10-Q 1 form10-qseptember302010.htm RADIO ONE, INC. FORM 10-Q SEPTEMBER 30. 2010 form10-qseptember302010.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 September 30, 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 October 29, 2010
Class A Common Stock, $.001 Par Value
 
2,863,912
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
 
45,416,082
 
 
 

 
 
 

 

 
 

TABLE OF CONTENTS

   
Page
   
PART I. FINANCIAL INFORMATION
 
   
Item 1.
Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2010 and 2009 (Unaudited)
4
 
Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009
5
 
Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2010 (Unaudited)
6
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)
7
 
Notes to Consolidated Financial Statements (Unaudited) 
8
 
Consolidating Financial Statements                                                            
35
 
Consolidating Statement of Operations for the Three Months Ended September 30, 2010 (Unaudited)
35
 
Consolidating Statement of Operations for the Three Months Ended September 30, 2009 (Unaudited)
36
 
Consolidating Statement of Operations for the Nine Months Ended September 30, 2010 (Unaudited)
37
 
Consolidating Statement of Operations for the Nine Months Ended September 30, 2009 (Unaudited)
38
 
Consolidating Balance Sheet as of September 30, 2010 (Unaudited)
39
 
Consolidating Balance Sheet as of December 31, 2009
40
 
Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2010 (Unaudited)
41
 
Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2009 (Unaudited)
42
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
44
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
70
Item 4.
Controls and Procedures                                                                                                                                        
70
   
PART II. OTHER INFORMATION
 
   
Item 1.
Legal Proceedings                                                                                                                                         
71
Item 1A.
Risk Factors                                                                                                                                         
72
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
73
Item 3.
Defaults Upon Senior Securities                                                                                                                 
73
Item 4.
Submission of Matters to a Vote of Security Holders                                                                                   
74
Item 5.
Other Information                                                                                                                                         
74
Item 6.
Exhibits                                                                                                                                         
74
 
SIGNATURES                                                                                                                                         
75
 
 
 

 

 

 

 
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:

 
our recurring losses from operations and need to obtain cash flow from operations or adequate funding to fund our ongoing operations or pay our outstanding debt raise substantial doubt as to our ability to continue as a going concern;

 
failure to complete the anticipated refinancing transactions, as generally described in our Current Report on Form 8-K filed June 16, 2010, and as may be amended, for any reason, likely would require us to seek protection under Chapter 11 of the Bankruptcy Code;

 
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;

 
our high degree of leverage may impact upon our ability to refinance our debt and/or the terms upon which we refinance given current market conditions;

 
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; 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/A.

You should not place undue reliance on these forward-looking statements, which reflect our views as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise. 
 
 
3

 
RADIO ONE, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
              (As Adjusted – See Note 1)               (As Adjusted – See Note 1)  
                                 
      (In thousands, except share data)  
                                 
NET  REVENUE
 
$
74,491
   
$
74,651
   
$
208,703
   
$
204,835
 
OPERATING EXPENSES:
                               
Programming and technical, including stock-based compensation of $0 and $0, and $0 and $88, respectively
   
18,811
     
17,994
     
56,736
     
56,856
 
Selling, general and administrative, including stock-based compensation of $151 and $54, and $833 and $285, respectively
   
27,517
     
24,018
     
78,290
     
68,828
 
Corporate selling, general and administrative, including stock-based compensation of $757 and $248, and $4,044 and $1,014, respectively
   
6,245
     
4,950
     
24,581
     
16,048
 
Depreciation and amortization
   
4,625
     
5,337
     
14,195
     
15,804
 
Impairment of long-lived assets
   
     
     
     
48,953
 
Total operating expenses
   
57,198
     
52,299
     
173,802
     
206,489
 
Operating income (loss)
   
17,293
     
22,352
     
34,901
     
(1,654
)
INTEREST INCOME
   
28
     
33
     
95
     
98
 
INTEREST EXPENSE
   
12,122
     
9,224
     
31,059
     
29,036
 
GAIN ON RETIREMENT OF DEBT
   
     
     
     
1,221
 
EQUITY IN INCOME OF AFFILIATED COMPANY
   
(1,784
)
   
(1,397
)
   
(3,832
)
   
(3,294
)
OTHER EXPENSE, net
   
50
     
38
     
2,934
     
96
 
        Income (loss) before provision for (benefit from) income taxes, noncontrolling interests in income of subsidiaries and loss from discontinued operations
   
6,933
     
14,520
     
4,835
 
   
(26,173
)
PROVISION FOR (BENEFIT FROM) INCOME TAXES
   
4,760
     
(1,508
   
4,685
 
   
7,340
 
Net income (loss) from continuing operations
   
2,173
     
16,028
     
150
 
   
(33,513
)
LOSS FROM DISCONTINUED OPERATIONS, net of tax
   
(125
)
   
(90
)
   
(205
   
(835
)
CONSOLIDATED NET INCOME (LOSS)
   
2,048
     
15,938
     
(55
)
   
(34,348
)
NONCONTROLLING INTERESTS IN INCOME OF SUBSIDIARIES
   
1,010
     
1,712
     
1,427
     
3,650
 
    CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
 
$
1,038
   
$
14,226
   
$
(1,482
)
 
$
(37,998
)
                                 
        BASIC AND DILUTED CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
                               
        Continuing operations
 
$
0.02
   
$
0.25
   
$
(0.02
)*
 
$
(0.60
)
Discontinued operations, net of tax
   
(0.00
)
   
(0.00
)
   
(0.00
)*
   
(0.01
)
Net income (loss) attributable to common stockholders
 
$
0.02
   
$
0.25
   
$
(0.03
)*
 
$
(0.61
)
WEIGHTED AVERAGE SHARES OUTSTANDING:
                               
Basic
   
52,064,108
     
56,242,964
     
51,316,498
     
61,873,161
 
Diluted
   
54,262,885
     
56,684,369
     
51,316,498
     
61,873,161
 
 
*  Earnings per share amounts may not add due to rounding.

The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 
RADIO ONE, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS

  
As of
 
 
September 30, 
2010
   
December 31,
2009
 
 
(Unaudited)
       
           
 
(In thousands, except share data)
 
ASSETS
         
CURRENT ASSETS:
         
Cash and cash equivalents
$
21,571
   
$
19,963
 
    Trade accounts receivable, net of allowance for doubtful accounts of $2,784 and $2,651, respectively
 
60,840
     
47,019
 
Prepaid expenses and other current assets
 
4,739
     
4,950
 
Current assets from discontinued operations
 
78
     
424
 
Total current assets
 
87,228
     
72,356
 
PROPERTY AND EQUIPMENT, net
 
35,318
     
40,585
 
GOODWILL
 
137,493
     
137,517
 
RADIO BROADCASTING LICENSES
 
698,645
     
698,645
 
OTHER INTANGIBLE ASSETS, net
 
36,656
     
35,059
 
INVESTMENT IN AFFILIATED COMPANY
 
46,479
     
48,452
 
OTHER ASSETS
 
2,565
     
2,854
 
NON-CURRENT ASSETS FROM DISCONTINUED OPERATIONS
 
     
74
 
    Total assets
$
1,044,384
   
$
1,035,542
 
               
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY              
CURRENT LIABILITIES:
             
Accounts payable
$
2,719
   
$
4,160
 
Accrued interest
 
10,355
     
9,499
 
Accrued compensation and related benefits
 
12,085
     
10,249
 
Income taxes payable
 
2,444
     
1,533
 
Other current liabilities
 
7,105
     
7,236
 
Current portion of long-term debt
 
652,138
     
652,534
 
Current liabilities from discontinued operations
 
2,428
     
2,949
 
Total current liabilities
 
689,274
     
688,160
 
LONG-TERM DEBT, net of current portion
 
1,000
     
1,000
 
OTHER LONG-TERM LIABILITIES
 
10,147
     
10,185
 
DEFERRED TAX LIABILITIES
 
90,762
     
88,144
 
Total liabilities
 
791,183
     
787,489
 
               
REDEEMABLE NONCONTROLLING INTERESTS
 
44,047
     
52,225
 
               
STOCKHOLDERS’ EQUITY:
             
    Convertible preferred stock, $.001 par value, 1,000,000 shares authorized; no shares outstanding at September 30, 2010 and December 31, 2009
 
     
 
    Common stock — Class A, $.001 par value, 30,000,000 shares authorized; 2,863,912 and 2,981,841 shares issued and outstanding as of September 30, 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 September 30, 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 September 30, 2010 and December 31, 2009, respectively
 
3
     
3
 
    Common stock — Class D, $.001 par value, 150,000,000 shares authorized; 45,416,082 and 42,280,153 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively
 
45
     
42
 
Accumulated other comprehensive loss
 
(1,685
)
   
(2,086
Additional paid-in capital
 
982,679
     
968,275
 
Accumulated deficit
 
(771,894
)
   
(770,412
)
    Total stockholders’ equity
 
209,154
     
195,828
 
Total liabilities, redeemable noncontrolling interests and stockholders’ equity
$
1,044,384
   
$
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 STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
 
                                                             
                                       
Accumulated
                   
   
Convertible
   
Common
   
Common
   
Common
   
Common
         
Other
   
Additional
          Total  
   
Preferred
   
Stock
   
Stock
   
Stock
   
Stock
   
Comprehensive
   
Comprehensive
   
Paid-In
   
Accumulated
   
Stockholders’
 
   
Stock
   
Class A
   
Class B
   
Class C
   
Class D
   
Income (Loss)
   
Loss
   
Capital
   
Deficit
   
Equity
 
   
(In thousands)
 
                                                         
                                                                                 
                                                             
BALANCE, as of December 31, 2009
    $
-
   
3
   
3
   
3
   
42
            $
(2,086
)
 
968,275
   
(770,412
)
 
195,828
 
Comprehensive loss:
                                                                               
Net loss
   
-
     
-
     
-
     
-
     
-
   
$
(1,482
)
   
-
     
-
     
(1,482
)
   
(1,482
)
Change in unrealized loss on derivative and hedging activities, net of taxes
   
-
     
-
     
-
     
-
     
-
     
401
     
401
     
-
     
-
     
401
 
Comprehensive loss
                                         
$
(1,081
)
                               
Stock-based compensation expense
   
-
     
-
     
-
     
-
     
3
             
-
     
4,874
     
-
     
4,877
 
Decretion of redeemable noncontrolling interests to estimated redemption value
                                                           
9,530
     
-
     
9,530
 
BALANCE, as of September 30, 2010
 
 $
-
   
 $
3
   
 $
3
   
 $
3
   
 $
45
           
 $
(1,685
)
 
 $
982,679
   
 $
(771,894
)
 
 $
209,154
 

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

 

 
6

 

RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
   
Nine Months Ended September 30,
 
   
2010
   
2009
 
   
(Unaudited)
 
         
(As Adjusted – See Note 1)
 
   
(In thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Consolidated net loss
   
(55
)
   
(34,348
Adjustments to reconcile consolidated net loss to net cash from operating activities:
               
Depreciation and amortization
   
14,195
     
15,804
 
Amortization of debt financing costs
   
1,694
     
1,811
 
Write off of debt financing costs
   
3,055
     
 
Deferred income taxes
   
2,611
     
3,887
 
Impairment of long-lived assets
   
     
48,953
 
Equity in income of affiliated company
   
(3,832
   
(3,294
Stock-based compensation
   
4,877
     
1,381
 
Gain on retirement of debt
   
     
(1,221
Amortization of contract inducement and termination fee
   
     
(1,263
)
Effect of change in operating assets and liabilities, net of assets acquired:
               
Trade accounts receivable
   
(13,821
   
(617
)
Prepaid expenses and other assets
   
211
 
   
1,404
 
Other assets
   
6,868
     
1,481
 
Accounts payable
   
(1,824
)
   
348
 
Accrued interest
   
856
     
(6,122
)
Accrued compensation and related benefits
   
1,836
     
(2,715
Income taxes payable
   
911
     
855
 
Other liabilities
   
(403
)
   
(4,687
Net cash flows (used in) provided from operating activities of discontinued operations
   
(404
   
207
 
Net cash flows provided from operating activities
   
16,775
 
   
21,864
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property and equipment
   
(3,251
)
   
(3,368
)
Purchase of other intangible assets
   
(341
)
   
(272
)
Net cash flows used in investing activities
   
(3,592
)
   
(3,640
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayment of other debt
   
     
(153
)
Proceeds from credit facility
   
12,000
     
111,500
 
Repayment of credit facility
   
(12,396
)
   
(125,170
Repurchase of senior subordinated notes
   
     
(1,220
Debt refinancing and modification costs
   
(11,179
)
   
 
Repurchase of common stock
   
     
(10,695
)
Net cash flows used in financing activities
   
(11,575
)
   
(25,738
)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
1,608
     
(7,514
)
CASH AND CASH EQUIVALENTS, beginning of period
   
19,963
     
22,289
 
CASH AND CASH EQUIVALENTS, end of period
 
$
21,571
   
$
14,775
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for:
               
Interest
 
$
28,510
   
$
33,346
 
Income taxes
 
$
1,160
   
$
2,731
 
 
 
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 business 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 and urban 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 September 30, 2010 and December 31, 2009, and the publication’s results from operations for the three months and nine months ended September 30, 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/A.
 
Certain reclassifications associated with accounting for discontinued operations have been made to the accompanying prior period financial statements to conform to the current period presentation. These reclassifications had no effect on previously reported net income or loss, or any other previously reported statements of operations, balance sheet or cash flow amounts. (See Note 3 – Discontinued Operations.)
 
(c)  Financial Instruments
 
Financial instruments as of September 30, 2010 and December 31, 2009 consisted of cash and cash equivalents, trade accounts receivable, accounts payable, accrued expenses, note payable, redeemable noncontrolling interests and long-term debt. The carrying amounts approximated fair value for each of these financial instruments as of September 30, 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 $89.3 million as of September 30, 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 $168.0 million as of September 30, 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 trading values of these instruments as of the reporting date.
 

 
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 $8.3 million and $7.8 million for the three months ended September 30, 2010 and 2009, respectively.  Agency and outside sales representative commissions were approximately $23.4 million and $20.7 million for the nine months ended September 30, 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
 
From time to time, as part of our normal operations, 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 September 30, 2010 and 2009, barter transaction revenues were $794,000 and $820,000, respectively. For each of the nine months ended September 30, 2010 and 2009, barter transaction revenues were $2.4 million. Additionally, barter transaction costs were reflected in programming and technical expenses and selling, general and administrative expenses of $741,000 and $779,000 and $53,000 and $41,000, for the three months ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010 and 2009, barter transaction costs were reflected in programming and technical expenses and selling, general and administrative expenses of $2.2 million and $2.3 million and $184,000 and $124,000, 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
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
 
   
(In thousands)
 
       
Consolidated net income (loss) 
 
$
2,048
   
$
15,938
   
$
(55
 
$
(34,348
Other comprehensive income (loss) (net of tax benefit of $0 for all periods):
                               
Derivative and hedging activities
   
5
     
(97
   
401
     
378
 
Comprehensive income (loss)
   
2,053
     
15,841
     
346
     
(33,970
)
Comprehensive income attributable to the noncontrolling interests
   
1,010
     
1,712
     
1,427
     
3,650
 
Comprehensive (loss) income attributable to common stockholders
 
$
1,043
   
$
14,129
   
$
(1,081
)
 
$
(37,620
 
 

 
 
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
September 30,
  
 
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
 
(Unaudited)
 
Numerator:
     
Consolidated net income (loss) attributable to common stockholders
 
$
1,038
   
$
14,226
   
$
(1,482
)
 
$
(37,998
)
        Denominator:
                               
Denominator for basic net income (loss) per share - weighted average outstanding shares
   
52,064,108
     
56,242,964
     
51,316,498
     
61,873,161
 
    Effect of dilutive securities:
                               
Stock options and restricted stock
   
2,198,777
     
441,405
     
     
 
    Denominator for diluted net income per share - weighted-average outstanding shares
   
54,262,885
     
56,684,369
     
51,316,498
     
61,873,161
 
                                 
Net income (loss) attributable to common stockholders per share - basic 
 
$
0.02
   
$
0.25
   
$
(0.03
)
 
$
(0.61
)
Net income (loss) attributable to common stockholders per share - diluted 
 
$
0.02
   
$
0.25
   
$
(0.03
)
 
$
(0.61
)

 All stock options and restricted stock were excluded from the diluted calculation for the nine months ended September 30, 2010 and 2009, as their inclusion would have been anti-dilutive.  Additionally, for the three months ended September 30, 2010 and 2009, approximately 5.1 million options and 5.4 million options, respectively, to purchase shares were not included in the diluted earnings per share calculation, as their inclusion would have been anti-dilutive. The following table summarizes the potential common shares excluded from the diluted calculation.

 
Nine Months Ended September 30,
 
 
2010
 
2009
 
(Unaudited)
 
 
(In thousands)
 
             
    Stock options 
    5,090       5,371  
Restricted stock 
    2,185       504  


 
(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.
 

 
 
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      As of September 30, 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 September 30, 2010 
             
Liabilities subject to fair value measurement:
             
Interest rate swap (a)
$
1,687
 
$
 
$
1,687
 
$
Employment agreement award (b)
 
5,733
   
   
   
5,733
Total
$
7,420
 
$
 
$
1,687
 
$
5,733
                       
Mezzanine equity subject to fair value measurement:
                     
Redeemable noncontrolling interest (c)
$
44,047
 
$
 
$
 
$
44,047
                       
As of December 31, 2009 
                     
Liabilities subject to fair value measurement:
                     
Interest rate swap (a)
$
2,086
 
$
 
$
2,086
 
$
Employment agreement award (b)
 
4,657
   
   
   
4,657
Total
$
6,743
 
$
 
$
2,086
 
$
4,657
 
Mezzanine equity subject to fair value measurement:
                     
Redeemable noncontrolling interests (c)
$
52,225
 
$
 
$
 
$
52,225
 
(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 estimating the fair valuation of the award. (See Note 6 – Derivative Instruments and Hedging Activities.)
 
(c)  Redeemable noncontrolling interest in Reach Media is measured at fair value using a discounted cash flow methodology. Significant inputs to the discounted cash flow analysis include forecasted operating results, the discount rate and a terminal value.
 
 
      The following table presents the changes in Level 3 liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2010.
 
   
Employment Agreement Award
     
Redeemable Noncontrolling Interests
 
   
(In thousands)
 
               
Balance at December 31, 2009
 
$
4,657
   
$
52,225
 
Losses included in earnings
   
1,076
     
 
Net income attributable to noncontrolling interest
   
     
1,427
 
Decretion to estimated redemption value
   
     
(9,605
)
Balance at September 30, 2010
 
$
5,733
   
44,047
 
                 
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
 
$
(1,076
 
$
 
 
 

 
 
11

 
 
The increase in the fair value of the employment award liability was recorded in the consolidated statements of operations as corporate selling, general and administrative expenses for the three and nine months ended September 30, 2010.

Net income attributable to noncontrolling interest amounts reflected in the table above was recorded in the consolidated statements of operations as noncontrolling interest in income of subsidiaries for the three and nine months ended September 30, 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 and nine months ended September 30, 2010 and therefore were not reported at fair value. 

 
 (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. The application of the new guidance did not result in any changes in the Company’s accounting for its investment in TV One. However, the Company updated its footnote disclosure to comply with the disclosure requirements. (See Note 5 - Investment in Affiliated Company.)

In June 2009, the FASB issued ASC 105, “Generally Accepted Accounting Principles,” which establishes the ASC as the source of authoritative non-SEC U.S. GAAP for non-governmental entities. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of ASC 105 did not have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued ASC 855, “Subsequent Events,” which addresses accounting and disclosure requirements related to subsequent events. It requires management to evaluate subsequent events through the date the financial statements are either issued or available to be issued. In February 2010, the FASB issued ASU 2010-09, which amends ASC 855 to remove all requirements for SEC filers to disclose the date through which subsequent events are considered. The amendment became effective upon issuance. The Company has provided the required disclosures regarding subsequent events in Note 15 – Subsequent Events.

The provisions under ASC 825, “Financial Instruments,” requiring disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements became effective for the Company during the quarter ended June 30, 2009. The additional disclosures required under ASC 825 are included in Note 1 – Organization and Summary of Significant Accounting Policies.

Effective January 1, 2009, the provisions under ASC 350, “Intangibles - Goodwill and Other,” related to the determination of the useful life of intangible assets and requiring additional disclosures related to renewing or extending the terms of recognized intangible assets became effective for the Company. The adoption of these provisions did not have a material effect on the Company’s consolidated financial statements.

Effective January 1, 2009, the Company adopted an accounting standard update from the Emerging Issues Task Force (“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 and Uncertainties Related to Going Concern

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.

In June 2005, the Company entered into an agreement with a syndicate of banks (the “Credit Agreement”).  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. The Senior Subordinated Notes and credit facilities are classified as current in the accompanying consolidated balance sheets at September 30, 2010 and December 31, 2009 as these obligations may become callable due to the termination of the Forbearance Agreement Amendment on September 10, 2010.
 
        As of each of June 30, 2010, July 1, 2010 and September 30, 2010, we were not in compliance with the terms of our Existing Credit Facility. More specifically, (i) as of June 30, 2010, we failed to maintain a then required total leverage ratio of 7.25 to 1.00, (ii) as of July 1, 2010, as a result of a step down of the total leverage ratio from no greater than 7.25 to 1.00 to no greater than 6.50 to 1.00 effective for the period July 1, 2010 to September 30, 2011, we failed to maintain the requisite total leverage ratio, (iii) as of September 30, 2010, we failed to meet our current total leverage ratio requirement of 6.50 to 1.00 and our senior leverage ratio requirement of 4.00 to 1.00, and (iv) as of each of June 30, 2010 and September 30, 2010, we failed to meet certain hedging obligations; specifically, we failed to maintain a ratio of at least 50% fixed rate debt to floating rate debt. On July 15, 2010, the Company and its subsidiaries entered into a forbearance agreement (the “Forbearance Agreement”) with Wells Fargo Bank, N.A. (successor by merger to Wachovia Bank, National Association), as administrative agent (the “Agent”), and financial institutions constituting the majority of outstanding loans and commitments (the “Required Lenders”) under our Existing Credit Facility, relating to the defaults and events of default occurring as of June 30, 2010 and July 1, 2010.  On August 13, 2010, we entered into an amendment to the Forbearance Agreement (the “Forbearance Agreement Amendment”) that, among other things, extended the termination date of the Forbearance Agreement to September 10, 2010, unless terminated earlier by its terms, and provided additional forbearance related to the then anticipated default caused by an opinion of Ernst & Young LLP expressing substantial doubt about the Company’s ability to continue as a going concern as issued in connection with the restatement of our financial statements.  Under the Forbearance Agreement and the Forbearance Agreement Amendment, the Agent and the Required Lenders maintained the right to deliver “payment blockage notices” to the trustees for the holders of the 87/8% Senior Subordinated Notes due 2011 (“2011 Notes”) and/or the 63/8% Senior Subordinated Notes due 2013 (“2013 Notes”).

On August 5, 2010, the Agent delivered a payment blockage notice to the Trustee under the Indenture governing our 2013 Notes.   As a result, neither we nor any of our guaranteeing subsidiaries may make any payment or distribution of any kind or character in respect of obligations under the 2013 Notes, including the interest payment that was scheduled to be made on August 16, 2010.  The 30-day grace period for the nonpayment of interest before such nonpayment constituted an event of default under the 2013 Notes Indenture expired on September 15, 2010.  While the trustee or holders of at least 25% in principal amount of the then outstanding 2013 Notes could declare the principal amount, and accrued and unpaid interest, on all outstanding 2013 Notes to be due and payable immediately as a result of such event of default, as of the date of this filing, no such remedies have been sought as we continue to negotiate the terms of the amended exchange offer and a new support agreement with the members of the ad hoc group of holders of our 2011 and 2013 Notes.  The event of default under the 2013 Notes Indenture also constitutes an event of default under the Existing Credit Facility.  While the Forbearance Agreement Amendment expired by its terms on September 10, 2010, we and the Agent continue to negotiate the terms of a credit facility amendment (the “Credit Agreement Amendment”) and the Agent and the lenders have not, as of the date of this filing, exercised additional remedies under the Existing Credit Facility.   We, along with our advisors, have negotiated the principal terms of the Credit Agreement Amendment with the Agent. However, to the extent the Required Lenders do not agree to enter into the Credit Agreement Amendment at the completion of an amended exchange offer, we would expect that all of our indebtedness under the Existing Credit Facility would be declared immediately due and payable.  Such acceleration of our indebtedness would also cause a cross-default under our other debt obligations, including under the Existing Notes.

If we complete our anticipated refinancing transactions, we intend to pay the August 16, 2010 defaulted interest in full in cash and cure or otherwise obtain a waiver of any and all defaults or events of default under the 2013 Notes Indenture and the Existing Credit Facility.  The members of the ad hoc group continue to forbear from exercising rights and remedies under the Existing Indentures with respect to any default or event of default that has occurred or may occur as a result of our failure to make the interest payment on the 2013 Notes due on August 16, 2010.  However, we cannot assure that we will complete our anticipated refinancing transactions.  In the event we do not complete our anticipated refinancing transactions and remedies are exercised by the trustee or holders under the 2013 Notes Indenture, we would expect that all of our indebtedness under the Existing Notes and the Existing Credit Facility would be declared immediately due and payable.  Either of these events would make it difficult for us to operate our business in the ordinary course, and we would likely need to seek protection under Chapter 11 of the Bankruptcy Code. The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of liabilities that may result from the outcome of this uncertainty.
 
 
13

 
 
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, as well as for the first, second and third quarters of 2010.

(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 commission based, there are no minimum guarantees on revenue.  Consequently, and combined with the fact that Radio Networks is only selling out-of-show advertising inventory, we believe it is unlikely that total revenue to be generated from Radio Networks will exceed 10% in future periods.

For the three months and nine months ended September 30, 2009, net revenues attributable to the RN Barter Revenue and Sales Representation Agreement were approximately $8.6 million and $25.8 million, respectively, all of which was reported in our Radio Broadcasting segment.

 (l) Redeemable Noncontrolling Interests

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


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. Citadel, Reach Media’s sales representative and an investor in the company, owned a noncontrolling interest in Reach Media. In November 2009, Citadel 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). This transaction increased Radio One’s common stock interest in Reach Media to 53.5%.

As part of the Company’s acquisition of a controlling 51% ownership interest of Reach Media in 2005, the noncontrolling shareholders of Reach Media were granted the right to require Reach Media, a consolidated subsidiary of the Company, to purchase all or a portion of their shares at the then current fair market value for such shares during the 30 day period beginning on February 28, 2012 and each anniversary thereafter (“Put Right”). The purchase price for such shares may be paid in cash and/or registered Class D Common Stock of Radio One, at the sole discretion of Radio One. Because the Company cannot ensure that it will be able to settle the Put Right in registered shares, the Company determined that the Put Right is presumed to be settlable only in cash. Accordingly, the noncontrolling interests are considered to be instruments that are redeemable at the option of the holders for cash and are classified outside of permanent equity in mezzanine equity.
 

 
14

 
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 September 30, 2010 and 2009, and the publication’s results from operations for the three months and nine months ended September 30, 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 as well as all of the stations sold and classified as discontinued operations for all periods presented:

   
Three Months Ended 
September 30,
   
Nine Months Ended 
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
 
   
(In thousands)
 
                                 
Net revenue
 
$
   
$
852
   
$
   
$
1,423
 
Station operating expenses
   
113
     
994
     
188
     
2,489
 
Depreciation and amortization
   
     
24
     
3
     
72
 
Loss (gain) on sale of assets
   
12
     
16
     
14
     
(302
)
(Loss) income before income taxes
   
(125
)
   
(182
)
   
(205
)
   
(836
)
(Benefit from) provision for income taxes
   
     
(92
)
   
     
1
 
Loss from discontinued operations, net of tax
 
$
(125
)
 
$
(90
)
 
$
(205
)
 
$
(835
)

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

   
As of
   
September 30, 2010
 
December 31, 2009
   
(Unaudited)
   
   
(In thousands)
    Currents assets:
       
    Accounts receivable, net of allowance for doubtful accounts
 
$
78
 
$
424
    Total current assets
   
78
   
424
    Property and equipment, net
   
   
14
    Intangible assets, net
   
   
60
    Total assets
 
$
78
 
$
498
    Current liabilities:
           
    Accounts payable
 
$
 
$
91
    Accrued compensation and related benefits
   
   
70
    Other current liabilities
   
2,428
   
2,788
    Total current liabilities
   
2,428
   
2,949
    Total liabilities
 
$
2,428
 
$
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 has revised its internal projections for Reach Media three times due to lower than expected revenue and operating results during the first, second and third quarters of 2010. These revised financial projections are lower than those assumed in the 2009 annual testing. The decline in net revenues was driven by the December 31, 2009 expiration of a sales representation agreement with Citadel whereby a minimum level of revenue was guaranteed over the term of the agreement.  Reach Media’s newly established sales organization began selling its inventory on the Tom Joyner Morning Show and under a new commission based sales representation agreement with Citadel.  The Company deemed the lowered financial projections as triggering events that warranted interim impairment testing of goodwill attributable to Reach Media. We performed such testing as of February 28, 2010, May 31, 2010, and again as of August 31, 2010 and concluded all three times that the goodwill carrying value for Reach Media had not been impaired. Accordingly, there were no impairment charges recorded for the three or nine month periods ended September 30, 2010 for Reach Media.
 
15

 
 
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.  There were no impairment charges recorded for the three or nine month periods ended September 30, 2010.

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. 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 and August 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 responded to declining revenues at that time with significant cost-cutting initiatives, profitability levels were 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 October 2009 as well as the interim February 2009 and August 2009 impairment tests.

Radio Broadcasting Licenses
 
October 1,
2008
   
February 28,
 2009
   
August 31,
2009 (a)
   
October 1,
2009
 
   
(In millions)
 
Pre-tax impairment charge
 
$
51.2
   
$
49.0
   
$
   
$
16.1
 
                                 
Discount Rate
   
10.5
%
   
10.5
%
   
     
10.5
%
Year 1 Market Revenue Growth or Decline Rate or Range
   
(8.0
)%
   
(13.1)% - (17.7)
%
   
(22.3)
%
   
1.0
%
Long-term Market Revenue Growth Rate Range (Years 6 – 10)
   
1.5% - 2.5
%
   
1.5% - 2.5
%
   
     
1.0% - 2.5
%
Mature Market Share Range
   
1.2% - 27.0
%
   
1.2% - 27.0
%
   
     
0.8% - 28.1
%
Operating Profit Margin Range
   
20.0% - 50.7
%
   
17.7% - 50.7
%
   
     
18.5% - 50.7
%

(a)  
Reflects changes only to the key assumptions used in the February 2009 interim testing for a certain unit of accounting.

Relative to the 2009 environment, the recent improved economy and credit markets and the recovery of the advertising industry have contributed to more stable valuations for these intangible assets in 2010. In addition, there were no triggering events warranting impairment testing of our radio broadcasting licenses for the three and nine month periods ended September 30, 2010.

 
16

 
 
Valuation of Goodwill

The impairment testing of goodwill is performed at the reporting unit level. We currently have, and had as of our October 2009 annual impairment assessments, 20 reporting units. 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 to estimate the fair value of our reporting units. 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 350, “Intangibles - Goodwill and Other,” 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 or goodwill.

For the August 2010 goodwill interim impairment test of Reach Media, using updated internal projections, the Year 1 (2010) revenue growth rate remained at 2.5%. The 2010 growth rates used in the impairment tests are lower than the 16.5% growth rate assumed in the October 2009 annual assessment. The 2010 revenue growth rates were lowered to reflect Reach Media net revenues and cash flows which had declined for the three quarters of 2010 compared to the same period in 2009, thus causing the Company to revise its financial projections below those assumed in the 2009 annual impairment test. The revenue decline was attributable to the December 31, 2009 expiration of a sales representation agreement with Citadel whereby a minimum level of revenue was guaranteed over the term of the agreement.  Reach Media’s newly established sales organization began selling its inventory on the Tom Joyner Morning Show and under a new commission based sales representation agreement with Citadel.
 
Below are key assumptions used in the income approach model for estimating the fair value for Reach Media for the annual October 2009 and interim February, May and August 2010 impairment tests. When compared to a 9.5% to 10.5% discount rate used for assessing radio market reporting units, 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
   
May 31,
2010
   
August 31,
2010
 
    (In millions)  
Pre-tax impairment charge
  $     $     $     $  
                                 
Discount Rate
    14.0 %     13.5 %     13.5 %     13.0 %
2010 (Year 1) Revenue Growth Rate
    16.5 % (a)     8.5 %     2.5 %     2.5 %
Long-term Revenue Growth Rate Range
 (Years 6 – 10)
    2.5% - 3.0 %     2.5% – 3.0 %     2.5% – 2.9 %     2.5% – 3.3 %
Operating Profit Margin Range
    27.2% - 35.3 %     22.7% - 31.4 %     23.3% - 31.5 %     25.5% - 31.2 %

(a)
The Year 1 revenue growth rate 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 fourth quarter of 2009, the final quarter for the term of the agreement. Effective January 2010, Reach Media and Citadel became parties 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, May and August 2010 interim impairment tests, 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 nine month period ended September 30, 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    
 
 
          Nine Months Ended September 30, 2010       
     
As of December 31, 2009
 
   
Acquisitions/
   
Other
   
As of September 30, 2010
 
Reporting Unit
 
Goodwill
   
Impairment
   
Dispositions
   
Activity
   
Goodwill
 
                               
                               
Reporting Unit 3
  $ -     $ -     $ -     $ -     $ -  
Reporting Unit 4
    -       -       -       -       -  
Reporting Unit 8
    -       -       -       -       -  
Reporting Unit 9
    -       -       -       -       -  
Reporting Unit 15
    -       -       -       -       -  
Reporting Unit 14
    -       -       -       -       -  
Reporting Unit 2
    406       -       -       -       406  
Reporting Unit 6
    928       -       -       -       928  
Reporting Unit 10
    2,081       -       -       -       2,081  
Reporting Unit 13
    2,491       -       -       -       2,491  
Reporting Unit 12
    2,915       -       -       -       2,915  
Reporting Unit 11
    3,791       -       -       -       3,791  
Reporting Unit 16
    4,442       -       -       -       4,442  
Reporting Unit 5
    5,074       -       -       -       5,074  
Reporting Unit 7
    12,887       -       -       -       12,887  
Reporting Unit 19
    30,468       -       -       -       30,468  
Reporting Unit 1
    50,194       -       -       -       50,194  
Radio Broadcasting Segment     115,677       -        -       -       115,677  
                                         
Corporate/Eliminations/Other
    -       -       -       -       -  
Reporting Unit 20
    -       -       -       -       -  
                                         
 
      -       -       -       -  
                                         
Reporting Unit 17
    -       -       -       -       -  
Reporting Unit 18
    21,840       -       -       (24 )     21,816  
Internet Segment
    21,840       -       -       (24 )     21,816  
                                         
   Total
  $ 137,517     $ -     $ -     $ (24 )   $ 137,493  

 
18

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

   
As of
   
   
September 30, 2010
   
December 31, 2009
 
Period of Amortization
     (Unaudited)
 
   
   
(In thousands)
   
               
Trade names
 
$
17,133
   
$
16,965
 
2-5 Years
Talent agreement
   
19,549
     
19,549
 
10 Years
Debt financing and modification costs
   
25,159
     
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
   
1,282
     
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
   
1,257
     
1,260
 
1-5 Years
     
98,930
     
91,133
   
Less: Accumulated amortization
   
(62,274
)
   
(56,074
)
 
Other intangible assets, net
 
$
36,656
   
$
35,059
   

Amortization expense of intangible assets for the three months ended September 30, 2010 and 2009 was approximately $1.8 million and $2.1 million, respectively, and for the nine months ended September 30, 2010 and 2009 was approximately $5.4 million and $6.4 million, respectively. The amortization of deferred financing costs was charged to interest expense for all periods presented. The amount of deferred financing costs included in interest expense for the three months ended September 30, 2010 and 2009 was $527,000 and $606,000, respectively, and for the nine month periods ended September 30, 2010 and 2009 was approximately $1.7 million and $1.8 million, 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 (October through December)
 
$
1,666
 
2011   $ 5,647  
2012
 
$
5,415
 
2013
 
$
4,830
 
2014
 
$
4,124
 
2015
 
248
 

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, LLC, 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. Since December 31, 2006, the initial four year commitment period for funding the capital has been extended on a quarterly basis due in part to TV One’s lower than anticipated capital needs.  Currently, the commitment period has been extended to November 15, 2010, and we anticipate further extension based upon TV One’s cash flow and anticipated capital needs.  In December 2004, TV One entered into a distribution agreement with DIRECTV and certain affiliates of DIRECTV became investors in TV One. As of September 30, 2010, the Company owned approximately 37% of TV One on a fully-converted basis.

On June 16, 2010, the Company announced a series of financing transactions designed to refinance substantially all of its existing indebtedness (the “Refinancing Transactions”) and finance (the “TV One Financing”) its purchase of an additional approximately 19% of the outstanding equity interests in TV One (the “TV One Acquisition”). On July 16, 2010, the Company announced that it had extended the expiration time of the Refinancing Transactions; however, it also announced that it had determined not to further extend the subscription offer for the TV One Financing.  Thus, the Company elected to focus its efforts on the Refinancing Transactions and determined not to continue to pursue the TV One Acquisition at that time.  As of the date hereof, the Company maintains its ownership of 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 September 30, 2010 and 2009, the Company’s allocable share of TV One’s operating income was $1.8 million and $1.4 million, respectively.  For the nine months ended September 30, 2010 and 2009, the Company’s allocable share of TV One’s operating income was $3.8 million and $3.3 million, respectively.

At each of September 30, 2010 and December 31, 2009, the carrying value of the Company’s investment in TV One was approximately $46.5 million and $48.5 million, respectively, and is presented on the consolidated balance sheets as investment in affiliated company. At September 30, 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 $60.2 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 agreements 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 $42,000 and $334,000 in revenue relating to this agreement for the three months ended September 30, 2010 and 2009, respectively.  The Company recognized $1.0 million in revenue relating to this agreement for both of the nine month periods ended September 30, 2010 and 2009.
 
 

 
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 sheets are as follows: 
 
 
Liability Derivatives
 
  
As of September 30, 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
 
$
 
Other Current Liabilities
 
$
486
 
Interest rate swaps
Other Long-Term Liabilities
   
1,687
 
Other Long-Term Liabilities
   
1,600
 
                     
Derivatives not designated as hedging instruments:
                   
Employment agreement award
Other Long-Term Liabilities
   
5,733
 
Other Long-Term Liabilities
   
4,657
 
Total derivatives
   
$
7,420
     
$
6,743
 
 
 
The effect and the presentation of the Company’s derivative instruments on the consolidated statements of operations are as follows:
  
 Derivatives in Cash Flow Hedging Relationships
 
Amount of Gain (Loss) in Other Comprehensive Loss on Derivative (Effective Portion)
 
Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
 
Gain (Loss) in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
   
Amount
 
Location
 
Amount
 
Location
Amount
Three Months Ended September 30,
(Unaudited)
 (In thousands)
 
   
2010
 
2009
     
2010
 
2009
   
2010
 
2009
Interest rate swaps
 
 
$5
 
 
 $(97)
 
 Interest expense
 
$(254)
 
$(485)
 
 
Interest expense
$—
 
$—
 

 Derivatives in Cash Flow Hedging Relationships
 
Amount of Gain (Loss) in Other Comprehensive Loss on Derivative (Effective Portion)
 
Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
 
Gain (Loss) in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
   
Amount
 
Location
 
Amount
 
Location
Amount
Nine Months Ended September 30,
(Unaudited)
 (In thousands)
 
   
2010
 
2009
     
2010
 
2009
   
2010
 
2009
Interest rate swaps
 
 
$401
 
 
 $378
 
 Interest expense
 
$(1,243)
 
$(1,107)
 
 
Interest expense
$—
 
$—

 
 
21

 
 
 
Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) in Income of Derivative
Amount of Gain (Loss) in Income of Derivative
   
Three Months Ended September 30,
   
2010
 
2009
   
(Unaudited)
   
(In thousands)
     
Employment agreement award
Corporate selling, general and administrative expense
$(131)
 
$(103)


Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) in Income on Derivative
Amount of Gain (Loss) in Income of Derivative
 
   
Nine Months Ended September 30,
 
   
2010
 
2009
   
(Unaudited)
 
   
(In thousands)
 
       
Employment agreement award
Corporate selling, general and administrative expense
$(1,076)
 
$9
 


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. Three of the four $25.0 million swap agreements have expired, one in each of June 2007, 2008, and 2010, respectively.
 
The remaining swap agreement has the following terms:

   
Notional Amount
 
Expiration
 
Fixed Rate
 
                 
                Swap Agreement
 
$25.0 million
 
June 16, 2012
   
4.47
%
 
The remaining 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 nine months ended September 30, 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 $1.0 million will be reclassified as an increase to interest expense.
 
Under the swap agreement, the Company pays the fixed rate listed in the table above. The counterparties to the agreement pay the Company a floating interest rate based on the three month LIBOR, for which measurement and settlement is performed quarterly. The counterparty to the agreement is an international financial institution. The Company estimates the net fair value of the instrument as of September 30, 2010 to be a liability of approximately $1.7 million. The fair value of the interest rate swap agreement is determined by obtaining a quotation from the financial institution, which is a party to the Company’s swap agreement and adjusted for credit risk. 
 
 
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Costs incurred to execute the swap agreement are deferred and amortized over the term of the swap agreement. The amounts incurred by the Company, representing the effective difference between the fixed rate under the swap agreement 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 the swap agreement, 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. 

As of September 30, 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, and only after the return of the Company’s aggregate investment in TV One. The Company reassessed the estimated fair value of the award at September 30, 2010 to be approximately $5.7 million, and accordingly, adjusted its liability to this amount. The Company’s obligation to pay the award will be triggered only after the Company’s recovery of the aggregate amount of its capital contribution in TV One and only upon actual receipt of distributions of cash or marketable securities or proceeds from a liquidity event with respect to the Company’s membership interest in TV One. The CEO was fully vested in the award upon execution of the Employment Agreement, and the award lapses 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
 
   
September 30, 2010
   
December 31, 2009
 
   
(Unaudited)
       
   
(In thousands)
 
                 
                 
Senior bank term debt
 
$
27,628
   
$
45,024
 
Senior bank revolving debt
   
323,000
     
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 due December 31, 2011
   
1,000
     
1,000
 
Total long-term debt
   
653,138
     
653,534
 
Less: current portion
   
652,138
     
652,534
 
Long-term debt, net of current portion
 
$
1,000
   
$
1,000
 

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.

 
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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.        

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.
  

 
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As of September 30, 2010, approximate ratios calculated in accordance with the Credit Agreement, are as follows:

   
As of September 30, 2010
   
Covenant Limit
   
Cushion/(Deficit)
 
                   
PF LTM Covenant EBITDA (In millions)
 
$
86.6
             
                     
PF LTM Interest Expense (In millions)
 
$
40.4