costs
EQUITY IN NET LOSS OF AFFILIATED COMPANY
OTHER INCOME, net
Income before provision for income taxes and minority interest in income of subsidiary
PROVISION FOR INCOME TAXES
Income before minority interest in income of subsidiary
MINORITY INTEREST IN INCOME OF SUBSIDIARY
Net income
PREFERRED STOCK DIVIDENDS
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS
BASIC AND DILUTED NET INCOME PER COMMON SHARE
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic
Diluted
The accompanying notes are an integral part of these consolidated statements.
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CONSOLIDATED BALANCE SHEETS
CURRENT ASSETS:
Cash and cash equivalents
Short term investments
Trade accounts receivable, net of allowance for doubtful accounts of $3,243 and $4,943, respectively
Prepaid expenses and other current assets
Income tax receivable
Deferred income tax asset
Total current assets
PROPERTY AND EQUIPMENT, net
GOODWILL
RADIO BROADCASTING LICENSES
OTHER INTANGIBLE ASSETS, net
INVESTMENT IN AFFILIATED COMPANY
OTHER ASSETS
Total assets
CURRENT LIABILITIES:
Accounts payable
Accrued interest
Accrued compensation and related benefits
Income taxes payable
Other accrued expenses
Deferred revenue
Other current liabilities
Current portion of long-term debt
Total current liabilities
LONG-TERM DEBT, net of current portion
DEFERRED REVENUE, net of current portion
DEFERRED INCOME TAX LIABILITY
Total liabilities
MINORITY INTEREST IN SUBSIDIARY
STOCKHOLDERS’ EQUITY:
Convertible preferred stock, $.001 par value, 1,000,000 shares authorized; no shares and 309,820 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively; liquidation preference of $1,000 per share plus cumulative dividends at 6.5% per year, unpaid dividends were $0 and $4,198 at March 31, 2005 and December 31, 2004, respectively
Common stock—Class A, $.001 par value, 30,000,000 shares authorized 21,948,280 and 22,374,547 shares issued and outstanding
Common stock—Class B, $.001 par value, 150,000,000 shares authorized, 2,867,463 shares issued and outstanding
Common stock—Class C, $.001 par value, 150,000,000 shares authorized, 3,132,458 shares issued and outstanding at March 31, 2005 and December 31, 2004
Common stock—Class D, $.001 par value, 150,000,000 shares authorized, 77,796,207 and 76,635,971 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively
Accumulated other comprehensive income (loss)
Stock subscriptions receivable
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated balance sheets.
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2004 AND FOR THE THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)
BALANCE, as of December 31, 2003
Comprehensive income:
Change in unrealized loss on derivative and hedging activities, net of taxes
Comprehensive income
Vesting of non-employee restricted stock
Preferred stock dividends
Interest on stock subscriptions receivable
Repayment of interest on officer loan
Adjustment of basis for investment in affiliated company
Employee exercise of options for 162,953 shares
Conversion of 30,000 shares of Class A common stock to 30,000 shares of Class D common stock
Tax effect on non-qualified option exercises
BALANCE, as of December 31, 2004
Change in unrealized gain on derivative and hedging activities, net of taxes
Redemption of preferred stock
Issuance of common stock pursuant to investment in Reach Media, Inc.
Repayment of officer loan
Interest income on stock subscriptions receivable
Repurchase of common stock
Employee exercise of options for 72,321 shares
BALANCE, as of March 31, 2005
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CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash from operating activities:
Amortization of debt financing costs, unamortized discount and deferred interest
Deferred income taxes
Equity in net loss of affiliated company
Minority interest in income of subsidiary
Non-cash compensation
Effect of change in operating assets and liabilities, net of assets acquired:
Trade accounts receivable, net
Other assets
Net cash flows from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Equity investments, net of cash acquired
Sale of short term investments
Purchase of other intangible assets
Deposits and payments for station purchases
Net cash flows from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt
Proceeds from bank credit facility
Proceeds from debt issuances, net of offering costs
Redemption of convertible preferred stock
Proceeds from stock subscriptions due
Payment of bank financing costs
Payment of preferred stock dividends
Proceeds from exercise of stock options
Change in interest due on stock subscriptions receivable
Net cash flows from financing activities
INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
CASH AND CASH EQUIVALENTS, end of period
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest
Income taxes
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a)Organization and Business
Radio One, Inc. (a Delaware corporation referred to as “Radio One”) and subsidiaries (collectively the “Company”) were organized to acquire, operate and maintain radio broadcasting stations. The Company owns and/or operates 69 radio stations in 22 markets throughout the United States.
The Company’s operating results are significantly affected by its share of the audience in markets where it owns and/or operates stations. To increase its share, the Company has made and may continue to make significant acquisitions of radio stations, which may require it to incur additional debt. The service of this debt will require the Company to make significant debt service payments.
In July 2003, the Company entered into a joint venture with an affiliate of Comcast Corporation and other investors to create TV One, LLC (“TV One”), an entity formed to operate a cable television network featuring lifestyle, entertainment, and news-related programming targeted primarily towards African-American viewers. The Company expects to make a cumulative cash investment of approximately $74.0 million in TV One over approximately four years, of which the Company has already funded approximately $37.0 million. The Company also provides advertising and management services to TV One under agreements that expire in January 2009. As consideration for providing these services, the Company receives cash and has received equity in TV One. As of March 31, 2005, the Company owned approximately 36% of TV One on a fully converted basis.
In February 2005, the Company completed the acquisition of 51% of the common stock of Reach Media, Inc. (“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. Reach Media commenced operations in 2003 and was formed by Tom Joyner, its Chairman, and David Kantor, its Chief Executive Officer, to operate the Tom Joyner Morning Show and related businesses. Mr. Joyner is a leading nationally syndicated radio personality. The Tom Joyner Morning Show is broadcast on over 115 affiliate stations across the United States and is a top-rated morning show in many of the markets in which it is broadcast. Reach Media also operates the Tom Joyner Sky Show, the Tom Joyner Family Reunion and various other special event-related activities. Additionally, Reach Media operates BlackAmericaWeb.com, an African-American targeted Internet destination, and airs a television program on TV One.
(b) Basis of Presentation
The accompanying consolidated financial statements include the accounts of Radio One, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
(c) Interim Financial Statements
The interim consolidated financial statements included herein for Radio One and subsidiaries have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“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 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. It is suggested that these consolidated financial statements be read in conjunction with the Company’s December 31, 2004 financial statements and notes thereto included in the Company’s annual report on Form 10-K/A.
(d) Financial Instruments
Financial instruments as of March 31, 2005 and December 31, 2004 consist of cash and cash equivalents, short term investments, trade accounts receivable, notes receivable (which are included in other current assets), accounts payable, accrued expenses, long-term debt and subscriptions receivable. The carrying amounts approximate fair value for each of these financial instruments as of March 31, 2005 and December 31, 2004, except for the Company’s outstanding senior subordinated notes. The 8 7/8% senior subordinated notes had a fair value of approximately $321.8 million and $334.1 million as of March 31, 2005 and December 31, 2004, respectively. The fair value was determined based on the fair market value of similar instruments.
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In February 2005, the Company completed the private placement of $200.0 million of 6 3/8% senior subordinated notes. The net proceeds from the sale of the notes were approximately $195.7 million. The notes mature in February 2013 and interest on the notes is payable in cash on February 15 and August 15 of each year, beginning August 15, 2005. The 6 3/8% senior subordinated notes had a fair value of approximately $196.0 million as of March 31, 2005. The fair value was determined based on the fair market value of similar instruments.
(e) Revenue Recognition
The Company recognizes revenue for broadcast advertising when the commercial is broadcast and is reported net of agency commissions in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” as amended by Staff Accounting Bulletin No. 104, Topic 13, “Revenue Recognition, Revised and Updated.” Agency commissions, when applicable, are calculated based on a stated percentage applied to gross billing. Generally, clients remit the gross billing amount to the agency and the agency remits the gross billing, less their commission, to the Company. Agency commissions were approximately $10.0 million and $9.2 million during the three months ended March 31, 2005 and 2004, respectively.
(f) Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” and related interpretations, and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation.” Under APB No. 25, compensation expense is based upon the difference, if any, on the date of grant, between the fair value of the Company’s stock and the exercise price.
At March 31, 2005, the Company had one stock-based employee compensation plan. The Company accounts for the plan under the recognition and measurement principles of APB No. 25, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the determined market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:
For the Three Months
Ended
March 31,
Net income applicable to common stockholders, as reported:
Add: stock-based employee compensation expense included in net income
Less: total stock-based employee compensation expense determined under fair value-based method for all awards
Pro forma net income applicable to common stockholders
As reported net income per share—basic
As reported net income per share—diluted
Pro forma net income per share —basic
Pro forma net income per share—diluted
The per share weighted-average fair value of employee options granted during the three months ended March 31, 2005 and 2004 was $8.63 and $11.02, respectively, on the date of grant. These fair values were derived using the Black-Scholes Option Pricing Model with the following weighted-average assumptions:
Average risk-free interest rate
Expected dividend yield
Expected lives
Expected volatility
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(g) Comprehensive Income
The Company’s comprehensive income consists of net income and other items recorded directly to the equity accounts. The objective is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events during the period, other than transactions with owners. The Company’s other comprehensive income consists principally of gains and losses on derivative instruments that qualify for cash flow hedge treatment.
The following table sets forth the components of comprehensive income:
Other comprehensive income (loss) (net of tax benefit of $472 and tax provision of $382, respectively):
Derivative and hedging activities
(h) Net Income Applicable to Common Stockholders
The net income applicable to common stockholders for the periods ended March 31, 2005 and 2004 is net income less dividends on the Company’s preferred stock of approximately $2.8 and $5.0 million, respectively.
(i) Earnings Per Share
Earnings per share is based on the weighted average number of common and diluted common equivalent shares for stock options and warrants outstanding during the period the calculation is made, divided into the net income applicable to common stockholders. Diluted common equivalent shares consist of shares issuable upon the exercise of stock options and warrants, using the treasury stock method.
2. RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123(R) (“SFAS No. 123(R)”), “Accounting for Stock-Based Compensation.” SFAS No. 123(R) sets accounting requirements for “share-based” compensation to employees, including employee stock purchase plans. The statement eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally requires instead that such transactions be accounted for using a fair-value-based method. Disclosure of the effect of expensing the fair value of equity compensation is currently required under existing literature. The statement also requires the tax benefit associated with these share based payments be classified as financing activities in the Statement of Cash Flows rather than operating activities as currently permitted. The Securities and Exchange Commission recently delayed the required implementation date for this statement from the Company’s third quarter of 2005 to the beginning of the Company’s 2006 fiscal year.
3. ACQUISITIONS:
In February 2005, the Company completed the acquisition of 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. Reach Media commenced operations in 2003 and was formed by Tom Joyner, its Chairman, and David Kantor, its Chief Executive Officer, to operate the Tom Joyner Morning Show and related businesses. Reach Media primarily derives its revenue from the sale of advertising inventory in connection with its syndication agreements. Mr. Joyner is a leading nationally syndicated radio personality. The Tom Joyner Morning Show is broadcast on over 115 affiliate stations across the United States and is a top-rated morning show in many of the markets in which it is broadcast. Reach Media also operates the Tom Joyner Sky Show, the Tom Joyner Family Reunion and various other special event-related activities. Additionally, Reach Media operates BlackAmericaWeb.com, an African-American targeted Internet destination, and airs a television program on TV One. The Company allocated approximately $1.8 million of the purchase price to net working capital balances and the remaining amount to other intangible assets on the Company’s consolidated balance sheet as of March 31, 2005, pending completion of the purchase price allocation.
In November 2004, the Company completed the acquisition of the assets of WABZ-FM, a radio station located in the Charlotte metropolitan area. Upon completing the acquisition, the Company consolidated the station with its existing Charlotte operations, changed the call sign to WPZS-FM and reformatted the station. The total acquisition price was approximately $11.5 million in cash.
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The Company initially allocated the full value of the purchase price to radio broadcasting licenses on the Company’s consolidated balance sheet as of December 31, 2004. Upon completion of this purchase price allocation in February 2005, the allocation was adjusted and approximately $11.4 million and $76,000 was assigned to radio broadcasting licenses and goodwill, respectively.
In October 2004, the Company acquired the outstanding stock of New Mableton Broadcasting Corporation (“NMBC”), which owns WAMJ-FM, a radio station located in the Atlanta metropolitan area. The Company had operated WAMJ-FM under a local marketing agreement (“LMA”) since August 2001. New Mableton Broadcasting Corporation’s majority shareholder was an entity controlled by the Company’s Chief Executive Officer and President. The total acquisition price was approximately $35.0 million in cash. The Company has allocated the full purchase price to radio broadcasting licenses on the Company’s consolidated balance sheet as of March 31, 2005, pending completion of the purchase price allocation.
In February 2004, the Company completed the acquisition of the assets of WSNJ-FM, a radio station located in the Philadelphia metropolitan area. Upon receiving the necessary regulatory approvals, the Company consolidated the station with its existing Philadelphia operations, changed the call sign to WRNB-FM and reformatted the station. The acquisition price was approximately $35.0 million in cash. The Company initially allocated the full value of the purchase price to radio broadcasting licenses on the Company’s consolidated balance sheet as of December 31, 2004. Upon completion of the purchase price allocation in January 2005, the allocation was adjusted and approximately $34.9 million and $54,000 was assigned to radio broadcasting licenses and goodwill, respectively.
4. INVESTMENT IN AFFILIATED COMPANY:
In July 2003, the Company entered into a joint venture agreement with an affiliate of Comcast Corporation and other investors to create TV One, an entity formed to operate a cable television network featuring lifestyle, entertainment and news-related programming targeted primarily towards African-American viewers. The Company has committed to make a cumulative cash investment of approximately $74.0 million in TV One over approximately four years, of which the Company has already funded approximately $37.0 million. In December 2004, TV One entered into a distribution agreement with DIRECTV, Inc. (“DIRECTV”) and certain affiliates of DIRECTV became investors in TV One. As of March 31, 2005, the Company owned approximately 36% of TV One on a fully converted basis, and Comcast owned a slightly smaller stake.
The Company has recorded its investment at cost and has adjusted the carrying amount of the investment to recognize the change in the Company’s claim on the net assets of TV One resulting from losses of TV One as well as other capital transactions of TV One using a hypothetical liquidation at book value approach. For the three months ended March 31, 2005, the Company’s allocable share of TV One’s losses was $459,000. Under the hypothetical liquidation at book value approach, the decrease in the Company’s claim on the change in net assets of TV One resulting from additional equity contributed to TV One by investors, resulted in a decrease of $383,000 to additional paid-in capital of Radio One in accordance with SEC Staff Accounting Bulletin No. 51, “Accounting for Sales of Stock by a Subsidiary.”
The Company also entered into separate network services and advertising services agreements with TV One in 2003. Under the network services agreement, which expires in January 2009, the Company is providing TV One with administrative and operational support services and access to Company personalities. Under the advertising services agreement, the Company is providing a specified amount of advertising to TV One over a term of five years ending in January 2009. As consideration for providing these services, the Company receives an annual service fee of $500,000 in cash and has received equity in TV One.
The Company is accounting for these services transactions in accordance with Emerging Issues Task Force, Issue No. 00-8, “Accounting by a Grantee for an Equity Instrument to Be Received in Conjunction with Providing Goods or Services.” As these services are provided to TV One, the Company is recording revenue based on the fair value of the most reliable unit of measurement in these transactions. For the advertising services agreement, this has been determined to be the value of underlying advertising time that is being provided to TV One. For the network services agreement, this has been determined to be the initial value of the equity received in TV One; as a result, the Company is re-measuring the fair value of the equity received to complete its obligations under the network services agreement in each subsequent reporting period as the services are provided. The Company recognized $624,000 and approximately $1.1 million of revenue relating to these two agreements for the three months ended March 31, 2005 and 2004, respectively.
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5. LONG-TERM DEBT:
Long-term debt consists of the following:
8 7/8% Senior subordinated notes
6 3/8% Senior subordinated notes
Bank credit facilities
Capital lease obligations
Total long-term debt
Less: current portion
Long term debt, net of current portion
Senior Subordinated Notes
In February 2005, the Company completed the private placement of $200.0 million of 6 3/8% senior subordinated notes due 2013 realizing net proceeds of approximately $195.7 million. The Company recorded approximately $4.3 million in deferred offering costs, which are being amortized to interest expense over the life of the notes using the effective interest rate method.
In May 2001, the Company completed the private placement of $300.0 million of 8 7/8% senior subordinated notes due 2011 realizing net proceeds of approximately $291.8 million. The Company recorded approximately $8.2 million in deferred offering costs, which are being amortized to interest expense over the life of the notes using the effective interest rate method.
Bank Credit Facilities
In July 2000, the Company entered into a credit agreement with a group of financial institutions whereby the Company could borrow up to $750.0 million. This agreement was subsequently amended on March 18, 2002 to provide new facilities under which the Company may borrow up to $600.0 million. The bank credit agreement requires compliance with financial tests based on financial position and results of operations, including a leverage ratio, an interest coverage ratio and a fixed charge coverage ratio, all of which could effectively limit the Company’s ability to borrow or otherwise raise funds in the credit and capital markets.
The bank credit agreement consist of a Term A facility in the amount of $350.0 million and a revolving credit facility, in an amount up to $250.0 million that may be borrowed on a revolving basis. The Term A facility requires minimum quarterly principal payments and as of March 31, 2005, the Company had repaid $122.5 million with $227.5 million outstanding. As of March 31, 2005 the Company had $210.0 million outstanding on the revolving credit facility, with $40.0 million available to be drawn down (subject to various covenant restrictions). The bank facilities mature in June 2007. The interest rate on the bank credit facilities is LIBOR plus a spread based on the Company’s leverage ratio, as defined in the credit agreement. The weighted average interest rate for the bank credit facilities was 3.26% and 3.40% during the three months ended March 31, 2005 and 2004, respectively.
The Company’s bank credit agreement and the indentures governing the other outstanding debt contain covenants that restrict, among other things, the ability of the Company to incur additional debt, purchase capital 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.
Future minimum principal payments of long-term debt as of March 31, 2005 are as follows:
April – December, 2005
2006
2007
2008
2009
2010 and thereafter
6. STOCKHOLDERS’ EQUITY:
In February 2005, the Company redeemed all of its outstanding 6 1/2% Convertible Preferred Remarketable Term Income Deferrable Equity Securities in the aggregate sum of approximately $310.0 million. This redemption was financed with the net proceeds of the sale of the Company’s 6 3/8% senior subordinated notes due 2013, borrowings under its revolving credit facility and available excess cash.
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7. RELATED PARTY TRANSACTIONS:
The Company leased office space from a partnership in which the Company’s Chief Executive Officer (“CEO”) and Chairperson are partners. Effective June 28, 2004, the partnership sold the property to a third party. On that date, the Company entered into a new lease agreement with the third party that expired in January 2005, after which the Company relocated to a new facility. Total rent paid to the partnership was $60,000 during the three months ended March 31, 2004.
Three officers of the Company, the CEO, Chief Financial Officer (“CFO”) and the Chief Administrative Officer (“CAO”), purchased 1,500,000 shares of the Company’s Class D common stock, 333,334 shares of the Company’s Class A common stock and 666,666 of the Company’s Class D common stock, and 250,000 shares of the Company’s Class D common stock, respectively. The stock was purchased with the proceeds of full recourse loans from the Company in the amounts of approximately $21.1 million, $7.0 million and $2.0 million, respectively. The CEO made an interest payment on his loan in the amount of $2.0 million in December 2004. As of December 31, 2004, accrued interest on these loans were approximately $2.5 million, $1.7 million and $401,000, respectively. The CEO made a further repayment of approximately $17.8 million on his loan in February 2005 and repaid the remaining balance of the loan of approximately $6.0 million in March 2005. The repayment of approximately $17.8 million was effected using 1,125,000 shares of the Company’s Class D common stock owned by the CEO. All shares transferred to the Company in satisfaction of these loans have been retired by the Company. As of March 31, 2005, the accrued interest on these loans to the CFO and CAO were approximately $1.8 million and $423,000, respectively.
The Company also had loans outstanding to the Company’s CEO, CFO and Chief Operating Officer (“COO”) in the amounts of $380,000, $88,000 and $262,000, respectively. The loans are due on demand and bear interest at 5.6%. As of December 31, 2004, accrued interest on these loans were $163,000, $31,000 and $99,000, respectively. The CEO repaid in full, and in cash, the balance of his loan in the amount of $549,000 in March 2005. As of March 31, 2005, the accrued interest on these loans to the CFO and COO were $33,000 and $104,000 respectively.
In February 2002, the Company’s CFO exercised a contractual right to receive a non-interest-bearing loan in the amount of $750,000. The loan was paid in full in January 2005. The repayment was effected using a combination of cash and 20,000 shares of the Company’s Class D common stock owned by the CFO. All shares transferred to the Company in satisfaction of these loans have been retired by the Company.
In October 2004, the Company acquired the outstanding stock of NMBC, which owns WAMJ-FM, a radio station licensed to the Atlanta metropolitan area. The total acquisition price was approximately $35.0 million in cash, of which approximately $10.0 million was paid in available cash and $25.0 million was paid through a draw down on the Company’s bank credit facility. Prior to the acquisition, Mableton Investment Group, LLC (“MIG”) was NMBC’s majority shareholder. Alfred C. Liggins, III, the Company’s CEO, was the sole member and manager of MIG. Until February 2003, Syndicated Communications Venture Partners II, LP was also a member of MIG. Terry L. Jones, a general partner of Syndicated Communications Venture Partners II, LP is a member of the Company’s board of directors. The terms of the NMBC acquisition were approved by an independent committee of the Company’s board of directors and a fairness opinion was obtained from an independent third party. Prior to acquiring NMBC, the Company programmed and provided marketing services to WAMJ-FM through an LMA with MIG. Total fees paid under the LMA were $111,000 for the three months ended March 31, 2004.
8. COMMITMENTS AND CONTINGENCIES:
Radio Broadcasting Licenses
Each of the Company’s radio stations operates pursuant to one or more licenses issued by the Federal Communications Commission that have a maximum term of eight years prior to renewal. The Company’s radio broadcasting licenses expire at various times through October 1, 2012. 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.
TV One Cable Network
Pursuant to a limited liability company agreement dated July 18, 2003, the Company and certain other investors formed TV One for the purpose of developing and distributing a new television programming service. The Company has committed to make a cumulative cash investment of approximately $74.0 million in TV One over approximately four years. As of March 31, 2005, the Company has already funded approximately $37.0 million under this agreement.
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Royalty Agreements
The Company has entered into fixed fee and variable share agreements with music performance rights organizations that expire as late as 2009. During the three months ended March 31, 2005 and 2004, the Company incurred expenses of approximately $2.8 million and approximately $2.4 million, respectively, in connection with these agreements.
Other Contingencies
The Company has been named as a defendant in several legal actions occurring in the ordinary course of business. It is management’s opinion, after consultation with its legal counsel, that the outcome of these claims will not have a material adverse effect on the Company’s financial position or results of operations.
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CONSOLIDATING FINANCIAL STATEMENTS
The Company conducts a portion of its business through its subsidiaries. All of the Company’s restricted subsidiaries (“Subsidiary Guarantors”) have fully and unconditionally guaranteed the Company’s 8 7/8% senior subordinated notes due 2011 and 6 3/8% senior subordinated notes due 2013.
Set forth below are consolidating financial statements for the Company and the Subsidiary Guarantors as of March 31, 2005 and 2004, and for the three-month periods then ended. The equity method of accounting has been used by the Company to report its investments in subsidiaries. Separate financial statements for the Subsidiary Guarantors are not presented based on management’s determination that they do not provide additional information that is material to investors.
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CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
Income (loss) before provision for income taxes and minority interest in income of subsidiary
Net income (loss) before equity in income of subsidiaries
EQUITY IN INCOME OF SUBSIDIARIES
PREFERRED STOCK DIVIDEND
The accompanying notes are an integral part of this consolidating statement.
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FOR THE THREE MONTHS ENDED MARCH 31, 2004
OTHER INCOME (EXPENSE), net
Income before provision for income taxes
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CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2005
Short-term investments
Trade accounts receivable, net of allowance for doubtful accounts
Deferred tax asset
INTANGIBLE ASSETS, net
INVESTMENT IN SUBSIDIARIES
Accrued expenses
Common stock
Accumulated other comprehensive income
The accompanying notes are an integral part of this consolidating balance sheet.
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AS OF DECEMBER 31, 2004
Fair value of derivative instruments
Accumulated other comprehensive loss
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CONSOLIDATING STATEMENT OF CASH FLOWS
Adjustments to reconcile loss to net cash from operating activities:
Equity in net losses of affiliated company
Due to corporate/from subsidiaries
Prepaid expenses and other
Accrued expenses and other
Sale of short-term investments
Investment in subsidiaries
Purchase other intangible assets
Proceeds from credit facility
Change in interest due on stock subscription receivable
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Equity investments
Investment in subsidiary
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with “Selected Financial Data” and the Consolidated Financial Statements and Notes thereto included elsewhere in this report and the audited financial statements and Management Discussion and Analysis contained in our Annual Report on Form 10-K/A for the year ended December 31, 2004.
Introduction
Revenue
We derive revenue from sales of advertisements and program sponsorships to local and national advertisers and, to a much lesser extent, tower rental income, independent promotion agreements, ticket and other revenue related to special events we sponsor throughout the year and management fees from our affiliated company, TV One, LLC (“TV One”). 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. In February 2005, we acquired 51% of the common stock of Reach Media, Inc. (“Reach Media”). Reach Media primarily derives revenue from the sale of advertising time on the affiliate stations which broadcast the Tom Joyner Morning Show. The affiliate radio stations provide Reach Media with advertising inventory on their stations which is then sold to the marketplace through a sales representative agreement with ABC Radio Networks. ABC Radio Networks guarantees Reach Media an agreed upon amount of annual revenue with the potential to earn additional amounts if certain revenue goals are met. The agreement with ABC Radio Networks runs through 2009. Additional revenue is generated by Reach Media from special events, sponsorships, its Internet business and other related activities.
Approximately 69% of our net revenue was generated from local advertising and approximately 28% was generated from national spot advertising, including network advertising, during the three months ended March 31, 2005. In comparison, approximately 70% of our net revenue was generated from local advertising and approximately 28% was generated from national spot advertising, including network advertising, during the three months ended March 31, 2004. The balance of revenue was generated primarily from tower rental income, ticket sales and revenue related to our sponsored events, management fees and other revenue.
In the broadcasting industry, radio stations often utilize trade or barter agreements to reduce cash expenses by exchanging advertising time for goods or services. In order to maximize cash revenue from our spot inventory, we monitor the use of trade agreements.
Expenses
Our significant broadcast expenses are (i) employee salaries and commissions, (ii) programming expenses, (iii) advertising and promotion expenses, (iv) rental of premises for studios, (v) rental of transmission tower space and (vi) music license royalty fees. We strive to control these expenses by centralizing certain functions such as finance, accounting, legal, human resources and management information systems and the overall programming management function. We also use our multiple stations, market presence and purchasing power to negotiate favorable rates with certain vendors and national representative selling agencies.
We generally incur advertising and promotional expenses to increase our audiences. However, because Arbitron reports ratings quarterly, any changed ratings and therefore the effect on advertising revenue, tends to lag behind the incurrence of advertising and promotional expenditures.
Measurement of Performance
We monitor the growth and operational results of our business using net income and the following key metrics:
(a) Net broadcast revenue: The performance of an individual radio station or group of radio stations in a particular market is customarily measured by its ability to generate net broadcast revenue. Net broadcast revenue consists of gross broadcast revenue net of local and national agency commissions consistent with industry practice. Net broadcast revenue is recognized in the period in which advertisements are broadcast. Net broadcast revenue also includes advertising aired in exchange for goods and services, which is recorded at fair value.
(b) Station operating income: Net income before depreciation and amortization, income taxes, interest income, interest expense, equity in net loss of affiliated company, minority interest in income of subsidiary, other expense, corporate expenses and non-cash compensation expenses is commonly referred to in our business as station operating income. Station operating income is not a measure of financial performance under generally accepted accounting principles. Nevertheless we believe station operating income is often a useful measure of a broadcasting company’s operating performance and is a significant basis used by our management to measure the operating performance of our stations within the various markets because station operating income provides helpful information about our results of operations apart from expenses associated with our physical plant, income taxes provision,
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investments, debt financings, overhead and non-cash compensation. Station operating income is frequently used as one of the bases for comparing businesses in our industry, although our measure of station operating income may not be comparable to similarly titled measures of other companies. Station operating income does not purport to represent operating loss or cash flow from operating activities, as those terms are defined under generally accepted accounting principles, and should not be considered as an alternative to those measurements as an indicator of our performance.
(c) Station operating income margin: Station operating income margin represents station operating income as a percentage of net broadcast revenue. Station operating income margin is not a measure of financial performance under generally accepted accounting principles. Nevertheless, we believe that station operating income margin is a useful measure of our performance because it provides helpful information about our profitability as a percentage of our net broadcasting revenue.
(d) EBITDA: Net income or loss before interest income, interest expense, income taxes, depreciation and amortization is commonly referred to in our business as “EBITDA.” EBITDA is not a measure of financial performance under generally accepted accounting principles. We believe EBITDA is often a useful measure of a company’s operating performance and is a significant basis used by our management to measure the operating performance of our business because EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our acquisitions and debt financings, and our provision for tax expense. Accordingly, we believe that EBITDA provides helpful information about the operating performance of our business, apart from the expenses associated with our physical plant or capital structure. EBITDA is frequently used as one of the bases for comparing businesses in our industry, although our measure of EBITDA may not be comparable to similarly titled measures of other companies. EBITDA does not purport to represent operating loss or cash flow from operating activities, as those terms are defined under generally accepted accounting principles, and should not be considered as an alternative to those measurements as an indicator of our performance.
Summary of Performance
The table below provides a summary of our performance based on the metrics described above:
Net broadcast revenue
Station operating income(1)
Station operating income margin
EBITDA(2)
Net income as reported
Add back non-station operating income items included in net income:
Interest income
Interest expense
Provision for income taxes
Corporate expenses, excluding non-cash compensation
Other income, net
Station operating income
Add back non-EBITDA items included in net income:
EBITDA
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RESULTS OF OPERATIONS
The following table summarizes our historical consolidated results of operations:
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Statements of Operations:
Operating expenses:
Programming and technical, excluding non-cash compensation
Income tax provision
Preferred stock dividend
Net income applicable to common stockholders
Net Broadcast Revenue.
Three Months Ended
During the three months ended March 31, 2005, we recognized approximately $77.0 million in net broadcast revenue compared to approximately $69.7 million during the three months ended March 31, 2004. These amounts are net of agency commissions, which were approximately $10.0 million during 2005, compared to approximately $9.2 million during 2004. The increase in net broadcast revenue was due primarily to increased demand for advertising on our stations that resulted from our increased listenership and ratings. The revenue growth in several of our markets, including, Charlotte, Cleveland, Columbus, Dallas, Houston, Raleigh and Washington, DC and our consolidation of the March 2005 operating results of Reach Media were partially offset by revenue declines in some of our other markets, including Philadelphia due to a format change, Los Angeles due to soft ratings and Baltimore due to general market conditions. Excluding Reach Media, our net broadcast revenue grew approximately 7.0% for the three months ended March 31, 2005.
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Operating Expenses.
Programming and technical.
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 our programming on our radio stations. Programming and technical expenses also include expenses associated with our research activities and music royalties. The increase in programming and technical expenses during the three months ended March 31, 2005 resulted primarily from our consolidation of the March 2005 operating results of Reach Media, and to a lesser extent, an increase in programming expenses relating to our on-air talent, incremental costs relating to expanding our presence on the internet and stations acquired in late 2004.
Selling, general and administrative.
Selling, general and administrative expenses include expenses associated with our offices and facilities (outside of our corporate headquarters) and headcount, marketing expenses and back office expenses. Selling, general and administrative expenses also include expenses related to the advertising traffic (scheduling and insertion) functions. The increase in selling, general and administrative expenses between periods resulted primarily from increased compensation and selling expenses driven by increased revenue, our stations acquired in late 2004 and our consolidation of the March 2005 operating results of Reach Media.
Corporate expenses.
Corporate expenses consist of expenses associated with maintaining our corporate headquarters and facilities, including headcount. The increase in corporate expenses resulted primarily from increased compensation, additional professional fees and our consolidation of the March 2005 operating results of Reach Media.
Non-cash compensation.
During the three months ended March 31, 2004, we issued restricted stock to certain on-air talent, some of which vested immediately. As a result, the non-cash compensation expense during the three months ended March 31, 2005 decreased from the expense recorded in the comparable period of the prior year.
Depreciation and amortization.
2005
2004
Increase/(Decrease)
$ 3,467
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The decrease in depreciation and amortization expense for the three months ended March 31, 2005 was due primarily to the completion of amortization of some of our trade names in late 2004, partially offset by depreciation for our additional capital expenditures made since the first quarter of 2004.
Interest Income
The decrease in interest income resulted primarily from lower average balances of cash, cash equivalents and short-term investments and the pay-off of certain officer loans during the three months ended March 31, 2005.
Interest Expense.
The increase in interest expense resulted from additional interest obligations relating to the issuance of $200.0 million senior subordinated notes and the draw down of $135.0 million on our revolving credit facility during the quarter ended March 31, 2005. These funds were used to redeem approximately $310.0 million of our Convertible Preferred Remarketable Term Income Deferrable Equity Securities (“HIGH TIDES”) and to partially fund our acquisition of 51% of the common stock of Reach Media during the three months ended March 31, 2005.
Equity in Net Loss of Affiliated Company.
In July 2003, we entered into a joint venture agreement with an affiliate of Comcast Corporation and certain other investors to form TV One for the purpose of distributing a new cable television programming service. See “Liquidity and Capital Resources” section below for further discussion. During 2004, we modified our methodology for estimating our equity in the net loss of TV One. As a result of this modification, we recognized a net loss of $459,000 for the three months ended March 31, 2005, compared to a net loss of approximately $2.4 million in for the three months ended March 31, 2004, for our share of the net loss of TV One.
Net Income.
The increase in net income resulted primarily from an increase of approximately $3.4 million in operating income offset by an increase of approximately $2.5 million in interest expense for the three months ended March 31, 2005.
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Net Income Applicable to Common Stockholders.
Net income applicable to common stockholders is net income less dividends on our HIGH TIDES. The increase in net income applicable to common stockholders was attributable to the increase in net income of $896,000 and a decrease in preferred stock dividends of approximately $2.3 million during the three months ended March 31, 2005. In February 2005, we redeemed all outstanding HIGH TIDES using proceeds from our sale of $200.0 million 6 3/8% senior subordinated notes, borrowings of $110.0 million under our revolving bank credit facility, and available excess cash.
Other Data
Station operating income. Station operating income consists of net income before depreciation and amortization, income taxes, interest income, interest expense, equity in net loss of affiliated company, minority interest in income of subsidiary, other expense, corporate expenses and non-cash compensation expenses. Station operating income is not a measure of financial performance under generally accepted accounting principles. Station operating income increased to approximately $37.5 million for the three months ended March 31, 2005, compared to approximately $34.1 million for the three months ended March 31, 2004, an increase of approximately $3.4 million or 10%. This increase was primarily attributable to an increase in net broadcast revenue, partially offset by higher operating expenses as described above. A reconciliation of net income to station operating income is provided on page 23.
Station operating income margin. Station operating income margin represents station operating income as a percentage of net broadcast revenue. Station operating income margin is not a measure of financial performance under generally accepted accounting principles. Our station operating income margin was 48.7% for the three months ended March 31, 2005, compared to 49.0% for the three months ended March 21, 2004. Our station operating income was approximately $37.5 million and $34.1 million for the three months ended March 31, 2005 and 2004, respectively, while our net broadcast revenue was approximately $77.0 million and $69.7 million for the three months ended March 31, 2005 and 2004, respectively.
EBITDA. EBITDA represents net income or loss before interest income, interest expense, income taxes, depreciation and amortization. EBITDA is not a measure of financial performance under generally accepted accounting principles. EBITDA was approximately $31.7 million for the three months ended March 31, 2005, compared to approximately $27.6 million for the three months ended March 31, 2004, an increase of approximately $4.1 million or 15%. A reconciliation of net income to EBITDA is provided on page 23.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is cash provided by operations and, to the extent necessary, commitments available under our amended and restated bank credit facilities and other debt or equity financing. We have used, and will continue to use, a significant portion of our capital resources to consummate acquisitions. These acquisitions were or may be funded from:
We have entered into an amended and restated bank credit agreement dated July 17, 2000. The bank credit agreement consists of a Term A facility in the amount of $350.0 million and a revolving credit facility in an amount up to $250.0 million that may be borrowed on a revolving basis. As of March 31, 2005, we have repaid $122.5 million of the Term A facility, leaving an outstanding balance of $227.5 million. As of March 31, 2005, we had $210.0 outstanding on the revolving credit facility, with $40.0 million available to be drawn down, subject to the applicable covenant restrictions. During the first quarter of 2005, we drew down $25.0 million to complete our acquisition of 51% of the common stock of Reach Media and an additional $110.0 million to complete the redemption of our HIGH TIDES. Both the Term A facility and the revolving commitments under the credit facility bear interest, at the company’s option, at a rate equal to either LIBOR plus a spread that ranges from 0.63% to 2.00% or the prime rate plus a spread of up to 1.00%, depending on our leverage ratio. Under our bank credit agreement, we may be required from time to time to protect
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ourselves from interest rate fluctuations using interest rate hedge agreements. As a result, we have entered into various fixed rate swap agreements designed to mitigate our exposure to higher floating interest rates. These swap agreements require that we pay a fixed rate of interest on the notional amount to a bank and that the bank pays to us a variable rate equal to three-month LIBOR. We currently have swap agreements in place for a total notional amount of $150.0 million. As of March 31, 2005, the periods remaining on the swap agreements range in duration from eight to 18 months.
Our credit exposure under these swap agreements is limited to the cost of replacing an agreement in the event of non-performance by our counter-party; however, we do not anticipate non-performance. All of the swap agreements are tied to the three-month LIBOR interest rate, which may fluctuate significantly on a daily basis. The valuation of each of these swap agreements is affected by the change in the three-month LIBOR rates and the remaining term of the agreement. Any increase in the three-month LIBOR rate results in a more favorable valuation, while a decrease in the three-month LIBOR rate results in a less favorable valuation.
The following table summarizes the interest rates in effect with respect to certain of our debt as of March 31, 2005:
Type of debt
Senior bank term debt (swap matures 10/5/2006)(1)(2)
Senior bank term debt (swap matures 12/5/2005) )(1)(2)
Senior bank term debt (subject to variable interest rates)(3)
Senior bank revolving debt (subject to variable interest rates)(3)
8 7/8% Senior subordinated notes (fixed rate)
6 3/8% Senior subordinated notes (fixed rate)
In May 2001, we completed the private placement of $300.0 million of 8 7/8% senior subordinated notes due 2011, realizing net proceeds of approximately $291.8 million. We recorded approximately $8.2 million in deferred offering costs, which are being amortized to interest expense over the life of the notes using the effective interest rate method. The net proceeds of the offering were primarily used to repay amounts owed on our bank credit facilities and previously outstanding senior subordinated notes.
In February 2005, we completed the private placement of $200.0 million of 6 3/8% senior subordinated notes due 2013, realizing net proceeds of approximately $195.7 million. We recorded approximately $4.3 million in deferred offering costs, which are being amortized to interest expense over the life of the related notes using the effective interest rate method. The net proceeds of the offering, in addition to a draw down of $110.0 million under our revolving credit facility and available excess cash, were primarily used to redeem our HIGH TIDES.
Our credit agreement and the indentures for our senior subordinated notes require that we comply with certain financial covenants limiting our ability to incur additional debt. Such terms also place restrictions on us with respect to the sale of assets, liens, investments, dividends, debt repayments, capital expenditures, transactions with affiliates, consolidation and mergers, and the issuance of equity interests, among other things. Our credit agreement also requires compliance with financial tests based on financial position and results of operations, including a leverage ratio, an interest coverage ratio and a fixed charge coverage ratio, all of which could effectively limit our ability to borrow under the credit agreement or to otherwise raise funds in the debt market. In February 2005, we entered into an amendment with our lenders under our credit agreement that modified the financial condition covenants to terms more favorable to us. We believe that we are in compliance in all material respects with all the covenants of our credit agreement and the indentures for our senior subordinated notes.
The following table provides a comparison of our statements of cash flows for the three months ended March 31, 2005 and 2004:
Net cash flows used in investing activities
Net cash flows used in financing activities
Net cash flows from operating activities were approximately $16.3 million and $24.2 million for the three months ended March 31, 2005 and 2004, respectively. Cash flows provided by operating activities for the three months ended March 31, 2005 declined from the prior year primarily because of changes to the components of working capital. Trade accounts receivable and accounts payable are primarily the working capital components that impacted the decline. Trade accounts receivable increased due to sales growth and accounts payable declined due to the redemption of our HIGH TIDES.
Net cash flows used in investing activities were approximately $17.4 million and $29.9 million for the three months ended March 31, 2005 and 2004, respectively. During the three months ended March 31, 2005, we completed the acquisition of Reach Media for approximately $55.8 million in a combination of approximately $30.4 million of cash and 1,809,648 shares of our Class D common stock and sold short-term marketable securities for approximately $7.0 million. Capital expenditures were approximately $3.0 million for the three months ended March 31, 2005. During the three months ended March 31, 2004, we completed the acquisition of the assets of WRNB-FM (formerly WSNJ FM) in the Philadelphia market for approximately $35.0 million and sold short term marketable securities for approximately $5.7 million. Capital expenditures were approximately $1.5 million for the three months ended March 31, 2004.
Net cash flows from financing activities were approximately $2.5 million for the three months ended March 31, 2005 compared to net cash flows used in financing activities of approximately $17.6 million for the three months ended March 31, 2004. During the three months ended March 31, 2005, we repaid approximately $17.5 million of our Term A facility, realized net proceeds of approximately $195.7 million from the private placement of $200.0 million of our 6 3/8% senior subordinated notes due 2013, drew down $135.0 million under our revolving credit facility, redeemed our HIGH TIDES for approximately $309.8 million, received approximately $6.0 million from our stock subscriptions receivable and paid preferred dividends of approximately $7.0 million. During the three months ended March 31, 2004, we repaid approximately $39.4 million of our Term A facility and also paid preferred dividends of approximately $5.0 million.
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We continuously review opportunities to acquire additional radio stations, primarily in the top 60 African-American markets, and to make strategic investments. As of the date of this report, other than our agreement with an affiliate of Comcast Corporation, DIRECTV and other investors to fund TV One (the balance of our commitment is $37.0 million at March 31, 2005), we have no definitive agreements to make acquisitions of additional radio stations or to make strategic investments. We anticipate that any future acquisitions or strategic investments will be financed through funds generated from operations, cash on hand, equity financings, permitted debt financings, debt financings through unrestricted subsidiaries or a combination of these sources. However, there can be no assurance that financing from any of these sources, if available, will be available on favorable terms.
As of March 31, 2005, we had two standby letters of credit in the amounts of $140,000 and $270,000 in connection with our annual insurance policy renewals. To date, there has been no activity on these standby letters of credit.
For the remainder of 2005, we must make a minimum principal payment of approximately $52.5 million on the Term A facility. We expect that we will meet this debt commitment through one or more of the following: (1) cash on hand; (2) cash flow from operations; (3) additional permitted borrowings; or (4) other debt or equity financings.
Our ability to meet our debt service obligations and reduce our total debt, our ability to refinance the 8 7/8 % senior subordinated notes at or prior to their scheduled maturity date in 2011, and our ability to refinance the 6 3/8% senior subordinated notes at or prior to their scheduled maturity date in 2013 will depend upon our future performance which, in turn, will be subject to general economic conditions and to financial, business and other factors, including factors beyond our control. During the remainder of 2005, in addition to scheduled principal repayments of our Term A facility of approximately $52.5 million, our principal liquidity requirements will be for working capital, continued business development, strategic investment opportunities and for general corporate purposes, including capital expenditures.
We believe that, based on current levels of operations and anticipated internal growth, for the foreseeable future, cash flow from operations together with other available sources of funds will be adequate to make required payments of interest on our indebtedness, to fulfill our commitment to fund TV One, to fund potential acquisitions, to fund anticipated capital expenditures and working capital requirements and to enable us to comply with the terms of our debt agreements. However, in order to finance future acquisitions or investments, if any, we may require additional financing and there can be no assurance that we will be able to obtain such financing on terms acceptable to us.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are described in Note 1 of the Consolidated Financial Statements. We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. In Management’s Discussion and Analysis contained in our Annual Report on Form 10-K/A for the year ended December 31, 2004, we summarized the policies and estimates that we believe to be most critical in understanding the judgments involved in preparing our financial statements and the uncertainties that could affect our results of operations, financial condition and cash flows. There have been no material changes on such policies or estimates since we filed our Annual Report on Form 10-K/A for the year ended December 31, 2004.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123(R), (“SFAS No. 123(R)”), “Accounting for Stock-Based Compensation.” SFAS No. 123(R) sets accounting requirements for “share-based” compensation to employees, including employee stock purchase plans. The statement eliminates the ability to account for share-based compensation transactions using Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally requires instead that such transactions be accounted for using a fair-value-based method. Disclosure of the effect of expensing the fair value of equity compensation is currently required under existing literature. The statement also requires the tax benefit associated with these share based payments be classified as financing activities in the Statement of Cash Flows rather than operating activities as currently permitted. The Securities and Exchange Commission recently delayed the required implementation date for this statement from our third quarter of 2005 to the beginning of our 2006 fiscal year. We currently use the Black-Scholes Option Pricing Model to compute the fair value of our stock options in connection with our disclosure of the pro forma effects on net earnings and earnings per share as if compensation cost had been recognized for such options at the date of grant. However, a number of technical implementation issues have not yet been resolved, including the selection and use of an appropriate valuation model, and therefore, we have not yet determined the ultimate impact of the adoption of SFAS No. 123(R).
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CAPITAL AND COMMERCIAL COMMITMENTS
Long-term debt
In February 2005, we completed the private placement of $200.0 million of 6 3/8% senior subordinated notes due 2013 realizing net proceeds of approximately $195.7 million. The net proceeds were primarily used to redeem our HIGH TIDES.
Our bank credit agreement consist of a Term A facility in an amount up to $350.0 million, and a revolving credit facility in an amount up to $250.0 million that may be borrowed on a revolving basis. The interest rate on the bank credit facilities is LIBOR plus a spread based on the Company’s leverage ratios, as defined in the credit agreement. The credit facilities require quarterly interest payments. The Term A facility also requires minimum quarterly principal payments, which commenced March 31, 2003. The loans mature in June 2007. As of March 31, 2005, we had $227.5 million outstanding on the Term A facility and $40.0 million remained available (subject to various covenant restrictions) to be drawn down from the revolving credit facility.
Lease obligations
We have non-cancelable operating leases for office space, studio space, broadcast towers and transmitter facilities and non-cancelable capital leases for equipment that expire over the next 20 years.
Contractual Obligations Schedule
The following table represents our contractual obligations as of March 31, 2005:
Payments Due by Period(1)
(In thousands)
Contractual Obligations
Other operating contracts/agreements(2)
Operating lease obligations
Total
In addition to the obligations above, as of March 31, 2005, we had swap agreements in place for a total notional amount of $150.0 million. The periods remaining on the swap agreements range in duration from eight to 18 months. If we terminate our interest swap agreements before they expire, we will be required to pay early termination fees. Our credit exposure under these agreements is limited to the cost of replacing an agreement in the event of non-performance by our counter-party, however, we do not anticipate non-performance.
We anticipate that we will fund our obligations and commitments through one or more of the following: (1) cash on hand; (2) cash flow from operations; (3) additional permitted borrowings; or (4) other debt or equity financings.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are not historical facts, but rather reflect our current expectations concerning future results and events. You can identify 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. We cannot guarantee that we will achieve these plans, intentions or expectations. Because these statements apply to future events, they are subject to risks and uncertainties that could cause actual results to differ materially from those forecast or anticipated in the forward-looking statements. These risks, uncertainties and factors include, but are not limited to:
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You should not place undue reliance on these forward-looking statements, which reflect our view as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk affecting Radio One, see Item 7A: “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K/A, for the fiscal year ended December 31, 2004. Our exposure related to market risk has not changed materially since December 31, 2004.
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 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 first quarter of 2005, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 2001, Radio One and certain of its officers and directors were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of New York, now captioned, In re Radio One, Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-10160. Similar complaints were filed in the same court against hundreds of other public companies (Issuers) that conducted initial public offerings of their common stock in the late 1990s (the IPO Lawsuits). In the complaint filed against Radio One (as amended), the plaintiffs claim that Radio One, certain of its officers and directors, and the underwriters of certain of its public offerings violated Section 11 of the Securities Act of 1933 as amended (the “Securities Act”) based on allegations that its registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices of, the underwriters. The complaint also contains a claim for violation of Section 10(b) of the Securities Exchange Act of 1934 based on allegations that this omission constituted a deceit on investors. The plaintiffs seek unspecified monetary damages and other relief.
In July 2002, Radio One joined in a global motion, filed by the Issuers, to dismiss the IPO Lawsuits. In October 2002, the court entered an order dismissing the 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 settlement proposal with the plaintiffs that is anticipated to include most of the Issuers. The proposed settlement would provide for the dismissal with prejudice of all claims against the participating Issuers and their officers and the assignment to plaintiffs of certain potential claims that the Issuers may have against their underwriters. The tentative settlement also provides that, in the event that plaintiffs ultimately recover less than a guaranteed sum from the underwriters, plaintiffs would be entitled to payment by each participating Issuer’s insurer of a pro rata share of any shortfall in the plaintiffs guaranteed recovery. In September 2003, in connection with the proposed settlement, Radio One’s named officers and directors extended the tolling agreement so that it would not expire prior to any settlement being finalized. In June 2004, Radio One executed a final settlement agreement with the plaintiffs. On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. In addition, the settlement is still subject to statutory notice requirements as well as final judicial approval.
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
In February 2005, Radio One completed the acquisition of 51% of the common stock of Reach Media, Inc. for approximately $55.8 million in a combination of approximately $30.4 million of cash and 1,809,648 shares of Radio One’s Class D common stock. The shares were issued in a private transaction in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
32
Item 6. Exhibits
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.
/s/ SCOTT R. ROYSTER
Scott R. Royster
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
33