10-Q 1 form10-qmarch312010.htm RADIO ONE FORM 10-Q MARCH 31, 2010 form10-qmarch312010.htm

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, 2010

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   o

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

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

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

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

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

Class
 
Outstanding at May 10, 2010
Class A Common Stock, $.001 Par Value
 
2,980,641
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
 
45,531,353

 
 

 
 
 

 

 
 

TABLE OF CONTENTS

   
Page
   
PART I. FINANCIAL INFORMATION
 
   
Item 1.
Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 (Unaudited)
4
 
Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009
5
 
Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2010 (Unaudited)
6
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (Unaudited)
7
 
Notes to Consolidated Financial Statements (Unaudited) 
8
 
Consolidating Financial Statements                                                            
34
 
Consolidating Statement of Operations for the Three Months Ended March 31, 2010 (Unaudited)
34
 
Consolidating Statement of Operations for the Three Months Ended March 31, 2009 (Unaudited)
35
 
Consolidating Balance Sheet as of March 31, 2010 (Unaudited)
36
 
Consolidating Balance Sheet as of December 31, 2009
37
 
Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2010 (Unaudited)
38
 
Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2009 (Unaudited)
39
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
41
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
63
Item 4.
Controls and Procedures                                                                                                                                        
63
   
PART II. OTHER INFORMATION
 
   
Item 1.
Legal Proceedings                                                                                                                                         
64
Item 1A.
Risk Factors                                                                                                                                         
65
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
65
Item 3.
Defaults Upon Senior Securities                                                                                                                 
65
Item 4.
Submission of Matters to a Vote of Security Holders                                                                                   
65
Item 5.
Other Information                                                                                                                                         
65
Item 6.
Exhibits                                                                                                                                         
66
 
SIGNATURES                                                                                                                                         
67
 
 
 

 

 

 
 
 

 
 
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 the global financial and economic downturn, credit and equity market volatility and continued fluctuations in the U.S. economy may continue to have on our business and financial condition and the business and financial condition of our advertisers;

 
continued fluctuations in the economy could negatively impact our ability to meet our cash needs and our ability to maintain compliance with our debt covenants;

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

 
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;

 
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 FCC relative to maintaining our broadcasting licenses, enacting media ownership rules and enforcing of indecency rules;

 
changes in our key personnel and on-air talent;

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

 
financial losses that may be incurred due to impairment charges against our broadcasting licenses, goodwill and other intangible assets, particularly in light of the current economic environment;
 
 
increased competition from new media and technologies;

 
the impact of our acquisitions, dispositions and similar transactions;

 
our high degree of leverage and potential inability to refinance our debt given current market conditions; and

 
other factors mentioned in our filings with the Securities and Exchange Commission including the factors discussed in detail in Item 1A, “Risk Factors,” contained in our 2009 Annual report on Form 10-K.

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 March 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
         
(As Adjusted-
 
         
See Note 1)
 
       
   
(In thousands, except share data)
 
             
NET REVENUE
 
$
59,018
   
$
60,310
 
OPERATING EXPENSES:
               
Programming and technical, including stock-based compensation of $0 and $31, respectively
   
18,585
     
19,956
 
Selling, general and administrative, including stock-based compensation of $402 and $95, respectively
   
23,007
     
23,501
 
Corporate selling, general and administrative, including stock-based compensation of $1,611 and $357, respectively
   
8,896
     
5,490
 
Depreciation and amortization
   
4,721
     
5,231
 
Impairment of long-lived assets
   
     
48,953
 
Total operating expenses
   
55,209
     
103,131
 
Operating income (loss)
   
3,809
     
(42,821
INTEREST INCOME
   
25
     
18
 
INTEREST EXPENSE
   
9,235
     
10,779
 
GAIN ON RETIREMENT OF DEBT
   
     
1,221
 
EQUITY IN INCOME OF AFFILIATED COMPANY
   
909
     
1,150
 
OTHER (EXPENSE) INCOME, net
   
(477
   
50
 
Loss before (benefit from) provision for income taxes, noncontrolling interest in (loss) income of subsidiaries and income (loss) from discontinued operations
   
(4,969
)
   
(51,161
)
(BENEFIT FROM) PROVISION FOR INCOME TAXES
   
(309
   
7,071
 
Net loss from continuing operations
   
(4,660
)
   
(58,232
)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
   
63
     
(334
)
CONSOLIDATED NET LOSS
   
(4,597
)
   
(58,566
)
NONCONTROLLING INTEREST IN (LOSS) INCOME OF SUBSIDIARIES
   
(29
)
   
871
 
CONSOLIDATED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
 
$
(4,568
)
 
$
(59,437
)
                 
BASIC AND DILUTED CONSOLIDATED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS:
               
Continuing operations
 
$
(0.09
)
 
$
(0.84
)
Discontinued operations, net of tax
   
(0.00
)
   
(0.00
)
Consolidated net loss attributable to common stockholders
 
$
(0.09
)
 
$
(0.84
)
                 
WEIGHTED AVERAGE SHARES OUTSTANDING:
               
Basic
   
50,844,148
     
70,719,332
 
Diluted
   
50,844,148
     
70,719,332
 
 

 
 

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

 
4

 
RADIO ONE, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS

  
As of
 
 
March 31,
2010
   
December 31,
2009
 
 
(Unaudited)
       
           
 
(In thousands, except share data)
 
ASSETS
         
CURRENT ASSETS:
         
Cash and cash equivalents
$
9,958
   
$
19,963
 
    Trade accounts receivable, net of allowance for doubtful accounts of $2,315 and $2,651, respectively
 
47,482
     
47,019
 
Prepaid expenses and other current assets
 
5,702
     
4,950
 
Current assets from discontinued operations
 
 86
     
424
 
Total current assets
 
63,228
     
72,356
 
PROPERTY AND EQUIPMENT, net
 
38,688
     
40,585
 
GOODWILL
 
137,493
     
137,517
 
RADIO BROADCASTING LICENSES
 
698,645
     
698,645
 
OTHER INTANGIBLE ASSETS, net
 
35,454
     
35,059
 
INVESTMENT IN AFFILIATED COMPANY
 
48,494
     
48,452
 
OTHER ASSETS
 
2,970
     
2,854
 
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS
 
12
     
74
 
Total assets
$
1,024,984
   
$
1,035,542
 
               
LIABILITIES AND EQUITY
             
CURRENT LIABILITIES:
             
Accounts payable
$
2,102
   
$
4,160
 
Accrued interest
 
3,951
     
9,499
 
Accrued compensation and related benefits
 
 11,631
     
10,249
 
Income taxes payable
 
1,502
     
1,533
 
Other current liabilities
 
10,757
     
7,236
 
Current portion of long-term debt
 
346,522
     
18,010
 
Current liabilities from discontinued operations
 
2,551
     
2,949
 
Total current liabilities
 
379,016
     
53,636
 
LONG-TERM DEBT, net of current portion
 
302,510
     
635,524
 
OTHER LONG-TERM LIABILITIES
 
10,272
     
10,185
 
DEFERRED TAX LIABILITIES
 
87,583
     
88,144
 
Total liabilities
 
779,381
     
787,489
 
               
STOCKHOLDERS’ EQUITY:
             
    Convertible preferred stock, $.001 par value, 1,000,000 shares authorized; no shares outstanding at March 31, 2010 and December 31, 2009
 
     
 
    Common stock — Class A, $.001 par value, 30,000,000 shares authorized; 2,980,641 and 2,981,841 shares issued and outstanding as of March 31, 2010 and December 31, 2009, respectively
 
3
     
3
 
    Common stock — Class B, $.001 par value, 150,000,000 shares authorized; 2,861,843 shares issued and outstanding as of March 31, 2010 and December 31, 2009, respectively
 
3
     
3
 
    Common stock — Class C, $.001 par value, 150,000,000 shares authorized; 3,121,048 shares issued and outstanding as of March 31, 2010 and December 31, 2009, respectively
 
3
     
3
 
    Common stock — Class D, $.001 par value, 150,000,000 shares authorized; 45,531,353 and 42,280,153 shares issued and outstanding as of March 31, 2010 and December 31, 2009, respectively
 
45
     
42
 
Accumulated other comprehensive loss
 
(1,952
)
   
(2,086
Additional paid-in capital
 
1,016,522
     
1,014,512
 
Accumulated deficit
 
(774,980
)
   
(770,412
)
Total stockholders’ equity
 
239,644
     
242,065
 
Noncontrolling interest
 
5,959
     
5,988
 
Total equity
 
245,603
     
248,053
 
Total liabilities and equity
$
1,024,984
   
$
1,035,542
 
 
 
 
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 THREE MONTHS ENDED MARCH 31, 2010 (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 Loss
   
Accumulated Other Comprehensive Loss
   
Additional Paid-In Capital
 
Accumulated Deficit
   
Noncontrolling 
Interest
   
Total Equity
 
   
(In thousands)
 
      BALANCE, as of December 31, 2009
  $   $ 3   $ 3   $ 3   $ 42         $ (2,086 )   $ 1,014,512   $ (770,412 )   $ 5,988     $ 248,053  
      Comprehensive loss:
                                                                         
Consolidated net loss
                        $ (4,597 )               (4,568     (29 )     (4,597 )
      Change in unrealized loss on derivative and hedging activities, net of taxes
                          134       134                       134  
      Comprehensive loss
                                  $ (4,463 )                                      
      Stock-based compensation expense
                    3                     2,010                 2,013  
      BALANCE, as of
      March 31, 2010
  $   $ 3   $ 3   $ 3   $ 45             $ (1,952 )   $ 1,016,522   $ (774,980 )   $ 5,959     $ 245,603  
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements. 

 

 
6

 

RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
   
Three Months Ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
         
(As Adjusted – See Note 1)
 
   
(In thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Consolidated net loss
   
( 4,597
)
   
(58,566
Adjustments to reconcile consolidated net loss to net cash from operating activities:
               
Depreciation and amortization
   
 4,721
     
 5,231
 
Amortization of debt financing costs
   
  612
     
  602
 
Write off of debt financing costs
   
645
     
 
Deferred income taxes
   
(383
   
5,726
 
Impairment of long-lived assets
   
     
48,953
 
Equity in income of affiliated company
   
(909
   
(1,150
Stock-based compensation
   
2,013
     
  483
 
Gain on retirement of debt
   
     
(1,221
Amortization of contract inducement and termination fee
   
     
(474
)
Effect of change in operating assets and liabilities, net of assets acquired:
               
Trade accounts receivable
   
(463
   
 9,132
 
Prepaid expenses and other assets
   
(752
)
   
987
 
Other assets
   
  553
     
837
 
Accounts payable
   
(2,059
)
   
(411
Accrued interest
   
(5,548
)
   
(5,841
)
Accrued compensation and related benefits
   
1,381
     
(177
Income taxes payable
   
(31
   
 1,418
 
Other liabilities
   
3,751
     
(3,080
Net cash flows (used in) provided from operating activities of discontinued operations
   
(62
   
  537
 
Net cash flows (used in) provided from operating activities
   
(1,128
)
   
 2,986
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property and equipment
   
(1,072
)
   
(1,148
)
Purchase of other intangible assets
   
 
   
(39
)
Net cash flows used in investing activities
   
(1,072
)
   
(1,187
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayment of other debt
   
     
(153
)
Proceeds from credit facility
   
     
80,000
 
Repayment of credit facility
   
(4,502
)
   
( 75,570
Repurchase of senior subordinated notes
   
     
( 1,220
Debt refinancing and modification costs
   
(3,303
)
   
 
Repurchase of common stock
   
     
(6,843
)
Net cash flows used in financing activities
   
(7,805
)
   
( 3,786
)
DECREASE IN CASH AND CASH EQUIVALENTS
   
(10,005
)
   
(1,987
)
CASH AND CASH EQUIVALENTS, beginning of period
   
19,963
     
22,289
 
CASH AND CASH EQUIVALENTS, end of period
 
$
 9,958
   
$
20,302
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for:
               
Interest
 
$
14,171
   
$
16,018
 
Income taxes
 
$
106
   
$
   17
 
 
 

 
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 consumers. Our core business is our radio broadcasting franchise that is the largest radio broadcasting operation that primarily targets African-American and urban listeners. We currently own 53 broadcast stations located in 16 urban markets in the United States.  While our primary source of revenue is the sale of local and national advertising for broadcast on our radio stations, our operating strategy is to operate the premier multi-media entertainment and information content provider targeting African-American 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 37% ownership interest in TV One, LLC (“TV One”), an African-American targeted cable television network that we invested in with an affiliate of Comcast Corporation and other investors; our 53.5% ownership interest in Reach Media, Inc. (“Reach Media”), which operates the Tom Joyner Morning Show; our ownership of Interactive One, LLC (“Interactive One”), an online platform serving the African-American community through social content, news, information, and entertainment, which operates a number of branded sites, including News One, UrbanDaily and HelloBeautiful; and our ownership of Community Connect, LLC (formerly Community Connect Inc.) (“CCI”), an online social networking company, which operates a number of branded websites, including BlackPlanet, MiGente and Asian Avenue.  Through our national multi-media presence, we provide advertisers with a unique and powerful delivery mechanism to the African-American audience.   

In December 2009, the Company ceased publication of our urban-themed lifestyle periodical Giant Magazine. The remaining assets and liabilities of this publication have been classified as discontinued operations as of March 31, 2010 and December 31, 2009, and the publication’s results from operations for the three months ended March 31, 2010 and 2009, 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 two reportable segments: (i) Radio Broadcasting; and (ii) Internet. (See Note 10 – 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 2009 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.)

(c)  Financial Instruments
 
Financial instruments as of March 31, 2010 and December 31, 2009 consisted of cash and cash equivalents, trade accounts receivable, accounts payable, accrued expenses, note payable, long-term debt and subscriptions receivable. The carrying amounts approximated fair value for each of these financial instruments as of March 31, 2010 and December 31, 2009, except for the Company’s outstanding senior subordinated notes. The 87/8% Senior Subordinated Notes due July 2011 had a carrying value of $101.5 million and a fair value of approximately $92.4 million as of March 31, 2010, and a carrying value of $101.5 million and a fair value of approximately $78.2 million as of December 31, 2009. The 63/8% Senior Subordinated Notes due February 2013 had a carrying value of $200.0 million and a fair value of approximately $163.0 million as of March 31, 2010, and a carrying value of $200.0 million and a fair value of approximately $142.0 million as of December 31, 2009. The fair values were determined based on the current trading values of these instruments.
 

 
 
8

 
 
(d)  Revenue Recognition
 
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. Agency and outside sales representative commissions were approximately $6.6 million and $5.5 million for the three months ended March 31, 2010 and 2009, respectively.

CCI, which the Company acquired in April 2008, currently 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. CCI has a diversity recruiting relationship with Monster, Inc. (“Monster”).  Monster posts job listings and advertising on CCI’s websites and CCI earns revenue for displaying the images on its websites.  

(e)  Barter Transactions
 
The Company provides broadcast advertising time in exchange for programming content and certain services. In accordance with ASC 605, “Revenue Recognition,” the terms of these exchanges generally permit the Company to preempt such broadcast time in favor of advertisers who purchase time in exchange for cash. The Company includes the value of such exchanges in both broadcasting net revenue and station operating expenses. The valuation of barter time is based upon the fair value of the network advertising time provided for the programming content and services received. For the three months ended March 31, 2010 and 2009, barter transaction revenues were $815,000 and $757,000, respectively. Additionally, barter transaction costs were reflected in programming and technical expenses and selling, general and administrative expenses of $764,000 and $716,000 and $51,000 and $41,000, for the three months ended March 31, 2010 and 2009, respectively.

(f)  Comprehensive Loss

The Company’s comprehensive loss consists of net loss attributable to common stockholders 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 consists of income on derivative instruments that qualify for cash flow hedge treatment. (See Note 6 - Derivative Instruments and Hedging Activities.
 
The following table sets forth the components of comprehensive loss:

   
Three Months Ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
   
(In thousands)
 
                 
Consolidated net loss 
 
$
(4,597
 
$
(58,566
           Other comprehensive income (net of tax benefit of $0 and $0, respectively):
               
Derivative and hedging activities
   
 134
     
 55
 
Comprehensive loss
   
 (4,463
   
 (58,511
Comprehensive (loss) income attributable to the noncontrolling interest
   
(29
   
871
 
Comprehensive loss attributable to common stockholders
 
$
(4,434
 
$
(59,382
 
 
 
9

 
 
(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.

The following table sets forth the calculation of basic and diluted earnings per share (in thousands, except share and per share data):
 
 
Three Months Ended March 31,
 
2010
   
2009
 
(Unaudited)
Numerator:
 
Consolidated net loss attributable to common stockholders
$
(4,568
 
$
(59,437
        Denominator:
             
       Denominator for basic net loss per share - weighted-average outstanding shares
 
50,844,148
     
70,719,332
 
Effect of dilutive securities:
             
Stock options and restricted stock
 
-
     
-
 
Denominator for diluted net loss per share - weighted-average outstanding shares
 
50,844,148
     
70,719,332
 
               
    Net loss attributable to common stockholders per share - basic 
$
(0.09
 
$
  (0.84
)
Net loss attributable to common stockholders per share - diluted 
$
(0.09
 
$
(0.84
)
 
      All stock options and restricted stock were excluded from the diluted calculation as their inclusion would have been anti-dilutive.  The following table summarizes the potential common shares excluded from the diluted calculation.
 
 
Three Months Ended March 31,
 
 
2010
 
2009
 
(Unaudited)
 
 
(In thousands)
 
             
    Stock options 
    5,404       5,540  
Restricted stock 
    3,592       576  

 
(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.
 
 
 
10

 

 
      As of March 31, 2010 and December 31, 2009, the fair values of our financial liabilities are categorized as follows:
  
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(Unaudited)
 
(In thousands)
   
As of March 31, 2010 
             
Liabilities subject to fair value measurement:
             
Interest rate swaps (a)
 
$
1,952
   
$
   
$
1,952
 
$
Employment agreement award (b)
   
5,118
     
     
   
5,118
Total
 
$
7,070
   
$
   
$
1,952
 
$
5,118
                             
As of December 31, 2009 
                           
Liabilities subject to fair value measurement:
                           
Interest rate swaps (a)
 
$
2,086
   
$
   
$
2,086
 
$
Employment agreement award (b)
   
4,657
     
     
   
4,657
Total
 
$
6,743
   
$
   
$
2,086
 
$
4,657
 
(a)  Based on London Interbank Offered Rate (“LIBOR”).
 
(b)  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. 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 in April 2011, or earlier if the CEO voluntarily leaves the Company or is terminated for cause. A third-party valuation firm assisted the Company in calculating the fair valuation of the award. (See Note 6 – Derivative Instruments and Hedging Activities.)
 
      The following table presents the changes in Level 3 liabilities measured at fair value on a recurring basis for the three months ended March 31, 2010.
 
   
Employment Agreement Award
 
   
(Unaudited)
 
   
(In thousands)
 
       
Balance at December 31, 2009 
 
$
4,657
 
Losses included in earnings (realized/unrealized)
   
461
 
Changes in accumulated other comprehensive loss
   
 
Purchases, issuances, and settlements  
   
 
Balance at March 31, 2010
 
$
5,118
 
         
The amount of total gains for the period included in earnings attributable to the change in unrealized gains relating to assets and liabilities still held at the reporting date
 
$
(461
)

      Losses included in earnings (realized/unrealized) were recorded in the consolidated statement of operations as corporate selling, general and administrative expenses for the three months ended March 31, 2010.

Certain assets and liabilities are measured at fair value on a non-recurring basis.  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. These assets were not impaired during the three months ended March 31, 2010 and therefore were not reported at fair value. 
 
 
 
11

 
 
 
 (i) Impact of Recently Issued Accounting Pronouncements
 
In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-17 “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which amends the guidance on variable interest entities (“VIE”) in ASC 810, “Consolidation.” Effective January 1, 2010, the new guidance requires more qualitative than quantitative analyses to determine the primary beneficiary of a VIE, requires continuous assessments of whether an enterprise is the primary beneficiary of a VIE, amends certain guidance for determining whether an entity is a VIE and requires additional year-end and interim disclosures. Under the new guidance, a VIE must be consolidated if the enterprise has both (a) the power to direct the activities of the VIE that most significantly impact the entity's economic performance, and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. This new accounting guidance became effective for our Company on January 1, 2010, and is being applied prospectively.
 
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 16 – 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 (“EITF”) 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.

 
12

 


 
      (j) Liquidity

The Company continually projects its anticipated cash needs, which include, but are not limited to, its operating needs, capital requirements, the TV One funding commitment and principal and interest payments on its indebtedness. Management’s most recent revenue, operating income and cash flow projections considered the recent gradual improvement in both the economy and advertising environment, and the projections compare more favorably to prior periods during which the economic downturn persisted. For instance, based on analysts’ projected recovery estimates for the advertising environment and specifically the radio industry, which is supported by our order pacings at the time of filing of this form 10-Q, we have projected revenue growth of mid-single digits for fiscal year 2010. As of the filing of this Form 10-Q, management believes the Company can meet its liquidity needs through March 31, 2011 with cash and cash equivalents on hand, projected cash flows from operations and, to the extent necessary, through additional borrowings available under the credit agreement that the Company entered into a with a syndicate of banks in June 2005 (the “Credit Agreement”). The borrowing capacity available under the Credit Agreement was approximately $10.0 million at March 31, 2010. Based on these projections, management also believes it is probable that the Company will be in compliance with its debt covenants through March 31, 2011. It should be noted that certain covenants either have or will become considerably more restrictive in 2010. Specifically, the interest coverage ratio has changed from no less than 1.75 to 1.00 at December 31, 2009 to no less than 2.00 to 1.00 for the period January 1, 2010 to December 31, 2010, and the total leverage ratio will step down from no greater than 7.25 to 1.00 at December 31, 2009 to no greater than 6.50 to 1.00 effective July 1, 2010 to September 30, 2011. Management projects it will likely need to pay down borrowings under the Credit Agreement to maintain compliance with the leverage ratio required in 2010.

The Credit Agreement expires the earlier of (a) six months prior to the scheduled maturity of the 87/8% Senior Subordinated Notes due July 1, 2011 (January 1, 2011) (unless the 87/8% Senior Subordinated Notes have been refinanced or repurchased prior to such date) or (b) June 30, 2012. Management believes it is probable that the Company will refinance the 87/8% Senior Subordinated Notes prior to January 1, 2011.
 
As of March 31, 2010, the Company had outstanding approximately $346.5 million on its credit facility, all of which was classified as current portion of long-term debt in the consolidated balance sheet.

Management’s projections are dependent on the continuation of the recently improving economic and advertising environments, and any adverse fluctuations, or other unforeseen circumstances, may negatively impact the Company’s operations beyond those assumed. Management considered the risks that the current economic conditions may have on its liquidity projections, as well as the Company’s ability to meet its debt covenant requirements. If economic conditions deteriorate unexpectedly or do not continue to rebound, or if other adverse factors outside the Company’s control arise, our operations could be negatively impacted, and the Company’s ability to maintain compliance with its debt covenants could be negated or even prevented. If it appears that we could not meet our liquidity needs or that noncompliance with debt covenants is likely to result, the Company would implement several remedial measures, which could include further operating cost and capital expenditure reductions and deferrals, seeking its share of distributions from TV One and further de-leveraging actions, which may include repurchases of discounted senior subordinated notes and other debt repayments, subject to our available liquidity to make such repurchases. It should be noted that the TV One distributions require the consent of third-parties and there is no assurance that such third-party consents would be granted. These third parties did approve TV One distributions for the fourth quarter of 2009 and the first quarter of 2010.

If the above measures are not successful in maintaining compliance with our debt covenants, the Company would attempt to negotiate for relief through an amendment or waiver of covenant noncompliance with its lenders, which could result in higher interest costs, additional fees and reduced borrowing limits. There is no assurance that the Company would be successful in reaching any definitive agreement to obtain relief from its debt covenant requirements in these circumstances. Failure to comply with its debt covenants and a corresponding failure to negotiate a favorable amendment or waivers with the Company’s lenders could result in the acceleration of the maturity of all the Company’s outstanding debt, which would have a material adverse effect on the Company’s business and financial position.
 
We have retained a financial advisor and are currently evaluating various alternatives with respect to our upcoming debt maturities and other strategic initiatives that we may undertake in the future. These alternatives include entering into one or more amendments, refinancing transactions, retiring or purchasing our outstanding indebtedness through cash purchases, prepayments and/or exchanges for newly issued debt or equity securities or obligations, in open market purchases or privately negotiated transactions.  Our ability to consummate such amendments, refinancings, repurchases, prepayments or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, some of which may be beyond our control. Accordingly, while management believes it is probable, there is no assurance that the Company will successfully enter into any definitive agreements for such alternatives, or that any of the strategic initiatives being assessed will occur in the future.
 
 
 
13

 
(k)  Major Customer

During 2009 and in prior years, we generated over 10% of our consolidated net revenues from a single customer, Radio Networks, Inc.  (“Radio Networks”), a sales representation company owned by Citadel Broadcasting Corporation (“Citadel”).

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 (the “RN Barter Revenue”). 

Under a separate sales representation agreement between our subsidiary Reach Media, and Radio Networks (the “Sales Representation Agreement”), Reach Media was paid an annual guarantee in exchange for providing the rights to Radio Networks to sell advertising inventory on Reach Media’s 105 affiliate radio stations broadcasting the Tom Joyner Morning Show.  Radio Networks also served as sales representative for Reach Media’s Internet advertising and special events.  This agreement, which commenced in 2003, expired on December 31, 2009.

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.  Consequently, we believe it is unlikely that total revenue to be generated from Radio Networks will exceed 10% in future periods.

For the three months ended March 31, 2009, net revenues attributable to the RN Barter Revenue and Sales Representation Agreement were approximately $8.6 million, all of which was reported in our Radio Broadcasting segment.

 
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 7 – 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%.

 
3.  DISCONTINUED OPERATIONS:

In December 2009, the Company ceased publication of Giant Magazine. The remaining assets and liabilities of this publication have been classified as discontinued operations as of March 31, 2010 and 2009, and the publication’s results from operations for the three months ended March 31, 2010 and 2009, 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 and classified as discontinued operations for all periods presented:

   
Three Months Ended March 31,
 
   
2010
   
2009
 
   
(In thousands)
                 
Net revenue
 
$
(3
 
$
361
 
Station operating expenses
   
(71
   
926
 
Depreciation and amortization
   
3
     
24
 
Loss (gain) on sale of assets
   
2
     
(344
Income (loss) before income taxes
   
63
     
(245
Provision for income taxes
   
     
89
 
Income (loss) from discontinued operations, net of tax
 
$
63
   
$
(334




 
14

 


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

   
As of
   
March 31,
 
December 31,
   
2010
 
2009
   
(Unaudited)
   
   
(In thousands)
    Currents assets:
       
    Accounts receivable, net of allowance for doubtful accounts
 
$
86
 
$
424
    Total current assets
   
86
   
424
    Property and equipment, net
   
12
   
14
    Intangible assets, net
   
   
60
    Total assets
 
$
98
 
$
498
    Current liabilities:
           
    Accounts payable
 
$
 
$
91
    Accrued compensation and related benefits
   
   
70
    Other current liabilities
   
2,551
   
2,788
    Total current liabilities
   
2,551
   
2,949
    Total liabilities
 
$
2,551
 
$
2,949
 

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.

Since our October 2009 annual goodwill impairment test, the Company revised its internal projections for Reach Media due to lower than expected operating results during the first quarter of 2010. Reach Media’s first quarter 2010 net revenues declined 23.6% from the prior year, which led the Company to lower its financial projections below those assumed in the 2009 annual testing. The decline in net revenues was driven by the transition from a guaranteed revenue sales representation agreement with Citadel to sell all advertising inventory for the Tom Joyner Morning Show, to a commissioned based agreement with Citadel selling out-of-show inventory and Reach Media selling in-show inventory. The Company deemed this revenue decline as a triggering event that warranted interim impairment testing of goodwill attributable to Reach Media. We performed such testing as of February 28, 2010 and concluded that the goodwill carrying value for Reach Media had not been impaired. There was no impairment charge recorded for the three months ended March 31, 2010.

During the first quarter of 2009, the prolonged economic downturn at that time caused further deterioration to the then current 2009 outlook for the radio industry, and resulted in further significant revenue and profitability declines beyond levels assumed in our 2008 annual impairment testing. As a result, we made reductions to our internal projections and given the adverse impact on terminal values, we deemed the then worsening radio outlook and the lowering of our early 2009 internal projections as impairment indicators that warranted interim impairment testing of our radio broadcasting licensees and goodwill associated with our radio markets, which we performed as of February 28, 2009. The outcome of our interim testing was to record impairment charges against radio broadcasting licenses in 11 of our 16 markets, for approximately $49.0 million, for the three months ended March 31, 2009. The Company concluded that goodwill had not been impaired during the first quarter of 2009.
 

 
15

 


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, including goodwill. 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 16 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 2008 assessment, we have not made any changes to the methodology for valuing broadcasting licenses.

Compared to our October 2008 annual testing, the projections incorporated into our February 2009 license valuations were more conservative and included updated assumptions relative to the prolonged economic downturn at that time, which led to a further weakened, deteriorating and less profitable radio marketplace with reduced potential for growth. Specifically, while we kept the discount rate at 10.5%, we increased the 2009 radio marketplace revenue decline from (8.0)% to a range of (13.1)% to (17.7)%, which in most cases decreased market share ranges. We assumed a slight recovery, with growth rates ranging from 0.3% to 0.5% in Year 2, which is 2010. Industry growth rates can still vary significantly year to year based upon the even and odd numbered years in the projection period, which is reflective of what could be significant cyclical content for political advertising in the even numbered years.

Although the industry has responded to declining revenues with significant cost-cutting initiatives, profitability levels are still adversely impacted, as fixed costs represent a large component of a station’s operating costs. Depending on the given market, we lowered the minimum profit margin by as much as 230 basis points between the annual October 2008 and interim February 2009 assessments.

Below are other key assumptions used in the income approach model for estimating broadcasting licenses fair values for the annual October 2008 and interim February 2009 impairment tests.

Radio Broadcasting Licenses
October 1,
2008
February 28,
 2009
 
(In millions)
Pre-tax impairment charge
$  51.2
$   49.0
     
Discount Rate
10.5%
10.5%
2009 Market Revenue Growth or Decline Rate or Range
(8.0)%
(13.1)% - (17.7)%
Long-term Market Revenue Growth Rate Range (Years 6 – 10)
1.5% - 2.5%
1.5% - 2.5%
Mature Market Share Range
1.2% - 27.0%
1.2% - 27.0%
Operating Profit Margin Range
20.0% - 50.7%
17.7% - 50.7%
 
The recent improving economy and credit markets and the current recovery of the advertising industry have contributed to more stable valuations for these intangible assets. In addition, there were no impairment triggering events warranting impairment testing of our radio broadcasting licenses for the three month period ended March 31, 2010.

 
 
16

 
 
Valuation of Goodwill

The impairment testing of goodwill is performed at the reporting unit level. We had 20 reporting units as of our October 2009 annual impairment assessment. For the purpose of valuing goodwill, the 20 reporting units consist of the 16 radio markets and four other business divisions. In testing for the impairment of goodwill, with the assistance of a third-party valuation firm, we also use 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.

For the February 2010 goodwill interim impairment test of Reach Media, using updated internal projections for Reach Media, we lowered the Year 1 2010 revenue growth rate to 8.5% (including giving effect to seasonal revenue fluctuations) from the 16.5%, which was previously assumed in our October 2009 annual assessment. The 2010 revenue growth rate was lowered to reflect Reach Media net revenues and cash flows which were substantially down for the quarter ended March 31, 2010, thus causing the Company to revise its projections below those assumed in our 2009 annual impairment test. The revenue decline was attributable to the transition from a guaranteed revenue sales representation agreement with Citadel to sell all advertising inventory for the Tom Joyner Morning Show, to a commissioned based agreement with Citadel selling out-of-show inventory and Reach Media selling in-show inventory.

Below are key assumptions used in the income approach model for estimating the fair value for Reach Media for both, the annual October 2009 and interim February 2010 impairment tests. When compared to a 10.5% discount rate used for assessing radio market reporting units as part of the 2009 annual testing, the higher discount rate used in this assessment reflects 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.

Reach Media Goodwill (Reporting Unit Within the Radio Broadcasting Segment)
  October 1, 2009     February 28, 2010  
   
(In millions)
 
Pre-tax impairment charge
  $     $  
                 
Discount Rate
    14.0 %     13.5 %
Year 1 Revenue Growth Rate (a)
    16.5 %     8.5 %
Long-term Revenue Growth Rate Range (Years 6 – 10)
    2.5% - 3.0 %     2.5% – 3.0 %
Operating Profit Margin Range
    27.2% - 35.3 %     22.7% - 31.4 %
 
(a)  
 
 
 
 
The Year 1 revenue growth rate in both assessments is driven by the September 2009 amendment of Reach Media’s sales representation agreement with Citadel, whereby the guaranteed revenue paid to Reach Media by Citadel was reduced by $2.0 million in the forth quarter of 2009, the final quarter for the term of the agreement. Effective January 2010, Reach Media and Citadel are now party to a commission based sales representation agreement, whereby Citadel sells out-of-show inventory for the Tom Joyner Morning Show. Reach Media now sells all in-show inventory.
 
As a result of the February 2010 interim impairment test, the Company concluded that the carrying value of goodwill attributable to Reach Media had not been impaired.

 
 
17

 
 
Goodwill Valuation Results

The table below presents the changes in the carrying amount of goodwill by segment and reporting unit during the three month period ended March 31, 2010. The actual reporting units are not disclosed so as to not make publicly available sensitive information that could potentially be competitively harmful to the Company.

          Changes in Goodwill Carrying Value        
   
As of December 31, 2009
   
Three months ended March 31, 2010
   
As of March 31, 2010
 
   
Aggregate
   
Accumulated
                           
Aggregate
   
Accumulated
       
   
Goodwill
   
Impairment
         
Impairment
   
Acquisitions/
   
Other
   
Goodwill
   
Impairment
       
Reporting Unit
 
Acquired
   
Losses
   
Goodwill
   
Losses
   
Dispositions
   
Activity
   
Acquired
   
Losses
   
Goodwill
 
   
(In thousands)
 
                                                       
Reporting Unit 3
  $ 1,846     $ (1,846 )   $ -     $ -     $ -     $ -     $ 1,846     $ (1,846 )   $ -  
Reporting Unit 4
    528       (528 )     -       -       -       -       528       (528 )     -  
Reporting Unit 8
    373       (373 )     -       -       -       -       373       (373 )     -  
Reporting Unit 9
    23,521       (23,521 )     -       -       -       -       23,521       (23,521 )     -  
Reporting Unit 15
    379       (379 )     -       -       -       -       379       (379 )     -  
Reporting Unit 14
    628       (628 )     -       -       -       -       628       (628 )     -  
Reporting Unit 2
    406       -       406       -       -       -       406       -       406  
Reporting Unit 6
    928       -       928       -       -       -       928       -       928  
Reporting Unit 10
    2,081       -       2,081       -       -       -       2,081       -       2,081  
Reporting Unit 13
    2,491       -       2,491       -       -       -       2,491       -       2,491  
Reporting Unit 12
    2,915       -       2,915       -       -       -       2,915       -       2,915  
Reporting Unit 11
    3,791       -       3,791       -       -       -       3,791       -       3,791  
Reporting Unit 16
    4,442       -       4,442       -       -       -       4,442       -       4,442  
Reporting Unit 5
    9,633       (4,559 )     5,074       -       -       -       9,633       (4,559 )     5,074  
Reporting Unit 7
    14,509       (1,622 )     12,887       -       -       -       14,509       (1,622 )     12,887  
Reporting Unit 19
    30,468       -       30,468       -       -       -       30,468       -       30,468  
Reporting Unit 1
    50,194       -       50,194       -       -       -       50,194       -       50,194  
Radio Broadcasting Segment
    149,133       (33,456 )     115,677       -       -       -       149,133       (33,456 )     115,677  
                                                                         
Reporting Unit 20
    -       -       -       -       -       -       -       -       -  
Corporate/Eliminations/Other
    -       -       -       -       -       -       -       -       -  
                                                                         
Reporting Unit 17
    -       -       -       -       -       -       -       -       -  
Reporting Unit 18
    21,840       -       21,840       -       -       (24 )     21,816       -       21,816  
Internet Segment
    21,840       -       21,840       -       -       (24 )     21,816       -       21,816  
                                                                         
   Total
  $ 170,973     $ (33,456 )   $ 137,517     $ -     $ -     $ (24 )   $ 170,949     $ (33,456 )   $ 137,493  


 
18

 
 
Intangible Assets Excluding Goodwill and Radio Broadcasting Licenses
 
Other intangible assets, excluding goodwill and radio broadcasting licenses, are amortized on a straight-line basis over various periods. Other intangible assets consist of the following:

 
As of
   
 
March 31, 2010
   
December 31, 2009
 
Period of Amortization
 
(Unaudited)
     
 
(In thousands)
   
             
Trade names
$
17,109
   
$
16,965
 
2-5 Years
Talent agreement
 
19,549
     
19,549
 
10 Years
Debt financing and modification costs
 
19,239
     
17,527
 
Term of debt
Intellectual property
 
13,011
     
13,011
 
4-10 Years
Affiliate agreements
 
7,769
     
7,769
 
1-10 Years
Acquired income leases
 
1,281
     
1,282
 
3-9 Years
Non-compete agreements
 
1,260
     
1,260
 
1-3 Years
Advertiser agreements
 
6,613
     
6,613
 
2-7 Years
Favorable office and transmitter leases
 
3,358
     
3,358
 
2-60 Years
Brand names
 
2,539
     
2,539
 
2.5 Years
Other intangibles
 
1,237
     
1,260
 
1-5 Years
   
92,965
     
91,133
   
Less: Accumulated amortization
 
(57,511
)
   
(56,074
)
 
Other intangible assets, net
$
35,454
   
$
35,059
   

Amortization expense of intangible assets for the three months ended March 31, 2010 and 2009 was approximately $1.7 million and $2.1 million, respectively. The amortization of deferred financing costs was charged to interest expense for all periods presented. The amount of deferred financing costs included in interest expense for the three months ended March 31, 2010 and 2009 was $612,000 and $602,000, respectively.
 
The following table presents the Company’s estimate of amortization expense for the remainder of 2010 and years 2011 through 2015 for intangible assets, excluding deferred financing costs:

   
(In thousands)
 
       
2010 (April through December)
 
$
5,331
 
2011
 
$
5,693
 
2012
 
$
5,409
 
2013
 
$
4,824
 
2014
 
$
4,122
 
2015
 
246
 

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

 
19

 

 
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, with no additional funding investment made since then. The initial four year commitment period for funding the capital was extended to June 30, 2010, due in part to TV One’s lower than anticipated capital needs during the initial commitment period. In December 2004, TV One entered into a distribution agreement with DIRECTV and certain affiliates of DIRECTV became investors in TV One. As of March 31, 2010, the Company owned approximately 37% of TV One on a fully-converted basis.

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 operating income or 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, 2010 and 2009, the Company’s allocable share of TV One’s operating income was $909,000 and approximately $1.2 million, respectively.

At each of March 31, 2010 and December 31, 2009, the carrying value of the Company’s investment in TV One was approximately $48.5 million and is presented on the consolidated balance sheets as investment in affiliated company. At March 31, 2010, the Company has future contractual funding commitments of $13.7 million and the Company’s maximum exposure to loss as a result of its involvement with TV One was determined to be approximately $62.2 million, which is the Company’s carrying value of its investment plus its future contractual funding commitment.

We entered into separate network services and advertising services agreements with TV One in 2003. Under the network services agreement, we are providing TV One with administrative and operational support services and access to Radio One personalities. This agreement, originally scheduled to expire in January 2009, has been extended to January 2011. Under the advertising services agreement, we are providing a specified amount of advertising to TV One. This agreement was also originally scheduled to expire in January 2009 and has been extended to January 2011. In consideration of providing these services, we have received equity in TV One, and receive an annual cash fee of $500,000 for providing services under the network services agreement.

The Company is accounting for the services provided to TV One under the advertising services agreement in accordance with ASC 505-50-30, “Equity.”  As 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. The most reliable unit of measurement has been determined to be the value of underlying advertising time that is being provided to TV One. The Company recognized $457,000 and $494,000 in revenue relating to this agreement for the three months ended March 31, 2010 and 2009, respectively.
 
 

 
20

 

6.  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 sheet are as follows: 
 
 
Liability Derivatives
 
  
As of March 31, 2010
 
As of December 31, 2009
 
 
(Unaudited)
   
 
(In thousands)
 
     
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Derivatives designated as hedging instruments:
               
Interest rate swaps
Other Current Liabilities
 
$
251
 
Other Current Liabilities
 
$
486
 
Interest rate swaps
Other Long-Term Liabilities
   
1,701
 
Other Long-Term Liabilities
   
1,600
 
                     
Derivatives not designated as hedging instruments:
                   
Employment agreement award
Other Long-Term Liabilities
   
5,118
 
Other Long-Term Liabilities
   
4,657
 
Total derivatives
   
$
7,070
     
$
6,743
 
 
The effect and the presentation of the Company’s derivative instruments on the consolidated statement of operations are as follows:
  
 Derivatives in Cash Flow Hedging Relationships
 
Amount of Gain  in Other Comprehensive Loss on Derivative (Effective Portion)
 
Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
   
Gain (Loss) in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
   
Amount
 
Location
 
Amount
    Location    
 
  Amount
Three Months Ended March 31,
(Unaudited)
 (In thousands)
 
   
2010
 
2009
   
2010
 
2009
     
2010
    2009
Interest rate swaps
 
 
$134
 
 
$55
 
Interest expense
 
$(514)
 
$(227)
   
Interest expense
$-
 
$-

Derivatives Not Designated
 as Hedging Instruments
 
 
Location of Gain (Loss) in Income of Derivative
 
 
Amount of Loss in Income of Derivative
       
Three Months Ended March 31,
       
2010
 
2009
       
(Unaudited)
       
(In thousands)
         
 
Employment agreement award
 
Corporate selling, general and administrative
expense
 
 
$(461)
 
 
$(122)
 

 
 
21

 

Hedging Activities
 
In June 2005, pursuant to the Credit Agreement (as defined in Note 7 — Long-Term Debt), the Company entered into four fixed rate swap agreements to reduce interest rate fluctuations on certain floating rate debt commitments. Two of the four $25.0 million swap agreements expired in June 2007 and 2008, respectively.
 
The remaining swap agreements have the following terms:

Agreement
 
Notional Amount
 
Expiration
 
Fixed Rate
 
                No. 1
 
$25.0 million
 
June 16, 2010
   
4.27
%
                No. 2
 
$25.0 million
 
June 16, 2012
   
4.47
%
 
Each swap agreement has 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 are 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 uses 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 is recorded in Accumulated Other Comprehensive Loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2010, 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, is recognized directly in earnings.

Amounts reported in Accumulated Other Comprehensive Loss related to derivatives are reclassified to interest expense as interest payments are made on the Company’s floating rate debt. During the next 12 months, the Company estimates that an additional amount of approximately $1.3 million will be reclassified as an increase to interest expense.
 
Under the swap agreements, the Company pays the fixed rate listed in the table above. The counterparties to the agreements pay 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 are international financial institutions. The Company estimates the net fair value of these instruments as of March 31, 2010 to be a liability of approximately $2.0 million. The fair value of the interest rate swap agreements is determined by obtaining quotations from the financial institutions, which are parties to the Company’s swap agreements and adjusted for credit risk. 
 
Costs incurred to execute the swap agreements are deferred and amortized over the term of the swap agreements. The amounts incurred by the Company, representing the effective difference between the fixed rate under the swap agreements and the variable rate on the underlying term of the debt, are included in interest expense in the accompanying consolidated statements of operations. In the event of early termination of these swap agreements, any gains or losses would be amortized over the respective lives of the underlying debt or recognized currently if the debt is terminated earlier than initially anticipated.
 
Other Derivative Instruments
 
The Company recognizes all derivatives at fair value, whether designated in hedging relationships or not, in 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.  Any fees associated with these derivatives are amortized over their term. 
 
 

 
22

 

As of March 31, 2010, the Company was party to an Employment Agreement executed in April 2008 with the CEO, which calls 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. With the assistance of a third party valuation firm, the Company reassessed the estimated fair value of the award at March 31, 2010 to be approximately $5.1 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 in April 2011, or earlier if the CEO voluntarily leaves the Company, or is terminated for cause.
 

7.  LONG-TERM DEBT:
 
Long-term debt consists of the following:
 
   
As of
 
   
March 31, 2010
   
December 31, 2009
 
   
(Unaudited)
       
   
(In thousands)
 
                 
                 
Senior bank term debt
 
$
40,522
   
$
45,024
 
Senior bank revolving debt
   
306,000
     
306,000
 
87/8% Senior Subordinated Notes due July 2011
   
101,510
     
101,510
 
63/8% Senior Subordinated Notes due February 2013
   
200,000
     
200,000
 
Note payable
   
1,000
     
1,000
 
Total long-term debt
   
649,032
     
653,534
 
Less: current portion
   
346,522
     
18,010
 
Long-term debt, net of current portion
 
$
302,510
   
$
635,524
 

Credit Facilities
 
In June 2005, the Company entered into the Credit Agreement with a syndicate of banks. Simultaneous with entering into the Credit Agreement, the Company borrowed $437.5 million to retire all outstanding obligations under its previous credit agreement. The Credit Agreement was amended in April 2006, September 2007 and March 2010 to modify certain financial covenants and other provisions. The Credit Agreement expires the earlier of (a) six months prior to the scheduled maturity date of the 87/8% Senior Subordinated Notes due July 1, 2011 (January 1, 2011)  (unless the 87/8% 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 is $700.0 million, consisting of a $400.0 million revolving facility and a $300.0 million term loan facility. Borrowings under the credit facilities are subject to compliance with certain provisions including, but not limited, to financial covenants. The Company may 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.
 

 
 
23

 


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 63/8% and 87/8% Senior Subordinated 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 Credit Agreement dated June 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 (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 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 work on the amendment.  With the Joinder and waivers included in the Third Amendment, we believe we are currently in compliance with all of our debt covenants as of the date of the filing of this Form 10-Q, and based on current projections, the Company believes it is probable that it will be in compliance with all debt covenants through March 31, 2011.       

The Credit Agreement contains affirmative and negative covenants that the Company must comply with, including:

(a)  
maintaining an interest coverage ratio of no less than:

§
1.90 to 1.00 from January 1, 2006 to September 13, 2007;
§
1.60 to 1.00 from September 14, 2007 to June 30, 2008;
§
1.75 to 1.00 from July 1, 2008 to December 31, 2009;
§
2.00 to 1.00 from January 1, 2010 to December 31, 2010; and
§
2.25 to 1.00 from January 1, 2011 and thereafter;

(b)  
maintaining a total leverage ratio of no greater than:

§
7.00 to 1.00 beginning April 1, 2006 to September 13, 2007;
§
7.75 to 1.00 beginning September 14, 2007 to March 31, 2008;
§
7.50 to 1.00 beginning April 1, 2008 to September 30, 2008;
§
7.25 to 1.00 beginning October 1, 2008 to June 30, 2010;
§
6.50 to 1.00 beginning July 1, 2010 to September 30, 2011; and
§
6.00 to 1.00 beginning October 1, 2011 and thereafter;

(c)  
maintaining a senior leverage ratio of no greater than:

§
5.00 to 1.00 beginning June 13, 2005 to September 30, 2006;
§
4.50 to 1.00 beginning October 1, 2006 to September 30, 2007; and
§
4.00 to 1.00 beginning October 1, 2007 and thereafter; and

(d)  
limitations on:

§
liens;
§
sale of assets;
§
payment of dividends; and
§
mergers.
  
 
 

 
 
24

 


As of March 31, 2010, approximate ratios calculated in accordance with the Credit Agreement, are as follows:

   
As of March 31, 2010
   
Covenant Limit
   
Cushion
 
                   
PF LTM Covenant EBITDA (In millions)
 
$
91.2
             
                     
PF LTM Interest Expense (In millions)
 
$
36.8
             
                     
Senior Debt (In millions)
 
$
347.4
             
Total Debt (In millions)
 
$
649.5
             
                     
Senior Secured Leverage 
                   
Senior Secured Debt / Covenant EBITDA 
   
3.81
 
4.00
 
0.19
                     
Total Leverage
                   
Total Debt / Covenant EBITDA
   
7.12
x
   
7.25
x
   
0.13
x
                         
Interest Coverage
                       
Covenant EBITDA / Interest Expense
   
2.47
x
   
2.00
x
   
0.47
x
                         
PF - Pro forma
                       
LTM  - Last twelve months
                       
EBITDA - Earnings before interest, taxes, depreciation and amortization 
                       

At the date of the filing of this Form 10-Q and based on its most recent projections, the Company's management believes it is probable that the Company will be in compliance with all debt covenants through March 31, 2011. Based on its December 31, 2009 excess cash flow calculation, the Company made a $5.0 million term loan principal prepayment in May 2010 on its senior bank term debt. No excess cash calculation was required and, therefore, no payment was required for the year ended December 31, 2008. In March 2009 and May 2009, the Company made prepayments of $70.0 million and $31.5 million, respectively, on the term loan facility based on its excess proceeds calculation, which included asset acquisition and disposition activity for the twelve month period ended May 31, 2008.  These prepayments were funded with $70.0 million and $31.5 million in loan proceeds from the revolving facility in March 2009 and May 2009, respectively.
 
As of March 31, 2010, the Company had approximately $93.0 million of borrowing capacity under its revolving credit facility. Taking into consideration the financial covenants under the Credit Agreement, approximately $10.0 million of that amount was available for borrowing. The Company expects to pay down amounts under its revolving credit facility in 2010 to maintain compliance with its leverage ratio requirements in 2010.

Under the terms of the Credit Agreement, upon any breach or default under either the 87/8% Senior Subordinated Notes due July 2011 or the 63/8% Senior Subordinated Notes due February 2013, the lenders could among other actions immediately terminate the Credit Agreement and declare the loans then outstanding under the Credit Agreement to be immediately due and payable. Similarly, under the 87/8% Senior Subordinated Notes and the 63/8% Senior Subordinated Notes, a default under the terms of the 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 immediately due and payable.
 
 

 
25

 


Interest payments under the terms of the Credit Agreement are due based on the type of loan selected. Interest on alternate base rate loans as defined under the terms of the Credit Agreement is payable on the last day of each March, June, September and December. Interest due on the LIBOR loans is payable on the last day of the interest period applicable for borrowings up to three months in duration, and on the last day of each March, June, September and December for borrowings greater than three months in duration. In addition, quarterly installments of principal on the term loan facility are 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.
 
The Credit Agreement expires the earlier of (a) six months prior to the scheduled maturity of the 87/8% Senior Subordinated Notes due July 1, 2011 (January 1, 2011) (unless the 87/8% Senior Subordinated Notes have been refinanced or repurchased prior to such date) or (b) June 30, 2012. Management believes it is probable that the Company will refinance the 87/8% Senior Subordinated Notes prior to January 1, 2011.
 
As of March 31, 2010, the Company had outstanding approximately $346.5 million on its credit facility, all of which was classified as current portion of long-term debt in the consolidated balance sheet. During the three months ended March 31, 2010 the Company repaid approximately $4.5 million.

We have retained a financial advisor and are currently evaluating various alternatives with respect to our upcoming debt maturities and other strategic initiatives that we may undertake in the future. These alternatives include entering into one or more amendments, refinancing transactions, retiring or purchasing our outstanding indebtedness through cash purchases, prepayments and/or exchanges for newly issued debt or equity securities or obligations, in open market purchases or privately negotiated transactions.  Our ability to consummate such amendments, refinancings, repurchases, prepayments or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, some of which may be beyond our control. Accordingly, while management believes it is probable, there is no assurance that the Company will successfully enter into any definitive agreements for such alternatives, or that any of the strategic initiatives being assessed will occur in the future.
 
Senior Subordinated Notes
 
As of March 31, 2010 and December 31, 2009, the Company had outstanding $200.0 million of its 63/8% Senior Subordinated Notes due February 2013 and $101.5 million of its 87/8% Senior Subordinated Notes due July 2011. The 63/8% Senior Subordinated Notes due February 2013 had a carrying value of $200.0 million and a fair value of approximately $163.0 million as of March 31, 2010, and a carrying value of $200.0 million and a fair value of approximately $142.0 million as of December 31, 2009. The 87/8% Senior Subordinated Notes due July 2011 had a carrying value of $101.5 million and a fair value of approximately $92.4 million as of March 31, 2010, and a carrying value of $101.5 million and a fair value of approximately $78.2 million as of December 31, 2009. The fair values were determined based on the fair market value of similar instruments.
 

 
 
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During the first quarter of 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 63/8% and 87/8% Senior Subordinated 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 Credit Agreement dated June 2005. We have since joined the relevant subsidiaries as guarantors under the relevant indentures (the “Joinder”).  As discussed in the section above, on March 30, 2010 the Company cured a non-monetary technical cross-default under the terms of our Credit Agreement dated June 2005 by entering into the Third Amendment. As of March 31, 2010 and through the date of the filing of this Form 10-Q, the Company is in compliance with all of our debt covenants, and based on our projects, the Company believes it is probable that it will be in compliance with all debt covenants through March 31, 2011.       

Interest payments under the terms of the 63/8% and the 87/8% Senior Subordinated Notes are due in February and August, and January and July of each year, respectively.  Based on the $200.0 million principal balance of the 63/8% Senior Subordinated Notes outstanding on March 31, 2010, interest payments of $6.4 million are payable each February and August through February 2013.  The Company made this $6.4 million payment in February and August 2009, and in February 2010. Based on the $101.5 million principal balance of the 87/8% Senior Subordinated Notes outstanding on March 31, 2010, interest payments of $4.5 million are payable each January and July through July 2011. The Company made a $4.6 million interest payment in January 2009, and $4.5 million interest payment in each of July 2009 and January 2010.

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

The remaining outstanding amounts of our 87/8% Senior Subordinated Notes are due in July 2011.  We have retained a financial advisor and are currently evaluating various alternatives with respect to our upcoming debt maturities and other strategic initiatives that we may undertake in the future. These alternatives include entering into one or more amendments, refinancing transactions, retiring or purchasing our outstanding indebtedness through cash purchases, prepayments and/or exchanges for newly issued debt or equity securities or obligations, in open market purchases or privately negotiated transactions.  Our ability to consummate such amendments, refinancings, repurchases, prepayments or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, some of which may be beyond our control. Accordingly, while management believes it is probable, there is no assurance that the Company will successfully enter into any definitive agreements for such alternatives, or that any of the strategic initiatives being assessed will occur in the future.
 
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 87/8% Senior Subordinated Notes, the 63/8% Senior Subordinated Notes and the Company’s obligations under the Credit Agreement.
 
Note Payable

In November 2009, Reach Media issued a $1.0 million promissory note payable to a subsidiary of Citadel.  The note bears interest at 7.0% per annum, which is payable quarterly, and the entire principal is due on December 31, 2011.  The note was issued in connection with Reach Media entering into a Sales Representation and Redemption Agreement which among other things, provided for the purchase by Reach Media of certain of its stock formerly owned by that subsidiary of Citadel (See Note 2 – Acquisitions.)
 
Future minimum principal payments of debt as of March 31, 2010 are as follows:

   
Senior Subordinated Notes
   
Credit Facilities
   
Note Payable
 
   
(Unaudited)
 
   
(In thousands)
 
                   
April – December 2010
 
$
   
$
17,010
   
$
 
2011
   
101,510
     
329,512
     
1,000
 
2012
   
     
     
 
2013
   
200,000
     
     
 
2014
   
     
     
 
2015 and thereafter
   
     
     
 
Total Debt
 
$
301,510
   
$
346,522
   
$
1,000
 


 
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8.  INCOME TAXES:

The effective tax rate from continuing operations for the three month period ended March 31, 2010 was 6.2%, which includes an immaterial effect for discrete items.  This rate is based on the blending of an estimated annual effective tax rate of zero for Radio One, which has a full valuation allowance for its deferred tax assets (“DTAs”), with an estimated annual effective tax rate of 35.3% for Reach Media, which does not have a valuation allowance. Generally, the 2010 estimated annual effective tax rate for Radio One would reflect an expense of $11.9 million for the increase in the deferred tax liability (“DTL”) associated with the amortization of certain of the Company’s radio broadcasting licenses for tax purposes and an expense of $249,000 for state taxes related to jurisdictions with gross receipts based income taxes.  Inclusion of these expenses in the annual effective tax rate calculation for 2010 would have resulted in a rate of 51.0%; however, the application of this rate to the pre-tax book loss for the three month period ended March 31, 2010 would have resulted in the recording of a tax benefit for this period.  Since management believes it is not more likely than not that the tax benefit will be realized, the benefit cannot be recorded and accordingly, the rate was reduced to zero.
 
      In 2007, the Company concluded it was more likely than not that the benefit from certain of its DTAs would not be realized. The Company considered its historically profitable jurisdictions, its sources of future taxable income and tax planning strategies in determining the amount of valuation allowance recorded. As part of that assessment, the Company also determined that it was not appropriate under generally accepted accounting principles to benefit its DTAs based on DTLs related to indefinite-lived intangibles that cannot be scheduled to reverse in the same period. Because the DTL in this case would not reverse until some future indefinite period when the intangibles are either sold or impaired, any resulting temporary differences cannot be considered a source of future taxable income to support realization of the DTAs. As a result of this assessment, and given the then three year cumulative loss position, the uncertainty of future taxable income and the feasibility of tax planning strategies, the Company recorded a valuation allowance for its DTAs in 2007. For the three month period ended March 31, 2010, 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.
 
      On January 1, 2007, the Company adopted the provisions of ASC 740, “Income Taxes,” related to accounting for uncertainty in income taxes, which 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 the uncertainties pertaining to our income tax position is primarily due to various state tax positions. As of March 31, 2010, we had approximately $6.3 million in unrecognized tax benefits. Accrued interest and penalties related to unrecognized tax benefits is recognized as a component of tax expense. During the three months ended March 31, 2010, the Company recorded an expense for interest and penalties of $32,000.  As of March 31, 2010, the Company had a liability of $237,000 for unrecognized tax benefits for interest and penalties which is included in taxes payable in the consolidated balance sheet. The Company estimates the possible change in unrecognized tax benefits prior to March 31, 2011 which could range from zero to a reduction of $72,000, due to expiring statutes.
 
 

 
 

 
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9.  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 March 2008, the Company’s board of directors authorized a repurchase of shares of the Company’s Class A and Class D common stock through December 31, 2009, in an amount of up to $150.0 million, the maximum amount allowable under the Credit Agreement.  The amount and timing of such repurchases was based on pricing, general economic and market conditions, and the restrictions contained in the agreements governing the Company’s credit facilities and subordinated debt and certain other factors. While $150.0 million is the maximum amount allowable under the Credit Agreement, in 2005, under a prior board authorization, the Company utilized approximately $78.0 million to repurchase common stock leaving capacity of $72.0 million under the Credit Agreement. During the three months ended March 31, 2009, the Company repurchased 22,515 shares of Class A common stock at an average price of $0.57 per share for $13,000 and 14.4 million shares of Class D common stock at an average price of $0.47 per share for approximately $6.8 million. As of March 31, 2010, the Company did not have any capacity available to repurchase stock since the authorization expired by its terms on December 31, 2009.

 Stock Option and Restricted Stock Grant Plan

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

A new stock option and restricted stock plan (the “2009 Stock Plan”) was approved by the stockholders at the Company’s annual meeting on December 16, 2009.  The terms of the 2009 Stock Plan are substantially similar to the prior Plan. The Company has the authority to issue up to 8,250,000 shares of Class D common stock under the 2009 Stock Plan. As of March 31, 2010, 4,960,570 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 and the first installment of 33% will vest on June 5, 2010.  The remaining two installments will vest equally on June 5, 2011 and 2012. Pursuant to the terms of the 2009 Stock Plan, subject to the Company’s insider trading policy, a portion of each recipients' vested shares may be sold into the open market for tax purposes on or about the vesting dates.

 
29

 

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, which is consistent with our valuation methodologies previously used for options in footnote disclosures. Such fair value is recognized as an expense over the service period, net of estimated forfeitures, using the straight-line method. Estimating the number of stock awards that will ultimately vest requires judgment, and to the extent actual forfeitures differ substantially from our current estimates, amounts will be recorded as a cumulative adjustment in the period the estimated number of stock awards are revised. We consider many factors when estimating expected forfeitures, including the types of awards, employee classification and historical experience. Actual forfeitures may differ substantially from our current estimate.
 
The Company also uses the BSM valuation model to calculate the fair value of stock-based awards. The BSM incorporates various assumptions including volatility, expected life, and interest rates. For options granted the Company uses the BSM option-pricing model and determines: (i) the term by using the simplified “plain-vanilla” method as allowed under SAB No. 110; (ii) a historical volatility over a period commensurate with the expected term, with the observation of the volatility on a daily basis; and (iii) a risk-free interest rate that was consistent with the expected term of the stock options and based on the U.S. Treasury yield curve in effect at the time of the grant.

Stock-based compensation expense for the three months ended March 31, 2010 and 2009 was approximately $2.0 million and $483,000, respectively.

The Company granted 39,430 stock options during the three months ended March 31, 2010 and did not grant stock options during the three months ended March 31, 2009.

 
Three Months Ended March 31,
 
 
2010
   
2009
 
Average risk-free interest rate
    3.28 %      
Expected dividend yield
    0.00 %      
Expected lives
6.25 years
       
Expected volatility
    111.27 %      
       
Transactions and other information relating to stock options for the three months ended March 31, 2010 are summarized below:

   
 
Number of Options
   
Weighted-Average Exercise Price
   
Weighted-Average Remaining Contractual Term (In Years)
   
 
Aggregate Intrinsic Value
 
    Outstanding at December 31, 2009
   
5,365,000
   
$
9.64
     
     
 
    Grants
   
39,000
   
3.17
                 
    Exercised
   
     
                 
    Forfeited/cancelled/expired
   
     
                 
    Balance as of March 31, 2010
   
5,404,000
   
$
9.59
     
5.64
   
3,138,386
 
    Vested and expected to vest at March 31, 2010
   
5,173,000
   
$
9.92
     
5.53
   
$
2,814,122
 
    Unvested at March 31, 2010
   
1,352,000
   
$
1.75
     
8.15
   
$
2,027,024<