10-K 1 w18606e10vk.htm FORM 10-K FOR RADIO ONE INC. e10vk
 

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2005
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
    For the transition period from           to
 
Commission File No. 0-25969
 
RADIO ONE, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware
  52-1166660
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
5900 Princess Garden Parkway
7th Floor
Lanham, Maryland 20706
(Address of principal executive offices)
 
Registrant’s telephone number, including area code
(301) 306-1111
 
Securities registered pursuant to Section 12(b) of the Act:
None
 
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.001 par value
Class D Common Stock, $.001 par value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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 þ     Accelerated filer o     Non-accelerated filer o
 
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
 
The number of shares outstanding of each of the issuer’s classes of common stock is as follows:
 
         
Class
 
Outstanding at March 3, 2006
 
Class A Common Stock, $.001 par value     10,690,630  
Class B Common Stock, $.001 par value     2,867,463  
Class C Common Stock, $.001 par value     3,132,458  
Class D Common Stock, $.001 par value     82,013,183  
 
The aggregate market value of common stock held by non-affiliates of the registrant, based upon the closing price of the registrant’s Class A and Class D common stock on June 30, 2005, was approximately $1.1 billion.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Certain information in the registrant’s definitive proxy statement for its 2006 annual meeting of stockholders, which is expected to be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year end, is incorporated by reference into Part III of this report.
 


 

 
RADIO ONE, INC. AND SUBSIDIARIES
 
Form 10-K
For the Year Ended December 31, 2005
 
TABLE OF CONTENTS
 
             
        Page
 
  Business   1
  Risk Factors   21
  Unresolved Staff Comments   25
  Properties   25
  Legal Proceedings   25
  Submission of Matters to a Vote of Security Holders   26
 
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   27
  Selected Financial Data   28
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   30
  Quantitative and Qualitative Disclosure About Market Risk   50
  Financial Statements and Supplementary Data   50
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   51
  Controls and Procedures   51
  Other Information   51
 
  Directors and Executive Officers of the Registrant   51
  Executive Compensation   52
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   52
  Certain Relationships and Related Transactions   52
  Principal Accounting Fees and Services   52
 
  Exhibits and Financial Statement Schedules   53
  55


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CERTAIN DEFINITIONS
 
Unless otherwise noted, the terms “Radio One,” “we,” “our” and “us” refer to Radio One, Inc. and 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 are not historical facts, but rather reflect our current expectations concerning future results and events. You can identify some of these forward-looking statements by our use of words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “likely,” “may,” “estimates” and similar expressions. We cannot guarantee that we will achieve these plans, intentions or expectations. Because these statements apply to future events, they are subject to risks and uncertainties that could cause actual results to differ materially from those forecast or anticipated in the forward-looking statements. These risks, uncertainties and factors include, but are not limited to the factors described under the heading “Risk Factors” contained in this report.
 
You should not place undue reliance on these forward-looking statements, which reflect our view as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise.


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PART I
 
ITEM 1.   BUSINESS
 
Overview
 
We are one of the largest radio broadcasting companies in the United States and the leading radio broadcasting company primarily targeting African-Americans. Founded in 1980, we own and/or operate 70 radio stations in 22 markets. Of these stations, 42 (33 FM and 9 AM) are in 14 of the top 20 African-American markets.
 
We are led by our Chairperson and co-founder, Catherine L. Hughes, and her son, Alfred C. Liggins, III, our Chief Executive Officer and President, who together have more than 50 years of operating experience in the radio broadcasting industry. Ms. Hughes, Mr. Liggins and our strong management team have successfully implemented a strategy of acquiring and turning around underperforming radio stations. We believe radio broadcasting primarily targeting African-Americans continues to have growth potential and that we have a competitive advantage in the African-American market and the radio industry in general, due to our focus on urban formats, our skill in programming and marketing these formats, and our turnaround expertise. To maintain and/or improve our competitive position, we have made and continue to make acquisitions of, and investments in, radio stations and other complementary media properties.
 
We continually explore opportunities in other forms of media that are complementary to our core radio business, which we believe will allow us to leverage our expertise in the African-American market and our significant listener base. In January 2004, together with an affiliate of Comcast Corporation and other investors, we launched TV One, LLC (“TV One”), an African-American targeted cable television network. In February 2005, we acquired 51% of the common stock of Reach Media, Inc. (“Reach Media”), which operates the Tom Joyner Morning Show and related businesses.
 
Significant 2005 and Recent Events
 
WIFE-FM Acquisition.  In February 2006, we signed an agreement to acquire the assets of WIFE-FM, a radio station located in the Cincinnati metropolitan area for approximately $18.0 million in cash. Subject to the necessary regulatory approvals, we will consolidate the station with our existing Cincinnati operations. We expect to complete this acquisition during the second half of 2006.
 
African-American Talk Radio Network.  In January 2006, through a joint venture with Reach Media, we launched a new African-American news/talk radio network. The network features several leading African-American personalities. To date, 26 stations have committed to carrying all or a portion of the network’s programming.
 
WHHL-FM Acquisition.  In September 2005, we announced an agreement to acquire the assets of WHHL-FM (formerly WRDA-FM), a radio station located in the St. Louis metropolitan area for approximately $20.0 million in cash. We began operating the station under a local marketing agreement (“LMA”) in October 2005. The station has been reformatted and has been consolidated with our existing St. Louis operations. We expect to complete the acquisition during the second quarter of 2006.
 
New Bank Loans.  In June 2005, we entered into a new credit agreement (the “Credit Agreement”) with a syndicate of banks. The term of the Credit Agreement is seven years and the total amount available for borrowing is $800.0 million, consisting of a $500.0 million revolving facility and a $300.0 million term loan facility. Borrowings under the credit facilities are subject to compliance with certain provisions of the Credit Agreement, including but not limited to, financial covenants. We may use proceeds from the credit facilities for working capital, capital expenditures made in the ordinary course of business, our common stock repurchase program, direct and indirect investments permitted under the Credit Agreement, and other lawful corporate purposes.
 
Stock Repurchase.  In May 2005, our board of directors authorized a stock repurchase program for up to $150.0 million of our Class A and Class D common stock over a period of 18 months, with the amount and timing of repurchases based on stock price, general economic and market conditions, certain restrictions contained in our Credit Agreement, the indentures governing our senior subordinated debt, and certain other factors. The repurchase program does not obligate us to repurchase any of our common stock and may be discontinued or suspended at any


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time. As of March 3, 2006, 592,744 shares of Class A and 5,805,697 shares of Class D common stock have been repurchased at an average price of $12.02 and $12.15, respectively, for a total of approximately $77.7 million.
 
Reach Media Acquisition.  In February 2005, we acquired 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 our Class D common stock. Reach Media commenced operations in 2003 and was formed by Tom Joyner, Chairman, and David Kantor, Chief Executive Officer, to operate the Tom Joyner Morning Show and related businesses. Reach Media primarily derives its revenue from the sale of advertising inventory in connection with its syndication agreements. Mr. Joyner is a leading nationally syndicated radio personality. The Tom Joyner Morning Show is broadcast on over 115 affiliate stations across the United States and is a top-rated morning show in many of the markets in which it is broadcast. In addition, in October 2005, Reach Media launched the Tom Joyner Show, a weekly syndicated television variety show airing in most of the top 50 markets. Reach Media also operates the Tom Joyner Sky Show, the Tom Joyner Family Reunion and various other special event-related activities. Additionally, Reach Media operates www.BlackAmericaWeb.com, an African-American targeted internet destination, and provides programming content for a television program on TV One.
 
Sale of Notes.  In February 2005, we completed the private placement of $200.0 million of 63/8% senior subordinated notes. The notes are due in February 2013 and interest on the notes is payable in cash on February 15 and August 15 of each year. The net proceeds from the sale of the notes were approximately $195.3 million. In October 2005, the 63/8% senior subordinated notes were exchanged for an equal amount of notes registered under the Securities Act of 1933, as amended (the “Securities Act”).
 
Redemption of HIGH TIDES.  In February 2005, we redeemed all of our outstanding 61/2% Convertible Preferred Remarketable Term Income Deferrable Equity Securities (“HIGH TIDES”) in an amount of $309.8 million. The redemption was financed with the net proceeds of the sale of our 63/8% senior subordinated notes, borrowings under our revolving credit facility, and available cash.
 
Our Stations and Markets
 
We own and/or operate radio stations in many of the largest African-American markets. The table below provides information about our radio stations and the markets in which we operate.
 
                                                                 
    Radio One     Market Data  
    Number
    African-
                      Estimated
 
    of
    American
    Entire
                Fall 2005 Metro
 
    Stations     Audience     Audience                 Population Persons 12+(d)  
                      Four Book
          Ranking by
             
                      Average
          Size of
             
                      (Ending
          African-
             
                Audience
    Fall 2005)
    Estimated 2005
    American
             
                Share
    Audience
    Annual Radio
    Population
          African-
 
Market
  FM     AM     Rank(a)     Share(b)     Revenue     Persons 12+(d)     Total     American%  
                            ($ millions)(c)           (In millions)        
 
Atlanta
    4             1       12.6     $ 399.9       3       3.9       28.2 %
Washington, DC
    2       2       1       11.7       394.7       4       4.1       26.1  
Philadelphia
    3             2       8.7       323.9       5       4.4       20.0  
Detroit
    2       1       2       7.2       282.2       6       3.9       21.6  
Los Angeles
    1             2       2.8       1,097.1       7       10.8       7.6  
Miami
          1       n/a       n/a       286.3       8       3.5       20.3  
Houston
    3             1       12.9       360.1       9       4.4       16.1  
Dallas
    2             2       5.2       418.1       10       4.7       13.6  
Baltimore
    2       2       1       15.9       149.0       11       2.2       26.6  
St. Louis
    2             2       5.1       148.8       15       2.3       18.2  
Cleveland
    2       2       1       13.3       130.2       17       1.8       18.7  
Charlotte
    2             2       7.0       110.3       18       1.4       20.9  
Richmond
    4       1       1       22.3       60.4       19       0.9       29.8  


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    Radio One     Market Data  
    Number
    African-
                      Estimated
 
    of
    American
    Entire
                Fall 2005 Metro
 
    Stations     Audience     Audience                 Population Persons 12+(d)  
                      Four Book
          Ranking by
             
                      Average
          Size of
             
                      (Ending
          African-
             
                Audience
    Fall 2005)
    Estimated 2005
    American
             
                Share
    Audience
    Annual Radio
    Population
          African-
 
Market
  FM     AM     Rank(a)     Share(b)     Revenue     Persons 12+(d)     Total     American%  
                            ($ millions)(c)           (In millions)        
 
Raleigh-Durham
    4             1       19.4       90.5       20       1.1       21.8  
Boston
    1       1       1       3.3       367.8       22       3.8       6.3  
Cincinnati
    1       1       1       5.8       139.7       30       1.7       11.4  
Columbus
    3             1       12.8       109.7       31       1.4       13.8  
Indianapolis
    3       1       1       16.7       106.5       32       1.3       14.3  
Minneapolis
    1             1       3.2       186.5       42       2.6       6.0  
Augusta
    4       1       1       16.6       17.2       46       0.4       33.0  
Louisville
    6             1       21.1       59.2       48       0.9       13.9  
Dayton
    4       1       1       16.4       50.8       60       0.8       13.4  
                                                                 
Total
    56       14                                                  
                                                                 
 
 
(a) “Audience Share Rank” is the relative size of the African-American listenership on our station clusters in a given market compared to other African-American targeted stations in the market, based on average quarter-hour audience shares for the stations.
 
(b) Audience share data are for the 12+ demographic and derived from the Arbitron Survey four-book averages ending with the Fall 2005 Arbitron Survey. In the Miami market, we provide no audience share data because we do not subscribe to the Arbitron service for our station in that market. Audience share data for the Augusta market was not available as of the date of this annual report.
 
(c) 2005 estimated annual radio revenues are from BIA Financials Investing in Radio Market Report, 2005 Fourth Edition.
 
(d) Population estimates were provided by Arbitron.
 
The African-American Market Opportunity
 
We believe that operating urban-formatted radio stations primarily targeting African-Americans continues to have growth potential for the following reasons:
 
Rapid African-American Population Growth.  From 2000 to 2004, the African-American population grew 4.8%, compared to a 4.3% overall population growth rate, and accounted for 13.5% of total population growth. In addition, the African-American population is expected to increase by approximately 2.4 million between 2005 and 2010 to approximately 40.0 million, a 9.9% increase from 2000, compared to an expected increase during the same period of 6.0% for the non-African-American population. African Americans are expected to make up 17.9% of total population growth during this period. (Source: U.S. Census Bureau, 2004, “U.S. Interim Projections by Age, Sex, Race, and Hispanic Origin.”)
 
Higher African-American Income Growth.  The economic status of African-Americans improved at an above-average rate over the past two decades. The per capita income of African-Americans is expected to increase 21.1% between 2005 and 2010 (Source: U.S. Census Bureau, Historical Income Data). African-American buying power was estimated at $762.0 billion in 2005, up from $723.0 billion in 2004. African-American buying power is expected to increase to $981.0 billion by 2010, with cumulative growth of 28.8% between 2005 and 2010. In addition, the African-American consumer tends to have a different consumption profile than non-African-Americans. An annual report published by Target Market News provides a list of products and services for which African-American households spent more than non-

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African-Americans. In the most recent such annual report, there were dozens of such products and services listed in categories such as apparel and accessories, appliances, consumer electronics, food, personal care products, telephone service and transportation. (Source: The U.S. African-American Market, 6th Edition, Packaged Facts, January 2006).
 
Growth in Advertising Targeting the African-American Market.  We continue to believe that large corporate advertisers are becoming more focused on reaching minority consumers in the United States. The African-American community is considered an emerging growth market within the mature domestic market. It is estimated that major national advertisers spent over $2.5 billion on advertising that targets African-American consumers in 2004, up from $1.8 billion in 2000. (Source: Target Market News). We believe many large corporations are expanding their commitment to ethnic advertising.
 
Growing Influence of African-American Culture.  We believe that there continues to be an ongoing “urbanization” of many facets of American society as evidenced by the influence of African-American culture in the areas of music (for example, hip-hop and rap music), film, fashion, sports and urban-oriented television shows and networks. We believe that many companies from a broad range of industries and prominent fashion designers have embraced this urbanization trend in their products as well as their advertising messages.
 
Concentrated Presence of African-Americans in Urban Markets.  Approximately 63.7% of the African-American population resides in the top 25 metropolitan areas. (Source: The U.S. African American Market, 6th Edition, Packaged Facts, January 2006). Relative to radio broadcasters targeting a broader audience, we believe we can cover the various segments of our target market with fewer programming formats and therefore fewer radio stations than the maximum per market allowed by the Federal Communications Commission (“FCC”).
 
Strong African-American Listenership and Loyalty.  In 2005, African-Americans, age 12 and older, spent 22.5 hours per week listening to radio. This compared to 19.8 hours per week for all Americans, age 12 and older. (Source: Radio Today, 2006 Edition, Arbitron, Inc.). We believe that African-American radio listeners exhibit greater loyalty to radio stations that target the African-American community because those radio stations are a valuable source of entertainment and information responsive to the community’s interests and lifestyles.
 
Rapidly Increasing African-American Internet Usage.  African-Americans are becoming significant users of the Internet. Currently, approximately 79% of African-Americans use the Internet, with average daily usage of 5.0 hours per day, which is well in excess of general market daily usage of 2.9 hours per day. In addition, African-Americans who do not currently use the Internet are more likely than the general online population to become Internet users within the next 6 to 12 months. Further, approximately 66% of African-American households that use the Internet have a high-speed connection, versus 53% of the general population. The overwhelming number of African-Americans say there is not enough online content that speaks to them as a distinct culture with its own needs and values. (Source: 2005 AOL African-American Cyberstudy, conducted for America Online by Images Market Research).
 
Growth Strategy
 
Radio Station Acquisitions.  Our acquisition strategy is to acquire underperforming radio stations and “stick stations” primarily in the top 60 African-American markets. A stick station is a station generating little or no revenue or cash flow at the time of acquisition that we subsequently reformat or relocate. We seek to make acquisitions in existing markets where expanded coverage is desirable and in new markets where we believe it is advantageous to establish a presence. For strategic reasons, or as a result of the acquisition of multiple stations in a market, we may also acquire and operate stations with formats that primarily target non-African-American segments of the population.
 
Investment in Complementary Businesses.  We intend to continue to invest in complementary businesses in the media and entertainment industry. The primary focus of these investments will be on businesses that provide entertainment and information content to African-American consumers. Such investments may include the Internet,


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publishing, and home video distribution. We believe that our existing asset base and audience coverage provide us with a competitive advantage in entering into these new businesses.
 
Top 60 African-American Radio Markets in the United States
 
In the table below, boxes and bold text indicate markets where we own and/or operate radio stations. Population estimates are for 2005 and are based upon data provided by Arbitron.
 
                         
                African-Americans
 
                as a Percentage of
 
          African-American
    the Overall
 
          Population
    Population
 
Rank
   
Market
  (Persons 12+)     (Persons 12+)  
          (In thousands)        
 
  1     New York, NY     2,714       17.7 %
  2     Chicago, IL     1,352       17.6  
  3     Atlanta, GA     1,090       28.2  
  4     Washington, DC     1,077       26.1  
  5     Philadelphia, PA     869       20.0  
  6     Detroit, MI     840       21.6  
  7     Los Angeles, CA     818       7.6  
  8     Miami-Ft. Lauderdale-Hollywood, FL     712       20.3  
  9     Houston-Galveston, TX     700       16.1  
  10     Dallas-Ft. Worth, TX     644       13.6  
  11     Baltimore, MD     598       26.6  
  12     Memphis, TN     456       43.5  
  13     San Francisco, CA     422       7.2  
  14     Norfolk-Virginia Beach-Newport News, VA     418       31.8  
  15     St. Louis, MO     411       18.2  
  16     New Orleans, LA     390       36.1  
  17     Cleveland, OH     335       18.7  
  18     Charlotte-Gastonia-Rock Hill, NC     294       20.9  
  19     Richmond, VA     267       39.8  
  20     Raleigh-Durham, NC     249       21.8  
  21     Birmingham, AL     243       28.1  
  22     Boston, MA     240       6.3  
  23     Tampa-St. Petersburg-Clearwater, FL     238       10.5  
  24     Jacksonville, FL     229       21.7  
  25     Nassau-Suffolk (Long Island), NY     227       9.5  
  26     Orlando, FL     221       15.8  
  27     Greensboro-Winston-Salem-High Point, NC     221       19.9  
  28     Milwaukee-Racine, WS     208       14.6  
  29     Kansas City, KS     201       13.0  
  30     Cincinnati, OH     194       11.4  
  31     Columbus, OH     193       13.8  
  32     Indianapolis, IN     188       14.3  
  33     Middlesex-Somerset-Union, NJ     179       13.0  
  34     Seattle-Tacoma, WA     175       5.5  
  35     Jackson, MS     174       45.1  
  36     Nashville, TN     172       15.3  


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                African-Americans
 
                as a Percentage of
 
          African-American
    the Overall
 
          Population
    Population
 
Rank
   
Market
  (Persons 12+)     (Persons 12+)  
          (In thousands)        
 
  37     Riverside-San Bernardino, CA     166       9.5  
  38     Baton Rouge, LA     163       30.9  
  39     West Palm Beach-Boca Raton, FL     161       14.7  
  40     Columbia, SC     161       33.2  
  41     Pittsburgh, PA     160       7.9  
  42     Minneapolis-St. Paul, MN     156       6.0  
  43     Charleston, SC     153       30.6  
  44     Greenville-Spartanburg, SC     141       17.3  
  45     San Diego, CA     138       5.6  
  46     Augusta, GA     136       33.0  
  47     Sacramento, CA     132       7.5  
  48     Louisville, KY     128       13.9  
  49     Greenville-New Bern-Jacksonville, NC     125       25.0  
  50     Mobile, AL     123       26.3  
  51     Las Vegas, NV     122       8.5  
  52     Shreveport, LA     121       36.6  
  53     Buffalo-Niagara Falls, NY     120       12.2  
  54     Fayetteville, NC     119       33.7  
  55     Little Rock, AR     116       22.5  
  56     Phoenix, AZ     114       3.9  
  57     Denver-Boulder, CO     114       5.3  
  58     Lafayette, LA     111       26.2  
  59     Montgomery, AL     103       39.5  
  60     Dayton, OH     102       13.4  
 
Operating Strategy
 
To maximize net broadcast revenue and station operating income at our radio stations, we strive to achieve the largest audience share of African-American listeners in each market, convert these audience share ratings to advertising revenue, and control operating expenses. Through our national presence we also provide advertisers with a radio station advertising platform that is a unique and powerful delivery mechanism to African-Americans. The success of our strategy relies on the following:
 
  •  market research, targeted programming and marketing;
 
  •  ownership of programming content;
 
  •  radio station clustering, programming segmentation and sales bundling;
 
  •  strategic sales efforts;
 
  •  marketing platform to national advertisers;
 
  •  advertising partnerships and special events;
 
  •  strong management and performance-based incentives; and
 
  •  significant community involvement.

6


 

 
Market Research, Targeted Programming and Marketing
 
We use market research to tailor the programming, marketing and promotions of our radio stations to maximize audience share. We also use our research to reinforce our current programming and to identify unserved or underserved markets or segments of the African-American population and to determine whether to acquire a new radio station or reprogram one of our existing radio stations to target those markets or segments.
 
We also seek to reinforce our targeted programming by creating a distinct and marketable identity for each of our radio stations. To achieve this objective, in addition to our significant community involvement discussed below, we employ and promote distinct, high-profile on-air personalities at many of our radio stations, many of whom have strong ties to the African-American community.
 
Ownership of Programming Content
 
To diversify our revenue streams, we seek to develop/acquire and monetize proprietary African-American targeted content. To date, these efforts have included our investment in TV One, our acquisition of a controlling interest in Reach Media and our creation of a news/talk radio network. Our strategy is to distribute proprietary content through our own distribution platform and to further monetize it by selling it to third parties.
 
Radio Station Clustering, Programming Segmentation and Sales Bundling
 
We strive to build clusters of radio stations in our markets, with each radio station targeting different demographic segments of the African-American population. This clustering and programming segmentation strategy allows us to achieve greater penetration into each segment of our target market. We are then able to offer advertisers multiple audiences and to bundle the radio stations for advertising sales purposes when advantageous.
 
We believe there are several potential benefits that result from operating multiple radio stations in the same market. First, each additional radio station in a market provides us with a larger percentage of the prime advertising time available for sale within that market. Second, the more stations we program, the greater the market share we can achieve in our target demographic groups through the use of segmented programming. Third, we are often able to consolidate sales, promotional, technical support and business functions to produce substantial cost savings. Finally, the purchase of additional radio stations in an existing market allows us to take advantage of our market expertise and existing relationships with advertisers.
 
Strategic Sales Efforts
 
We have assembled an effective, highly trained sales staff responsible for converting audience share into revenue. We operate with a focused, sales-oriented culture, which rewards aggressive selling efforts through a commission and bonus compensation structure. We hire and deploy large teams of sales professionals for each of our stations or station clusters, and we provide these teams with the resources necessary to compete effectively in the markets in which we operate. We utilize various sales strategies to sell and market our stations as stand-alones, in combination with other stations within a given market, and across markets, where appropriate.
 
Marketing Platform to National Advertisers
 
Through our acquisitions, we have created a national platform of radio stations in some of the largest African-American markets. This platform reaches approximately 14 million listeners weekly, more than that of any other radio broadcaster primarily targeting African-Americans. Thus, national advertisers find advertising on all our radio stations an efficient and cost-effective way to reach this target audience. Through our corporate sales department, we bundle and sell our platform of radio stations to national advertisers thereby enhancing our revenue generating opportunities, expanding our base of advertisers, creating greater demand for our advertising time inventory and increasing the capacity utilization of our inventory and making our sales efforts more efficient.
 
We engage in joint promotional activities with TV One, Reach Media and our joint venture with Reach Media in order to provide additional value to our advertisers by creating a more efficient medium to reach African-American consumers.


7


 

Advertising Partnerships and Special Events
 
We believe that in order to create advertising loyalty, we must strive to be the recognized expert in marketing to the African-American consumer in the markets in which we operate. We believe that we have achieved this recognition by focusing on serving the African-American consumer and by creating innovative advertising campaigns and promotional tie-ins with our advertising clients and sponsoring numerous entertainment events each year. In these events, advertisers buy signage, booth space and broadcast promotions to sell a variety of goods and services to African-American consumers. As we expand our presence in our existing markets and into new markets, we may increase the number of events and the number of markets in which we host events based upon our evaluation of the financial viability and economic benefits of such events.
 
Strong Management and Performance-Based Incentives
 
We focus on hiring and retaining highly motivated and talented individuals in each functional area of our organization who can effectively help us implement our growth and operating strategies. Our management team is comprised of a diverse group of individuals who bring significant expertise to their functional areas. We seek to hire and promote individuals with significant potential and the ability to operate with high levels of autonomy.
 
To enhance the quality of our management in the areas of sales and programming, general managers, sales managers and program directors have significant portions of their compensation tied to the achievement of certain performance goals. General managers’ compensation is based partially on achieving station operating income benchmarks, which creates an incentive for management to focus on both sales growth and expense control. Additionally, sales managers and sales personnel have incentive packages based on sales goals, and program directors and on-air talent have incentive packages focused on maximizing ratings in specific target segments.
 
Significant Community Involvement
 
We believe our active involvement and significant relationships in the African-American community provide a competitive advantage in targeting African-American audiences. We believe our proactive involvement in the African-American community in each of our markets significantly improves the marketability of our radio broadcast time to advertisers who are targeting such communities.
 
We believe that a radio station’s image should reflect the lifestyle and viewpoints of the target demographic group it serves. Due to our fundamental understanding of the African-American community, we are well positioned to identify music and musical styles, as well as political and social trends and issues, early in their evolution. This understanding is then integrated into significant aspects of our operations and enables us to create enhanced awareness and name recognition in the marketplace. In addition, we believe our multi-level approach to community involvement leads to increased effectiveness in developing and updating our programming formats. We believe our enhanced awareness and more effective programming formats lead to greater listenership and higher ratings over the long-term.


8


 

Our Station Portfolio
 
The following table sets forth selected information about our portfolio of radio stations. Market population data and revenue rank data are from BIA Financials Investing in Radio Market Report, 2005 Fourth Edition. Audience share and audience rank data are based on Arbitron Survey four book averages ending with the Fall 2005 Arbitron Survey unless otherwise noted. As used in this table, “n/a” means not applicable or not available and “t” means tied with one or more radio stations.
 
                                                                     
                                Four Book Average  
                                Audience
    Audience
    Audience
    Audience
 
    Market Rank                     Share in
    Rank in
    Share in
    Rank in
 
    2005
    2005
                    12+
    12+
    Target
    Target
 
    Metro
    Radio
    Year
        Target Age
    Demo-
    Demo-
    Demo-
    Demo-
 
Market
  Population     Revenue     Acquired    
Format
  Demographic     Graphic     Graphic     Graphic     Graphic  
 
Atlanta
    11       6                                                      
WPZE-FM
                    1999     Contemporary Inspirational     25-54       4.5       5       4.7       5  
WJZZ-FM
                    1999     NAC/Jazz     25-54       2.7       16 (t)     2.9       15 (t)
WHTA-FM
                    2002     Urban Contemporary     18-34       3.9       7 (t)     6.9       3  
WAMJ-FM
                    2004     Urban AC     25-54       1.6       20       1.9       20 (t)
Washington, DC
    8       7                                                      
WKYS-FM
                    1995     Urban Contemporary     18-34       4.4       5       9.1       2  
WMMJ-FM
                    1987     Urban AC     25-54       6.2       2       6.9       1  
WYCB-AM
                    1998     Contemporary Inspirational     25-54       0.6       25 (t)     0.4       27 (t)
WOL-AM
                    1980     News/Talk     35-64       0.5       27 (t)     0.2       30 (t)
Philadelphia
    6       10                                                      
WPPZ-FM(1)
                    1997     Contemporary Inspirational     25-54       2.5       19       2.7       16  
WPHI-FM(2)
                    2000     Urban Contemporary     18-34       2.7       18       5.8       6  
WRNB-FM(3)
                    2004     Urban AC     25-54       3.5       11       4.5       7  
Detroit
    10       12                                                      
WHTD-FM
                    1998     Urban Contemporary     18-34       3.3       12       6.8       4 (t)
WDMK-FM
                    1998     Urban AC     25-54       2.9       14       3.3       13  
WCHB-AM
                    1998     News/Talk     35-64       1.0       25 (t)     1.3       22 (t)
Los Angeles
    2       1                                                      
KKBT-FM
                    2000     Urban Contemporary     18-34       2.8       11       3.8       10  
Miami
    12       11                                                      
WTPS-AM(4)
                    2000     News/Talk     35-64       n/a       n/a       n/a       n/a  
Houston
    7       9                                                      
KMJQ-FM
                    2000     Urban AC     25-54       5.9       2       7.0       1  
KBXX-FM
                    2000     Urban Contemporary     18-34       5.7       3 (t)     9.4       1  
KROI-FM(5)
                    2004     Mexican Regional     25-54       1.3       23       1.4       23  
Dallas
    5       5                                                      
KBFB-FM
                    2000     Urban Contemporary     18-34       3.8       6       5.5       5  
KSOC-FM
                    2001     Urban AC     25-54       1.4       26       1.6       24  
Baltimore
    20       20                                                      
WERQ-FM
                    1993     Urban Contemporary     18-34       8.9       1       18.3       1  
WWIN-FM
                    1992     Urban AC     25-54       6.2       4       7.3       3  
WOLB-AM
                    1992     News/Talk     35-64       0.3       20 (t)     0.2       20 (t)
WWIN-AM
                    1993     Contemporary Inspirational     35+       0.5       18 (t)     0.6       19  
St. Louis
    19       21                                                      
WFUN-FM(6)
                    1999     Urban AC     25-54       3.2       13 (t)     3.8       11  
WHHL-FM(7)
                          Urban Contemporary     18-34       2.9       13 (t)     5.1       6  
Cleveland
    25       24                                                      
WENZ-FM
                    1999     Urban Contemporary     18-34       5.7       5       13.0       1  
WERE-AM
                    1999     News/Talk     35-64       0.3       21 (t)     0.4       21  
WZAK-FM
                    2000     Urban AC     25-54       5.7       5       7.0       4  
WJMO-AM
                    2000     Contemporary Inspirational     35-64       1.6       17       1.7       14  
Charlotte
    36       30                                                      
WQNC-FM(8)
                    2000     Urban AC     25-54       3.3       14 (t)     3.9       12  
WPZS-FM(9)
                    2004     Contemporary Inspirational     25-54       3.7       11 (t)     4.1       10  
Richmond
    56       47                                                      
WCDX-FM
                    2001     Urban Contemporary     18-34       6.2       8       12.9       2  
WPZZ-FM(10)
                    1999     Contemporary Inspirational     25-54       6.8       6       7.2       5  
WKJS-FM(11)
                    2001     Urban AC     25-54       7.2       4       8.9       2  
WKJM-FM(12)
                    2001     Urban AC     25-54       1.8       15 (t)     2.1       14  
WROU-AM(13)
                    2001     News/Talk     35-64       0.4       21 (t)     0.2       21 (t)


9


 

                                                                     
                                Four Book Average  
                                Audience
    Audience
    Audience
    Audience
 
    Market Rank                     Share in
    Rank in
    Share in
    Rank in
 
    2005
    2005
                    12+
    12+
    Target
    Target
 
    Metro
    Radio
    Year
        Target Age
    Demo-
    Demo-
    Demo-
    Demo-
 
Market
  Population     Revenue     Acquired    
Format
  Demographic     Graphic     Graphic     Graphic     Graphic  
 
Raleigh-Durham     43       36                                                      
WQOK-FM
                    2000     Urban Contemporary     18-34       7.1       2       13.0       1  
WFXK-FM
                    2000     Urban AC     25-54       3.4       12 (t)     4.0       11 (t)
WFXC-FM
                    2000     Urban AC     25-54       2.5       13 (t)     4.1       10 (t)
WNNL-FM
                    2000     Contemporary Inspirational     25-54       5.4       4       5.5       5  
Boston     9       8                                                      
WILD-FM
                    1999     Urban AC     18-54       1.9       17 (t)     1.8       18 (t)
WILD-AM
                    2001     News/Talk     35-64       1.4       20 (t)     1.6       20  
Cincinnati     27       22                                                      
WIZF-FM
                    2001     Urban Contemporary     18-34       4.6       9       7.5       3  
WDBZ-AM(14)
                    n/a     News/Talk     35-64       1.2       17 (t)     1.5       15 (t)
Columbus     35       27                                                      
WCKX-FM
                    2001     Urban Contemporary     18-34       7.3       4       13.0       2  
WXMG-FM
                    2001     R&B/Oldies     25-54       4.3       7       5.0       8  
WJYD-FM
                    2001     Contemporary Inspirational     25-54       1.2       20 (t)     1.2       19 (t)
Indianapolis(15)     41       32                                                      
WHHH-FM
                    2000     Rhythmic CHR     18-34       7.0       3       13.6       1  
WTLC-FM
                    2000     Urban AC     25-54       4.8       6       5.1       6  
WYJZ-FM
                    2000     NAC/Jazz     25-54       3.0       14       2.7       16 (t)
WTLC-AM
                    2001     Contemporary Inspirational     25-54       2.0       18       1.3       20 (t)
Minneapolis     16       17                                                      
KTTB-FM
                    2001     Rhythmic CHR     18-34       3.2       13       6.6       5  
Augusta(16)     109       125                                                      
WAEG-FM
                    2000     Modern Rock     18-34       2.0       17 (t)     4.4       10  
WTHB-FM
                    2000     Contemporary Inspirational     25-54       3.4       10       4.0       11  
WAKB-FM
                    2000     Urban AC     25-54       4.9       9       6.3       5  
WFXA-FM
                    2000     Urban Contemporary     18-34       5.8       8       10.6       2 (t)
WTHB-AM
                    2000     Contemporary Inspirational     25-54       0.4       22       0.3       19 (t)
Louisville     55       46                                                      
WDJX-FM
                    2001     CHR     18-34       4.3       7       8.3       3  
WLRX-FM(17)
                    2003     Modern Rock     18-54       1.5       17       1.6       15  
WGZB-FM
                    2001     Urban Contemporary     18-34       6.0       4       10.7       2  
WXMA-FM
                    2001     Hot AC     25-54       2.8       12       3.8       10  
WMJM-FM
                    2001     R&B/Oldies     25-54       4.7       5       5.3       6 (t)
WLRS-FM
                    2001     Modern Rock     18-34       1.9       16 (t)     4.0       10  
Dayton     58       54                                                      
WGTZ-FM
                    2001     CHR     18-34       3.3       9       6.4       6  
WDHT-FM
                    2001     Urban Contemporary     18-34       5.5       6       10.5       12  
WING-AM
                    2001     News/Talk     35-64       1.2       19 (t)     1.5       16  
WKSW-FM
                    2001     Country     25-54       1.6       16       1.5       16  
WROU-FM(18)
                    2003     Urban AC     25-54       4.7       7       5.0       5  
 
AC   — refers to Adult Contemporary
NAC — refers to New Adult Contemporary
CHR — refers to Contemporary Hit Radio
R&B — refers to Rhythm and Blues
 
 
(1) WPPZ-FM (formerly known as WPHI-FM).
 
(2) WPHI-FM (formerly known as WPLY-FM).
 
(3) WRNB-FM (formerly known as WPPZ-FM, formerly known as WSNJ-FM).
 
(4) WTPS-AM (formerly known as WVCG-AM). We do not subscribe to the Arbitron service for this market.
 
(5) KROI-FM (formerly known as KRTS-FM).
 
(6) WFUN-FM changed format from Urban Contemporary to Urban AC in December 2004.
 
(7) WHHL-FM (formerly known as WRDA-FM). We operate WHHL-FM pursuant to a local marketing agreement. Audience share and audience rank data are based on the Arbitron Fall 2005 survey only.
 
(8) WQNC-FM (formerly known as WCHH-FM).
 
(9) WPZS-FM (formerly known as WABZ-FM).

10


 

(10) WPZZ-FM (formerly known as WKJS-FM).
 
(11) WKJS-FM (formerly known as WJMO-FM).
 
(12) WKJM-FM (formerly known as WPZZ-FM).
 
(13) WROU-AM (formerly known as WGCV-AM).
 
(14) We operate WDBZ-AM pursuant to a local marketing agreement.
 
(15) WDNI-LP, the low power television station that we acquired in Indianapolis in June 2000, is not included in this table.
 
(16) For the Augusta market, Arbitron issues its radio market survey reports on a semi-annual basis, rather than a quarterly basis as in our other markets.
 
(17) WLRX-FM (formerly known as WEGK-FM).
 
(18) WROU-FM (formerly known as WRNB-FM).
 
Advertising Revenue
 
Substantially all of our net broadcast revenue is generated from the sale of local and national advertising for broadcast on our radio stations. Local sales are made by the sales staff located in our markets. National sales are made by firms specializing in radio advertising sales on the national level. These firms are paid a commission on the advertising sold. Approximately 63% of our net broadcast revenue for the year ended December 31, 2005 was generated from the sale of local advertising and 32% from sales to national advertisers, including network advertising. The balance of net broadcast revenue is primarily derived from tower rental income, ticket sales and revenue related to Radio One sponsored events, management fees and other revenue.
 
Advertising rates charged by radio stations are based primarily on:
 
  •  a radio station’s audience share within the demographic groups targeted by the advertisers;
 
  •  the number of radio stations in the market competing for the same demographic groups; and
 
  •  the supply and demand for radio advertising time.
 
Advertising rates are generally highest during the morning and afternoon commuting hours.
 
A radio station’s listenership is reflected in ratings surveys that estimate the number of listeners tuned to a radio station and the time they spend listening to that radio station. Ratings are used by advertisers to evaluate whether to advertise on our radio stations, and are used by us to chart audience growth, set advertising rates and adjust programming.
 
Strategic Diversification
 
We continually explore opportunities in other forms of media that are complementary to our core radio business, which we believe will allow us to leverage our expertise in the African-American market and our significant listener base. In January 2006, through a joint venture with Reach Media, we launched a new African-American news/talk radio network. The network features several leading African-American personalities. To date, 26 stations have committed to carrying all or a portion of the network’s programming. In February 2005, we acquired 51% of the common stock of Reach Media, which operates The Tom Joyner Morning Show and related businesses. We currently have invested in the following media businesses:
 
  •  TV One, which operates a cable television network offering programming targeted primarily towards African-American viewers (see discussion below);
 
  •  iBiquity Digital Corporation (“iBiquity”), a leading developer of in-band on-channel digital broadcast technology.
 
In July 2003, we entered into a joint venture agreement with an affiliate of Comcast Corporation and other investors to create 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. We have committed to make a cumulative cash investment of $74.0 million in TV One over approximately four years, of which we have already funded $37.0 million. In December 2004, TV One entered into a distribution agreement with


11


 

DIRECTV, Inc. (“DIRECTV”) and certain affiliates of DIRECTV became investors in TV One. As of December 31, 2005, we owned approximately 36% of TV One on a fully-converted basis.
 
We entered into separate network services and advertising services agreements with TV One in 2003. Under the network services agreement, which expires in January 2009, we are providing TV One with administrative and operational support services and access to Company personalities. Under the advertising services agreement, we are providing a specified amount of advertising to TV One over a term of five years ending in January 2009. In consideration of providing these services, we have received equity in TV One, and receive an annual fee of $500,000 in cash for providing services under the network services agreement.
 
We have launched websites for 65 of our radio stations, and we derive revenue from the sale of advertisements on those websites. We generally encourage our web advertisers to run simultaneous radio campaigns and use our radio airwaves to promote our websites.
 
Future opportunities could include investments in, or acquisitions of, companies in diverse media businesses, outdoor advertising in urban environments, music production and distribution, publishing, movie distribution, Internet-based services, and distribution of our content through emerging distribution systems such as the Internet, cellular phones, personal digital assistants, digital entertainment devices, and the home entertainment market.
 
Competition
 
The radio broadcasting industry is highly competitive. Radio One’s stations compete for audiences and advertising revenue with other radio stations and with other media such as broadcast and cable television, the Internet, satellite radio, newspapers, magazines, direct mail and outdoor advertising, some of which may be controlled by horizontally-integrated companies. Audience ratings and advertising revenue are subject to change and any adverse change in a market could adversely affect our net broadcast revenue in that market. If a competing station converts to a format similar to that of one of our stations, or if one of our competitors strengthens its operations, our stations could suffer a reduction in ratings and advertising revenue. Other radio companies, which are larger and have more resources may also enter, or increase their presence in, markets where we operate. Although we believe our stations are well positioned to compete, we cannot assure that our stations will maintain or increase their current ratings or advertising revenue.
 
The radio broadcasting industry is subject to rapid technological change, evolving industry standards and the emergence of new media technologies, which may impact our business. We cannot assure you that we will have the resources to acquire new technologies or to introduce new services that could compete with these new technologies. Several new media technologies are being, or have been, developed including the following:
 
  •  satellite delivered digital audio radio service, which has resulted in the introduction of several new satellite radio services with sound quality equivalent to that of compact discs;
 
  •  audio programming by cable television systems, direct broadcast satellite systems, Internet content providers and other digital audio broadcast formats; and
 
  •  digital audio and video content available for listening and/or viewing on the Internet and/or available for downloading to portable devices.
 
As a response to these and other competing technologies, we have entered into an alliance with XM Satellite Radio, whereby we program one channel on XM Satellite Radio’s satellite delivered digital audio radio service. Additionally, we, along with most other public radio companies, have invested in iBiquity, a developer of digital audio broadcast technology. We have committed over the course of the next three years to convert most of our analog broadcast radio stations to in-band, on-channel digital radio broadcasts, which could provide multi-channel, multi-format digital radio services in the same bandwidth currently occupied by traditional AM and FM radio services. However, we cannot assure you that these arrangements will be successful or enable us to adapt effectively to these new media technologies. As of December 31, 2005, we have converted 19 stations to digital broadcast.


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Antitrust Regulation
 
The agencies responsible for enforcing the federal antitrust laws, the Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”), may investigate certain acquisitions. After the passage of the Telecommunications Act of 1996, the DOJ gave increased attention to reviewing proposed acquisitions of radio stations. The DOJ is likely to focus particular attention when the proposed buyer already owns one or more radio stations in the market of the station it is seeking to buy. The DOJ has challenged a number of radio broadcasting transactions. Some of those challenges ultimately resulted in consent decrees requiring, among other things, divestitures of certain stations. In general, the DOJ has more closely scrutinized radio station acquisitions where the involved radio stations account for a significant percentage of local radio advertising revenue.
 
We cannot predict the outcome of any specific DOJ or FTC review of a particular acquisition. Any decision by the DOJ or FTC to challenge a proposed acquisition could affect our ability to consummate an acquisition or to consummate it on the proposed terms. For an acquisition meeting certain size thresholds, the Hart-Scott-Rodino Act requires the parties to file Notification and Report Forms concerning antitrust issues with the DOJ and the FTC and to observe specified waiting period requirements before consummating the acquisition. If the investigating agency raises substantive issues in connection with a proposed transaction, the parties involved frequently engage in lengthy discussions and/or negotiations with the investigating agency to address those issues, including restructuring the proposed acquisition or divesting assets. In addition, the investigating agency could file suit in federal court to enjoin the acquisition or to require the divestiture of assets, among other remedies. All acquisitions, regardless of whether they are required to be reported under the Hart-Scott-Rodino Act, may be investigated by the DOJ or the FTC under the antitrust laws before or after consummation. In addition, private parties may under certain circumstances bring legal action to challenge an acquisition under the antitrust laws. As part of its increased scrutiny of radio station acquisitions, the DOJ has stated publicly that it believes that local marketing agreements, joint sales agreements, time brokerage agreements and other similar agreements customarily entered into in connection with radio station transfers could violate the Hart-Scott-Rodino Act if such agreements take effect prior to the expiration of the waiting period under the Hart-Scott-Rodino Act. Furthermore, the DOJ has noted that joint sales agreements may raise antitrust concerns under Section 1 of the Sherman Act and has challenged joint sales agreements in certain locations. As indicated above, the DOJ also has stated publicly that it has established certain revenue and audience share concentration benchmarks with respect to radio station acquisitions, above which a transaction may receive additional antitrust scrutiny. However, to date, the DOJ has also investigated transactions that do not meet or exceed these benchmarks and has cleared transactions that do exceed these benchmarks.
 
In the past, the FCC has exercised its discretion to review individual FCC assignment or transfer of control applications involving proposed radio broadcasting transactions that it believes might raise excessive market concentration issues even where an application complies with the FCC’s media ownership limits. As part of its June 2003 decision revising media ownership rules, which proceeding is discussed below, the FCC announced that it would no longer follow this former practice of “flagging” certain assignment and transfer of control applications that raise competitive concerns for its staff to conduct a competitive analysis of the particular market. The FCC continues to adhere to this shift in practice during the pendency of a judicial stay of the revised media ownership rules adopted in the June 2003 decision, although it does retain discretion to consider such competitive issues when it reviews transactions.
 
Federal Regulation of Radio Broadcasting
 
The radio broadcasting industry is subject to extensive and changing regulation by the FCC of programming, technical operations, employment and other business practices. The FCC regulates radio broadcast stations pursuant to the Communications Act of 1934, as amended. The Communications Act permits the operation of radio broadcast stations only in accordance with a license issued by the FCC upon a finding that the grant of a license would serve the public interest, convenience and necessity. Among other things, the FCC:
 
  •  assigns frequency bands for radio broadcasting;
 
  •  determines the particular frequencies, locations, operating power, interference standards and other technical parameters of radio broadcast stations;


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  •  issues, renews, revokes and modifies radio broadcast station licenses;
 
  •  imposes annual regulatory fees and application processing fees to recover its administrative costs;
 
  •  establishes technical requirements for certain transmitting equipment to restrict harmful emissions;
 
  •  adopts and implements regulations and policies that directly or indirectly affect the ownership, operation, program content and employment and business practices of radio broadcast stations; and
 
  •  has the power to impose penalties, including monetary forfeitures, for violations of its rules and the Communications Act.
 
The following is a brief summary of certain provisions of the Communications Act and specific FCC rules and policies. This summary does not purport to be a complete listing of all of the regulations and policies affecting radio stations and is qualified in its entirety by the text of the Communications Act, the FCC’s rules, regulations and policies, and the rulings and public notices of the FCC. You should refer to the Communications Act and these FCC notices, rules and rulings for further information concerning the nature and extent of federal regulation of radio broadcast stations.
 
The Communications Act prohibits the assignment of an FCC license, or transfer of control of an FCC licensee, without the prior approval of the FCC. In determining whether to grant requests for consents to assignments or transfers, and in determining whether to grant or renew a radio broadcast license, the FCC considers a number of factors pertaining to the licensee (and any proposed licensee), including restrictions on foreign ownership, compliance with FCC media ownership limits and other FCC rules, the character of the licensee (or proposed licensee) and those persons holding attributable interests in the licensee (or proposed licensee), and compliance with the Anti-Drug Abuse Act of 1988.
 
A licensee’s failure to comply with the requirements of the Communications Act or FCC rules and policies may result in the imposition of various sanctions, including admonishment, fines, the grant of a license renewal of less than a full eight-year term, the grant of a license or license renewal with conditions or, for particularly egregious violations, the denial of a license renewal application, the revocation of an FCC license and/or the denial of FCC consent to acquire additional broadcast properties.
 
Congress, the FCC and, in some cases, local jurisdictions, have had under consideration or reconsideration, or may in the future consider and adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operation, ownership and profitability of our radio stations, result in the loss of audience share and advertising revenue for our radio broadcast stations or affect our ability to acquire additional radio broadcast stations or finance such acquisitions. Such matters include or may include:
 
  •  changes to the license authorization and renewal process;
 
  •  proposals to impose spectrum use or other fees on FCC licensees;
 
  •  changes to rules relating to political broadcasting including proposals to grant free air time to candidates, and other changes regarding political and non-political program content, funding, political advertising rates, and sponsorship disclosures;
 
  •  proposals to restrict or prohibit the advertising of beer, wine and other alcoholic beverages;
 
  •  proposals regarding the regulation of the broadcast of indecent or violent content;
 
  •  proposals to increase the actions stations must take to demonstrate service to their local communities;
 
  •  technical and frequency allocation matters;
 
  •  changes in broadcast multiple ownership, foreign ownership, cross-ownership and ownership attribution policies;
 
  •  changes to allow satellite radio operators to insert local content into their programming service;


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  •  changes to allow telephone companies to deliver audio and video programming to homes in their service areas; and
 
  •  proposals to alter provisions of the tax laws affecting broadcast operations and acquisitions.
 
Finally, the FCC has adopted procedures for the auction of broadcast spectrum in circumstances where two or more parties have filed mutually exclusive applications for authority to construct new stations or certain major changes in existing stations. Such procedures may limit our efforts to modify or expand the broadcast signals of our stations.
 
We cannot predict what changes, if any, might be adopted, nor can we predict what other matters might be considered in the future, nor can we judge in advance what impact, if any, the implementation of any particular proposals or changes might have on our business.
 
FCC License Grants and Renewals.  In making licensing determinations, the FCC considers an applicant’s legal, technical, financial and other qualifications. The FCC grants radio broadcast station licenses for specific periods of time and, upon application, may renew them for additional terms. A station may continue to operate beyond the expiration date of its license if a timely filed license renewal application is pending. Under the Communications Act, radio broadcast station licenses may be granted for a maximum term of eight years.
 
Generally, the FCC renews radio broadcast licenses without a hearing upon a finding that:
 
  •  the radio station has served the public interest, convenience and necessity;
 
  •  there have been no serious violations by the licensee of the Communications Act or FCC rules and regulations; and
 
  •  there have been no other violations by the licensee of the Communications Act or FCC rules and regulations which, taken together, indicate a pattern of abuse.
 
After considering these factors and any petitions to deny a license renewal application (which may lead to a hearing), the FCC may grant the license renewal application with or without conditions, including renewal for a term less than the maximum otherwise permitted. Historically, our licenses have been renewed without any conditions or sanctions imposed. However, there can be no assurance that the licenses of each of our stations will be renewed, will be renewed for a full term or will be renewed without conditions or sanctions.
 
Types of FCC Broadcast Licenses.  The FCC classifies each AM and FM radio station. An AM radio station operates on either a clear channel, regional channel or local channel. A clear channel is assigned to serve wide areas, particularly at night. A regional channel is assigned to serve primarily a principal center of population and the rural areas contiguous to it. A local channel is assigned to operate unlimited time and serve primarily a community and the suburban and rural areas immediately contiguous to it. Class A radio stations operate unlimited time and are designed to render primary and secondary service over an extended area. Class B radio stations operate unlimited time and are designed to render service only over a primary service area. Class C radio stations operate unlimited time and are designed to render service only over a primary service area that may be reduced as a consequence of interference. Class D radio stations operate either daytime, during limited times only, or unlimited time with low nighttime power.
 
FM class designations depend upon the geographic zone in which the transmitter of the FM radio station is located. The minimum and maximum facilities requirements for an FM radio station are determined by its class. In general, commercial FM radio stations are classified as follows, in order of increasing power and antenna height: Class A, B1, C3, B, C2, C1, C0 and C. The FCC has adopted a rule that subjects Class C FM stations that do not satisfy a certain antenna height requirement to an involuntary downgrade in class to Class C0 under certain circumstances.


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Radio One’s Licenses.  The following table sets forth information with respect to each of our radio stations. A broadcast station’s market may be different from its community of license. The coverage of an AM radio station is chiefly a function of the power of the radio station’s transmitter, less dissipative power losses and any directional antenna adjustments. For FM radio stations, signal coverage area is chiefly a function of the ERP of the radio station’s antenna and the HAAT of the radio station’s antenna. “ERP” refers to the effective radiated power of an FM radio station. “HAAT” refers to the antenna height above average terrain of an FM radio station.
 
                                             
                        Antenna
           
                  ERP (FM)
    Height (AM)
           
    Station Call
  Year of
        Power (AM)
    HAAT (FM)
    Operating
  Expiration Date
 
Market
  Letters   Acquisition     FCC Class   in Kilowatts     in Meters     Frequency   of FCC License  
 
Atlanta
  WPZE-FM     1999     C3     7.9       175.0     97.5 MHz     04/01/2012  
    WJZZ-FM     1999     C3     21.5       110.0     107.5 MHz     04/01/2012  
    WHTA-FM     2002     C2     27.0       176.0     107.9 MHz     04/01/2012  
    WAMJ-FM     2004     A     3.0       143.0     102.5 MHz     04/01/2012  
Washington, DC
  WOL-AM     1980     C     1.0       90.8     1450 kHz     10/01/2011  
    WMMJ-FM     1987     A     2.9       146.0     102.3 MHz     10/01/2011  
    WKYS-FM     1995     B     24.5       215.0     93.9 MHz     10/01/2011  
    WYCB-AM     1998     C     1.0       81.9     1340 kHz     10/01/2011  
Philadelphia
  WPPZ-FM(1)     1997     A     0.34       305.0     103.9 MHz     08/01/2006  
    WPHI-FM(2)     2000     B     35.0       183.0     100.3 MHz     08/01/2006  
    WRNB-FM(3)     2004     A     0.78       276.0     107.9 MHz     06/01/2006 *
Detroit
  WDMK-FM     1998     B     20.0       221.0     105.9 MHz     10/01/2004 *
    WCHB-AM     1998     B     50.0       71.1     1200 kHz     10/01/2012 *
    WHTD-FM     1998     B     50.0       152.0     102.7 MHz     10/01/2012  
Los Angeles
  KKBT-FM(4)     2000     B     5.3       916.0     100.3 MHz     12/01/2005 *
Miami
  WTPS-AM(6)     2000     B     50.0       90.0     1080 kHz     02/01/2012  
Houston
  KMJQ-FM     2000     C     100.0       524.0     102.1 MHz     08/01/2013  
    KBXX-FM     2000     C     100.0       585.0     97.9 MHz     08/01/2013  
    KROI-FM(5)     2004     C1     21.4       526.0     92.1 MHz     08/01/2013  
Dallas
  KBFB-FM     2000     C     100.0       491.0     97.9 MHz     08/01/2013  
    KSOC-FM     2001     C     78.0       591.0     94.5 MHz     08/01/2013  
Baltimore
  WWIN-AM     1992     C     0.5       146.0     1400 kHz     10/01/2011  
    WWIN-FM     1992     A     3.0       91.0     95.9 MHz     10/01/2011  
    WOLB-AM     1993     D     0.25       103.5     1010 kHz     10/01/2011  
    WERQ-FM     1993     B     37.0       174.0     92.3 MHz     10/01/2011  
St. Louis
  WFUN-FM     1999     C3     24.5       102.0     95.5 MHz     12/01/2004 *
    WHHL-FM(7)           C2     39.0       168.0     104.1 MHz     12/01/2012  
Cleveland
  WERE-AM     1999     B     5.0       200.0     1300 kHz     10/01/2012  
    WENZ-FM     1999     B     16.0       272.0     107.9 MHz     10/01/2012  
    WZAK-FM     2000     B     27.5       189.0     93.1 MHz     10/01/2012  
    WJMO-AM     2000     C     1.0       190.9     1490 kHz     10/01/2012  
Charlotte
  WQNC-FM(8)     2000     A     6.0       100.0     92.7 MHz     12/01/2011  
    WPZS-FM(9)     2004     A     6.0       100.0     100.9 MHz     12/01/2011  
Richmond
  WPZZ-FM(10)     1999     C1     100.0       299.0     104.7 MHz     10/01/2011  
    WCDX-FM     2001     B1     4.5       235.0     92.1 MHz     10/01/2011  
    WKJM-FM(11)     2001     A     6.0       100.0     99.3 MHz     10/01/2011  
    WKJS-FM(12)     2001     A     2.3       162.0     105.7 MHz     10/01/2011  
    WROU-AM(13)     2001     C     1.0       181.5     1240 kHz     10/01/2011  
Raleigh-Durham
  WQOK-FM     2000     C1     100.0       299.0     97.5 MHz     10/01/2011  
    WFXK-FM     2000     C1     100.0       299.0     104.3 MHz     12/01/2011  
    WFXC-FM     2000     A     2.6       153.0     107.1 MHz     12/01/2011  
    WNNL-FM     2000     C3     7.9       176.0     103.9 MHz     12/01/2011  
Boston
  WILD-FM     1999     A     1.7       176.0     97.7 MHz     04/01/2006 *
    WILD-AM     2001     D     5.0       78.0     1090 kHz     04/01/2006 *
Cincinnati
  WIZF-FM     2001     A     1.25       155.0     100.9 MHz     08/01/2012  
    WDBZ-AM(14)           C     1.0       89.6     1230kHz     10/01/2012  


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                        Antenna
           
                  ERP (FM)
    Height (AM)
           
    Station Call
  Year of
        Power (AM)
    HAAT (FM)
    Operating
  Expiration Date
 
Market
  Letters   Acquisition     FCC Class   in Kilowatts     in Meters     Frequency   of FCC License  
 
Columbus
  WCKX-FM     2001     A     1.9       126.0     107.5 MHz     10/01/2012  
    WXMG-FM     2001     A     2.6       154.0     98.9 MHz     10/01/2012  
    WJYD-FM     2001     A     6.0       100.0     106.3 MHz     10/01/2012  
Indianapolis
  WHHH-FM     2000     A     3.3       87.0     96.3 MHz     08/01/2012  
    WTLC-FM     2000     A     3.0       100.0     106.7 MHz     08/01/2012  
    WYJZ-FM     2000     A     6.0       100.0     100.9 MHz     08/01/2012  
    WTLC-AM     2001     B     5.0       221.0     1310 kHz     08/01/2012  
Minneapolis
  KTTB-FM     2001     C1     100.0       176.0     96.3 MHz     04/01/2005 *
Augusta
  WAEG-FM     2000     A     3.0       100.0     92.3 MHz     04/01/2012  
    WTHB-FM     2000     A     6.0       100.0     100.9 MHz     04/01/2012  
    WAKB-FM     2000     C3     0.75       416.0     96.9 MHz     04/01/2012  
    WFXA-FM     2000     A     6.0       92.0     103.1 MHz     04/01/2012  
    WTHB-AM     2000     D     5.0       154.9     1550 kHz     04/01/2012  
Louisville
  WDJX-FM     2001     B     24.0       218.0     99.7 MHz     08/01/2012  
    WLRX-FM(15)     2003     A     3.0       100.0     104.3 MHz     08/01/2012  
    WGZB-FM     2001     A     1.6       194.0     96.5 MHz     08/01/2012  
    WXMA-FM     2001     A     6.0       87.0     102.3 MHz     08/01/2012  
    WMJM-FM     2001     A     2.0       59.0     101.3 MHz     08/01/2012  
    WLRS-FM     2001     A     2.2       136.0     105.1 MHz     08/01/2012  
Dayton
  WGTZ-FM     2001     B     40.0       168.0     92.9 MHz     10/01/2004 *
    WDHT-FM     2001     B     50.0       150.0     102.9 MHz     10/01/2004 *
    WING-AM     2001     B     5.0       200.0     1410 kHz     10/01/2004 *
    WKSW-FM     2001     A     3.2       124.0     101.7 MHz     10/01/2012  
    WROU-FM(16)     2003     A     0.89       182.0     92.1 MHz     10/01/2004 *
 
 
(1) WPPZ-FM (formerly known as WPHI-FM). WPPZ-FM operates with facilities equivalent to 3kW at 100 meters.
 
(2) WPHI-FM (formerly known as WPLY-FM).
 
(3) WRNB-FM (formerly known as WPPZ-FM, formerly known as WSNJ-FM, and formerly licensed to Bridgeton, NJ). The FCC granted authority to change the community of license to Pennsauken, NJ and we relocated the operations of the stations to serve the greater Philadelphia market.
 
(4) We also hold a license for K261AB, a translator for KKBT-FM.
 
(5) KROI-FM (formerly known as KRTS-FM).
 
(6) WTPS-AM (formerly known as WVCG-AM).
 
(7) WHHL-FM (formerly known as WRDA-FM). We operate WHHL-FM pursuant to a local marketing agreement.
 
(8) WQNC-FM (formerly known as WCHH-FM).
 
(9) WPZS-FM (formerly known as WABZ-FM).
 
(10) WPZZ-FM (formerly known as WKJS-FM).
 
(11) WKJM-FM (formerly known as WPZZ-FM).
 
(12) WKJS-FM (formerly known as WJMO-FM).
 
(13) WROU-AM (formerly known as WGCV-AM).
 
(14) We operate WDBZ-AM pursuant to a local marketing agreement.
 
(15) WLRX-FM (formerly known as WEGK-FM).
 
(16) WROU-FM (formerly known as WRNB-FM).
 
Renewal of the license is currently pending before the FCC.
 
To obtain the FCC’s prior consent to assign or transfer control of a broadcast license, an appropriate application must be filed with the FCC. If the application to assign or transfer the license involves a substantial change in ownership or control of the licensee, for example, the transfer or acquisition of more than 50% of the voting stock, the long form application must be placed on an FCC public notice for a period of 30 days during which petitions to deny the application may be filed by interested parties. Informal objections may be filed any time until the FCC acts upon the application. If the FCC grants an assignment or transfer application, administrative procedures provide for

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reconsideration of the grant. The Communications Act also permits the appeal of a contested grant to a federal court in certain instances.
 
Under the Communications Act, a broadcast license may not be granted to or held by any persons who are not U.S. citizens, whom the Communications Act and FCC rules refer to as “aliens,” including any corporation that has more than 20% of its capital stock owned or voted by non-U.S. citizens or entities or their representatives, by foreign governments or their representatives, or by non-U.S. corporations. Furthermore, the Communications Act prohibits indirect foreign ownership through a parent company of the licensee of more than 25% if the FCC determines the public interest will be served by the refusal or revocation of such license. Thus, for instance, the licenses for our stations could be revoked if more than 25% of our outstanding capital stock is issued to or for the benefit of non-U.S. citizens.
 
The FCC generally applies its media ownership limits, which are discussed below, to “attributable” interests held by an individual, corporation, partnership or other association or entity, including limited liability companies. In the case of a corporation holding broadcast licenses, the interests of officers, directors and those who, directly or indirectly hold five percent or more of the total outstanding votes of a licensee corporation are generally deemed attributable interests. Certain passive investors that hold stock for investment purposes only become attributable with the ownership of 20% or more of the voting stock of the corporation holding broadcast licenses. An entity with one or more radio stations in a radio market that enters into a local marketing agreement or a time brokerage agreement with another radio station in the same market obtains an attributable interest in the brokered radio station for purposes of the FCC’s local radio station ownership rules, if the brokering station supplies more than 15% of the brokered radio station’s weekly broadcast hours. Similarly, under a new FCC rule, a station licensee’s rights under a joint sales agreement (“JSA”) to sell more than 15% per week of the advertising time on another station in the same market constitutes an attributable ownership interest for purposes of the FCC’s ownership rules. This new rule was adopted as part of a larger 2003 media ownership decision, and is one of the few rule changes adopted in that decision that has gone into effect (most of the new rules are subject to judicial stay pending remand proceedings).
 
Under the FCC’s current policies, debt instruments, non-voting stock, options and warrants for voting stock that have not yet been exercised, minority voting interests in corporations having a single majority shareholder and insulated limited partnership or limited liability company membership interests where the interest holder is not “materially involved” in the media-related activities of the partnership or company generally do not subject their holders to attribution unless such interests implicate the FCC’s equity-debt-plus (or “EDP”) rule. Under the EDP rule, a major programming supplier or a same-market media entity will have an attributable interest in a station if the supplier or same-market media entity also holds debt or equity, or both, in the station that is greater than 33% of the value of the station’s total debt plus equity. For purposes of the EDP rule, equity includes all stock, whether voting or nonvoting, and equity held by insulated limited partners or limited liability company members. Debt includes all liabilities, whether long-term or short-term. A major programming supplier includes any programming supplier that provides more than 15% of the station’s weekly programming hours. A same-market media entity subject to the ownership restrictions applicable to radio stations includes any holder of an attributable interest in a broadcast station or daily newspaper, located in the same market as the station, but only if the holder’s interest is attributable under an FCC attribution rule other than the EDP rule.
 
The Communications Act and FCC rules generally restrict ownership, operation or control of, or the common holding of attributable interests in:
 
  •  radio broadcast stations above certain numerical limits serving the same local market;
 
  •  radio broadcast stations combined with television broadcast stations above certain numerical limits serving the same local market (radio/television cross ownership); and
 
  •  a radio broadcast station and an English-language daily newspaper serving the same local market (newspaper/broadcast cross-ownership).
 
These media ownership rules are subject to periodic review by the FCC. In its 2003 media ownership decision, the FCC voted to retain the limits it previously had on the number of radio broadcast stations one entity may own, control, or in which it may have an attributable interest, within a local market, but to change the way a local market is defined. As noted above, the FCC also voted to make JSAs involving more than 15% of a same-market station’s as


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sales “attributable” under the media ownership limits. The 2003 rules were challenged in court, and the Third Circuit held that the FCC did not adequately justify its radio ownership limits and stayed their implementation. After the Third Circuit partially lifted its stay to allow the new radio market definition and rule attributing JSAs to go into effect, the FCC revised its application forms for transfers of control and assignments of licenses to incorporate these aspects of the new rules, and the FCC is now applying such revisions to all pending and new applications.
 
The numerical limits on radio stations that one entity may own in a local market, that were in place prior to the 2003 media ownership decision, and retained in that decision but subject to further review based on the Third Circuit’s decision, are as follows:
 
  •  in a radio market with 45 or more commercial radio stations, a party may own, operate or control up to eight commercial radio stations, not more than five of which are in the same service (AM or FM).
 
  •  in a radio market with 30 to 44 commercial radio stations, a party may own, operate or control up to seven commercial radio stations, not more than four of which are in the same service (AM or FM).
 
  •  in a radio market with 15 to 29 commercial radio stations, a party may own, operate or control up to six commercial radio stations, not more than four of which are in the same service (AM or FM).
 
  •  in a radio market with 14 or fewer commercial radio stations, a party may own, operate or control up to five commercial radio stations, not more than three of which are in the same service (AM or FM), except that a party may not own, operate, or control more than 50% of the radio stations in such market.
 
To apply these four local numerical caps or tiers, the FCC defines local radio market areas and the number of radio stations in such markets. For a number of years, the FCC employed a contour-overlap methodology. As part of the 2003 media ownership decision, the FCC decided to rely on Arbitron Metro Survey Areas (in portions of the country where they exist), rather than the contour-overlap methodology. It also grandfathered existing local radio combinations that conflicted with the new rules based on the revised market definition until the combination is sold. While these changes were initially subject to the Third Circuit’s stay, at the request of the FCC the Third Circuit decided to lift its stay with respect to the use of Arbitron Metro Survey areas and the transferability restrictions. It is important to note that the market definition employed by the FCC to determine compliance with its rules is not necessarily the same as that used for purposes of the Hart-Scott-Rodino Act. In addition, for radio stations located outside Arbitron Metro Survey Areas, the FCC instituted a rulemaking to determine how to define local radio markets in such areas. In the interim, the FCC is applying a modified contour-overlap methodology. Under this approach, the FCC uses one overlapping contour methodology for defining a local radio market and counting the number of stations that the applicant controls or proposes to control in that market, and it employs a separate overlapping contour methodology for determining the number of operating commercial radio stations in the market for determining compliance with the local radio ownership caps.
 
In its 2003 media ownership decision, the FCC also voted to adopt more liberal cross-media limits to replace the former newspaper-broadcast and radio-television cross-ownership rules. It voted to grandfather existing radio or radio/television combinations that otherwise would violate the revised media ownership rules until the combination is sold. These provisions have been remanded by the Third Circuit for further FCC consideration and are currently subject to a judicial stay.
 
The rules adopted in the FCC’s 2003 ownership decision are still in flux and subject both to further court proceedings and court review. At the FCC, the rules are currently on remand from the Third Circuit and the FCC has yet to institute further proceedings. There are also petitions for reconsideration of the 2003 ownership decision on file and pending at the FCC. In addition, the FCC’s media ownership rules are subject to periodic review by the FCC. The next periodic review is scheduled to begin in 2006.
 
All of these attribution and media ownership rules limit the number of radio stations we may acquire or own in any particular market and may limit the prospective buyers of any stations we want to sell.


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The FCC’s new rules, including any further changes resulting from FCC and court action, could affect our business in a number of ways, including, but not limited to, the following:
 
  •  enforcement of a more narrow market definition based upon Arbitron markets could have an adverse effect on our ability to accumulate stations in a given area or to sell a group of stations in a local market to a single entity.
 
  •  restricting the assignment and transfer of control of radio combinations that exceed the new ownership limits as a result of the revised local market definitions could adversely affect our ability to buy or sell a group of stations in a local market from or to a single entity.
 
  •  “attributing” joint sales agreements for multiple ownership purposes could limit our ability to buy or sell time on certain stations.
 
  •  in general terms, future changes in the way the FCC defines markets or determines excess market concentration for purposes of the broadcast multiple ownership rules, could limit our ability to acquire new stations in certain markets, our ability to operate stations pursuant to certain agreements, and our ability to improve the coverage contours of our existing stations.
 
Programming and Operations.  The Communications Act requires broadcasters to serve the “public interest” by presenting programming in response to community problems, needs and interests and maintaining certain records demonstrating its responsiveness. The FCC will consider complaints from listeners about a broadcast station’s programming, and such complaints are required to be maintained in a station’s public file for two years. Stations also must pay FCC regulatory and application fees, and follow various FCC rules that regulate, among other things, political advertising, the broadcast of obscene or indecent programming, sponsorship identification, the broadcast of contests and lotteries and technical operation, including limits on human exposure to radio frequency radiation.
 
The FCC’s rules prohibit a broadcast licensee from simulcasting more than 25% of its programming on another radio station in the same broadcast service (that is, AM/AM or FM/FM). The simulcasting restriction applies if the licensee owns both radio broadcast stations or owns one and programs the other through a local marketing agreement, and only if the contours of the radio stations overlap in a certain manner.
 
The FCC requires that licensees not discriminate in hiring practices. In November 2002, the FCC adopted new Equal Employment Opportunity (“EEO”) rules, which became effective March 10, 2003, that bar employment discrimination by broadcast stations on the basis of race, color, religion, national origin or gender. They also require station employment units with at least five full-time employees to widely disseminate information about all full-time job openings, absent certain limited exceptions, to recruitment sources, including those requesting to be on the job-vacancy notification list, so as to reach all segments of the population in the communities served by the employment unit. In addition, station employment units must undertake a set number of non-vacancy-specific outreach initiatives (normally every two years) from an FCC menu of outreach initiatives, including, for example, meaningful participation in job fairs, internships or scholarship programs. Station employment units subject to these recruitment and outreach requirements must retain various records of their efforts and place in their public inspection files, annually, an EEO public file report (posting an electronic version on their Internet websites). Radio station employment units with more than 10 full-time employees generally must file certain of their annual EEO public file reports with the FCC midway through their license term. The FCC is considering whether to apply these recruitment requirements to part-time employment positions.
 
From time to time, complaints may be filed against Radio One’s radio stations alleging violations of these or other rules. In addition, the FCC may conduct audits or inspections to ensure and verify licensee compliance with FCC rules and regulations. Failure to observe these or other rules and policies can result in the imposition of various sanctions, including fines or conditions, the grant of “short” (less than the maximum eight year) renewal terms or, for particularly egregious violations, the denial of a license renewal application or the revocation of a license.


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Employees
 
As of February 15, 2006, we employed 1,091 full-time employees and 769 part-time employees. Our employees are not unionized; however, some of our employees are covered by collective bargaining agreements that we assumed in connection with certain of our station acquisitions. We have not experienced any work stoppages and believe relations with our employees are satisfactory.
 
Corporate Governance
 
Code of Ethics.  We have adopted a code of ethics that applies to all of our directors, officers (including our principal financial officer and principal accounting officer) and employees and meets the requirements of the rules of the SEC and the Nasdaq Stock Market Rules. Our code of ethics can be found on our website, www.radio-one.com. We will provide a paper copy of the Code of Ethics, free of charge, upon request.
 
Audit Committee Charter.  Our Audit Committee has adopted a charter as required by the Nasdaq Stock Market Rules. This committee charter can be found on our website, www.radio-one.com. We will provide a paper copy of the Audit Committee Charter, free of charge, upon request.
 
Environmental
 
As the owner, lessee or operator of various real properties and facilities, we are subject to various federal, state and local environmental laws and regulations. Historically, compliance with these laws and regulations has not had a material adverse effect on our business. There can be no assurance, however, that compliance with existing or new environmental laws and regulations will not require us to make significant expenditures of funds.
 
Seasonality
 
Seasonal net broadcast revenue fluctuations are common in the radio broadcasting industry and are due primarily to fluctuations in advertising expenditures by local and national advertisers. Our first fiscal quarter generally produces the lowest net broadcast revenue for the year.
 
Internet Address and Internet Access to SEC Reports
 
Our Internet address is www.radio-one.com. You may obtain through our Internet website, free of charge, copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. These reports will be available as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this Form 10-K.
 
ITEM 1A.   RISK FACTORS
 
Our future operating results could be adversely affected by a number of risks and uncertainties, the most significant of which are described below.
 
Our revenues are substantially dependent on spending by advertisers, and a decrease in such spending would adversely affect our revenue and operating results.
 
Substantially all of our revenue is derived from sales of advertisements and program sponsorships on our stations to local and national advertisers. Generally, advertising tends to decline during economic recession or downturn. As a result, our advertising revenue is likely to be adversely affected by a recession or downturn in the United States economy, the economy of an individual geographic market in which we own or operate radio stations, or other events or circumstances that adversely affect advertising activity.


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We may lose audience share and advertising revenue to competing radio stations or other media competitors.
 
We operate in a highly competitive industry. Our radio stations compete for audiences and advertising revenue with other radio stations and station groups, as well as with other media such as broadcast television, newspapers, magazines, cable television, satellite television, satellite radio, outdoor advertising, the Internet and direct mail. Audience ratings and market shares are subject to change. Any adverse change in a particular market, or adverse change in the relative market positions of the stations located in a particular market could have a material adverse effect on our revenue or ratings, could require increased promotion or other expenses in that market, and could adversely affect our revenue in other markets. Other radio broadcasting companies may enter the markets in which we operate or may operate in the future. These companies may be larger and have more financial resources than we have. Our radio stations may not be able to maintain or increase their current audience ratings and advertising revenue. In addition, from time to time, other stations may change their format or programming, a new station may adopt a format to compete directly with our stations for audiences and advertisers, or stations might engage in aggressive promotional campaigns. These tactics could result in lower ratings and advertising revenue or increased promotion and other expenses and, consequently, lower earnings and cash flow for us. Audience preferences as to format or programming may also shift due to demographic or other reasons. Any failure by us to respond, or to respond as quickly as our competitors, could have an adverse effect on our business and financial performance. We cannot assure you that we will be able to maintain or increase our current audience ratings and advertising revenue.
 
If we are unable to successfully identify, acquire and integrate businesses pursuant to our diversification strategy, our business and prospects may be adversely impacted.
 
We are pursuing a strategy of acquiring and investing in other forms of media that complement our core radio business in an effort to grow our business and diversify our revenue streams. We will not be able to pursue these acquisitions and investments if we cannot find suitable acquisition or investment opportunities or obtain acceptable financing. The negotiation of transactions, as well as the integration of an acquired business, could require us to incur significant costs and cause diversion of management’s time and resources. In addition, the transactions we pursue may prove to be unprofitable or fail to achieve the anticipated benefits. As such, we can provide no assurance that our diversification strategy will be successful.
 
We must respond to the rapid changes in technology, services and standards, which characterize our industry in order to remain competitive.
 
The radio broadcasting industry is subject to evolving industry standards and the emergence of new media technologies, which may impact our business. We cannot assure you that we will have the resources to acquire new technologies or to introduce new services that could compete with these new technologies. Several new media technologies are being, or have been, developed, including the following:
 
  •  satellite delivered digital audio radio service, which has resulted in the introduction of several new satellite radio services with sound quality equivalent to that of compact discs;
 
  •  audio programming by cable television systems, direct broadcast satellite systems, Internet content providers and other digital audio broadcast formats; and
 
  •  digital audio and video content available for listening and/or viewing on the Internet and/or available for downloading to portable devices.
 
We cannot assure you that we will be able to adapt effectively to these new media technologies.
 
The loss of key personnel, including on-air talent, could disrupt the management and operations of our business.
 
Our business depends upon the continued efforts, abilities and expertise of our executive officers, including our Chief Executive Officer (“CEO”), Chief Financial Officer, Chief Operating Officer and Chief Administrative Officer, and other key employees, including on-air personalities. We believe that the unique combination of skills and experience possessed by our executive officers could be difficult to replace, and that the loss of any one of them


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could have a material adverse effect on us, including the impairment of our ability to execute our business strategy. Additionally, we employ or independently contract with several on-air personalities and hosts of syndicated radio programs with significant loyal audiences in their respective broadcast areas. These on-air personalities are sometimes significantly responsible for the ranking of a station, and thus, the ability of the station to sell advertising. In addition, since we derive revenue from syndicating programs hosted by these on-air personalities, the loss of such on-air personalities could impact our revenues. We cannot be assured that these individuals will remain with us or will retain their current audiences.
 
Our growth strategy could be hampered by a lack of attractive opportunities or other risks associated with integrating the operations, systems and management of the radio stations we acquire.
 
Our growth strategy partially depends on our ability to identify underperforming radio stations or stick stations in attractive markets, to purchase such stations at a reasonable cost and to increase ratings, revenue and cash flow from such radio stations. Some of the material risks that could hinder our ability to implement this strategy include:
 
  •  increases in prices for radio stations due to increased competition for acquisition opportunities;
 
  •  reduction in the number of suitable acquisition targets;
 
  •  failure or unanticipated delays in completing acquisitions due to difficulties in obtaining required regulatory approval, including possible difficulties in obtaining antitrust approval for acquisitions in markets where we already own multiple stations or potential delays resulting from the uncertainty arising from legal challenges to the FCC’s adoption of new broadcast ownership rules;
 
  •  difficulty in integrating operations and systems and managing a large and geographically diverse group of radio stations;
 
  •  failure of some acquisitions to prove profitable or generate sufficient cash flow;
 
  •  issuance of large amounts of common stock in order to purchase radio stations;
 
  •  need to finance acquisitions through funding from the debt markets; and
 
  •  inability to finance acquisitions on acceptable terms.
 
Our business depends on maintaining our licenses with the FCC. We could be prevented from operating a radio station if we fail to maintain its license.
 
Radio broadcasters depend upon maintaining radio broadcasting licenses issued by the FCC. These licenses are ordinarily issued for a maximum term of eight years and are renewable. Our radio broadcasting licenses expire at various times through August 1, 2013. Although we may apply to renew our radio broadcasting licenses, interested third parties may challenge our renewal applications. In addition, we are subject to extensive and changing regulation by the FCC with respect to such matters as programming, indecency standards, technical operations, employment and business practices. If we or any of our significant stockholders, officers, or directors violate the FCC’s rules and regulations or the Communications Act of 1934, or is convicted of a felony, the FCC may commence a proceeding to impose fines or sanctions upon us. Examples of possible sanctions include the imposition of fines, the renewal of one or more of our broadcasting licenses for a term of fewer than eight years or the revocation of our broadcast licenses. If the FCC were to issue an order denying a license renewal application or revoking a license, we would be required to cease operating the radio station covered by the license only after we had exhausted administrative and judicial review without success.
 
There is significant uncertainty regarding the FCC’s media ownership rules, and such rules could restrict our ability to acquire radio stations.
 
The radio broadcasting industry is subject to extensive and changing federal regulation. Among other things, the Communications Act and FCC rules and policies limit the number of broadcasting properties that any person or entity may own (directly or by attribution) in any market and require FCC approval for transfers of control and assignments of licenses.


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In June 2003, the FCC issued a media ownership decision, which substantially altered its television, radio and cross-media ownership restrictions (the “2003 rules”). The FCC’s media ownership restrictions apply to parties that hold “attributable” interests in broadcast station licensees. With respect to radio, the 2003 rules, among other things, (a) retained the pre-existing numerical limits on the permissible number of radio stations in FCC-defined local radio markets in which a party may co-own or have an attributable interest; (b) redefined local radio markets to rely on Arbitron Metro Survey Areas (Arbitron Metros) (in portions of the country where they exist) in place of the contour-overlap methodology previously used; (c) grandfathered existing local radio combinations that conflict with the 2003 rules based on the Arbitron Metro definition of local radio markets until the combination is sold; (d) provided that a contract to sell more than 15% per week of the advertising time on another in-market radio station (Joint Sales Agreement or JSA) constitutes an attributable interest; and (e) replaced radio-TV and daily newspaper-broadcast cross-ownership rules with a more relaxed single set of new cross-media ownership restrictions. In addition, the FCC instituted a rulemaking to determine how to define local radio markets in areas outside Arbitron Metros.
 
The 2003 rules were challenged in court. The challenges were consolidated before the U.S. Court of Appeals for the Third Circuit, which initially issued a stay of the 2003 rules before they became effective and subsequently remanded many of them to the FCC for further proceedings, keeping the judicial stay in place and retaining jurisdiction. As a result, the FCC continued to apply the rules in effect before the stay. The FCC also filed a petition to partially lift the judicial stay as it relates to the new local radio ownership restrictions. The Third Circuit lifted the stay as it relates to the FCC’s decision to (i) make JSAs an attributable interest, (ii) define local radio markets based on Arbitron Metros, and (iii) grandfather certain local radio combinations only until the combination is sold. The court declined to lift the stay as to “matters pertaining to numerical limits on local radio ownership and the AM ‘subcap’.” In response, the FCC revised its application forms for transfers of control and assignments of licenses to incorporate these aspects of the 2003 rules, and the FCC is now applying such revisions to all pending and new applications.
 
The FCC’s media ownership rules remain in flux and subject to further agency and court proceedings. Certain of the parties to the Third Circuit’s decision requested review by the U.S. Supreme Court, which request was denied. At the FCC, the 2003 rules are currently on remand from the Third Circuit and the FCC has not yet instituted further proceedings. Also, the FCC has not yet ruled on pending petitions for reconsideration of the decision adopting the 2003 rules.
 
In addition to the FCC media ownership rules, the outside media interests of our officers and directors could limit our ability to acquire stations. The filing of petitions or complaints against Radio One or any FCC licensee from which we are acquiring a station could result in the FCC delaying the grant of, or refusing to grant or imposing conditions on its consent to the assignment or transfer of control of licenses. The Communications Act and FCC rules and policies also impose limitations on non-U.S. ownership and voting of our capital stock.
 
Increased enforcement by FCC of its indecency rules against the broadcast industry.
 
In 2004, the FCC indicated that it was enhancing its enforcement efforts relating to the regulation of indecency. Congress is considering legislation that would dramatically increase the penalties for broadcasting indecent programming and potentially subject broadcasters to license revocation, renewal or qualification proceedings in the event that they broadcast indecent material. In addition, the FCC’s heightened focus on the indecency regulatory scheme, against the broadcast industry generally, may encourage third parties to oppose our license renewal applications or applications for consent to acquire broadcast stations.
 
Two common stockholders have a majority voting interest in Radio One and have the power to control matters on which our common stockholders may vote, and their interests may conflict with yours.
 
As of March 3, 2006, our Chairperson and her son, our President and CEO collectively held approximately 72.8% of the outstanding voting power of our common stock. As a result, our Chairperson and the CEO will control most decisions involving us, including transactions involving a change of control, such as a sale or merger. In addition, certain covenants in our debt instruments require that our Chairperson and the CEO maintain a specified ownership and voting interest in us, and prohibit other parties’ voting interests from exceeding specified amounts. In addition, the TV One operating agreement provides for adverse consequences to Radio One in the event our


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Chairperson and CEO fail to maintain a specified ownership and voting interest in us. Our Chairperson and the CEO have agreed to vote their shares together in elections of members to the board of directors.
 
Our substantial level of debt could limit our ability to grow and compete.
 
As of March 3, 2006, we had indebtedness of approximately $952.5 million. In June 2005, we borrowed $437.5 million under our new credit facility to retire all outstanding obligations under our previous credit facilities. Draw downs of revolving loans under the credit facility are subject to compliance with provisions of our credit agreement, including, but not limited to, the financial covenants. Currently, we are permitted to borrow up to an additional approximately $103.4 million under our new credit facility. See “Management’s Discussion and Analysis — Liquidity and Capital Resources.” We may reborrow under our revolving credit facility as needed to fund our working capital needs, for general corporate purposes and to fund permitted acquisitions and investments. A portion of our indebtedness bears interest at variable rates. Our substantial level of indebtedness could adversely affect us for various reasons, including limiting our ability to:
 
  •  obtain additional financing for working capital, capital expenditures, acquisitions, debt payments or other corporate purposes;
 
  •  have sufficient funds available for operations, future business opportunities or other purposes;
 
  •  compete with competitors that have less debt than we do; and
 
  •  react to changing market conditions, changes in our industry and economic downturns.
 
The foregoing list is not exhaustive. There can be no assurance that we have correctly identified and appropriately assessed all factors affecting our business or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely impact our business. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on our business, financial condition, and results of operations.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.   PROPERTIES
 
The types of properties required to support each of our radio stations include offices, studios and transmitter/antenna sites. We typically lease our studio and office space with lease terms ranging from five to ten years in length. A station’s studios are generally housed with its offices in downtown or business districts. We generally consider our facilities to be suitable and of adequate size for our current and intended purposes. We lease a majority of our main transmitter/antenna sites and associated broadcast towers and, when negotiating a lease for such sites, we try to obtain a lengthy lease term with options to renew. In general, we do not anticipate difficulties in renewing facility or transmitter/antenna site leases, or in leasing additional space or sites, if required.
 
We own substantially all of our equipment, consisting principally of transmitting antennae, transmitters, studio equipment and general office equipment. The towers, antennae and other transmission equipment used by Radio One’s stations are generally in good condition, although opportunities to upgrade facilities are periodically reviewed.
 
The tangible personal property owned by Radio One and the real property owned or leased by Radio One are subject to security interests under our credit facility.
 
ITEM 3.   LEGAL PROCEEDINGS
 
In November 2001, Radio One and certain of its officers and directors were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of New York, now captioned, In re Radio One, Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-10160. Similar


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complaints were filed in the same court against hundreds of other public companies (Issuers) that conducted initial public offerings of their common stock in the late 1990s (“the IPO Lawsuits”). In the complaint filed against Radio One (as amended), the plaintiffs claimed that Radio One, certain of its officers and directors, and the underwriters of certain of its public offerings violated Section 11 of the Securities Act. The plaintiffs’ claim was based on allegations that Radio One’s registration statement and prospectus failed to disclose material facts regarding the compensation to be received by the underwriters, and the stock allocation practices of the underwriters. The complaint also contains a claim for violation of Section 10(b) of the Securities Exchange Act of 1934 based on allegations that this omission constituted a deceit on investors. The plaintiffs seek unspecified monetary damages and other relief.
 
In July 2002, Radio One joined in a global motion, filed by the Issuers, to dismiss the IPO Lawsuits. In October 2002, the court entered an order dismissing the Company’s named officers and directors from the IPO Lawsuits without prejudice, pursuant to an agreement tolling the statute of limitations with respect to Radio One’s officers and directors until September 30, 2003. In February 2003, the court issued a decision denying the motion to dismiss the Section 11 and Section 10(b) claims against Radio One and most of the Issuers.
 
In July 2003, a Special Litigation Committee of Radio One’s board of directors approved in principle a settlement proposal with the plaintiffs that is anticipated to include most of the Issuers. The proposed settlement would provide for the dismissal with prejudice of all claims against the participating Issuers and their officers and the assignment to plaintiffs of certain potential claims that the Issuers may have against their underwriters. The tentative settlement also provides that, in the event that plaintiffs ultimately recover less than a guaranteed sum from the underwriters, plaintiffs would be entitled to payment by each participating Issuer’s insurer of a pro rata share of any shortfall in the plaintiffs guaranteed recovery. In September 2003, in connection with the proposed settlement, Radio One’s named officers and directors extended the tolling agreement so that it would not expire prior to any settlement being finalized.
 
In June 2004, Radio One executed a final settlement agreement with the plaintiffs. In February 2005, the court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. In August 2005, the court reaffirmed class certification and preliminary approval of the modified settlement in a comprehensive order. A form of Notice was sent to members of the settlement classes beginning in November 2005. The court has set a Final Settlement Fairness Hearing on the settlement in April 2006. The settlement is still subject to statutory notice requirements and final judicial approval.
 
Radio One is involved from time to time in various routine legal and administrative proceedings and threatened legal and administrative proceedings incidental to the ordinary course of our business. Radio One believes the resolution of such matters will not have a material adverse effect on its business, financial condition or results of operations.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of security holders during the fourth quarter of 2005.


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PART II
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Price Range of Our Class A and Class D Common Stock
 
Our Class A common stock is traded on the Nasdaq Stock Market under the symbol “ROIA.” The following table presents, for the quarters indicated, the high and low sales prices per share of our Class A common stock as reported on the Nasdaq Stock Market.
 
                 
    High     Low  
 
2005
               
First Quarter
  $ 16.48     $ 13.04  
Second Quarter
    15.08       12.29  
Third Quarter
    14.59       12.46  
Fourth Quarter
    13.25       10.21  
2004
               
First Quarter
  $ 20.00     $ 17.55  
Second Quarter
    20.30       15.12  
Third Quarter
    16.56       14.07  
Fourth Quarter
    16.38       13.02  
 
Our Class D common stock is traded on the Nasdaq Stock Market under the symbol “ROIAK.” The following table presents, for the quarters indicated, the high and low sales prices per share of our Class D common stock as reported on the Nasdaq Stock Market.
 
                 
    High     Low  
 
2005
               
First Quarter
  $ 16.43     $ 13.06  
Second Quarter
    15.05       12.30  
Third Quarter
    14.59       12.46  
Fourth Quarter
    13.25       10.22  
2004
               
First Quarter
  $ 19.83     $ 17.55  
Second Quarter
    20.24       15.01  
Third Quarter
    16.50       14.08  
Fourth Quarter
    16.36       13.01  
 
The following table provides information on our repurchases of our Class A and Class D common stock during the three months ended December 31, 2005.
 
                                 
                      Maximum
 
                Total Number of
    Approximate Dollar
 
                Shares Purchased
    Value of Shares
 
    Total Number of
          as Part of Publicly
    that May Yet be
 
    Shares
    Average Price
    Announced Plans
    Purchased Under the
 
    Purchased(1)     Paid per Share     or Programs     Plans or Programs  
 
November 2005
    330,445 Class A     $ 10.78       330,445          
November 2005
    3,043,526 Class D     $ 10.80       3,043,526          
Total
    3,373,971                        3,373,971     $ 72,343,732  
 
 
(1) In May 2005, the Company’s board of directors authorized a stock repurchase program for up to $150.0 million of the Company’s Class A and Class D common stock over a period of 18 months, with the amount and timing of repurchases based on stock price, general economic and market conditions, certain restrictions contained in


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the Credit Agreement governing the Company’s credit facilities and subordinated debt and certain other factors. The repurchase program does not obligate the Company to repurchase any of its common stock and may be discontinued or suspended at any time.
 
Dividends
 
Since first selling our common stock publicly in May 1999, we have not declared any cash dividends on our common stock. We intend to retain future earnings for use in our business and do not anticipate declaring or paying any cash or stock dividends on shares of our common stock in the foreseeable future. In addition, any determination to declare and pay dividends will be made by our board of directors in light of our earnings, financial position, capital requirements, contractual restrictions contained in our credit facility and the indentures governing our senior subordinated notes, and such other factors as the board of directors deems relevant. See “Management’s Discussion and Analysis — Liquidity and Capital Resources” and Note 8 of our Consolidated Financial Statements — Long-Term Debt.
 
Number of Stockholders
 
Based upon a survey of record holders and a review of our stock transfer records, as of March 3, 2006, there were approximately 166 holders of Radio One’s Class A common stock, three holders of Radio One’s Class B common stock, three holders of Radio One’s Class C common stock, and approximately 111 holders of Radio One’s Class D common stock.
 
ITEM 6.   SELECTED FINANCIAL DATA
 
The following table contains selected historical consolidated financial data with respect to Radio One. The selected historical consolidated financial data have been derived from the audited consolidated financial statements of Radio One for each of the years in the five-year period ended December 31, 2005. The pro forma results are presented as if the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” had been adopted for all periods presented, and are unaudited. The selected historical consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of Radio One included elsewhere in this report.
 
                                         
    Year Ended December 31,(1)  
    2005     2004     2003     2002     2001  
    (In thousands, except share data)  
 
Statements of Income:
                                       
Net broadcast revenue
  $ 371,134     $ 319,761     $ 303,150     $ 295,851     $ 243,804  
Programming and technical expenses
    70,376       53,358       51,496       49,582       40,791  
Selling, general and administrative expenses
    116,969       91,517       92,157       94,884       79,672  
Corporate expenses
    24,286       16,658       14,334       13,765       10,065  
Depreciation and amortization
    16,590       16,934       18,078       17,640       129,723  
                                         
Operating income (loss)
    142,913       141,294       127,085       119,980       (16,447 )
Interest expense(2)
    63,011       39,611       41,438       59,143       63,358  
Equity in loss of affiliated company
    1,846       3,905       2,123              
Gain on sale of assets, net
                      133       4,224  
Other income, net
    1,345       2,541       2,721       1,213       991  
Income tax provision (benefit)
    27,003       38,717       32,462       25,282       (24,550 )
Minority interest in income of subsidiary
    1,868                          
                                         
Income (loss) before extraordinary item and cumulative effect of accounting change
    50,530       61,602       53,783       36,901       (50,040 )
Extraordinary loss, net of tax
                            5,207  


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    Year Ended December 31,(1)  
    2005     2004     2003     2002     2001  
    (In thousands, except share data)  
 
Cumulative effect of a change in accounting principle, net of tax                       29,847        
                                         
Net income (loss)
    50,530       61,602       53,783       7,054       (55,247 )
Preferred stock dividend
    2,761       20,140       20,140       20,140       20,140  
                                         
Net income (loss) applicable to common stockholders
  $ 47,769     $ 41,462     $ 33,643     $ (13,086 )   $ (75,387 )
                                         
Net income (loss) per common share — basic:                                        
Income (loss) before extraordinary item and cumulative effect of a change in accounting principle(3)
  $ 0.46     $ 0.40     $ 0.32     $ 0.16     $ (0.78 )
Extraordinary item
                            (0.05 )
Cumulative effect of a change in accounting principle
                      (0.29 )      
                                         
Net income (loss) applicable to common stockholders per share
  $ 0.46     $ 0.40     $ 0.32     $ (0.13 )   $ (0.83 )
                                         
Net income (loss) per common share — diluted:                                        
Income (loss) before extraordinary item and cumulative effect of a change in accounting principle(3)
  $ 0.46     $ 0.39     $ 0.32     $ 0.16     $ (0.78 )
Extraordinary item
                            (0.05 )
Cumulative effect of a change in accounting principle
                      (0.29 )      
                                         
Net income (loss) applicable to common stockholders per share
  $ 0.46     $ 0.39     $ 0.32     $ (0.13 )   $ (0.83 )
                                         
Pro Forma Amounts:(4)                                        
Net income   $ 50,530     $ 61,602     $ 53,783     $ 36,901     $ 21,302  
Net income applicable to common stockholders     47,769       41,462       33,643       16,761       1,162  
Net income per share applicable to common stockholders — basic     0.46       0.40       0.32       0.16       0.01  
Net income per share applicable to common stockholders — diluted     0.46       0.39       0.32       0.16       0.01  
Statement of Cash Flows:                                        
Cash flows from (used in) —                                         
Operating activities
  $ 101,631     $ 123,719     $ 109,720     $ 70,821     $ 59,783  
Investing activities
    (28,305 )     (155,498 )     (44,357 )     (105,277 )     (146,928 )
Financing activities
    (64,636 )     4,160       (72,768 )     47,756       98,381  
Other Data:                                        
Cash interest expense(5)   $ 58,840     $ 37,909     $ 39,743     $ 57,089     $ 61,371  
Capital expenditures     15,737       12,979       11,382       10,971       9,283  

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    Year Ended December 31,(1)  
    2005     2004     2003     2002     2001  
    (In thousands, except share data)  
 
Balance Sheet Data:                                        
Cash and cash equivalents   $ 19,081     $ 10,391     $ 38,010     $ 45,415     $ 32,115  
Short-term investments           10,000       40,700       40,700        
Intangible assets, net     2,013,480       1,931,045       1,782,258       1,776,626       1,776,201  
Total assets     2,201,380       2,111,141       2,001,461       1,984,360       1,923,915  
Total debt (including current portion)     952,520       620,028       597,535       650,001       780,022  
Total liabilities     1,777,983       782,696       723,042       740,337       870,968  
Total stockholders’ equity     1,020,541       1,328,445       1,278,419       1,244,023       1,052,947  
 
(1) Year-to-year comparisons are significantly affected by Radio One’s acquisitions during the periods covered.
 
(2) Interest expense includes non-cash interest, such as the accretion of principal, the amortization of discounts on debt and the amortization of deferred financing costs.
 
(3) Income (loss) before extraordinary item and cumulative effect of a change in accounting principle is the reported amount, less dividends paid on Radio One’s preferred securities.
 
(4) The pro forma amounts summarize the effect of SFAS No. 142 as of the beginning of the periods presented. For 2001, the net loss is adjusted to eliminate the amortization expense recognized in those periods related to goodwill and radio broadcasting licenses, as these indefinite-lived assets are no longer amortized under SFAS No. 142. The adjusted amounts do not include any adjustments for potential impairment of Radio One’s indefinite-lived assets that could have resulted if Radio One had adopted SFAS No. 142 as of the beginning of the years presented and performed the required impairment test under this standard.
 
(5) Cash interest expense is calculated as interest expense less non-cash interest, including the accretion of principal, the amortization of discounts on debt and the amortization of deferred financing costs for the indicated period.
 
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following information should be read in conjunction with “Selected Financial Data” and the Consolidated Financial Statements and Notes thereto included elsewhere in this report.
 
Overview
 
For 2005, our net broadcast revenue continued to outpace the growth of the radio industry. However, overall industry growth remains stagnant.
 
We remain concerned about the state of the radio industry. As a result, we will continue to be prudent with respect to our radio acquisition strategy, and will continue to monitor our cost growth very closely.
 
Competition from digital audio players, the Internet and satellite radio, to name a few, is one of the primary reasons the radio industry has seen such slow growth over the past few years. Advertisers have shifted their advertising budgets away from traditional media such as newspapers, broadcast television and radio to new media forms. Additionally, Internet companies have evolved from being large sources of advertising revenue for radio companies in the late-1990s, to being significant competitors for advertising dollars. All of these dynamics present significant challenges for companies such as ours as we look to maintain our listener levels and find new sources of revenue.
 
We remain hopeful that the radio industry will see some signs of recovery in 2006. Whether or not such recovery occurs, we intend to build a company that will provide advertisers and creators of content a multifaceted way to reach African-American consumers.

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Results of Operations
 
Revenue
 
We primarily derive revenue from the sale of advertising time and program sponsorships to local and national advertisers. Advertising revenue is affected primarily by the advertising rates our radio stations are able to charge as well as the overall demand for radio advertising time in a market. These rates are largely based upon a radio station’s audience share in the demographic groups targeted by advertisers, the number of radio stations in the related market, and the supply of and demand for radio advertising time. Advertising rates are generally highest during morning and afternoon commuting hours.
 
In February 2005, we acquired 51% of the common stock of Reach Media, Inc. (“Reach Media”). Reach Media primarily derives revenue from the sale of advertising time on the affiliate stations, which broadcast the Tom Joyner Morning Show. The affiliate radio stations provide Reach Media with advertising inventory on their stations, which is then sold to the marketplace through a sales representative agreement with ABC Radio Networks. ABC Radio Networks guarantees Reach Media an agreed upon amount of annual revenue, with the potential to earn additional amounts if certain revenue goals are met. The agreement with ABC Radio Networks runs through 2009. Additional revenue is generated by Reach Media from special events, sponsorships, its internet business and other related activities.
 
During the year ended December 31, 2005, approximately 63% of our net revenue was generated from local advertising and approximately 32% was generated from national advertising, including network advertising. In comparison, during the year ended December 31, 2004, approximately 70% of our net revenue was generated from local advertising and approximately 27% was generated from national advertising, including network advertising. The change in the revenue mix is primarily due to the consolidation of the March through December 2005 operating results of Reach Media. The balance of revenue was generated primarily from tower rental income, ticket sales and revenue related to our sponsored events, management fees and other revenue.
 
In the broadcasting industry, radio stations often utilize trade or barter agreements to reduce cash expenses by exchanging advertising time for goods or services. In order to maximize cash revenue for our spot inventory, we monitor and limit the use of trade agreements.
 
Expenses
 
Our significant broadcast expenses are (i) employee salaries and commissions, (ii) programming expenses, (iii) advertising and promotion expenses, (iv) rental of premises for office facilities and studios, (v) rental of transmission tower space and (vi) music license royalty fees. We strive to control these expenses by centralizing certain functions such as finance, accounting, legal, human resources, management information systems, and the overall programming management function. We also use our multiple stations, market presence and purchasing power to negotiate favorable rates with certain vendors and national representative selling agencies.
 
We generally incur advertising and promotional expenses to increase our audiences. However, because Arbitron reports ratings quarterly, any changed ratings and therefore the effect on advertising revenue, tends to lag behind the incurrence of advertising and promotional expenditures.
 
Measurement of Performance
 
We monitor and evaluate the growth and operational performance of our business using net income and the following key metrics:
 
(a) Net broadcast revenue:  The performance of an individual radio station or group of radio stations in a particular market is customarily measured by its ability to generate net broadcast revenue. Net broadcast revenue consists of gross broadcast revenue net of local and national agency and outside sales representative commissions, consistent with industry practice. Net broadcast revenue is recognized in the period in which advertisements are broadcast. Net broadcast revenue also includes advertising aired in exchange for goods and services, which is recorded at fair value.


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(b) Station operating income:  Net income before depreciation and amortization, income taxes, interest income, interest expense, equity in loss of affiliated company, minority interest in income of subsidiary, other income, corporate expenses, excluding non-cash compensation and non-cash compensation expenses is commonly referred to in our industry as station operating income. Station operating income is not a measure of financial performance under generally accepted accounting principles. Nevertheless, we believe station operating income is often a useful measure of a broadcasting company’s operating performance and is a significant basis used by our management to measure the operating performance of our stations within the various markets because station operating income provides helpful information about our results of operations apart from expenses associated with our physical plant, income taxes provision, investments, debt financings, overhead and non-cash compensation. Station operating income is frequently used as one of the bases for comparing businesses in our industry, although our measure of station operating income may not be comparable to similarly titled measures of other companies. Station operating income does not purport to represent operating loss or cash flow from operating activities, as those terms are defined under generally accepted accounting principles, and should not be considered as an alternative to those measurements as an indicator of our performance.
 
(c) Station operating income margin:  Station operating income margin represents station operating income as a percentage of net broadcast revenue. Station operating income margin is not a measure of financial performance under generally accepted accounting principles. Nevertheless, we believe that station operating income margin is a useful measure of our performance because it provides helpful information about our profitability as a percentage of our net broadcast revenue.
 
(d) EBITDA:  Net income before interest income, interest expense, income taxes, depreciation and amortization is commonly referred to in our industry as EBITDA. EBITDA is not a measure of financial performance under generally accepted accounting principles. We believe EBITDA is often a useful measure of a company’s operating performance and is a significant basis used by our management to measure the operating performance of our business because EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our acquisitions and debt financings, and our provision for tax expense. Accordingly, we believe that EBITDA provides helpful information about the operating performance of our business, apart from the expenses associated with our physical plant or capital structure. EBITDA is frequently used as one of the bases for comparing businesses in our industry, although our measure of EBITDA may not be comparable to similarly titled measures of other companies. EBITDA does not purport to represent operating loss or cash flow from operating activities, as those terms are defined under generally accepted accounting principles, and should not be considered as an alternative to those measurements as an indicator of our performance.


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Summary of Performance
 
The table below provides a summary of our performance based on the metrics described above:
 
                         
    Year Ended December 31,  
    2005     2004     2003  
    (In thousands, except margin data)  
 
Net broadcast revenue
  $ 371,134     $ 319,761     $ 303,150  
Station operating income(1)
    183,848       175,690       159,497  
Station operating income margin
    50 %     55 %     53 %
EBITDA(2)
    155,706       154,340       143,173  
Net income
    50,530       61,602       53,783  
 
 
(1) The reconciliation of net income to station operating income is as follows:
 
                         
    Year Ended December 31,  
    2005     2004     2003  
    (In thousands)  
 
Net income as reported
  $ 50,530     $ 61,602     $ 53,783  
Add back non-station operating income items included in net income:
                       
Interest income
    (1,428 )     (2,524 )     (2,588 )
Interest expense
    63,011       39,611       41,438  
Provision for income taxes
    27,003       38,717       32,462  
Corporate expenses, excluding non-cash compensation
    22,587       15,049       12,589  
Non-cash compensation
    1,758       2,413       1,745  
Equity in loss of affiliated company
    1,846       3,905       2,123  
Other expense (income), net
    83       (17 )     (133 )
Minority interest in income of subsidiary
    1,868              
Depreciation and amortization
    16,590       16,934       18,078  
                         
Station operating income
  $ 183,848     $ 175,690     $ 159,497  
                         
 
(2) The reconciliation of net income to EBITDA is as follows:
 
                         
    Year Ended December 31,  
    2005     2004     2003  
    (In thousands)  
 
Net income as reported
  $ 50,530     $ 61,602     $ 53,783  
Add back non-EBITDA items included in net income:
                       
Interest income
    (1,428 )     (2,524 )     (2,588 )
Interest expense
    63,011       39,611       41,438  
Provision for income taxes
    27,003       38,717       32,462  
Depreciation and amortization
    16,590       16,934       18,078  
                         
EBITDA
  $ 155,706     $ 154,340     $ 143,173  
                         


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RADIO ONE, INC. AND SUBSIDIARIES
 
RESULTS OF OPERATIONS
 
The following table summarizes our historical consolidated results of operations:
 
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 (In thousands)
 
                                 
    Year Ended December 31,              
    2005     2004     Increase/(Decrease)  
 
Statements of Income:
                               
Net broadcast revenue
  $ 371,134     $ 319,761     $ 51,373       16.1 %
Operating expenses:
                               
Programming and technical, excluding non-cash compensation
    70,326       52,554       17,772       33.8  
Selling, general and administrative, excluding non-cash compensation
    116,960       91,517       25,443       27.8  
Corporate expenses, excluding non-cash compensation
    22,587       15,049       7,538       50.1  
Non-cash compensation
    1,758       2,413       (655 )     (27.1 )
Depreciation and amortization
    16,590       16,934       (344 )     (2.0 )
                                 
Total operating expenses
    228,221       178,467       49,754       27.9  
                                 
Operating income
    142,913       141,294       1,619       1.1  
Interest income
    1,428       2,524       (1,096 )     (43.4 )
Interest expense
    63,011       39,611       23,400       59.1  
Other (expense) income, net
    (83 )     17       (100 )     (588.2 )
Equity in loss of affiliated company
    1,846       3,905       (2,059 )     (52.7 )
                                 
Income before provision for income taxes and minority interest in income of subsidiary
    79,401       100,319       (20,918 )     (20.9 )
Income tax provision
    27,003       38,717       (11,714 )     (30.3 )
Minority interest in income of subsidiary
    1,868             1,868        
                                 
Net income
    50,530       61,602       (11,072 )     (18.0 )
Preferred stock dividend
    2,761       20,140       (17,379 )     (86.3 )
                                 
Net income applicable to common stockholders
  $ 47,769     $ 41,462     $ 6,307       15.2 %
                                 
 
Net broadcast revenue
 
                         
Year Ended December 31,              
2005   2004     Increase/(Decrease)  
 
$371,134
  $ 319,761     $ 51,373       16.1 %
 
In 2005, we recognized approximately $371.1 million in net broadcast revenue compared to approximately $319.8 million during 2004. These amounts are net of agency and outside sales representative commissions, which were approximately $48.1 million during 2005, compared to approximately $44.0 million during 2004. The increase in net broadcast revenue was due primarily to our consolidation of the March through December 2005 operating results of Reach Media and, to a lesser degree, increased demand and pricing for advertising on some of our stations that resulted from improvement in the general economy, increased listenership and ratings, revenue from our new Internet initiative, and four new stations launched in late 2004 and 2005. Excluding the March through December 2005 operating results of Reach Media, our net broadcast revenue increased 5.3% for the year ended December 31, 2005, compared to the same period in 2004. The revenue growth in most of our markets, including Houston, Atlanta, Charlotte, Dallas, Columbus, and Washington, DC, was partially offset by revenue declines in


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Los Angeles due to soft ratings, in Baltimore due to general market conditions, and in Philadelphia due to a station format change.
 
Operating expenses
 
Programming and technical, excluding non-cash compensation
 
                         
Year Ended December 31,              
2005   2004     Increase/(Decrease)  
 
$70,326
  $ 52,554     $ 17,772       33.8 %
 
Programming and technical expenses, excluding non-cash compensation, include expenses associated with on-air talent and the management and maintenance of the systems, tower facilities, and studios used in the creation, distribution and broadcast of programming on our radio stations. Programming and technical expenses, excluding non-cash compensation, also include expenses associated with our research activities and music royalties. The increase in programming and technical expenses, excluding non-cash compensation during the year ended December 31, 2005 resulted primarily from our consolidation of the March through December 2005 operating results of Reach Media, and to a lesser extent, an increase in programming expenses relating to our on-air talent, tower rentals, incremental costs relating to expanding our presence on the Internet and four new stations launched in late 2004 and 2005. The increase is also driven by a 2004 non-recurring reduction of approximately $1.1 million in music royalties expense associated with the industry’s settlement with the American Society of Composers, Authors and Publishers. Excluding the March through December 2005 operating results of Reach Media, programming and technical expenses, excluding non-cash compensation increased 5.4% for the year ended December 31, 2005, compared to the same period in 2004.
 
Selling, general and administrative, excluding non-cash compensation
 
                         
Year Ended December 31,              
2005   2004     Increase/(Decrease)  
 
$116,960
  $ 91,517     $ 25,443       27.8 %
 
Selling, general and administrative expenses, excluding non-cash compensation, include expenses associated with our sales departments, offices, facilities and headcount (outside of our corporate headquarters), marketing expenses, back office expenses, and the advertising traffic (scheduling and insertion) functions. The increase in selling, general and administrative expenses, excluding non-cash compensation during the year ended December 31, 2005, resulted primarily from a one-time non-cash charge of approximately $5.3 million associated with terminating our national sales representation agreements with Interep National Radio Sales, Inc. (“Interep”) and our consolidation of the March through December 2005 operating results of Reach Media. The increase in national sales representation expenses also resulted from a 2004 one-time reimbursement of approximately $3.4 million to us from a vendor pursuant to a performance-based agreement. Higher selling, general and administrative expenses also resulted from higher compensation (mainly commissions and bonuses) and other selling expenses driven by increased revenue, marketing and promotional activity, higher event costs, and sales expenses associated with four new stations launched in late 2004 and 2005. Excluding both the March through December 2005 operating results of Reach Media, the approximately $5.3 million one-time charge associated with terminating the Interep national sales representation agreements, and the approximately $3.4 million one-time vendor payment, selling, general and administrative expenses, excluding non-cash compensation, increased 8.9% for the year ended December 31, 2005, compared to the same period in 2004.
 
Corporate expenses, excluding non-cash compensation
 
                         
Year Ended December 31,              
2005   2004     Increase/(Decrease)  
 
$22,587
  $ 15,049     $ 7,538       50.1 %
 
Corporate expenses, excluding non-cash compensation, consist of expenses associated with our corporate headquarters and facilities, including headcount. The increase in corporate expenses, excluding non-cash compensation, during the year ended December 31, 2005, resulted primarily from our consolidation of the March


35


 

through December 2005 operating results of Reach Media, increased compensation, increased contract labor and additional professional fees. Excluding the March through December 2005 operating results of Reach Media, corporate expenses, excluding non-cash compensation, increased 16.1% for the year ended December 31, 2005, compared to the same period in 2004.
 
Depreciation and amortization
 
                         
Year Ended December 31,              
2005   2004     Increase/(Decrease)  
 
$16,590
  $ 16,934     $ (344 )     (2.0 )%
 
The decrease in depreciation and amortization expense for the year ended December 31, 2005 was due primarily to the completion of amortization of some of our trade names in late 2004, and the completion of amortization of a software system in 2005, both of which were partially offset by depreciation for our additional capital expenditures made during 2005. Excluding the March through December 2005 operating results of Reach Media, depreciation and amortization expense decreased 24.7% for the year ended December 31, 2005, compared to the same period in 2004.
 
Interest income
 
                         
Year Ended December 31,              
2005   2004     Increase/(Decrease)  
 
$1,428
  $ 2,524     $ (1,096 )     (43.4 )%
 
The decrease in interest income for the year ended December 31, 2005 resulted primarily from lower average balances of cash, cash equivalents and short-term investments, and the pay-off of certain officer loans during the year ended December 31, 2005. The decrease was partially offset by $285,000 in interest income associated with an income tax refund receivable.
 
Interest expense
 
                         
Year Ended December 31,              
2005   2004     Increase/(Decrease)  
 
$63,011
  $ 39,611     $ 23,400       59.1 %
 
The increase in interest expense during the year ended December 31, 2005 resulted from interest obligations associated with additional borrowings to partially fund the February 2005 redemption of our 61/2% Convertible Preferred Remarketable Term Income Deferrable Equity Securities (“HIGH TIDES”) in an amount of $309.8 million. Additional interest obligations were also incurred from borrowings to partially fund the February 2005 acquisition of 51% of the common stock of Reach Media. Also, in June 2005, we entered into an $800.0 million credit agreement and simultaneously borrowed $437.5 million to retire our previous credit facilities.
 
Equity in loss of affiliated company
 
                         
Year Ended December 31,              
2005   2004     Increase/(Decrease)  
 
$1,846
  $ 3,905     $ (2,059 )     (52.7 )%
 
The decrease in equity in loss of affiliated company is related to a modification in the methodology for estimating our equity in the net loss of TV One during the year ended December 31, 2004, coupled with improved operating results of TV One during the year ended December 31, 2005.
 
Provision for income taxes
 
                         
Year Ended December 31,              
2005   2004     Increase/(Decrease)  
 
$27,003
  $ 38,717     $ (11,714 )     (30.3 )%


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The decrease in the provision for income taxes for the year ended December 31, 2005 was primarily due to a decrease in pretax income for 2005 compared to 2004, and a favorable change to Ohio state tax laws enacted on June 30, 2005. The decrease was partially offset by our consolidation of the March through December 2005 operating results of Reach Media. Excluding the effect of the Ohio tax law change, our effective tax rate as of December 31, 2005 was 40.9%, compared to 38.9% as of December 31, 2004. The effective tax rate as of December 31, 2005 does not reflect the impact of Statement of Financial Accounting Standard (“SFAS”) No. 123®, “Share-Based Payment,” as we did not adopt this pronouncement until January 1, 2006.
 
Minority interest in income of subsidiary
 
                         
Year Ended December 31,              
2005   2004     Increase/(Decrease)  
 
$1,868
  $     $ 1,868       %
 
The minority interest in income of subsidiary of approximately $1.9 million for the year ended December 31, 2005 reflects the 49% minority stockholders’ interest in Reach Media’s net income for March through December of 2005. We acquired 51% of the common stock of Reach Media in February 2005.
 
Net income
 
                         
Year Ended December 31,              
2005   2004     Increase/(Decrease)  
 
$50,530
  $ 61,602     $ (11,072 )     (18.0 )%
 
As described above, the decrease in net income for the year ended December 31, 2005 is primarily due to approximately $1.6 million in increased operating income, a decrease in the equity in loss of affiliated company of approximately $2.1 million, a decrease in the provision for income taxes of approximately $11.7 million, all of which are offset by an increase in net interest expense of approximately $24.5 million, and an increase in minority interest in income of subsidiary of approximately $1.9 million
 
Net income applicable to common stockholders
 
                         
Year Ended December 31,              
2005   2004     Increase/(Decrease)  
 
$47,769
  $ 41,462     $ 6,307       15.2 %
 
Net income applicable to common stockholders is net income less dividends on our HIGH TIDES. The increase in net income applicable to common stockholders is attributable to a decrease of approximately $11.1 million in net income, and a decrease in dividends of approximately $17.4 million. Dividends on our HIGH TIDES were approximately $2.8 million in 2005 and approximately $20.1 million in 2004. In February 2005, we redeemed all our outstanding HIGH TIDES using proceeds from the sale of our $200.0 million 63/8% senior subordinated notes, borrowings of $110.0 million under our revolving credit facility, and available cash.
 
Other Data
 
Station operating income
 
Station operating income increased to approximately $183.8 million for the year ended December 31, 2005, compared to approximately $175.7 million for the year ended December 31, 2004, an increase of approximately $8.1 million, or 4.6%. This increase was primarily due to the consolidation of the March through December 2005 operating results of Reach Media, and increased net broadcast revenue in Radio One markets, which more than offset higher station operating expenses, including the one-time non-cash charge of approximately $5.3 million for the termination of the Interep national sales representation agreements. A reconciliation of net income to station operating income is provided on page 33.


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Station operating income margin
 
Station operating income margin decreased to 49.5% for the year ended December 31, 2005 from 54.9% for the year ended December 31, 2004. This decrease was primarily attributable to an increase in station operating expenses relative to the increase in net broadcast revenue described above. Contributing to the increased station operating expenses were the 2005 one-time non-cash charge of approximately $5.3 million for the termination of the Interep national sales representation agreements, and the 2004 one-time vendor reimbursement to us of approximately $3.4 million pursuant to a performance-based agreement. Our station operating income was approximately $183.8 million and $175.7 million for the years ended December 31, 2005 and 2004, respectively, while our net broadcast revenue was approximately $371.1 million and $319.8 million for the years ended December 31, 2005 and 2004, respectively.
 
EBITDA
 
EBITDA was approximately $155.7 million for the year ended December 31, 2005 compared to approximately $154.3 million for the year ended December 31, 2004, an increase of approximately $1.4 million or 0.9%. A reconciliation of net income to EBITDA is provided on page 33.
 
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 (In thousands)
 
                                 
    Year Ended December 31,              
    2004     2003     Increase/(Decrease)  
 
Statements of Income:
                               
Net broadcast revenue
  $ 319,761     $ 303,150     $ 16,611       5.5 %
Operating expenses:
                               
Programming and technical, excluding non-cash compensation
    52,554       51,496       1,058       2.1  
Selling, general and administrative
    91,517       92,157       (640 )     (0.7 )
Corporate expenses, excluding non-cash compensation
    15,049       12,589       2,460       19.5  
Non-cash compensation
    2,413       1,745       668       38.3  
Depreciation and amortization
    16,934       18,078       (1,144 )     (6.3 )
                                 
Total operating expenses
    178,467       176,065       2,402       1.4  
                                 
Operating income
    141,294       127,085       14,209       11.2  
Interest income
    2,524       2,588       (64 )     (2.5 )
Interest expense
    39,611       41,438       (1,827 )     (4.4 )
Other income, net
    17       133       (116 )     (87.2 )
Equity in loss of affiliated company
    3,905       2,123       1,782       83.9  
                                 
Income before provision for income taxes
    100,319       86,245       14,074       16.3  
Income tax provision
    38,717       32,462       6,255       19.3  
                                 
Net income
    61,602       53,783       7,819       14.5  
Preferred stock dividend
    20,140       20,140              
                                 
Net income applicable to common stockholders
  $ 41,462     $ 33,643     $ 7,819       23.2 %
                                 
 
Net broadcast revenue
 
                         
Year Ended December 31,              
2004   2003     Increase/(Decrease)  
 
$319,761
  $ 303,150     $ 16,611       5.5 %
 
In 2004, we recognized approximately $319.8 million in net broadcast revenue compared to approximately $303.2 million during 2003. These amounts are net of agency commissions, which were approximately $44.0 million during 2004, compared to approximately $41.5 million during 2003. The increase in net broadcast revenue was due primarily to increased demand for advertising on our stations that resulted from our increased listenership and


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ratings. The revenue growth in several of our markets, including Atlanta, Baltimore, Cleveland, Washington, DC, Dallas, Dayton and Raleigh was partially offset by revenue declines in some of our other markets, including Los Angeles, Louisville, Philadelphia and Richmond, due to soft ratings for some of our stations and general market conditions.
 
Operating expenses
 
Programming and technical, excluding non-cash compensation
 
                         
Year Ended December 31,              
2004   2003     Increase/(Decrease)  
 
$52,554
  $ 51,496     $ 1,058       2.1 %
 
Programming and technical expenses, excluding non-cash compensation, include expenses associated with on-air talent and the management and maintenance of the systems, tower facilities, and studios used in the creation, distribution and broadcast of our programming on our radio stations. Programming and technical expenses, excluding non-cash compensation, also include expenses associated with our research activities and music royalties. The increase in programming and technical expenses, excluding non-cash compensation in 2004 resulted primarily from an increase in programming expenses relating to our on-air talent, partially offset by a non-recurring reduction of approximately $1.1 million in music royalties expense associated with the radio industry’s settlement with the American Society of Composers, Authors and Publishers during 2004.
 
Selling, general and administrative
 
                         
Year Ended December 31,              
2004   2003     Increase/(Decrease)  
 
$91,517
  $ 92,157     $ (640 )     (0.7 )%
 
Selling, general and administrative expenses include expenses associated with our sales departments, offices, facilities and headcount (outside of our corporate headquarters), marketing expenses, back office expenses, and the advertising traffic (scheduling and insertion) functions. The decrease in selling, general and administrative expenses between periods resulted primarily from a one-time reimbursement of approximately $3.4 million to us from a vendor pursuant to certain requirements of a performance-based agreement. Excluding the effect of this reimbursement, selling, general and administrative expenses increased by approximately $2.8 million during 2004. This increase resulted primarily from increased compensation during 2004.
 
Corporate expenses, excluding non-cash compensation
 
                         
Year Ended December 31,              
2004   2003     Increase/(Decrease)  
 
$15,049
  $ 12,589     $ 2,460       19.5 %
 
Corporate expenses, excluding non-cash compensation consist of expenses associated with maintaining our corporate headquarters and facilities, including headcount. The increase in corporate expenses, excluding non-cash compensation resulted primarily from increased compensation, additional professional fees and other expenses incurred to ensure compliance with new regulatory requirements.
 
Non-cash compensation
 
                         
Year Ended December 31,              
2004   2003     Increase/(Decrease)  
 
$2,413
  $ 1,745     $ 668       38.3 %
 
The increase in non-cash compensation expense during 2004 resulted primarily from expenses associated with the grant of restricted stock to on-air talent in 2004.


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Depreciation and amortization
 
                         
Year Ended December 31,              
2004   2003     Increase/(Decrease)  
 
$16,934
  $ 18,078     $ (1,144 )     (6.3 )%
 
The decrease in depreciation and amortization expense in 2004 was due primarily to the completion of amortization relating to some of our trade names, partially offset by depreciation for our additional capital expenditures during 2004.
 
Interest expense
 
                         
Year Ended December 31,              
2004   2003     Increase/(Decrease)  
 
$39,611
  $ 41,438     $ (1,827 )     (4.4 )%
 
The decrease in interest expense resulted from lower average debt levels arising from principal payments on our outstanding debt balance since 2003. Drawdowns totaling $75.0 million on our revolving facility during 2004 did not significantly affect our interest expense for the year, as these drawdowns occurred late in the year.
 
Equity in loss of affiliated company
 
                         
Year Ended December 31,              
2004   2003     Increase/(Decrease)  
 
$3,905
  $ 2,123     $ 1,782       83.9 %
 
In July 2003, we entered into a joint venture agreement with an affiliate of Comcast Corporation and certain other investors to form TV One for the purpose of distributing a new cable television programming service. See “Management’s Discussion and Analysis — Liquidity and Capital Resources” section below for further discussion. During 2004, we modified our methodology for estimating our equity in the net loss of TV One. As a result of this modification, we recognized a net loss of approximately $3.9 million in 2004, compared to a net loss of approximately $2.1 million in 2003 for our share of the equity in loss of affiliated company.
 
Net income
 
                         
Year Ended December 31,              
2004   2003     Increase/(Decrease)  
 
$61,602
  $ 53,783     $ 7,819       14.5 %
 
Net income increased to approximately $61.6 million for the year ended December 31, 2004 compared to approximately $53.8 million for the year ended December 31, 2003, an increase of approximately $7.8 million. This increase resulted primarily from an increase of approximately $14.2 million in operating income, a decrease of approximately $1.8 million in interest expense during 2004, offset by an increase of approximately $6.3 million in the provision for income taxes during 2004, and an increase of approximately $1.8 million in the equity in loss of affiliated company.
 
Net income applicable to common stockholders
 
                         
Year Ended December 31,              
2004   2003     Increase/(Decrease)  
 
$41,462
  $ 33,643     $ 7,819       23.2 %
 
Net income applicable to common stockholders is net income less dividends on our HIGH TIDES. The increase in net income applicable to common stockholders was directly attributable to the increase in the net income during 2004. Dividends on our HIGH TIDES remained unchanged at approximately $20.1 million for 2004 and 2003. In February 2005, we redeemed all outstanding HIGH TIDES using proceeds from our sale of $200.0 million 63/8% senior subordinated notes, borrowings of $110.0 million under our revolving credit facility, and available cash.


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Other Data
 
Station operating income
 
Station operating income increased to approximately $175.7 million for the year ended December 31, 2004 compared to approximately $159.5 million for the year ended December 31, 2003, an increase of approximately $16.2 million or 10%. This increase was primarily attributable to an increase in net broadcast revenue, partially offset by higher operating expenses as described above. A reconciliation of operating income to station operating income is provided on page 33.
 
Station operating income margin
 
Our station operating income margin increased to 55% for the year ended December 31, 2004 from 53% for the year ended December 31, 2003. This increase was primarily attributable to an increase in station operating income relative to the increase in net broadcast revenue described above. Contributing to the increase in station operating income during 2004 was the reduction in expenses resulting from a one-time reimbursement of approximately $3.4 million to us from a vendor pursuant to certain requirements of a performance-based agreement.
 
EBITDA
 
EBITDA was approximately $154.3 million for the year ended December 31, 2004 compared to approximately $143.2 million for the year ended December 31, 2003, an increase of approximately $11.1 million or 8%. This increase was primarily attributable to an increase in net broadcast revenue, partially offset by higher operating expenses as described above. A reconciliation of net income to EBITDA is provided on page 33.
 
Liquidity and Capital Resources
 
Our primary source of liquidity is cash provided by operations and, to the extent necessary, commitments available under our credit facilities and other debt or equity financings.
 
In June 2005, we entered into a new credit agreement (the “Credit Agreement”) with a syndicate of banks. The term of the Credit Agreement is seven years and the total amount available under the Credit Agreement is $800.0 million, consisting of a $500.0 million revolving facility and a $300.0 million term loan facility. Borrowings under the credit facilities are subject to compliance with provisions of the Credit Agreement, including but not limited to, financial covenants. We may use proceeds from the credit facilities for working capital, capital expenditures made in the ordinary course of business, our common stock repurchase program, direct and indirect investments permitted under the Credit Agreement, and other lawful corporate purposes. The Credit Agreement contains affirmative and negative covenants that we must comply with, including (a) maintaining a ratio of consolidated adjusted EBITDA to consolidated interest expense of no less than 2.50 to 1.00, (b) maintaining a ratio of consolidated debt for borrowed money to consolidated adjusted EBITDA of no greater than 6.50 to 1.00 from June 13, 2005 to September 30, 2006, and no greater than 6.00 to 1.00 beginning October 1, 2006 and thereafter, (c) limitations on liens, (d) limitations on the sale of assets, (e) limitations on the payment of dividends, and (f) limitations on mergers, as well as other customary covenants. Simultaneous with entering into the Credit Agreement, we borrowed $437.5 million under the Credit Agreement to retire all outstanding obligations under our previous credit agreement, dated as of July 17, 2000. The previous credit agreement provided for borrowings up to $600.0 million, and consisted of a $350.0 million term facility and a $250.0 million revolving facility.
 
As of December 31, 2005, we had approximately $347.0 million available for borrowing. Taking into consideration the covenants under the Credit Agreement, approximately $103.4 million of that amount is available to be drawn down. Both the term loan facility and the revolving facility under the Credit Agreement bear interest, at our option, at a rate equal to either London Interbank Offered Rate (“LIBOR”) plus a spread that ranges from 0.63% to 1.50%, or the prime rate plus a spread of up to 0.50%, depending on our leverage ratio. We also pay a commitment fee that varies depending on certain financial covenants and the amount of unused commitment, up to a maximum of 0.375% per annum on the average balance of the revolving facility. We believe that we are in compliance with all covenants under the Credit Agreement.


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In connection with entering into the Credit Agreement in June 2005, we (a) recorded approximately $4.2 million of deferred financing costs to be amortized over the life of the Credit Agreement, and (b) wrote-off approximately $2.1 million of the previous credit facilities’ unamortized deferred financing costs as a loss on extinguishment of debt.
 
Under our Credit Agreement, we may be required from time to time to protect ourselves from interest rate fluctuations using interest rate hedge agreements. As a result, we have entered into various fixed rate swap agreements designed to mitigate our exposure to higher floating interest rates. These swap agreements require that we pay a fixed rate of interest on the notional amount to a bank and that the bank pays to us a variable rate equal to three-month LIBOR. As of December 31, 2005, we have four swap agreements in place for a total notional amount of $100.0 million, and the periods remaining on these swap agreements range in duration from 18 to 78 months.
 
Our credit exposure under these swap agreements is limited to the cost of replacing an agreement in the event of non-performance by our counter-party; however, we do not anticipate non-performance. All of the swap agreements are tied to the three-month LIBOR interest rate, which may fluctuate significantly on a daily basis. The valuation of each of these swap agreements is affected by the change in the three-month LIBOR rates and the remaining term of the agreement. Any increase in the three-month LIBOR rate results in a more favorable valuation, while a decrease in the three-month LIBOR rate results in a less favorable valuation.
 
The following table summarizes the interest rates in effect with respect to our debt as of December 31, 2005 (excluding capital leases):
 
                 
    Amount
    Applicable
 
Type of Debt
  Outstanding     Interest Rate  
    (In millions)        
 
Senior bank term debt (swap matures June 16, 2012)(1) (2)
  $ 25.0       5.72 %
Senior bank term debt (swap matures June 16, 2010)(1) (2)
    25.0       5.52  
Senior bank term debt (swap matures June 16, 2008)(1) (2)
    25.0       5.38  
Senior bank term debt (swap matures June 16, 2007)(1) (2)
    25.0       5.33  
Senior bank term debt (subject to variable interest rates)(3)
    200.0       6.00  
Senior bank revolving debt (subject to variable interest rates)(3)
    152.5       6.00  
87/8% Senior subordinated notes (fixed rate)
    300.0       8.88  
63/8% Senior subordinated notes (fixed rate)
    200.0       6.38  
 
 
(1) A total of $100.0 million is subject to fixed rate swap agreements that became effective in June 2005.
 
(2) Under our fixed rate swap agreements, we pay a fixed rate plus a spread based on our leverage ratio, as defined in our Credit Agreement. That spread is currently set at 1.25% and is incorporated into the applicable interest rates set forth above.
 
(3) Subject to rolling 90-day LIBOR plus a spread currently at 1.25% and incorporated into the applicable interest rate set forth above.
 
In February 2005, we completed the private placement of $200.0 million 63/8% senior subordinated notes due 2013, realizing net proceeds of approximately $195.3 million. We recorded approximately $4.7 million in deferred offering costs, which are being amortized to interest expense over the life of the related notes using the effective interest rate method. The net proceeds of the offering, in addition to borrowings of $110.0 million under our previous revolving credit facility, and available cash, were primarily used to redeem our outstanding HIGH TIDES in an amount of $309.8 million. In October 2005, the 63/8% senior subordinated notes were exchanged for an equal amount of notes registered under the Securities Act of 1933, as amended (the “Securities Act”).
 
In May 2001, we completed the private placement of $300.0 million 87/8% senior subordinated notes due 2011, realizing net proceeds of approximately $291.8 million. We recorded approximately $8.2 million in deferred offering costs, which are being amortized to interest expense over the life of the notes using the effective interest rate method. The net proceeds of the offering were primarily used to repay amounts owed on our credit facilities and previously outstanding senior subordinated notes. In November 2001, the 87/8% senior subordinated notes were exchanged for an equal amount of notes registered under the Securities Act.


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Our Credit Agreement and the indentures governing our senior subordinated notes require that we comply with certain financial covenants limiting our ability to incur additional debt. Such terms also place restrictions on us with respect to the sale of assets, liens, investments, dividends, debt repayments, capital expenditures, transactions with affiliates, consolidation and mergers, and the issuance of equity interests, among other things. Our Credit Agreement also requires compliance with financial tests based on financial position and results of operations, including a leverage ratio, an interest coverage ratio and a fixed charge coverage ratio, all of which could effectively limit our ability to borrow under the Credit Agreement or to otherwise raise funds in the debt markets.
 
The following table provides a comparison of our statements of cash flows for the years ended December 31, 2005 and 2004:
 
                         
    2005     2004        
    (In thousands)        
 
Net cash flows from operating activities
  $ 101,631     $ 123,719          
Net cash flows used in investing activities
    (28,305 )     (155,498 )        
Net cash flows (used in) from financing activities
    (64,636 )     4,160          
 
Net cash flows from operating activities were approximately $101.6 million and $123.7 million for the years ended December 31, 2005 and 2004, respectively. Cash flows from operating activities for the year ended December 31, 2005 declined from the prior year primarily due to increased interest expense resulting from a change to our capital structure. This change in capital structure occurred in February 2005, when we redeemed all of our outstanding HIGH TIDES in an amount of $309.8 million. This redemption was financed with the net proceeds of the sale of the Company’s 63/8% senior subordinated notes, borrowings under our revolving credit facility, and available cash. The result of the change is that we now pay interest expense, instead of dividends on our High Tides. The additional interest expense from the change in our capital structure is reflected in operating activities, whereas the dividends on our HIGH TIDES were reflected in financing activities.
 
Net cash flows used in investing activities were approximately $28.3 million and $155.5 million for the years ended December 31, 2005 and 2004, respectively. During the year ended December 31, 2005, we acquired 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 our Class D common stock, and we sold short-term marketable securities for approximately $10.0 million. Capital expenditures were approximately $15.7 million for the year ended December 31, 2005. During the year ended December 31, 2004, we completed the acquisition of the assets of WRNB-FM (formerly WSNJ-FM) in the Philadelphia market for approximately $35.0 million, the acquisition of KROI-FM (formerly KRTS-FM) in the Houston market for approximately $72.5 million, and acquired New Mableton Broadcasting Corporation (“NMBC”), which owned WAMJ-FM, a radio station located in the Atlanta market for $35.0 million. We also completed the acquisition of WPZS-FM (formerly WABZ-FM) in the Charlotte market for approximately $11.5 million. Also in 2004, we made a cash contribution of approximately $18.5 million towards our overall funding commitment of $74.0 million to TV One, and sold short-term marketable securities for approximately $30.0 million. For the year ended December 31, 2004, our capital expenditures were approximately $13.0 million.
 
Net cash flows used in financing activities were approximately $64.6 million for the year ended December 31, 2005, compared to net cash flows from financing activities of approximately $4.2 million for the year ended December 31, 2004. During the year ended December 31, 2005, we made a principal payment of $17.5 million on our previous term loan, paid approximately $437.5 million of amounts outstanding under our previous credit facilities with proceeds from our new revolving facility, borrowed $15.0 million from our new revolving facility in connection with our stock repurchase program, repurchased shares of Class A and Class D common stock for approximately $77.7 million, realized net proceeds of approximately $195.3 million from the private placement of $200.0 million 63/8% senior subordinated notes due 2013, borrowed $135.0 million under our previous revolving credit facility, redeemed our outstanding HIGH TIDES in an amount of $309.8 million, received approximately $5.6 million from our stock subscriptions receivable and paid dividends on our HIGH TIDES of approximately $7.0 million. During the year ended December 31, 2004, we made principal payments of $52.5 million on our previous term loan. We borrowed $50.0 million from our previous revolver to complete the acquisition of KROI-FM (formerly KRTS-FM) and also borrowed $25.0 million to complete the acquisition of the outstanding stock of


43


 

NMBC. Also in the year ended December 31, 2004, we paid preferred dividends of approximately $20.1 million on our HIGH TIDES.
 
We continuously review opportunities to acquire additional radio stations, primarily in the top 60 African-American markets, and to make strategic investments. In February 2006, we signed an agreement to acquire the assets of WIFE-FM, a radio station located in the Cincinnati metropolitan area for approximately $18.0 million in cash. Subject to the necessary regulatory approvals, we expect to complete this acquisition during the second half of 2006, and we will consolidate it with our existing Cincinnati operations. In September 2005, we announced an agreement to purchase the assets of WHHL-FM (formerly WRDA-FM), a radio station located in the St. Louis metropolitan area for approximately $20.0 million in cash. We consolidated the station with our existing St. Louis operations, reformatted the station, and began operating the station under a local marketing agreement in October 2005. We expect to complete this acquisition during the second quarter of 2006. Other than our agreements to purchase the assets of WIFE-FM and WHHL-FM, and an agreement with an affiliate of Comcast Corporation, DIRECTV and other investors to fund TV One (the balance of our commitment is $37.0 million as of December 31, 2005), we have no definitive agreements to make acquisitions of additional radio stations or to make strategic investments. We anticipate that any future acquisitions or strategic investments will be financed through funds generated from operations, cash on hand, equity financings, permitted debt financings, debt financings through unrestricted subsidiaries or a combination of these sources. However, there can be no assurance that financing from any of these sources, if available, will be available on favorable terms.
 
As of December 31, 2005, we had two standby letters of credit in the amount of $417,000 in connection with our annual insurance policy renewals. To date, there has been no activity on the standby letters of credit.
 
Our ability to meet our debt service obligations and reduce our total debt, our ability to refinance the 87/8% senior subordinated notes at or prior to their scheduled maturity date in 2011, and our ability to refinance the 63/8% senior subordinated notes at or prior to their scheduled maturity date in 2013 will depend upon our future performance which, in turn, will be subject to general economic conditions and to financial, business and other factors, including factors beyond our control. In the next twelve months, our principal liquidity requirements will be for working capital, continued business development, strategic investment opportunities and for general corporate purposes, including capital expenditures.
 
We believe that, based on current levels of operations and anticipated internal growth, for the foreseeable future, cash flow from operations together with other available sources of funds will be adequate to make required payments of interest on our indebtedness, to fulfill our commitment to fund TV One, to fund potential acquisitions, to fund anticipated capital expenditures and working capital requirements and to enable us to comply with the terms of our debt agreements. However, in order to finance future acquisitions or investments, if any, we may require additional financing and there can be no assurance that we will be able to obtain such financing on terms acceptable to us.
 
Credit Rating Agencies
 
On a continuing basis, credit rating agencies such as Moody’s Investor Services and Standard and Poor’s evaluate our debt. As a result of their reviews, our credit rating could change. We believe that any significant downgrade in our credit rating could adversely impact our future liquidity. The effect of a change in our credit rating may limit or eliminate our ability to obtain debt financing, or include, among other things, interest rate changes under any future credit facilities, notes or other types of debt.
 
Impact of Recent Accounting Pronouncements
 
In September 2004, the Emerging Issues Task Force issued Topic D-108, “Use of the Residual Method to Value Acquired Assets Other than Goodwill.” Topic D-108 prohibits the use of the residual method for all assets acquired in a business combination completed after September 29, 2004. Further, companies that have applied the residual method to the valuation of intangible assets for purposes of impairment testing should perform an impairment test using a direct value method on all intangible assets that were previously valued using the residual method by no later


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than the beginning of their first fiscal year beginning after December 15, 2004. We adopted Topic D-108 in 2005 and have obtained independent appraisals of all intangible assets acquired in order to perform our annual impairment tests in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” The adoption of this standard did not have a material impact on our financial statements.
 
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) sets forth accounting requirements for “share-based” compensation to employees, including employee stock purchase plans. The statement eliminates the ability to account for share-based compensation transactions using Accounting Principles Board (“APB”) Opinion No. 25 and generally requires instead that such transactions be accounted for using a fair-value-based method. Disclosure of the effect of expensing the fair value of equity compensation is currently required under existing literature. The statement also requires the tax benefit associated with these share based payments be classified as financing activities in the Statement of Cash Flows rather than operating activities as currently permitted.
 
We adopted SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:
 
  •  A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123(R) for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.
 
  •  A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123, “Accounting for Stock-Based Compensation,” for purposes of pro forma disclosures for either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
 
We are using the Black-Scholes Option Pricing Model to estimate the fair value of our stock options and expect to use the modified prospective method in adopting the fair value method of measuring compensation cost relating to stock-based employee compensation. Upon adoption, unrecognized non-cash stock compensation expense related to unvested options outstanding as of December 31, 2005 was approximately $18.7 million and will be recorded over the remaining vesting period of four years. We anticipate that our adoption of SFAS No. 123(R) will result in an increase in operating expenses in the range of approximately $11.0 to 13.0 million for 2006.
 
SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and Financial Accounting Standards Board (“FASB”) Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28” was issued in June 2005. SFAS No. 154 requires retrospective application to financial statements of prior periods for changes in accounting principles that are not adopted prospectively. This statement is effective January 1, 2006, and had no impact on the Company’s 2005 financial statements.
 
Critical Accounting Policies and Estimates
 
Our accounting policies are described in Note 1 — Organization and Summary of Significant Accounting Policies of the consolidated financial statements. We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. We consider the following policies and estimates to be most critical in understanding the judgments involved in preparing our financial statements and the uncertainties that could affect our results of operations, financial condition and cash flows.
 
Stock-Based Compensation
 
We account for our stock-based compensation plan as permitted by SFAS No. 123, which allows us to follow APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and recognize no compensation cost for options granted to employees at fair market value. We have computed, for pro forma disclosure purposes, the value of all


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compensatory options granted during 2005, 2004 and 2003, using the Black-Scholes option pricing model. Options were assumed to be exercised upon vesting for the purpose of this valuation.
 
Goodwill and Radio Broadcasting Licenses
 
Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in business combinations. Radio broadcasting licenses acquired in business combinations are valued using a discounted cash flow analysis. Commencing January 1, 2002, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and radio broadcasting licenses are not amortized, but are tested annually for impairment at the reporting unit level. Impairment of goodwill is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The implied fair value of goodwill is the amount determined by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit from the estimated fair value of the reporting unit. If the recorded value of goodwill exceeds its implied value, an impairment charge for goodwill is recorded for the excess. Impairment of radio broadcasting licenses is the condition that exists when the carrying amount of the radio broadcasting license exceeds its implied fair value. The implied fair value of a radio broadcasting license is the discounted cash flow value of its projected income stream. If the recorded value of the radio broadcasting license exceeds its implied value, an impairment charge for the radio broadcasting license is recorded for the excess. The Company conducts its annual test for impairment during the fourth quarter of every year. The Company determined that its long-lived assets were not impaired during 2005 and, accordingly, no impairment charge was recognized. See also Notes 1 and 4 — Goodwill, Radio Broadcasting Licenses and Other Intangible Assets.
 
Impairment of Long-Lived Assets Excluding Goodwill and Radio Broadcasting Licenses
 
Long-lived assets, excluding goodwill and radio broadcasting licenses, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, we will evaluate recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of like risk.
 
Allowance for Doubtful Accounts
 
We must make estimates of the uncollectability of our accounts receivable. We specifically review historical write-off activity by market, large customer concentrations, customer credit worthiness and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If circumstances change, such as higher than expected defaults or an unexpected material adverse change in an agency’s ability to meet its financial obligation to us, our estimates of the recoverability of amounts due to us could change by a material amount.
 
Revenue Recognition
 
We recognize and report revenue for broadcast advertising when the commercial is broadcast and is reported net of agency and outside sales representative commissions in accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, Topic 13, “Revenue Recognition, Revised and Updated.” When applicable, 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 us.


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Equity Accounting
 
We account for our investment in TV One under the equity method of accounting in accordance with APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”, and other related interpretations. We have recorded our investment at cost and have adjusted the carrying amount of the investment to recognize the change in Radio One’s claim on the net assets of TV One resulting from losses of TV One as well as other capital transactions of TV One using a hypothetical liquidation at book value approach. We will review the realizability of the investment if conditions are present or events occur to suggest that an impairment of the investment may exist. We have determined that although TV One is a variable interest entity (as defined by Financial Accounting Standards Board Interpretation (“FIN”) No. 46(R), “Consolidation of Variable Interest Entities.”), the Company is not the primary beneficiary of TV One. See Note 5 — Investment in Affiliated Company for further discussion.
 
Contingencies and Litigation
 
We regularly evaluate our exposure relating to any contingencies or litigation and record a liability when available information indicates that a liability is probable and estimable. We also disclose significant matters that are reasonably possible to result in a loss, or are probable but for which an estimate of the liability is not currently available.
 
Estimate of Effective Tax Rates
 
We evaluate our effective tax rates regularly and adjust rates when appropriate based on currently available information relative to statutory rates, apportionment factors and the applicable taxable income in the jurisdictions in which we operate, among other factors. Tax contingencies are also recorded to address potential exposures involving tax positions we have taken that could be challenged by taxing authorities. In addition, we consider the appropriateness of recording a valuation allowance against deferred tax assets to offset future tax benefits that may not be realized. In determining if a valuation allowance is appropriate, we consider whether it is more likely that all or some portion of our deferred tax assets will not be realized, based in part upon management’s judgments regarding future events. These potential exposures result from the varying application of statutes, rules, regulations and interpretations. We believe our estimates of the value of our tax contingencies and valuation allowances are critical accounting estimates as they contain assumptions based on past experiences and judgments about potential actions by taxing jurisdictions. It is reasonably likely that the ultimate resolution of these matters may be greater or less than the amount that we have currently accrued. Our estimate of our effective tax rates has ranged from 34.3% to 40.6% throughout 2005. This includes the current year 6.1% favorable impact for the Ohio tax law change. The effect of a 1.0% increase in our estimated tax rates as of December 31, 2005 would result in an increase in income tax expense of $829,000 to approximately $27.8 million from approximately $27.0 million for the year ended December 31, 2005. The 1.0% increase in income tax expense would result in a decrease in net income of $829,000 to approximately $49.7 million from approximately $50.5 million (reducing net income per share — basic and diluted by $0.01 to $0.45) for the year ended December 31, 2005.
 
Impact of Inflation
 
We believe that inflation has not had a material impact on our results of operations for each of our years in the three-year period ended December 31, 2005. However, there can be no assurance that future inflation would not have an adverse impact on our operating results and financial condition.
 
Seasonality
 
Several factors may adversely affect a radio broadcasting company’s performance in any given period. In the radio broadcasting industry, seasonal revenue fluctuations are common and are due primarily to variations in advertising expenditures by local and national advertisers. Typically, revenues are lowest in the first calendar quarter of the year.


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Capital and Commercial Commitments
 
Long-term debt
 
In June 2005, we entered into a new Credit Agreement with a syndicate of banks. The term of the Credit Agreement is seven years and the total amount available under the Credit Agreement is $800.0 million, consisting of a $500.0 million revolving facility and a $300.0 million term loan facility. Borrowings under the credit facilities are subject to compliance with provisions of the Credit Agreement, including but not limited to, financial covenants. We may use proceeds from the credit facilities for working capital, capital expenditures made in the ordinary course of business, our common stock repurchase program, direct and indirect investments permitted under the Credit Agreement, and other lawful corporate purposes. The Credit Agreement contains affirmative and negative covenants that we must comply with, including (a) maintaining a ratio of consolidated adjusted EBITDA to consolidated interest expense of no less than 2.50 to 1.00, (b) maintaining a ratio of consolidated debt for borrowed money to consolidated adjusted EBITDA of no greater than 6.50 to 1.00 from June 13, 2005 to September 30, 2006, and no greater than 6.00 to 1.00 beginning October 1, 2006 and thereafter, (c) limitations on liens, (d) limitations on the sale of assets, (e) limitations on the payment of dividends, and (f) limitations on mergers, as well as other customary covenants. Simultaneous with entering into the Credit Agreement, we borrowed $437.5 million under the Credit Agreement to retire all outstanding obligations under our previous credit agreement, dated as of July 17, 2000. The previous credit agreement provided for borrowings up to $600.0 million, and consisted of a $350.0 million term facility and a $250.0 million revolving facility.
 
In February 2005, we completed the private placement of $200.0 million 63/8% senior subordinated notes due 2013, realizing net proceeds of approximately $195.3 million. The net proceeds of the offering, in addition to borrowings of $110.0 million under our previous revolving credit facility, and available cash, were primarily used to redeem our outstanding HIGH TIDES in an amount of $309.8 million. In October 2005, the 63/8% senior subordinated notes were exchanged for an equal amount of notes registered under the Securities Act.
 
In May 2001, we completed the private placement of $300.0 million 87/8% senior subordinated notes due 2011, realizing net proceeds of approximately $291.8 million. The net proceeds of the offering were primarily used to repay amounts owed on our credit facilities and previously outstanding senior subordinated notes. In November 2001, the 87/8% senior subordinated notes were exchanged for an equal amount of notes registered under the Securities Act.
 
Lease obligations
 
We have non-cancelable operating leases for office space, studio space, broadcast towers and transmitter facilities and non-cancelable capital leases for equipment that expire over the next 20 years.
 
Operating Contracts and Agreements
 
We have other operating contracts and agreements including employment contracts, on-air talent contracts, severance obligations, retention bonuses, consulting agreements, equipment rental agreements, programming related agreements, and other general operating agreements that expire over the next 9 years.


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Contractual Obligations Schedule
 
The following table represents our contractual obligations as of December 31, 2005:
 
                                                         
    Payments Due by Period(1)  
Contractual Obligations
  2006     2007     2008     2009     2010     2011 and Beyond     Total  
    (In thousands)  
 
87/8% Senior subordinated notes
  $     $     $     $     $     $ 300,000     $ 300,000  
63/8% Senior subordinated notes
                                  200,000     $ 200,000  
Credit facilities
          7,500       37,500       67,500       75,000       265,000       452,500  
Capital lease obligations
    8       6       6                         20  
Other operating contracts/ agreements(2) (3) (4)
    35,732       25,989       20,245       18,098       18,030       43,330       161,424  
Operating lease obligations
    7,399       7,010       6,688       6,092       5,361       18,487       51,037  
                                                         
Total
  $ 43,139     $ 40,505     $ 64,439     $ 91,690     $ 98,391     $ 826,817     $ 1,164,981  
                                                         
 
 
(1) The above amounts do not include interest, which in some cases is variable in amount.
 
(2) Includes employment contracts, severance obligations, on-air talent contracts, consulting agreements, equipment rental agreements, programming related agreements, and other general operating agreements.
 
(3) Includes a retention bonus of approximately $2.0 million pursuant to an employment agreement with the Chief Administrative Officer (“CAO”) for remaining employed with the Company through and including October 31, 2008. If the CAO’s employment ends before October 31, 2008, the amount paid will be a pro rata portion of the retention bonus based on the number of days of employment between October 31, 2004 and October 31, 2008.
 
(4) Includes a retention bonus of approximately $7.0 million pursuant to an employment agreement with the Chief Financial Officer (“CFO”) for remaining employed with the Company through and including October 18, 2010. If the CFO’s employment ends before October 18, 2010, the amount paid will be a pro rata portion of the retention bonus based on the number of days of employment between October 18, 2005 and October 18, 2010.
 
Reflected in the obligations above, as of December 31, 2005, we had four swap agreements in place for a total notional amount of $100.0 million. The periods remaining on the swap agreements range in duration from 18 to 78 months. If we terminate our interest swap agreements before they expire, we will be required to pay early termination fees. Our credit exposure under these agreements is limited to the cost of replacing an agreement in the event of non-performance by our counter-party; however, we do not anticipate non-performance.
 
Off-Balance Sheet Arrangements
 
We did not have any off-balance sheet arrangements as of December 31, 2005 other than as follows:
 
We utilize letters of credit in connection with our annual insurance policy renewals. During the year ended December 31, 2003, we obtained two standby letters of credit in the amounts of $275,000 and $270,000, in connection with our annual insurance policy renewals. In December 2004, we obtained a new standby letter of credit in the amount of $147,000 to replace the letter of credit of $275,000. Accordingly, as of December 31, 2005, we had two standby letters of credit in the amount of $417,000. To date, there has been no further activity on the standby letters of credit.
 
As of December 31, 2005, we had four interest rate swap agreements in place for a total notional amount of $100.0 million to hedge our variable rate debt. The periods remaining on the swap agreements range in duration from 18 to 78 months. If we terminate our interest swap agreements before they expire, we will be required to pay early termination fees. Our credit exposure under these agreements is limited to the cost of replacing an agreement in the event of non-performance by our counter-party, however, we do not anticipate non-performance. See Note 7 — Derivative Instruments in the accompanying notes to the consolidated financial statements for a detailed discussion of our derivative instruments.