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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] 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. 333-30795
RADIO ONE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1166660
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5900 PRINCESS GARDEN PARKWAY
8TH FLOOR
LANHAM, MARYLAND 20706
(Address of principal executive offices)
(301) 306-1111
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (section 229.405 of this chapter) 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 [ ].
One share of voting stock is held by a non-affiliate of the registrant as of
December 31, 1997. The registrant is a private equity company and it has no view
as to the value of its voting stock.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 1997.
Class Outstanding at December 31, 1997
----- --------------------------------
Class A Common Stock, $.01 Par Value 138.45
Class B Common Stock, $.01 Par Value 0
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RADIO ONE, INC.
Form 10-K
For the Fiscal Year Ended December 31, 1997
INDEX
-----
Page
----
PART I
ITEM 1. Business 1
ITEM 2. Properties 18
ITEM 3. Legal Proceedings 19
ITEM 4. Submission of Matters to a Vote of Security Holders 20
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 21
ITEM 6. Selected Financial Data 22
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
ITEM 8. Financial Statements and Supplementary Data 32
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
PART III
ITEM 10. Directors and Executive Officers of the Registrant 34
ITEM 11. Executive Compensation 35
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management 37
ITEM 13. Certain Relationships and Related Transactions 39
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 41
PART I
ITEM 1. BUSINESS
EXCEPT WHERE THE CONTEXT INDICATES OTHERWISE, (I) PRIOR TO MARCH 16, 1998, THE
TERM "COMPANY" REFERS TO THE REGISTRANT RADIO ONE, INC. AND ITS WHOLLY-OWNED
SUBSIDIARY RADIO ONE LICENSES, INC. (THE SURVIVING CORPORATION OF THE MERGER OF
RADIO ONE LICENSE LLC WITH AND INTO RADIO ONE LICENSES, INC.) AND (II) ON AND
AFTER MARCH 16, 1998, THE TERM "COMPANY" REFERS TO THE REGISTRANT RADIO ONE,
INC. AND ITS DIRECT WHOLLY-OWNED SUBSIDIARIES (RADIO ONE LICENSES, INC. AND WYCB
ACQUISITION CORPORATION) AND ITS INDIRECT WHOLLY-OWNED SUBSIDIARY (BROADCAST
HOLDINGS, INC.).
Radio One, Inc. ("Radio One") founded in 1980, is the largest radio
broadcasting company in the United States exclusively targeting African-American
listeners and consumers. After giving effect to the Bell Acquisition (as
defined), the Company will own and operate a total of twelve radio stations (six
FM and six AM) in four of the top-15 African-American markets. The Company seeks
to expand within its existing markets and into new, primarily top-30
African-American markets. The Company believes that the African-American
community is an attractive target market for radio broadcasters and that the
Company has a competitive advantage serving this target market due in part to
its African-American ownership and its active involvement in the
African-American community.
The Company owns and operates four radio stations in Washington, D.C., the
third largest African-American market with a metropolitan statistical area
("MSA") population of approximately 4.2 million in 1995 (approximately 27.4% of
which was African-American), and four radio stations in Baltimore, the eleventh
largest African-American market with an MSA population of approximately 2.5
million in 1995 (approximately 26.0% of which was African-American). In 1997 the
Company entered the Philadelphia market pursuant to the acquisition of WPHI-FM
(formerly WDRE-FM), the sixth largest African-American market with an MSA
population of approximately 4.9 million in 1995 (approximately 19.9% of which
was African-American). On November 19, 1997, WYCB Acquisition Corporation
entered into an Option and Stock Purchase Agreement (the "WYCB Agreement") with
Broadcast Holdings, Inc. ("BHI"), licensee of WYCB-AM, to acquire BHI for
approximately $3.75 million (the "DC Acquisition"). WYCB Acquisition Corporation
consummated the DC Acquisition effective March 16, 1998. WYCB-AM is currently
the top-rated Gospel radio station in Washington, D.C. In conjunction with the
issuance of its Promissory Note in the original principal amount of $3.75
million, WYCB Acquisition Corporation granted a security interest in all of the
stock and assets of BHI. This security interest was granted to Allied Capital
Financial Corporation ("Allied"). Allied also received a Stock Purchase Warrant
from Radio One which entitles it to acquire up to 40,000 shares of the Series A
Preferred Stock (as defined) of Radio One if WYCB Acquisition Corporation
defaults on the payment of such Promissory Note and the stock and assets of BHI
are insufficient to pay the entire amount owed under such Promissory Note. In
that event, and only in that event and subject to Allied's fulfillment of
certain conditions, Allied may acquire such shares of Radio One equal to the
amount owed under the Promissory Note. In conjunction with issuing the Stock
Purchase Warrant, the shareholders of Radio One approved an increase in the
number of authorized shares of Series A Preferred Stock to provide for
sufficient shares in the event that Allied is entitled to exercise its warrant.
Radio One also entered into an local marketing agreement formally referred to as
a Time Management and Services Agreement with WYCB Acquisition Corporation and
BHI, which allows Radio One to provide programming services to and retain all
advertising revenue from WYCB-AM in exchange for a monthly fee paid by Radio One
to WYCB Acquisition Corporation.
Additionally, on December 23, 1997, Radio One entered into a Stock Purchase
Agreement (the "Bell Agreement") with Bell Broadcasting Company ("Bell"), the
owner of two radio stations, one AM and one FM, located in the Detroit, Michigan
market and one AM radio station located in Kingsley, Michigan (the "Bell
Acquisition"). Pursuant to the Bell Agreement, Radio One agreed to pay
approximately $34.2 million in cash plus the cost of certain improvements to the
stations, $2.0 million of which was deposited in escrow upon the execution of
the Bell Agreement and will be available to the sellers as liquidated damages if
Radio One breaches its obligations thereunder. The consummation of the Bell
Acquisition is contingent upon certain matters, including the
1
receipt of final approval from the Federal Communications Commission ("FCC") for
the transfer of the FCC licenses. Radio One expects to complete the Bell
Acquisition by the end of the third quarter of 1998 which may require the
exercise of up to four one month extensions of the closing date at an additional
cost of $150,000 per month. The Company anticipates that Bell will become a
Restricted Subsidiary, as such term is defined in the Indenture dated as of May
15, 1997 among Radio One, Inc., Radio One Licenses, Inc., and United States
Trust Company of New York (the "Indenture"), and a guarantor of the 12% Senior
Subordinated Notes due 2004 ("Notes"), as defined in the Indenture. Radio One
expects to fund the balance of the purchase price from the Company's free cash
balances as well as from the proceeds of a debt or equity offering (or
combination thereof) to be completed prior to the cosummation of this
acquisition. Detroit is the fifth largest African-American market with an MSA
population of approximately 4.5 million in 1995 (approximately 22.6% of which
was African-American). The Company may divest itself of the station located in
Kingsley, Michigan, following the consummation of the Bell Acquisition, because
that station is not integral or material to the transaction and is located a
substantial distance from Detroit.
The Company has grown significantly over the past five years through
acquisitions as well as internal expansion. From 1992 to 1997 net revenues and
broadcast cash flow increased from approximately $10.8 million to approximately
$32.4 million, and from approximately $4.8 million to approximately $13.5
million, respectively. The number of radio stations owned and operated by the
Company increased from two at the end of 1991 to eight by the end of 1997 and,
with the consummation of the DC Acquisition and the proposed Bell Acquisition,
will grow to 12.
The Company believes that operating radio stations targeting the
African-American population presents significant growth opportunities for the
following reasons:
o RAPID POPULATION GROWTH. According to the U.S. Department of Commerce,
Bureau of the Census (the "Census Bureau"), from 1980 to 1995, the
African-American population increased from approximately 26.7 million
to 33.1 million (a 24.0% increase, compared to a 16.0% increase in the
population as a whole). Furthermore, the African-American population
is expected to exceed 40 million by 2010 (a more than 20% increase
from 1995, compared to an expected increase of 13% for the population
as a whole).
o HIGHER INCOME GROWTH. According to the Census Bureau, from 1980 to
1995, the rate of increase in median household income in 1995 adjusted
dollars for African-Americans was approximately 12.3% compared to 3.9%
for the population as a whole.
o CONCENTRATED PRESENCE IN URBAN MARKETS. Approximately 58% of the
African-American population is located in the top-30 African-American
markets, and the Company believes that the African-American community
is usually geographically concentrated in such markets. This
concentration of African-Americans enables the Company to reach a
large portion of its target population with radio stations that may
have less powerful signals, thus potentially lowering the Company's
acquisition and operating costs.
o FEWER SIGNALS REQUIRED. The Company believes the current industry
trend is for radio broadcasters to acquire the maximum number of radio
stations allowed in a market under FCC ownership rules (up to eight
radio stations in the largest markets with no more than five being FM
or AM), unless restricted by other regulatory authorities. However,
relative to radio broadcasters targeting a broader audience, the
Company believes it can cover the various segments of its target niche
market with fewer programming formats and therefore fewer radio
station signals than the maximum allowed.
o STRONG AUDIENCE LISTENERSHIP AND LOYALTY. Based upon reports by
Arbitron (as defined) the Company believes that as a group,
African-Americans generally spend more time listening to radio than
non-African-American audiences. For example, during 1996,
African-Americans among all persons 12-years-old and older ("12-plus"
or the "12-plus market") in the ten largest 12-plus markets listened
to radio broadcasts an average of 27.2 hours per week compared to 22.9
2
hours per week for non-African-Americans in such markets. In addition,
the Company believes African-American radio listeners exhibit a
greater degree of loyalty to radio stations which target the
African-American community because those radio stations become a
valuable source of entertainment and information responsive to the
community's interests and lifestyles. As a result, the Company
believes that its target demographic group provides greater audience
ratings stability than that of other demographic groups.
o COST EFFECTIVE FOR ADVERTISERS. The Company believes that advertisers
can reach the African-American community more cost effectively through
radio broadcasting than through newspapers or television because the
Company's radio broadcasts specifically target the African-American
community while newspapers and television typically target a much more
diverse audience.
Radio One is led by its Chairperson, Ms. Catherine L. Hughes, who is one of
the Company's founders, and her son, Mr. Alfred C. Liggins, III, its Chief
Executive Officer and President, who together have over three decades of
operating experience in radio broadcasting. Ms. Hughes and Mr. Liggins, together
with a strong management team, have implemented a successful strategy of
acquiring and turning around underperforming radio stations in top-30
African-American markets. In both Baltimore and Washington, D.C., the Company
has increased audience share at each radio station it has acquired. For all of
1997, the Company's radio stations on a combined basis, were ranked first in
combined audience and revenue share of radio stations targeting
African-Americans in both Baltimore and Washington, D.C. The Company believes
that it is well-positioned to apply its successful operating strategy to other
radio stations in existing and new markets as attractive acquisition
opportunities arise.
The following table sets forth certain information with respect to Radio
One and its markets as of December 31, 1997 (including WYCB-AM but excluding the
radio stations to be acquired pursuant to the Bell Agreement):
PRO FORMA COMPANY DATA MARKET DATA
------------------------------------------------------------ ------------------------------------
NUMBER OF AFRICAN-AMERICAN RANKING BY
STATIONS MARKET ENTIRE MARKET SIZE OF
----------- ---------------------- ------------------- -------------------------------------
AFRICAN
AUDIENCE REVENUE AUDIENCE REVENUE RADIO AMERICAN
MARKET FM AM RANK RANK SHARE(%) SHARE(%) REVENUE($) POPULATION
- -------------------------- ---- ---- ---------- --------- ---------- --------- ---------- -----------
Washington, D.C. ......... 2 2 1 1 12.4 9.4 $ 218.2 3
Baltimore ................ 2 2 1 1 15.1 16.3 88.5 11
Philadelphia ............ 1 -- N/A N/A 3.5 1.3 227.5 6
OPERATING STRATEGY
In order to maximize broadcast cash flow at each of its radio stations, the
Company strives to create and operate the leading radio station group, in terms
of audience share, serving the African-American community and to effectively
convert these audience share ratings to advertising revenue while controlling
the costs associated with each radio station's operations. The success of the
Company's strategy relies on the following: (i) market research, targeted
programming and marketing; (ii) significant community involvement; (iii)
aggressive sales efforts; (iv) advertising partnerships and special events; (v)
strong management and performance-based incentives; and (vi) radio station
clustering, programming segmentation and sales bundling.
MARKET RESEARCH, TARGETED PROGRAMMING AND MARKETING
The Company uses market research to tailor the programming, marketing and
promotions of its radio stations to maximize audience share. To achieve these
goals, the Company uses market research to identify unserved or underserved
markets or segments of the African-American community in current and new markets
and to determine whether to acquire a new radio station or reprogram one of its
existing radio stations to target those markets or segments.
3
The Company also seeks to reinforce its targeted programming by creating a
distinct and marketable identity for each of its radio stations. To achieve this
objective, in addition to its significant community involvement discussed below,
the Company employs and promotes distinct, high-profile on-air personalities at
many of its radio stations, many of whom have strong ties to the
African-American community.
SIGNIFICANT COMMUNITY INVOLVEMENT
The Company believes its active involvement and significant relationships
in the African-American community, together with its African-American ownership,
provide a competitive advantage in targeting African-American audiences. In this
way, the Company believes its proactive involvement in the African-American
communities in each of its markets greatly improves the marketability of its
radio broadcast time to advertisers who are targeting such communities.
Management believes that a radio station's image should reflect the
lifestyle and viewpoints of the target demographic group it serves. Due to the
Company's fundamental understanding of the African-American community,
management believes it is able 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 all aspects of the Company's operations
and enables it to create enhanced awareness and name recognition in the
marketplace. In addition, the Company believes its multi-level approach to
community involvement leads to increased effectiveness in developing and
updating its programming formats. Management believes its enhanced awareness and
more effective programming formats lead to greater listenership and higher
ratings over the long-term.
The Company has a history of sponsoring events that showcase its commitment
to the African-American community including:
o heightening the awareness of certain diseases and holding fundraisers to
fund the search for cures for diseases which disproportionately impact
African-Americans, such as sickle-cell anemia and leukemia;
o developing contests specifically designed to assist African-American single
mothers with day care expense;
o fundraising for the many African-American churches throughout the country
which have been the target of arsonists; and
o organizing seminars designed to educate African-Americans on personal
issues that include buying a home, starting a business, developing a credit
history, financial planning and health care.
AGGRESSIVE SALES EFFORTS
The Company has assembled an effective, highly-trained sales staff focused
on converting the Company's audience share into revenue. The Company employs a
dual sales strategy of selling stations individually where appropriate, by
targeting a certain demographic segment, or in combination by focusing on the
complementary aspects of the Company's multiple stations.
ADVERTISING PARTNERSHIPS AND SPECIAL EVENTS
The Company believes that in order to create advertiser loyalty it must
strive to be the recognized expert in marketing to the African-American consumer
in its markets. The Company believes that it has achieved this recognition by
focusing on serving the African-American consumer and by creating innovative
advertising campaigns and promotional tie-ins. The Company sponsors several
major entertainment events each year. The Stone Soul Picnic, developed by the
Company in 1989, is an all-day free outdoor concert which showcases advertisers,
local merchants and other organizations desiring exposure to over 100,000 people
in each of Washington, D.C. and Baltimore. The Company also sponsors The
People's Expo every March in Washington, D.C. and Baltimore. This event provides
entertainment, shopping and educational seminars to the Company's
4
listeners and others from the communities that the Company serves. In connection
with these events, advertisers buy signage, booth space and broadcast promotions
to sell cars, groceries, clothing, financial services and other products and
services to the African-American consumer.
STRONG MANAGEMENT AND PERFORMANCE-BASED INCENTIVES
The Company focuses on hiring highly motivated and talented individuals in
each functional area of the organization who can effectively help the Company
implement its strategies of growth and value creation. The Company's management
team is comprised of a diverse group of individuals who bring strong expertise
to their respective functional areas. The Company looks to promote from within
and, thus, aims to build a middle management and lower-level employee base
comprised of individuals with great potential, the ability to operate with high
levels of autonomy and the appropriate team-orientation which will enable them
to grow their careers within the organization.
To enhance the quality of management in the sales and programming areas of
the Company, 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 cash flow benchmarks which creates an incentive for management to
focus not only on sales growth, but also on 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 overall ratings as well as ratings in specific target segments.
RADIO STATION CLUSTERING, PROGRAMMING SEGMENTATION AND SALES BUNDLING
The Company strives to build clusters of radio stations in its markets,
with each radio station targeting different demographic segments of the
African-American population. This clustering and programming segmentation
strategy allows the Company to achieve greater penetration into each segment of
its target market. The Company is then able to offer advertisers multiple
audiences and to bundle the radio stations for advertising sales purposes when
advantageous.
The Company believes there are several potential benefits that result from
operating multiple radio stations within the same market. First, each additional
radio station in a market provides the Company with a larger percentage of the
prime advertising time available for sale within that market. Second, the more
signals programmed by the Company, the greater the market share the Company can
achieve in its target demographic groups through the use of segmented
programming. Third, the Company is often able to consolidate sales, promotional,
technical support and corporate functions to produce substantial cost savings.
Finally, the purchase of additional radio stations in an existing market allows
the Company to take advantage of its market expertise and existing relationships
with advertisers.
ACQUISITION STRATEGY
The Company's primary acquisition strategy is to acquire and turn around
under performing radio stations in the top-30 African-American markets. The
Company considers acquisitions in existing markets where expanded coverage is
desirable and considers acquisitions in new markets where the Company believes
it is advantageous to establish a presence. In analyzing potential acquisition
candidates, the Company generally considers (i) whether the radio station has a
signal adequate to reach a large percentage of the African-American community in
a market, (ii) whether the Company can reformat or improve the radio station's
programming in order to profitably serve the African-American community, (iii)
whether the radio station affords the Company the opportunity to segment program
formats within a market in which the Company already maintains a presence, (iv)
whether the Company can increase broadcast revenues of the radio station through
aggressive marketing, sales and promotions, (v) the price and terms of the
purchase, (vi) the level of performance that can be expected from the radio
station under the Company's management and (vii) the number of competitive radio
stations in the market.
5
The Company believes that large segments of the African-American population
in its target markets are often concentrated in certain geographic sections of
such markets. The Company further believes that this geographic concentration
may provide it with an opportunity to acquire less expensive radio stations with
less powerful signals without materially diminishing the Company's coverage of
the African-American community. As a result, the Company believes it can have a
competitive advantage in securing a substantial share of the radio revenue at a
potentially lower acquisition cost per listener than radio stations targeting
other demographic groups.
The Company does not apply a fixed formula to determine the purchase price
of radio stations and does not focus solely on multiples of broadcast cash flow.
Rather the Company seeks to acquire radio stations consistent with its
acquisition and operating strategies. The Company will continue to evaluate
potential acquisitions in the top-30 African-American markets.
STATION OPERATIONS
The following is a general description of each of the Company's markets and
its radio stations in each market. As noted, the data provided in the tables
below includes information during periods the radio stations listed were not
owned or operated by the Company.
WASHINGTON D.C.
The Washington, D.C. market is estimated to be the eighth largest radio
market in terms of population and had 1997 radio advertising revenues totaling
an estimated $218.0 million. In 1995, Washington, D.C. had the third largest
African-American population in the United States with an MSA population of
approximately 4.2 million (approximately 27.4% of which was African-American).
The Company believes it owns the strongest franchise (in terms of audience share
and number of radio stations) of African-American targeted radio stations in the
Washington, D.C. market with two of the four FM radio stations and two of the
three AM radio stations that target African-Americans.
1994(d) 1995(d) 1996(d) 1997(d)
------------ ------------ ------------- -------------
WKYS-FM(a)
Audience share (12-plus) .............. 3.8% 3.8% 4.5% 5.8%
Audience share rank (12-plus) ......... 10 9(t) 6(t) 1
Audience share (18-34) ................ 5.6% 5.8% 7.5% 10.3%
Audience share rank (18-34) ........... 6 6 2 1
Revenue share ......................... 5.1% 3.8% 3.3% 4.5%
Revenue rank .......................... 8 14 14 10
WOL-AM and WMMJ-FM
(combined)(b)
Audience share (12-plus) .............. 6.0% 5.4% 5.5% 5.2%
Audience share (25-54) ................ 6.9% 6.4% 6.2% 5.9%
Revenue share ......................... 5.9% 5.6% 5.3% 4.5%
Revenue rank .......................... 7 7 8 12
WYCB-AM(c)
Audience share (12-plus) .............. 1.2% 1.6% 1.3% 1.2%
Audience share rank (12-plus) ......... 21 20 20 19
Audience share (35-64) ................ 1.3% 1.7% 1.5% 1.4%
Audience share rank (35-64) ........... 22 19 18 17
Revenue share ......................... N/A N/A 0.7% 0.6%
Revenue rank .......................... N/A N/A N/A N/A
- ----------
As used in this table, "N/A" means not applicable or not available and "(t)"
means tied with one or more radio stations.
(a) WKYS-FM was acquired by the Company on June 6, 1995.
(b) WOL-AM and WMMJ-FM advertising time is sold in combination.
(c) Radio One acquired WYCB-AM in the first quarter of 1998 through an
Unrestricted Subsidiary (as defined).
(d) Audience share and audience share rank data is based on Arbitron four book
averages for the years indicated. Revenue share and rank data are based upon the
Radio Revenue Report of Hungerford for December 1997, 1996, 1995 and 1994 except
for WYCB-AM which does not report to Hungerford. Revenue share for WYCB-AM
represents the radio station's net revenues as a percentage of the market radio
revenue reported by the Hungerford Report, (December 1997), as adjusted for
WYCB-AM's net revenues.
WOL-AM. Radio One's first radio station, WOL-AM, was purchased in 1980 for
approximately $900,000. WOL-AM was a music station with declining revenue share
and audience share that the Company converted to one
6
of the country's first all-talk radio stations targeting African-Americans.
Radio One's Chairperson, Ms. Catherine L. Hughes, who hosted WOL-AM's daily
four-hour morning show from 1983 to 1995, created a valuable niche for the radio
station as "The Voice of Washington's Black Community." The Company believes
that WOL-AM is a vital communications platform for the community, political and
business leaders in its market. WOL-AM's ratings have historically fluctuated
between a 1% and 2% audience share in the 12-plus market.
WMMJ-FM. Radio One purchased WMMJ-FM in 1987 for approximately $7.5
million. At the time, WMMJ-FM was being programmed in a general market adult
contemporary format, which led it to garner a 1.2% audience share of the 12-plus
market. However, given its relatively low signal strength (Class A with 3,000
watts of power since been upgraded to 6,000 watts) and low ratings, it was
generating minimal revenues and little or no broadcast cash flow. After
extensive research by the Company, WMMJ-FM was the first FM radio station on the
East Coast to introduce an Urban Adult Contemporary ("Urban AC") programming
format. This format focuses on African-Americans in the 25 to 54 age group and
provides adult-oriented Urban Contemporary music from the 1960s, 1970s, 1980s
and 1990s. The Urban AC format was almost immediately successful, and today
WMMJ-FM, with a 4.1% 1997 four-book audience share in the 12-plus market, is a
popular radio station among all 25 to 54-year-olds in Washington, D.C. with a
long-standing and loyal listener base.
WKYS-FM. Radio One purchased WKYS-FM in June 1995 for approximately $34.4
million. WKYS-FM is a Class B (as defined) Young Urban Contemporary radio
station targeting 18 to 34-year-old African-American adults. From 1978 to 1989,
WKYS-FM was Washington, D.C.'s perennial Urban Contemporary leader and was
frequently the market's number one radio station overall. However, in 1987,
WPGC-FM (now owned by CBS Corporation ("CBS")) changed its format from Adult
Contemporary to CHR/Urban and in the Spring of 1989, replaced WKYS-FM as the
number one urban radio station in terms of audience share. From 1986 to the Fall
of 1994, WKYS-FM's overall ratings rank fell from number one to number twelve
with a 3.3% audience share of the 12-plus market, while WPGC-FM moved from near
the bottom to number one with a 9.0% audience share of the 12-plus market. By
1995, the former owner of WKYS-FM abandoned the 18 to 34-year- old demographic
group and began to target 25 to 54-year-olds, making it a direct competitor to
Radio One's WMMJ-FM instead of CBS's WPGC-FM. When Radio One purchased WKYS-FM
in June 1995, it repositioned WKYS-FM's programming away from WMMJ-FM and back
towards 18 to 34-year-olds and WPGC-FM. Since June 1995, the Company has been
able to dramatically increase WKYS-FM's overall 12-plus market audience share
and in 1997 WKYS-FM became Washington, D.C.'s number one rated radio station for
the 12-plus as well as 18 to 34-year old markets. During this same period of
time, WPGC-FM has fallen to the number two position in the 12-plus and 18 to
34-year-old markets.
WYCB-AM. WYCB Acquisition Corporation, a wholly-owned Unrestricted
Subsidiary (as defined) of Radio One, entered into the WYCB Agreement with BHI,
licensee of WYCB-AM, on November 19, 1997 to acquire all of the outstanding
stock of BHI for approximately $3.75 million. WYCB Acquisition Corporation
consummated the DC Acquisition effective March 16, 1998. BHI is now a
wholly-owned subsidiary of WYCB Acquisition Corporation and also an Unrestricted
Subsidiary of Radio One. WYCB-AM is currently the top-rated Gospel radio station
in Washington, D.C. The Company believes WYCB-AM's Gospel programming format
will provide the Company with access to another segment of the African-American
community in Washington, D.C., which will complement its existing radio station
group in that market.
BALTIMORE, MARYLAND
The Baltimore market is the 19th largest radio market in terms of
population and had 1997 radio advertising revenues totaling an estimated $88.0
million. In 1995, Baltimore had the eleventh largest African-American population
in the United States with an MSA population of approximately 2.5 million
(approximately 26.0% of which was African-American). The Company believes
Baltimore is "under radioed" with only 15 viable FM radio stations (according to
Duncan's Radio Market Guide), in part because of its close proximity to
Washington, D.C., and therefore, a particularly attractive market. The Company
believes it owns the strongest franchise of African-American targeted radio
stations in the Baltimore market with the only two FM radio stations and two of
the four AM radio stations which target African-Americans.
7
1994(c) 1995(c) 1996(c) 1997(c)
------------- ------------- -------------- -------------
WERQ-FM(a)
Audience share (12-plus) .............. 5.6% 5.2% 6.4% 9.3%
Audience share rank (12-plus) ......... 6 7 4 1
Audience share (18-34) ................ 8.3% 8.6% 10.7% 16.0%
Audience share rank (18-34) ........... 3 2 2 1
WOLB-AM(a)
Audience share (12-plus) .............. 0.4% 0.9% 0.6% 0.9%
Audience share rank (12-plus) ......... 32(t) 23(t) 28(t) 24
Audience share (35-64) ................ 0.6% 1.1% 0.9% 1.2%
Audience share rank (35-64) ........... 26(t) 19(t) 23 17
WERQ-FM and WOLB-AM (Combined)(a)
Audience share (12-plus) .............. 6.0% 6.1% 7.0% 10.2%
Audience share (25-54) ................ 4.3% 4.9% 5.7% 9.1%
Revenue share ......................... 5.2% 6.7% 6.7% 11.1%
Revenue rank .......................... 8 8 8 4
WWIN-FM(b)
Audience share (12-plus) .............. 3.3% 4.0% 3.6% 3.6%
Audience share rank (12-plus) ......... 11 10 10 9
Audience share (25-54) ................ 4.5% 5.5% 4.9% 4.9%
Audience share rank (25-54) ........... 7 5 7(t) 7
WWIN-AM(b)
Audience share (12-plus) .............. 1.0% 1.1% 1.1% 0.8%
Audience share rank (12-plus) ......... 21 18(t) 20(t) 26
Audience share (35-64) ................ 1.2% 1.1% 1.4% 1.1%
Audience share rank (35-64) ........... 19(t) 19(t) 18 19
WWIN-FM and WWIN-AM (Combined)(b)
Audience share (12-plus) .............. 4.3% 5.1% 4.7% 4.4%
Audience share (25-54) ................ 5.6% 6.6% 6.0% 5.8%
Revenue share ......................... 5.1% 5.7% 5.8% 5.2%
Revenue rank .......................... 9 10 10 9
- ----------
As used in this table, "N/A" means not applicable or not available and "(t)"
means tied with one or more radio stations.
(a) Based upon the Hungerford Report, (December, 1997). WERQ-FM and WOLB-FM
jointly report revenue data to Hungerford.
(b) Based upon the Hungerford Report, (December, 1997). WWIN-FM and WWIN-AM
jointly report revenue data to Hungerford.
(c) Audience share and audience share rank data are based on Arbitron four book
averages for the years indicated. Revenue share and rank data are based on the
Radio Revenue Report by Hungerford for December 1997, 1996, 1995 and 1994.
WWIN-FM AND WWIN-AM. In January 1992, Radio One made its first acquisition
outside of the Washington, D.C. market with the purchase of two Baltimore radio
stations, WWIN-FM and WWIN-AM, for approximately $4.7 million. At the time,
these two radio stations were Black Adult Contemporary and Gospel radio
stations, respectively. Combined, the two Baltimore radio stations had
approximately $2.5 million in revenue and approximately $400,000 in broadcast
cash flow. During Radio One's first full year of ownership, through aggressive
selling efforts and expense control, revenues increased to approximately $3.5
million, and broadcast cash flow increased to approximately $1.0 million.
Additionally, at the time of the acquisition, WWIN-FM was a weak second to
WXYV-FM, the dominant Urban Contemporary radio station in the market, with less
than one-third of that radio station's market share. Today, WWIN-FM is a leading
urban radio station, second only to the Company's WERQ-FM, among 25 to
54-year-olds in the Baltimore market (in terms of audience share) and WWIN-AM
continues to occupy an attractive niche on the AM frequency with its Gospel
programming format.
WERQ-FM AND WOLB-AM. In September 1993, Radio One completed another
acquisition in the Baltimore market with the purchase of WERQ-FM and WOLB-AM
(formerly WERQ-AM) for approximately $9.0 million. WERQ-FM, which has a
full-powered signal, was, at the time of its acquisition, a CHR/Urban radio
station, while WERQ-AM was a satellite-fed, all-news radio station. Combined,
these radio stations were losing approximately $600,000 per year. Radio One
proceeded to convert the format of WERQ-FM to a more focused young Urban
Contemporary format targeted at 18 to 34-year-old African-Americans, while
WOLB-AM began simulcasting with Radio One's Black Talk radio station in
Washington, D.C., WOL-AM. These moves, in conjunction with more aggressive sales
efforts and savings from radio station clustering, increased revenues by
approximately $1.0 million and eliminated the operating loss in these radio
stations' first full year of ownership by Radio One. Over time, WERQ-FM's
audience share increased dramatically, and today, it is the number one radio
station in the 12-plus and 18 to 34-year-old market while its former primary
competitor, WXYV-FM, changed format during 1997 and no longer targets the same
listener base as that of WERQ-FM.
8
PHILADELPHIA, PENNSYLVANIA
The Philadelphia market is the fifth largest radio market in terms of MSA
population and had 1997 radio advertising revenues totaling an estimated $226.0
million. In 1995, Philadelphia had the sixth largest African-American population
in the United States with an MSA population of approximately 4.9 million
(approximately 19.9% of which was African-American).
WPHI-FM. On February 8, 1997, Radio One entered into a local marketing
agreement ("LMA") with the then-current owner of WPHI-FM (at the time the
station's call sign was WDRE-FM), and the radio station's programming format
changed from Modern Rock to young Urban Contemporary targeting 18 to 34-year-old
African-Americans like that of WKYS-FM's, one of the Company's radio stations in
Washington, D.C., and WERQ-FM's, one of the Company's radio stations in
Baltimore. On May 19, 1997, Radio One acquired WPHI-FM, providing the Company
with an opportunity to apply its operating strategy in another top-30
African-American market. Although WPHI-FM is a Class A facility operating at the
equivalent of 3,000 watts, the Company believes it adequately reaches at least
90% of the African-Americans in Philadelphia. The Company believes the
acquisition of WPHI-FM fits the Company's acquisition model of finding lower
powered and lower priced radio stations that will adequately cover a target
African-American population due to the relatively high concentration of that
target market in certain geographic sections of a market. In the most recent
Arbitron Survey, WPHI-FM achieved a 3.5% audience share in the 12-plus market
and had solidly positioned itself as the number two young urban station in the
market behind WUSL-FM.
DETROIT, MICHIGAN
The Detroit market is the sixth largest radio market in terms of MSA
population and had 1997 radio advertising revenues totaling an estimated $200.0
million. In 1995, Detroit had the fifth largest African-American population in
the United States with an MSA population of approximately 4.5 million
(approximately 22.6% of which was African-American).
On December 23, 1997, Radio One entered into the Bell Agreement to
acquire all of the outstanding capital stock of Bell, the owner of two radio
stations located in the Detroit, Michigan market and one radio station located
in Kingsley, Michigan. Pursuant to the Bell Agreement, Radio One agreed to pay
approximately $34.2 million in cash plus the cost of certain improvements to the
stations, $2.0 million of which was deposited in escrow upon the execution of
the Agreement and will be available to the sellers as liquidated damages if
Radio One breaches its obligations thereunder. The consummation of the Bell
Acquisition is contingent upon certain matters, including the receipt of final
approval from the FCC for the transfer of the FCC licenses. Radio One expects to
complete the Bell Acquisition by the end of the third quarter of 1998 which may
require the exercise of up to four one month extensions of the closing date,
each extension to cost $150,000. Radio One anticipates that Bell will become a
Restricted Subsidiary, as that term is defined in the Indenture, and a guarantor
of the Notes.
ADVERTISING REVENUES
Substantially all of the Company's revenues are generated from the sale of
local and national advertising for broadcast on its radio stations. Additional
broadcasting revenue is generated from network compensation payments and other
miscellaneous transactions. Local sales are made by the sales staffs located in
Washington, D.C., Baltimore and Philadelphia. National sales are made by firms
specializing in radio advertising sales on the national level, in exchange for a
commission from the Company that is based on a percentage of the Company's gross
revenue from the advertising obtained. Approximately 69% of the Company's net
broadcasting revenues for the fiscal year ended December 31, 1997 were generated
from the sale of local advertising and 26% from sales to national advertisers
with the balance of net broadcasting revenues being derived from various special
events hosted by the Company as well as sponsorships and other similar forms of
revenue generation.
The Company believes that advertisers can reach the African-American
community more cost-effectively through radio broadcasting than through
newspapers or television. Advertising rates charged by radio stations are
9
based primarily on (i) a radio station's audience share within the demographic
groups targeted by the advertisers, (ii) the number of radio stations in the
market competing for the same demographic groups and (iii) 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. Each radio station's ratings are used by
its advertisers to consider advertising with the radio station, and are used by
the Company to chart audience growth, set advertising rates and adjust
programming. The radio broadcast industry's principal ratings are from The
Arbitron Company ("Arbitron"), to which the Company subscribes. Arbitron
publishes monthly and quarterly ratings surveys for significant domestic radio
markets. These surveys are the Company's primary source of ratings data with
respect to its radio stations.
COMPETITION
Radio broadcasting is a highly competitive business. Each of the Company's
radio stations competes for audience share and advertising revenue directly with
other radio stations, as well as with other media such as billboards, newspapers
and television. There are well-capitalized firms competing in the same
geographic markets as the Company, many of which have greater financial
resources.
The financial success of each of the Company's radio stations depends, to a
significant degree, upon its audience ratings, its share of the overall radio
advertising revenue within a specific market and the economic health of that
market. The audience ratings and advertising revenue of the Company's individual
radio stations are subject to change, and any adverse change in a particular
market could have a material adverse effect on the total revenue and broadcast
cash flow of the Company. The Company's radio stations compete for audience
share and advertising revenue directly with other FM and AM radio stations and
with other media within their respective markets. While the Company already
competes with other radio stations with comparable programming formats in each
of its markets, if another radio station in the market were to convert its
programming format to a format similar to one of the Company's radio stations,
if a new radio station were to adopt a competitive format or if an existing
competitor were to strengthen its operations, the Company's radio stations could
suffer a reduction in ratings and/or advertising revenue and could require
increased promotion and other expenses. In addition, certain of the Company's
radio stations compete, and in the future other radio stations of the Company
may compete, with duopolies or other combinations of radio stations operated by
a single operator.
Radio broadcasting is also increasingly subject to competition from new
media technologies that are being developed or introduced, such as the delivery
of audio programming over the Internet and by cable television systems or the
introduction of digital audio broadcasting ("DAB"). DAB may provide a medium for
the delivery by satellite or terrestrial means of multiple audio programming
formats to local and national audiences. The Company cannot predict the effect,
if any, that any such new technologies may have on the radio broadcasting
industry.
ANTITRUST
An important element of the Company's growth strategy involves the
acquisition of additional radio stations. Following the passage of the
Telecommunications Act of 1996, the Antitrust Division of the Department of
Justice has become more aggressive in reviewing proposed acquisitions of radio
stations and radio station networks which otherwise complied with the FCC's
ownership limitations, particularly in instances where the proposed acquiror
already owns one or more radio stations in a particular market and the
acquisition involves another radio station in the same market. The Department of
Justice reviews transactions on a case-by-case basis to determine whether
competition will be adversely affected after the transaction is consummated.
Recently, the Antitrust Division obtained consent decrees requiring an acquiror
to dispose of one or more radio stations in a particular market where the
acquisition (which would otherwise comply with the FCC's ownership limitations)
would have resulted in an undue concentration of market share by the acquiror.
The post-acquisition concentration of combined market share and combined
advertising revenues of the acquiror were the likely factors which caused
10
the Antitrust Division to require divestiture. Additionally, any acquisitions
are potentially subject to review by the Federal Trade Commission.
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. The Communications Act provides for the FCC
to exercise its licensing authority to provide a fair, efficient and equitable
distribution of broadcast service throughout the United States. Among other
things, the FCC assigns frequency bands for radio broadcasting; determines the
particular frequencies, locations and operating power of radio broadcast
stations; issues, renews, revokes and modifies radio broadcast station licenses;
regulates transmitting equipment used by radio broadcast stations; 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 Communications Act prohibits the sale or assignment of an FCC license,
or other 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 rules, licensee "character" and compliance with the
Anti-Drug Abuse Act of 1988.
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 complete and is qualified in its entirety by the text of the
Communications Act, the FCC's rules and regulations, and the public notices and
rulings of the FCC. A potential investor should refer to the Communications Act
and these FCC rules and policies for further information concerning the nature
and extent of federal regulation of radio broadcast stations.
A licensee's failure to observe 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 "short" (less than the full
eight-year) renewal terms, grant of a license with conditions or, for
particularly egregious violations, the denial of a license renewal application,
the revocation of an FCC license or the denial of FCC consent to acquire
additional broadcast properties. Congress and the FCC have had under
consideration, and 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 the Company's
radio stations, result in the loss of audience share and advertising revenues
for the Company's radio broadcast stations or affect its ability to acquire
additional radio broadcast stations or finance such acquisitions. Such matters
may include changes to the license authorization and renewal process; proposals
to impose spectrum use or other fees on FCC licensees; auction of new broadcast
licenses; changes to the FCC's equal employment opportunity regulations and
other matters relating to involvement of minorities and women in the
broadcasting industry; proposals to change rules relating to political
broadcasting including proposals to grant free air time to candidates, and other
changes regarding program content; proposals to restrict or prohibit the
advertising of beer, wine and other alcoholic beverages; technical and frequency
allocation matters, including those relative to the implementation of digital
audio broadcasting on both a satellite and terrestrial basis; changes in
broadcast cross-interest, multiple ownership, foreign ownership, cross-ownership
and ownership attribution policies; changes to technical broadcast requirements;
proposals 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.
The Company cannot predict whether or not any such changes might be adopted
nor can it predict what other matters might be considered in the future, nor can
it judge in advance what impact, if any, the implementation of any of these
proposals or changes might have on its business.
11
FCC Licenses. The Communications Act provides that a broadcast station
license may be granted to any applicant if the public interest, convenience and
necessity will be served thereby, subject to certain limitations. 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. 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: (i) the radio station has served the public interest, convenience
and necessity, (ii) there have been no serious violations by the licensee of the
Communications Act or FCC rules and regulations, and (iii) there have been no
other violations of the Communications Act or FCC rules and regulations which,
taken together, indicate a pattern of abuse. After considering these factors,
the FCC may grant the license renewal application with or without conditions,
including renewal for a lesser term, or hold an evidentiary hearing. In
addition, the Communications Act authorizes the filing of petitions to deny a
license renewal during specific periods of time after a renewal application has
been filed. Interested parties, including members of the public, may use such
petitions to raise issues concerning a renewal applicant's qualifications. If a
substantial and material question of fact concerning a renewal or other
application is raised by the FCC or other interested parties, or if for any
reason the FCC cannot determine that grant of the renewal application would
serve the public interest, convenience and necessity, the FCC will hold an
evidentiary hearing on the application. If as a result of an evidentiary hearing
the FCC determines that the licensee has failed to meet the requirements
specified above and that no mitigating factors justify the imposition of a
lesser sanction, then the FCC may deny a license renewal application. Only after
a license renewal application is denied will the FCC accept and consider
competing applications for the vacated frequency. Also, during certain periods
when a renewal application is pending, the transferability of the applicant's
license may be restricted. Historically, the Company's licenses have been
renewed without any conditions or sanctions imposed. However, there can be no
assurance that the licenses of each station owned by the Company will be
renewed.
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 one on which AM radio stations are assigned to serve wide areas,
particularly at night. Clear channel AM radio stations are classified as either:
(i) Class A radio stations, which operate unlimited time and are designed to
render primary and secondary service over an extended area, or (ii) Class B
radio stations, which operate unlimited time and are designed to render service
only over a primary service area. Class D radio stations, which operate either
daytime, or unlimited time with low nighttime power, may operate on the same
frequencies as clear channel radio stations. A regional channel is one on which
Class B and Class D AM radio stations may operate and serve primarily a
principal center of population and the rural areas contiguous to it. A local
channel is one on which AM radio stations operate unlimited time and serve
primarily a community and the suburban and rural areas immediately contiguous to
it. A Class C AM radio station operates on a local channel and is designed to
render service only over a primary service area that may be reduced as a
consequence of interference.
The minimum and maximum facilities requirements for an FM radio station are
determined by its class. Possible FM class designations depend upon the
geographic zone in which the transmitter of the FM radio station is located. 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 or C radio
stations.
The following table sets forth with respect to each of the Company's radio
stations: (i) the market, (ii) the radio station call letters, (iii) the year of
acquisition, (iv) the class of FCC license, (v) the effective radiated power
("ERP"), if an FM radio station, or the power, if an AM radio station, (vi) the
antenna height above average terrain ("HAAT"), if an FM radio station, or the
above insulator measurement ("AI"), if an AM radio station, (vii) the operating
frequency and (viii) the date on which the radio station's FCC license expires.
12
ERP (FM) HAAT (FM)
STATION YEAR OF FCC POWER (AM) AI (AM) EXPIRATION
MARKET(a) CALL LETTERS ACQUISITION CLASS IN WATTS(b) IN METERS(c) FREQUENCY DATE OF LICENSE
- ------------------ -------------- ------------- ------- --------------- -------------- ----------- ------------------
Washington, D.C. WOL-AM 1980 C 1,000 52.1 1450 kHz 10/1/2003
WMMJ-FM 1987 A 2,900(d) 146.0 102.3 MHz 10/1/2003
WKYS-FM 1995 B 24,000(e) 215.0 93.9 MHz 10/1/2003
WYCB-AM (f) C 1,000 50.9 1340 kHz 10/1/2003
Baltimore WWIN-AM 1992 C 1,000 61.0 1400 kHz 10/1/2003
WWIN-FM 1992 A 3,000 91.0 95.9 MHz 10/1/2003
WOLB-AM 1993 D 1,000 85.4 1010 kHz 10/1/2003
WERQ-FM 1993 B 37,000(e) 174.0 92.3 MHz 10/1/2003
Philadelphia WPHI-FM 1997 A 340(g) 305.0 103.9 MHz 8/1/1998
- ----------
(a) A broadcast station's market may be different from its community of license.
(b) 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 transmitter and the HAAT of
the radio station's antenna.
(c) The height of an AM radio station's antenna is measured by reference to AI
and the height of an FM radio station's antenna is measured by reference to
HAAT.
(d) WMMJ-FM uses a directional antenna and it operates at a power equivalent to
6,000 watts at 100 meters.
(e) WKYS-FM and WERQ-FM operate at powers equivalent to 50,000 watts at 150
meters. WERQ-FM uses a directional antenna.
(f) Radio One acquired this radio station through an Unrestricted Subsidiary in
the first quarter of 1998.
g) WPHI-FM operates at a power equivalent to 3,000 watts at 100 meters.
Ownership Matters. The Communications Act requires prior approval of the
FCC for the assignment of a broadcast license or the transfer of control of a
corporation or other entity holding a license. In determining whether to approve
an assignment of a radio broadcast license or a transfer of control of a
broadcast licensee, the FCC considers, among other things, the financial and
legal qualifications of the prospective assignee or transferee, including
compliance with FCC restrictions on non-U.S. citizen or entity ownership and
control, compliance with FCC rules limiting the common ownership of certain
"attributable" interests in broadcast and newspaper properties, the history of
compliance with FCC operating rules, and the "character" qualifications of the
transferee or assignee and the individuals or entities holding "attributable"
interests in them. Applications to the FCC for assignments and transfers are
subject to petitions to deny by interested parties.
To obtain the FCC's prior consent to assign or transfer a broadcast
license, appropriate applications must be filed with the FCC. If the application
involves the assignment of the license or a "substantial change" in ownership or
control (i.e., the transfer of more than 50% of the voting stock), the
application must be placed on public notice for a period of 30 days during which
petitions to deny the application may be filed by interested parties, including
members of the public. If an assignment application does not involve new
parties, or if a transfer of control application does not involve a "substantial
change" in ownership or control, it is a "pro forma" application. The "pro
forma" application is nevertheless subject to informal objections filed against
it. If the FCC grants an assignment or transfer application, interested parties
have 30 days from public notice of the grant to seek reconsideration of that
grant. The FCC usually has an additional 10 days to set aside such grant on its
own motion. When ruling on an assignment or transfer application, the FCC is
prohibited from considering whether the public interest might be served by an
assignment or transfer to any party other than the assignee or transferee
specified in the application.
Under the Communications Act, a broadcast license may not be granted to or
held by any corporation that has more than one-fifth 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 provides that no FCC broadcast license may be granted to
any corporation directly or indirectly controlled by any other corporation of
which more than one-fourth of its capital stock is owned of record or voted by
non-U.S. citizens if the FCC finds the public interest will be served by the
refusal of such license. These restrictions apply in modified form to other
forms of business organizations, including partnerships, and limited liability
companies.
13
The FCC generally applies its other broadcast ownership limits 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 have the right to vote five
percent or more of the stock of a licensee corporation are generally deemed
attributable interests, as are positions as an officer or director of a
corporate parent of a broadcast licensee. The FCC treats all partnership
interests as attributable, except for those limited partnership interests that
under FCC policies are considered "insulated" from "material involvement" in the
media-related activities of the partnership. The FCC currently treats limited
liability companies like limited partnerships for purposes of attribution. Stock
interests held by insurance companies, mutual funds, bank trust departments and
certain other passive investors that hold stock for investment purposes only
become attributable with the ownership of ten percent or more of the voting
stock of the corporation holding broadcast licenses. To assess whether a voting
stock interest in a direct or an indirect parent corporation of a broadcast
licensee is attributable, the FCC uses a "multiplier" analysis in which
non-controlling voting stock interests are deemed proportionally reduced at each
non-controlling link in a multi-corporation ownership chain. A time brokerage
agreement with another radio station in the same market creates an attributable
interest in the brokered radio station as well for purposes of the FCC's local
radio station ownership rules, if the agreement affects more than 15% of the
brokered radio station's weekly broadcast hours. See "Local Marketing
Agreements."
Debt instruments, non-voting stock, options and warrants for voting stock
that have not yet been exercised, insulated limited partnership interests where
the limited partner is not "materially involved" in the media-related activities
of the partnership, and minority voting stock interests in corporations where
there is a single holder of more than 50% of the outstanding voting stock whose
vote is sufficient to affirmatively direct the affairs of the corporation,
generally do not subject their holders to attribution. The FCC's rules also
specify other exceptions to these general principles for attribution. The FCC is
currently evaluating whether to: (i) raise the benchmark for voting stock from
five to ten percent, (ii) raise the benchmark for passive investors holding
voting stock from ten to twenty percent, (iii) continue the single 50%
stockholder exception, and/or (iv) attribute non-voting stock or perhaps
non-voting stock interests when combined with other rights such as voting shares
or contractual relationships. More recently, the FCC has solicited comment on
proposed rules that would (i) treat an otherwise nonattributable ownership
equity or debt interest in a licensee as an attributable interest where the
interest holder is a program supplier or the owner of a broadcast station in the
same market and the equity and/or debt holding is greater than a specified
benchmark and (ii) in certain circumstances, treat the licensee of a broadcast
station that sells advertising time on another station in the same market
pursuant to a joint sales agreement as having an attributable interest in the
station whose advertising is being sold.
The Communications Act and FCC rules generally restrict ownership operation
or control of, or the common holding of attributable interests in, (i) radio
broadcast stations above certain limits servicing the same local market, (ii) a
radio broadcast station and a television broadcast station servicing the same
local market, and (iii) a radio broadcast station and a daily newspaper serving
the same local market. These rules include specific signal contour overlap
standards to determine compliance. Under these "cross-ownership" rules, the
Company, absent waivers, would not be permitted to own a radio broadcast station
and acquire an attributable interest in any daily newspaper or television
broadcast station (other than a low-powered television station) in the same
market where it then owned any radio broadcast station, and the Company's
stockholders, officers or directors, absent a waiver, could not hold an
attributable interest in a daily newspaper or television broadcast station. The
FCC is currently reviewing the ban on common ownership of a radio station and a
daily newspaper in the same geographic area. The FCC's rules provide for the
liberal grant of a waiver of the rule prohibiting common ownership of radio and
television stations in the same geographic market in the top 25 television
markets if certain conditions are satisfied, and the FCC will consider waivers
in other markets under more restrictive standards. The FCC is reviewing its ban
on the common ownership of a radio station and a television station or newspaper
including extending the policy of liberal waivers of common ownership of radio
and television stations to the top 50 television markets.
Although current FCC nationwide radio broadcast ownership rules allow one
entity to own, control or hold attributable interests in an unlimited number of
FM radio stations and AM radio stations nationwide, the FCC's rules limit the
number of radio broadcast stations in local markets in which a single entity may
own an attributable interest as follows:
14
o In a radio market with 45 or more commercial radio stations, a party may
own, operate, or control up to 8 commercial radio stations, not more than 5
of which are in the same service (AM or FM).
o In a radio market with between 30 and 44 (inclusive) commercial radio
stations, a party may own, operate, or control up to 7 commercial radio
stations, not more than 4 of which are in the same service (AM or FM).
o In a radio market with between 15 and 29 (inclusive) commercial radio
stations, a party may own, operate, or control up to 6 commercial radio
stations, not more than 4 of which are in the same service (AM or FM).
o In a radio market with 14 or fewer commercial radio stations, a party may
own, operate, or control up to 5 commercial radio stations, not more than 3
of which are in the same service (AM or FM), except that a party may not
own, operate, or control more than 50 percent of the radio stations in such
market.
The FCC is currently reviewing the effect of local market ownership
limitations on competition in the broadcast industry to determine if a
recommendation to repeal or modify the rules should be made to Congress.
Because of these multiple and cross-ownership rules, if a stockholder of
Radio One holds an "attributable" interest in Radio One, such stockholder,
officer or director may violate the FCC's rules if such person or entity also
holds or acquires an attributable interest in other television or radio
stations, or in daily newspapers, depending on the number and location of those
radio stations and the location of those television broadcast stations or daily
newspapers. If an attributable stockholder, officer or director of Radio One
violates any of these ownership rules, the Company may be unable to obtain from
the FCC one or more authorizations needed to conduct its radio station business
and may be unable to obtain FCC consents for certain future acquisitions. As
long as one person or entity holds more than 50% of the voting power of the
Common Stock of the Company where the vote of such person or entity is
sufficient to affirmatively direct the affairs of the Company, another
stockholder, unless serving as an officer and/or director, generally would not
hold an attributable interest in Radio One. As of December 31, 1997, Ms. Hughes
owned approximately 54.2% of the total voting power of the Common Stock of the
Company. However, if the Warrants (as defined) are exercised, Ms. Hughes
ownership would be approximately 26.3% and no one person or entity would hold
sufficient voting power to direct the affairs of the Company.
Under its "cross-interest" policy, the FCC considers "meaningful"
relationships among competing media outlets in the same market, even if the
ownership rules do not specifically prohibit the realtionship. Under this
policy, the FCC may consider significant nonattributable equity interests
(including non-voting stock, voting stock, limited partnership and limited
liability company interests) combined with an attributable interest in a media
outlet in the same market, joint ventures or common key employees among
competitors. The cross-interest policy does not necessarily prohibit all of
these interests, but requires that the FCC consider whether, in a particular
market, the "meaningful" relationships between competitors could have a
significant adverse effect upon economic competition and program diversity. In a
rule making proceeding concerning the attribution rules, the FCC has sought
comment on, among other things, (i) whether the cross-interest policy should be
applied only in smaller markets, and (ii) whether non-equity financial
relationships such as debt, when combined with multiple business relationships,
such as local marketing agreements, raise concerns under the cross-interest
policy. The FCC has proposed treating joint sales arrangements, and debt or
equity interests as attributable interests in certain circumstances without
regard to the cross-interest policy.
Programming and Operation. The Communications Act requires broadcasters to
serve the "public interest." Since the late 1980's, the FCC gradually has
relaxed or eliminated many of the more formalized procedures it developed to
promote the broadcast of certain types of programming responsive to the needs of
a radio station's community. Nevertheless, a broadcast licensee continues to be
required to present programming in response to community problems, needs and
interests and to maintain certain records demonstrating its responsiveness. The
FCC will consider complaints from listeners about a broadcast station's
programming when it evaluates the licensee's renewal application, but listeners'
complaints also may be filed and considered at any time. Stations also must pay
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
15
broadcast of contests and lotteries and technical operation (including limits on
human exposure to radio frequency radiation). From time to time, complaints may
be filed against the Company's radio stations alleging violations of these or
other rules.
In addition, licensees must develop and implement programs designed to
promote equal employment opportunities and must submit reports to the FCC on
these matters annually and in connection with each license renewal application.
The FCC rules also 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, provided that the contours of the radio stations overlap in
a certain manner. 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.
Local Marketing Agreements. Often radio stations enter into LMAs or time
brokerage agreements. These agreements take various forms. Separately owned and
licensed radio stations may agree to function cooperatively in programming,
advertising sales and other matters, subject to compliance with the antitrust
laws and the FCC's rules and policies, including the requirement that the
licensee of each radio station maintain independent control over the programming
and other operations of its own radio station. One type of time brokerage
agreement is a programming agreement between two separately owned radio stations
that serve a common service area whereby the licensee of one radio station
programs substantial portions of the broadcast day of the other licensee's radio
station (subject to ultimate editorial and other controls being exercised by the
radio station licensee) and sells advertising time during these program
segments. The FCC has held that such agreements do not violate the
Communications Act as long as the licensee of the radio broadcast station that
is being substantially programmed by another entity (i) remains ultimately
responsible for, and maintains control over, the operation of its radio station,
and (ii) otherwise ensures the radio station's compliance with applicable FCC
rules and policies.
A radio broadcast station that brokers time on another radio broadcast
station or engages in a time brokerage agreement with a radio broadcast station
in the same market will be considered to have an attributable ownership interest
in the brokered radio station for purposes of the FCC's local ownership rules,
if the time brokerage arrangement covers more than 15% of the brokered weekly
broadcast hours. As a result, a radio broadcast station may not enter into a
time brokerage agreement that allows it to program more than 15% of the
broadcast time, on a weekly basis, of another local radio broadcast station that
it could not own under the FCC's local multiple ownership rules. The FCC is
considering whether it should treat as attributable multiple business
arrangements among local radio stations such as joint sales accompanied by debt
financing. Also, as described above, FCC rules prohibit a radio broadcast
licensee from simulcasting more than 25% of its programming on another radio
broadcast station in the same broadcast service (that is, AM/AM or FM/FM) where
the two radio stations serve substantially the same geographic area, whether the
licensee owns both radio stations or owns one radio station and programs the
other through a time brokerage agreement. Thus far, the FCC has not considered
what relevance, if any, a time brokerage agreement may have upon its evaluation
of a licensee's performance at renewal time. On February 8, 1997, the Company
entered into an LMA with the then-owner of WPHI-FM in Philadelphia. The LMA
allowed the Company to program WPHI-FM 24 hours a day, seven days a week, and
continued in effect until the consummation of the Philadelphia Acquisition on
May 19, 1997. Radio One may enter into additional LMAs in the future.
RF Radiation. In 1985, the FCC adopted rules regarding human exposure to
levels of radio frequency ("RF") radiation. These rules require applicants for
renewal of broadcast licenses or modification of existing licenses to inform the
FCC at the time of filing such applications whether an existing broadcast
facility would expose people to RF radiation in excess of certain guidelines.
The FCC has since adopted more restrictive radiation limits which became
effective October 15, 1997.
Digital Audio Broadcasting. The FCC allocated spectrum to a new technology,
digital audio broadcasting, to deliver satellite-based audio programming to a
national or regional audience and issued regulations for a DAB service on March
3, 1997. DAB may provide a medium for the delivery by satellite or terrestrial
means of multiple new audio programming formats with compact disc quality sound
to local and national audiences. It is not known at
16
this time whether this technology also may be used in the future by existing
radio broadcast stations either on existing or alternate broadcasting
frequencies. In addition, applicants who applied to the FCC for authority to
offer multiple channels of digital, satellite-delivered S-Band aural services
that could compete with conventional terrestrial radio broadcasting participated
in an auction of the spectrum reserved for DAB held in April 1997. Two licenses
were awarded through the auction pursuant to which the licensees will be
permitted to sell advertising and lease channels. The FCC's rules require that
the service begin by 2001 and be fully operational by 2003. These satellite
radio services use technology that may permit higher sound quality than is
possible with conventional AM and FM terrestrial radio broadcasting.
Recently, the FCC established a new Wireless Communications Service ("WCS")
in the 2305-2320 and 2345-2360 MHZ bands (the "WCS Spectrum"). The FCC awarded
licenses for the WCS Spectrum by competitive bidding using multiple round
electronic auction procedures. Licensees are permitted to provide any fixed,
mobile, radio location services, or digital satellite radio service using the
WCS Spectrum. Implementation of DAB would provide an additional audio
programming service that could compete with the Company's radio stations for
listeners, but the effect upon the Company cannot be predicted.
Low Power Radio. The FCC recently requested comments on a proposal to
establish a low power radio service that would be limited to a maximum of one
watt and would cover one to several square miles. The nationwide service would
target "niche markets" and be supported by advertising revenue. Each low power
station would be licensed to operate in a specific location referred to as a
"cell". Only one AM and one FM low power station would be licensed to each cell.
An entity would be able to own either the AM or the FM license in each cell
although one entity could own up to five licenses nationwide. The licenses would
be awarded randomly (if more than one were filed) rather than by auction.
Implementation of a low power radio service would provide an additional audio
programming service that could compete with the Company's radio stations for
listeners, but the effect upon the Company cannot be predicted.
SUBSIDIARIES AND RELATED ENTITIES
The FCC licenses for eight of the radio stations operated by Radio One are
held by Radio One Licenses, Inc., a Delaware corporation and a wholly-owned
Restricted Subsidiary of Radio One ("License Company"). License Company holds no
other material assets. Radio One formed WYCB Acquisition Corporation, a Delaware
corporation and a wholly-owned Unrestricted Subsidiary, to consummate the DC
Acquisition, which occurred effective as of March 16, 1998. As a result of this
acquisition, WYCB Acquisition Corporation acquired all of the outstanding
capital stock of BHI. BHI is also an Unrestricted Subsidiary of the Company and
holds the FCC license for WYCB-AM. BHI also holds the assets used in the
operation of WYCB-AM. The Company may have other subsidiaries in the future. The
terms "Restricted Subsidiary" and "Unrestricted Subsidiary" are defined in Radio
One's Indenture.
INDUSTRY SEGMENTS
The Company considers radio broadcasting to be its only business segment.
EMPLOYEES
As of December 31, 1997, the Company employed 249 people, approximately 90
of whom are part-time employees. The Company's employees are not unionized. The
Company has not experienced any work stoppages and believes its relations with
its employees are satisfactory.
Each radio station has its own on-air personalities and clerical staff.
However, in an effort to control broadcast and corporate expenses, the Company
centralizes certain radio station functions by market location. For example, the
Company employs one General Manager for each of its markets who is responsible
for all of the Company's radio stations located in such markets and Radio One's
Vice President of Programming oversees programming for all of the Company's
radio stations.
17
ITEM 2. PROPERTIES
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
TYPE OF FACILITY AND OWNED OR LEASED APPROXIMATE SIZE
PROPERTY ADDRESS USE (EXPIRATION DATE) TENANT (SQUARE FEET)
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
5900 Princess Garden Parkway, Corporate Office, Leased Radio One, Inc. 17,175
8th Floor WKYS-FM, WOL-AM (expires
Lanham, Maryland WMMJ-FM, Office/Studio 12/31/2011)
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
4001 Nebraska Avenue, N.W. WKYS-FM Leased Radio One, Inc. Tower and
Washington, D.C. Transmitter/Tower (expires transmitter space
11/30/2001)
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
62 Pierce Street, N.E. WOL-AM, Tower Leased Radio One, Inc. Tower and
Washington, D.C. (expires transmitter space
3/31/2001)
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
4400 Massachusetts Avenue, N.W. WMMJ-FM, Tower Leased Radio One, Inc. Tower space (+)
Washington, D.C. (expires 5/1/99) 200
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
100 St. Paul Street WWIN-AM/FM, Leased Radio One, Inc. 8,000
Baltimore, Maryland WERQ-FM, WOLB-AM (expires
Office/Studio 10/31/2003)
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
Greenmount Avenue and 29th WWIN-AM, Tower Leased Radio One, Inc. 225
Street (expires
Baltimore, Maryland 8/31/2001)
(Waverly Towers)
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
1315 W. Hamburg Street WOLB-AM Leased Radio One, Inc. Tower and
Baltimore, Maryland Tower (expires transmitter space
12/31/2000)
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
7 St. Paul Street Satellite Dish Space Leased Radio One, Inc. 200
Baltimore, Maryland (expires 4/22/99)
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
Baltimore, Maryland Underground Duct Space Leased Radio One, Inc. N/A
(automatic six
month renewals)
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
*100 Old York Road WPHI-FM Leased Radio One, Inc. 4,485
Jenkintown, PA Office/Studio (expired 10/97)
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
**Domino Lane and Fowler Street WPHI-FM Leased Radio One, Inc. Tower and
Philadelphia, PA Transmitter/Tower (expired 7/96) transmitter space
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
2501 Hawkins Point Road WWIN-FM, Tower Owned Radio One, Inc. 16,800
Baltimore City, Maryland
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
2709 Boarman Avenue WERQ-FM, Tower Owned Radio One, Inc. 24,920
(4334-4338 Park Heights Ave.)
Baltimore, Maryland
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
1025 Vermont Avenue WYCB-AM Leased BHI 3,100
Washington, D.C. Office/Studio (expires 7/98)
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
Walker Mill Road WYCB-AM Leased BHI Tower and
District Heights, MD Tower (expires 11/99) transmitter space
- -------------------------------- ------------------------ ------------------- ------------------- ------------------
- ----------
*Radio One leases office space from Old York Road, L.L.C. on a month to month
basis as the lease expired October 1997. Radio One is currently negotiating with
the landlord for a new lease with a five-year term.
**The City of Philadelphia leases the transmitter site to Fox Television
Stations, Inc. under a Master Lease. Fox in turn subleases space on its tower to
Radio One. Both the underlying Master Lease and the sublease expired in 1996.
Fox timely notified the City of Philadelphia of its intent to renew and Fox was
timely notified of the renewal of the sublease. The City of Philadelphia and Fox
are currently negotiating a new Master Lease, including the amount of the
monthly rental. Therefore, Radio One has not been able to enter into a new
sublease with Fox.
The real property owned or leased by Radio One is the subject of a security
interest held pursuant to the terms of the Amended and Restated Credit Agreement
(as defined).
The Company owns substantially all of its other equipment, consisting
principally of studio equipment and office equipment. The towers, antennae and
other transmission equipment used by the Company's radio stations are generally
in good condition, although opportunities to upgrade facilities are periodically
reviewed.
The Company believes that its facilities for its radio stations and office
space in Washington, D.C., Baltimore, and Philadelphia, are generally suitable
and of adequate size for its current and intended purposes other than for
routine modifications and expansions which may be required from time to time but
would not be expected to have a material adverse effect on the Company or the
Company's financial position or performance.
18
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending or threatened to which the Company
is a party or to which any of its properties are subject, other than routine
litigation incidental to its business which either is covered by insurance or,
in the opinion of management of the Company, is not expected to have a material
adverse effect on the Company.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of 1997.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Class A Common Stock
or Class B Common Stock of Radio One. There are 138.45 outstanding shares of
Class A Common Stock of which there are three holders of record as of December
31, 1997, and there are no outstanding shares of Radio One's Class B Common
Stock. 147.04 shares of Class B Common Stock are issuable upon exercise of the
Amended and Restated Warrants dated May 19, 1997, issued by the Radio One (the
"Warrants").
DIVIDENDS
Radio One did not declare any dividends on its Common Stock during 1996 and
1997. Holders of shares of Common Stock are entitled to receive such dividends
as may be declared by Radio One's board of directors out of funds available for
such purpose to the extent not restricted by the terms of the Indenture, the
Preferred Stockholders' Agreement (as defined), and the Amended and Restated
Credit Agreement (as defined). The payment of dividends is currently restricted
by the Amended and Restated Credit Agreement, the Indenture, and the Preferred
Stockholders' Agreement dated May 14, 1997 (the "Preferred Stockholders'
Agreement"), among Catherine L. Hughes, Alfred C. Liggins, III, Jerry A. Moore
III, Alta Subordinated Debt Partners III, L.P. ("Alta"), BancBoston Investments,
Inc. ("BancBoston"), Syncom Capital Corporation ("Syncom"), Alliance Enterprise
Corporation ("Alliance"), Greater Philadelphia Venture Capital Corporation, Inc.
(whose interest was subsequently purchased by Mr. Liggins) ("Greater
Philadelphia"), Opportunity Capital Corporation ("Opportunity"), Capital
Dimensions Venture Fund, Inc. ("Capital"), TSG Ventures L.P. ("TSG"), and
Fulcrum Venture Capital Corporation ("Fulcrum"), and Grant Wilson ("Wilson")
(collectively, such persons other than Ms. Hughes and Messrs. Liggins and Moore,
are referenced to as the "Stockholders").
RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued the following securities pursuant to offerings
exempt from registration under Section 4(2) of the Securities Act:
On June 6, 1995, Radio One issued subordinated promissory notes due in the
year 2003 in the principal amount of $17.0 million (the "2003 Notes") to the
Stockholders. In connection with the issuance of the 2003 Notes, Radio One also
issued (a) warrants to purchase an aggregate of 50.93 shares of Radio One's
Common Stock for an exercise price of $100 per share to Alta, BancBoston and
Wilson. Concurrently with this transaction, the Stockholders (other than Alta,
BancBoston and Wilson) exchanged all of their warrants to acquire shares of
Radio One's Common Stock for cash and a note in the aggregate amount of
approximately $6.6 million and new warrants to acquire up to 96.11 shares of
Common Stock of Radio One for an exercise price per share of $100. All of these
warrants were exchanged on May 19, 1997 for the Warrants.
On May 19, 1997, Radio One issued an aggregate amount of 84,843.03 shares
of Series A 15% Senior Cumulative Exchangeable Redeemable Preferred Stock (the
"Series A Preferred Stock") to Syncom, Alliance, Greater Philadelphia,
Opportunity, Capital, TSG and Fulcrum in exchange for all of their 2003 Notes.
On May 19, 1997, Radio One issued an aggregate amount of 124,467.10 shares
of Series B 15% Senior Cumulative Exchangeable Redeemable Preferred Stock (the
"Series B Preferred Stock") to Alta, BancBoston and Wilson in exchange for all
of their 2003 Notes.
On May 19, 1997, Radio One issued approximately $85.5 million aggregate
principal amount of 12% Senior Subordinated Notes due 2004 to certain "qualified
institutional buyers" as defined by Rule 144A under the Securities Act.
On June 6, 1995 Alfred C. Liggins, III exercised an option to purchase
57.45 shares of Radio One Common Stock pursuant to a stock option granted to Mr.
Liggins.
21
ITEM 6. SELECTED FINANCIAL DATA
The following table contains selected historical consolidated
information with respect to the Company. The selected historical consolidated
financial data for the fiscal years ended December 26, 1993, December 25, 1994,
and December 31, 1995, 1996 and 1997 have been derived from the Company's
audited Consolidated Financial Statements (dollars in thousands). The
Consolidated Financial Statements for the years ended December 31, 1995, 1996
and 1997 are included elsewhere in this Form 10-K.
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements included elsewhere in this Form 10-K.
Fiscal Years Ended
December 26, December 25, Fiscal Years Ended December 31,
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
Net broadcast revenues ................................. $ 11,638 $ 15,541 $ 21,455 $ 23,702 $ 32,367
Operating Expenses:
Station operating expenses ......................... 6,972 8,506 11,736 13,927 18,848
Corporate expenses ................................. 683 1,128 1,995 1,793 2,155
Depreciation and amortization ...................... 1,756 2,027 3,912 4,262 5,828
-------- -------- -------- -------- --------
Total operating expenses ............................... 9,411 11,661 17,643 19,982 26,831
Broadcast operating income ............................. 2,227 3,880 3,812 3,720 5,536
Interest expense, including amortization of deferred
financing costs and debt discount expense .............. 1,983 2,665 5,289 7,252 8,910
Other income (expense) ................................. -- 38 89 (77) 415
-------- -------- -------- -------- --------
Income (loss) before provision for income taxes
and extraordinary item ............................. 244 1,253 (1,388) (3,609) (2,959)
Provision for income taxes ............................. 92 30 -- -- --
-------- -------- -------- -------- --------
Income (loss) before extraordinary item ................ 152 1,223 (1,388) (3,609) (2,959)
Extraordinary item (loss on early retirement of debt) 138 -- 468 -- 1,985
-------- -------- -------- -------- --------
Net income (loss) ...................................... $ 14 $ 1,223 $ (1,856) $ (3,609) $ (4,944)
======== ======== ======== ======== ========
OTHER DATA:
Broadcast cash flow (a) ............................ $ 4,666 $ 7,035 $ 9,719 $ 9,775 $ 13,519
Broadcast cash flow margin ......................... 40.1% 45.3% 45.3% 41.2% 41.8%
EBITDA (b) ......................................... $ 3,983 $ 5,907 $ 7,724 $ 7,982 $ 11,364
EBITDA margin ...................................... 34.2% 38.0% 36.0% 33.7% 35.1%
Capital expenditures ............................... $ 212 $ 639 $ 224 $ 251 $ 2,053
BALANCE SHEET DATA:
Cash and cash equivalents .......................... $ 1,110 $ 1,417 $ 2,703 $ 1,708 $ 8,500
Total assets ....................................... 20,660 20,566 55,894 51,777 79,225
Total debt ......................................... 24,709 23,049 64,585 64,939 74,954
Senior Cumulative Redeemable Preferred
Stock .............................................. -- -- -- -- 22,968
Total stockholders' equity (deficit) ............... $ (5,498) $ (4,367) $(11,394) $(15,003) $(21,984)
22
(a) "Broadcast cash flow" is defined as broadcast operating income plus
corporate expenses and depreciation and amortization of both tangible and
intangible assets. The Company has presented broadcast cash flow data,
which the Company believes is comparable to the data provided by other
companies in the radio broadcasting industry, and is commonly used as a
measure of performance for broadcast companies. Broadcast cash flow does
not purport to represent cash provided by operating activities as reflected
in the Company's consolidated statements of cash flow, is not a measure of
financial performance under generally accepted accounting principles and
should not be considered in isolation or as a substitute for operating
income, cash flows from operating activities or any other measure for
determining the Company's financial performance or liquidity which is
calculated in accordance with generally accepted accounting principles.
(b) "EBITDA" is defined as operating income before depreciation and
amortization.
23
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 Financial Statements and the notes thereto included
elsewhere in this Form 10-K.
INTRODUCTION
The Company currently owns and operates nine radio stations in three major
markets within the United States. During 1997, WYCB Acquisition Corporation, an
Unrestricted Subsidiary of Radio One, entered into a definitive agreement to
acquire all of the outstanding capital stock of BHI, owner of WYCB-AM in
Washington, D.C., for approximately $3.75 million. This transaction was
consummated effective as of March 16, 1998. Also during 1997, Radio One entered
into a definitive agreement to acquire all of the outstanding capital stock of
Bell Broadcasting Company, owner and operator of two radio stations in the
Detroit, Michigan market and one radio station elsewhere in the state of
Michigan, for approximately $34.2 million in cash plus the cost of certain
improvements to the radio stations. Radio One expects to consummate this
transaction before the end of the third quarter of 1998 which may require the
purchase of up to four one month extensions, each extension to cost $150,000.
The operating revenues of the Company are derived from local and national
advertisers and, to a much lesser extent, ticket revenue related to special
events sponsored by the Company throughout the year as well as a management fee
earned for providing corporate services to Radio One of Atlanta, Inc., an
affiliate of the Company. The Company's primary operating expenses involved in
owning, operating and programming its radio stations are commissions on
revenues, employee salaries, and advertising and promotions expenses.
Amortization and depreciation of costs associated with the acquisition of the
stations and interest carrying charges are significant factors in determining
the Company's overall profitability.
The primary source of the Company's revenue is the sale of broadcasting
time on its radio stations for advertising. The Company's significant broadcast
expenses are employee salaries and commissions, programming expenses,
advertising and promotion expenses, rental of premises for studios and rental of
transmission tower space and music license royalty fees. The Company strives to
control these expenses by centralizing certain functions such as finance and
accounting, and the overall programming management function as well as using its
multiple stations, market presence and purchasing power to negotiate favorable
rates with certain vendors and national representative selling agencies.
The Company's revenues are affected primarily by the advertising rates the
Company's radio stations are able to charge as well as the overall demand for
radio advertising time in a market. Advertising rates are based primarily on (i)
a radio station's audience share in the demographic groups targeted by
advertisers, as measured principally by quarterly reports (and to a lesser
extent, by monthly reports) by Arbitron, (ii) the number of radio stations in
the market competing for the same demographic groups and (iii) the supply of and
demand for radio advertising time. Advertising rates are generally highest
during morning and afternoon commuting hours. Most of the Company's revenues are
generated from local advertising, which is sold by each radio station's sales
staff.
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
revenues and broadcast cash flow (i.e., net revenue less station operating
expenses), although broadcast cash flow is not a measure utilized under
generally accepted accounting principles. Broadcast cash flow should not be
considered in isolation from, nor as a substitute for, operating income, net
income, cash flow, or other consolidated income or cash flow statement data
computed in accordance with generally accepted accounting principles, nor as a
measure of the Company's profitability or liquidity. Despite its limitations,
broadcast cash flow is widely used in the broadcasting industry as a measure of
a company's operating performance because it provides a meaningful measure of
comparative radio station performance, without regard to items such as
depreciation and amortization (which can vary depending upon accounting methods
and the book value of assets, particularly in the case of acquisitions) and
corporate expenses.
24
Radio One's operating results in any period may be affected by advertising
and promotion expenses that do not produce commensurate revenues in the period
in which such expenses are incurred. The Company generally incurs advertising
and promotion expenses in order to increase listenership and Arbitron ratings.
Increased advertising revenue may wholly or partially lag behind the incurrence
of such advertising and promotion expenses because Arbitron only reports
complete ratings information on a quarterly basis.
From 1993 to the present, Radio One acquired three radio stations. Most
recently, Radio One acquired WPHI-FM, a radio station in Philadelphia,
Pennsylvania on May 19, 1997 for approximately $20.0 million, and, effective
March 16, 1998, acquired WYCB-AM, a radio station located in Washington, D.C.,
for approximately $3.75 million. During the most recent five fiscal years, other
than the acquisition of WPHI-FM and WYCB-AM, Radio One completed one
acquisition, which was its acquisition in June 1995 of WKYS-FM, a radio station
located in Washington, D.C., for total consideration of approximately $34.4
million. The results of operations for WPHI-FM for approximately 11 months of
fiscal year 1997 and for WKYS-FM for the second half of fiscal year 1995 and for
fiscal years 1996 and 1997 are included in the Consolidated Financial Statements
of the Company included elsewhere in this Form 10-K. The discussion below
concerning results of operations reflects the operations of radio stations owned
and/or operated by the Company during the periods presented and therefore does
not include the pro forma results related to WYCB-AM or any other acquisitions.
As a result of the acquisition of WKYS-FM in June 1995, and WPHI-FM in May 1997
(with the LMA for this station beginning in February 1997) the Company's
historical financial data prior to such times are not directly comparable to the
Company's historical financial data subsequent thereto.
25
RADIO ONE, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following table sets forth certain operating data of the Company for
the fiscal years ended December 31, 1995, 1996 and 1997 (dollars in thousands):
STATEMENT OF OPERATIONS DATA:
(dollars in 000s)
1995 1996 1997
---- ---- ----
Net broadcast revenues ........................................... $ 21,455 $ 23,702 $ 32,367
Operating expenses excluding depreciation and amortization ....... 13,731 15,720 21,003
Depreciation and amortization .................................... 3,912 4,262 5,828
-------- -------- --------
Broadcast operating income ....................................... 3,812 3,720 5,536
Interest expense, including amortization of deferred
financing costs and debt discount expense ...................... 5,289 7,252 8,910
Other income (expense), net ...................................... 89 (77) 415
-------- -------- --------
Income (loss) before provision for income taxes .................. (1,388) (3,609) (2,959)
Provision for income taxes ....................................... -- -- --
-------- -------- --------
Income (loss) before extraordinary item .......................... (1,388) (3,609) (2,959)
Extraordinary item ............................................... 468 -- 1,985
-------- -------- --------
Net loss ......................................................... $ (1,856) $ (3,609) $ (4,944)
======== ======== ========
Broadcast cash flow .............................................. $ 9,719 $ 9,775 $ 13,519
Broadcast cash flow margin ....................................... 45.3% 41.2% 41.8%
EBITDA ........................................................... $ 7,724 $ 7,982 $ 11,364
EBITDA margin .................................................... 36.0% 33.7% 35.1%
Corporate expenses ............................................... $ 1,995 $ 1,793 $ 2,155
26
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
Net broadcast revenues increased to approximately $32.4 million for the
fiscal year ended December 31, 1997 from approximately $23.7 million for the
fiscal year ended December 31, 1996 or 36.7%. This increase in net broadcast
revenues was primarily the result of significant broadcast revenue growth in the
Company's Washington, D.C. and Baltimore, markets as the Company benefited from
ratings increases at its larger radio stations as well as market industry
growth. Additional revenue gains were derived from the LMA of and, subsequently,
the Company's acquisition of, radio station WPHI-FM in Philadelphia in early
1997.
Operating expenses excluding depreciation and amortization increased to
approximately $21.0 million for the fiscal year ended December 31, 1997 from
approximately $15.7 million for the fiscal year ended December 31, 1996 or
33.8%. This increase in expenses was due to higher sales, programming and
administrative costs associated with the significant revenue growth and ratings
gains experienced by the Company's radio stations and increased overhead
expenses related to the overall growth experienced by the Company in the last
year. Additionally, disproportionately higher expenses relative to revenues at
the Philadelphia radio station acquired in 1997 caused the operating expenses of
the Company to be higher in 1997 relative to 1996's level.
Broadcast cash flow increased to approximately $13.5 million for the fiscal
year ended December 31, 1997 from approximately $9.8 million for the fiscal year
ended December 31, 1996 or 37.8%. This increase was attributable to the
increases in broadcast revenues partially offset by higher operating expenses.
The broadcast cash flow margin increased to 41.8% from 41.2% due to the
Company's growth in revenues relative to expenses.
Corporate expenses increased to approximately $2.2 million for the fiscal
year ended December 31, 1997 from approximately $1.8 million for the fiscal year
ended December 31, 1996 or 22.2%. This increase was due primarily to growth in
the corporate staff in conjunction with the Company's overall expansion as well
as higher costs associated with the Company's 1997 high yield bond offering and
the costs associated with the Company's public reporting requirements.
Broadcast operating income increased to approximately $5.5 million for the
fiscal year ended December 31, 1997 from approximately $3.7 million for the
fiscal year ended December 31, 1996 or 48.6%. This increase was attributable to
the increases in broadcast revenues partially offset by higher operating
expenses and higher depreciation and amortization expenses as well as start-up
losses earlier in 1997 related to the acquisition of WPHI-FM.
Interest expense increased to approximately $8.9 million for the fiscal
year ended December 31, 1997 from approximately $7.3 million for the fiscal year
ended December 31, 1996 or 21.9%. This increase related primarily to the May 19,
1997 issuance of the Company's $85.5 million in 12% Senior Subordinated Notes
Due 2004 and the associated retirement of the Company's $45.6 million bank
credit facility at that time.
Other income increased to approximately $415,000 for the fiscal year ended
December 31, 1997 from approximately ($77,000) for the fiscal year ended
December 31, 1996. This increase was primarily attributable to higher interest
income due to higher cash balances associated with the Company's cash flow
growth and capital raised in the Company's high yield debt offering.
Loss before provision for income taxes and extraordinary item decreased to
approximately $3.0 million for the fiscal year ended December 31, 1997 from
approximately $3.6 million for the fiscal year ended December 31, 1996 or 16.7%.
The decrease was due to higher operating and other income partially offset by
higher interest expense associated with the Company's high yield debt offering.
Net loss increased to approximately $4.9 million for the fiscal year ended
December 31, 1997 from approximately $3.6 million for the fiscal year ended
December 31, 1996 or 36.1%. This increase was due to an approximately $2.0
million loss on the early retirement of the indebtedness under the Company's
bank credit facility with the proceeds from the Company's high yield debt
offering as well as the conversion of the Company's then outstanding
subordinated debt into Series A Preferred Stock and Series B Preferred Stock.
27
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
Net broadcast revenues increased to approximately $23.7 million for the
fiscal year ended December 31, 1996 from approximately $21.5 million for the
fiscal year ended December 31, 1995 or 10.2%. This increase was primarily
attributable to gains in both the Company's Washington, D.C. and Baltimore
operations. Net broadcast revenues in Washington, D.C. increased to $14.3
million from $12.7 million or 12.1%, due to the impact of a full year of
advertising revenue for WKYS-FM which was acquired in June 1995, offset by an
8.2% revenue decline to approximately $8.2 million from approximately $8.9
million for the WMMJ-FM/WOL-AM combination. Subsequent to the acquisition of
WKYS-FM in 1995 and for most of 1996, high turnover among the sales staff
relating to the integration of the existing and acquired sales staffs and a flat
Washington, D.C. radio market led to lower than expected advertising revenues.
However, by July 1996, Radio One hired three highly experienced sales managers
who contributed to the improvement in the Company's performance, as reflected in
the Company's improving revenues in the fourth quarter of 1996. In Baltimore,
net broadcast revenue increased to approximately $9.4 million from approximately
$8.8 million or 6.8%. This increase was due primarily to a 4.9% increase to
approximately $4.3 million from approximately $4.1 million at the Company's
WWIN-FM/WWIN-AM combination and an 11.9% increase to approximately $4.8 million
from approximately $4.3 million at the Company's WOLB-AM/WERQ-FM combination, as
both radio station combinations benefited from increasing ratings through much
of the year.
Operating expenses excluding depreciation and amortization increased to
approximately $13.9 million for the fiscal year ended December 31, 1996 from
approximately $11.7 million for the fiscal year ended December 31, 1995 or
18.8%. This increase resulted from greater operating expenses due to the
acquisition and integration of WKYS-FM, and higher marketing and promotion
expenses for all three of the Company's radio stations in the market.
Additionally, in conjunction with the reorganization of the Company's
Washington, D.C. operations following the acquisition of WKYS-FM, the Company
hired three highly experienced sales managers in Washington, D.C. as well as a
prominent on-air personality for its morning program on WKYS-FM which positively
impacted the Company's revenues and ratings beginning late in the fourth quarter
of 1996. In the Company's Baltimore operations, station operating expenses
increased as a result of the addition of a new high-profile on-air personality
for one of the Baltimore radio station's morning shows offset by effective
expense management. The relatively smaller increase in station operating
expenses in Baltimore helped mitigate the overall impact of higher station
operating expenses in Washington, D.C.
Broadcast cash flow increased to approximately $9.8 million for the fiscal
year ended December 31, 1996 from approximately $9.7 million for the fiscal year
ended December 31, 1995 or 1.0% due to higher revenues offset by higher
operating expenses as outlined above. The broadcast cash flow margin decreased
to 41.2% from 45.3% due to the factors noted above.
Corporate expenses decreased to approximately $1.8 million for the fiscal
year ended December 31, 1996 from approximately $2.0 million for the fiscal year
ended December 31, 1995 or 10.0%. This decrease was due to a $778,000 non-cash
compensation expense incurred during the fiscal year ended December 31, 1995
related to the grant of a stock option to Mr. Liggins to purchase 63.16 shares
of the Company's Common Stock, 57.45 shares of which vested in fiscal 1995. This
decrease was partially offset by higher legal and professional expenses during
the fiscal year ended December 31, 1996, as well as expenses associated with the
potential acquisition of various radio stations.
Broadcast operating income decreased to approximately $3.7 million of the
Company for the fiscal year ended December 31, 1996 from approximately $3.8
million for the fiscal year ended December 31, 1995 or 2.6% as a result of the
factors noted above as well as an increase in depreciation and amortization
expense associated with the inclusion of WKYS-FM in Company's financial
statements for the full year.
Interest expense increased to approximately $7.3 million for the fiscal
year ended December 31, 1996 from approximately $5.3 million for the fiscal year
ended December 31, 1995 or 37.7%, as the higher debt levels associated with the
acquisition of WKYS-FM impacted the Company's financial statements for a full
year.
28
Other expenses increased to approximately $77,000 for the fiscal year ended
December 31, 1996 from approximately ($89,000) for the fiscal year ended
December 31, 1995 due to higher interest income associated with higher cash flow
and higher average cash balances more than offset by a loss on the disposal of
leasehold improvements associated with the Company's move to its new facilities
in Lanham, Maryland in 1997 as well as the payment of various corporate back
taxes.
Net loss increased to approximately $3.6 million for the fiscal year ended
December 31, 1996 from approximately $1.9 million for the fiscal year ended
December 31, 1995 or 89.5% due to lower operating income and higher interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the capital structure of the Company consists of
the Company's outstanding long-term debt and stockholders' equity. The
stockholders' equity consists of common stock, additional paid-in capital and
accumulated deficit. The Company's balance of cash and cash equivalents was
approximately $8.5 million at December 31, 1997. The Company's increase in cash
to approximately $8.5 million at December 31, 1997 from approximately $1.7
million at December 31, 1996 resulted primarily from excess proceeds from the
Company's high yield debt offering in 1997 as well as cash from operations. In
addition, the Company has placed $2.0 million in a non-refundable escrow account
to be utilized in the consummation of the Bell Acquisition expected to occur
before the end of the third fiscal quarter of 1998. The balance of the expected
payment required to complete this acquisition will come from the Company's free
cash balances as well as proceeds from a debt or equity offering to be completed
prior to the consummation of the acquisition. As of December 31, 1997
approximately $7.5 million was available under the Company's $7.5 million bank
credit facility (the "Amended and Restated Credit Agreement").
In general, the Company's primary source of liquidity is cash provided by
operations and, to the extent necessary, on undrawn commitments available under
the Amended and Restated Credit Agreement. The Company's ability to borrow in
excess of the commitments set forth in the Amended and Restated Credit Agreement
is limited by the terms of the Indenture and the Preferred Stockholders'
Agreement. Additionally, such terms place restrictions on the Company 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.
Net cash provided by the Company's operating activities increased to
approximately $4.9 million for the fiscal year ended December 31, 1997 from
approximately $2.6 million for the fiscal year ended December 31, 1996 or 88.5%.
This increase was due to higher non-cash charges in excess of an increase in the
net loss. In addition, the Company experienced higher working capital
requirements associated with the Company's growth during the year.
Net cash used in the Company's investing activities increased to
approximately $23.2 million for the fiscal year ended December 31, 1997 from
approximately $1.3 million for the fiscal year ended December 31, 1996 or
1,685%. This increase was due primarily to the acquisition of WPHI-FM on May 19,
1997 as well as the expenditures associated with building new studios for the
Company's Washington, D.C.-based radio stations and new corporate offices in the
same location.
Cash provided by the Company's financing activities increased to
approximately $25.1 million for the fiscal year ended December 31, 1997 from
approximately ($2.4) million for the fiscal year ended December 31, 1996. The
increase was due primarily to the high yield bond financing completed by the
Company on May 19, 1997, partially offset by the retirement of debt under the
Company's commercial bank loan facility with the proceeds from the high yield
offering. During fiscal year ended December 31, 1996, the Company made principal
payments on its commercial bank loan facility of approximately $2.4 million,
leading to the negative cash provided by the Company's financing activities for
the fiscal year ended December 31, 1996.
The Company continuously reviews, and is currently reviewing, opportunities
to acquire additional radio stations, primarily in the top-30 African-American
markets. As of the date hereof, other than the Bell Acquisition,
29
the Company has no written or oral understandings, letters of intent or
contracts to acquire radio stations. The Company anticipates that any future
radio station acquisitions would be financed through funds generated from
operations, equity financings, permitted debt financings, debt financings
through unrestricted subsidiaries or a combination thereof. However, there can
be no assurance that any such financing, if available, will be available on
favorable terms.
In connection with the consummation of the Radio One's high yield debt
offering on May 19, 1997, the S Corporation status of Radio One was terminated.
Generally, a corporation operating as a C corporation may carry forward for
fifteen years (this period of time would include any years during which Radio
One was an S corporation) an accumulated net operating loss ("NOL") incurred in
any taxable year during which it was a C corporation to offset taxable income in
a future year or years. There can be no assurance that Radio One will be able to
use its accumulated NOLs in future tax years. After giving effect to the
termination of the S Corporation status of the Company, Radio One had an NOL
carryforward for U.S. Federal income tax purposes of approximately $5.1 million,
as of December 31, 1997.
Management believes that, based on current levels of operations and
anticipated internal growth, cash flow from operations together with other
available sources of funds will be adequate for the foreseeable future to make
required payments of interest on the Company's indebtedness, to fund anticipated
capital expenditures and working capital requirements and to enable the Company
to comply with the terms of its debt agreements. The ability of the Company to
meet its debt service obligations and reduce its total debt, and the Company's
ability to refinance the Notes, at or prior to their scheduled maturity date in
2004, and redeem the Series A Preferred Stock and Series B Preferred Stock on or
before their maturity date of 2005, will depend upon the future performance of
the Company which, in turn, will be subject to general economic conditions and
to financial, business and other factors, including factors beyond the Company's
control.
YEAR 2000 COMPLIANCE
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 compliance. The Company does not
expect that the cost to modify its information technology infrastructure to be
Year 2000 compliant will be material to its financial condition or results of
operations. The Company does not anticipate any material disruption to its
operations as a result of any failure by the Company to be in compliance. The
Company has evaluated the Year 2000 compliance status of its major suppliers of
technology-based systems and determined that there is no indication that the
Company will experience any material disruption to its operations as a result of
any failure by the Company's suppliers to be in Year 2000 compliance. In the
event that any of these suppliers prove to have not successfully and timely
achieved Year 2000 compliance, the Company does not expect its financial
condition or results of operations to be adversely effected in any material way.
SEASONALITY
The Company's results usually are subject to seasonal fluctuations, which
result in third and fourth fiscal quarter broadcast operating income usually
being greater than first and second fiscal quarter broadcast operating income
with the first fiscal quarter having the lowest level of broadcast operating
income than any of the other three fiscal quarters.
CERTAIN RELEVANT FACTORS
Under the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, forward looking statements, such as earnings projections,
are protected from liability as long as they are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from projected results. The Company wishes to
caution readers that the following important factors, among others, in some
cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual results to differ materially from
those expressed in any forward-looking statements made by, or
30
on behalf of, the Company whether contained herein, in other documents
subsequently filed by the Company with the SEC, or in oral statements:
o Changes in national and regional economies;
o Successful integration of acquired radio stations;
o Pricing fluctuations in local and national advertising;
o Volatility in programming costs;
o Significant leverage and debt service;
o Dependence on key personnel;
o Increased competition;
o Increased regulation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE CLOSURE ABOUT MARKET RISK
The Company has no quantitative or qualitative market risk to report.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of Radio One meeting the requirements of
Regulation S-X are filed on Pages F-1 to F-17. Supplementary financial data are
filed on pages S-1 to and in Exhibit 12.
32
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers and directors of Radio One, as well as
additional information with respect to those persons, are set forth in the table
below. All directors serve for the term for which they are elected or until
their successors are duly elected and qualified or until death, retirement,
resignation or removal. Radio One has chosen not to enter into employment
agreements with any of the named executive officers of Radio One at this time.
As of March 1, 1998, the executive officers and directors of Radio One are:
NAME AGE POSITION
- ---------------------------------- --- ----------------------------------------------------
Catherine L. Hughes(a) ........... 50 Chairperson of the Board and Director
Alfred C. Liggins, III(a) ........ 33 Chief Executive Officer, President and Director
Scott R. Royster ................. 33 Executive Vice President and Chief Financial Officer
Terry L. Jones(b) ................ 51 Director
Brian W. McNeill(b) .............. 42 Director
P. Richard Zitelman(b) ........... 42 Director
- ----------
(a) Mr. Alfred C. Liggins, III is the son of Ms. Catherine L. Hughes.
(b) Member of the Audit and Compensation Committees.
Ms. Hughes has been Chairperson of the Board, Secretary and a Director of
Radio One since 1980, and was Chief Executive Officer of Radio One from 1980 to
1997. She was one of the founders of Radio One's predecessor in 1980. Since
1980, Ms. Hughes has worked in various capacities for Radio One including
President, General Manager, General Sales Manager and talk show host. She began
her career in radio as the General Sales Manager of WHUR-FM, the Howard
University-owned, urban-contemporary radio station located in Washington, D.C.
Mr. Liggins has been Chief Executive Officer since 1997, and President,
Treasurer and a Director of Radio One since 1989. Mr. Liggins joined the Company
in 1985 as an Account Manager at WOL-AM. In 1987 he was promoted to General
Sales Manager and promoted again in 1988 to General Manager overseeing the
Company's Washington, D.C. operations. In 1989, Mr. Liggins became President of
Radio One and engineered the Company's expansion into other markets. Mr. Liggins
is a 1995 graduate of the Wharton School of Business/Executive M.B.A. Program.
Mr. Royster has been Executive Vice President of Radio One since 1997 and
Chief Financial Officer of Radio One since 1996. Prior to joining Radio One, he
served as an independent consultant to Radio One. From 1995 to 1996, Mr. Royster
was a principal at TSG Capital Group, LLC, a private equity investment firm
located in Stamford, Connecticut, which has been an investor in Radio One since
1987. Mr. Royster has also served as an associate and later a principal at
Capital Resource Partners from 1992 to 1995, a private capital investment firm
in Boston, Massachusetts, and as an analyst at Chemical Banking Corporation (now
Chase Banking Corporation) and a Senior Analyst at Chemical Venture Partners
(now Chase Venture Partners) from 1987 to 1990. Mr. Royster is a 1987 graduate
of Duke University and a 1992 graduate of Harvard Business School.
Mr. Jones has been a director of Radio One since 1995. Since 1990, Mr.
Jones has been President of Syndicated Communications, Inc. ("Syncom I"), a
communications venture capital investment company, and its wholly owned
subsidiary, Syncom. He joined Syncom I in 1978 as a Vice President. Mr. Jones
serves in various capacities, including director, president, general partner and
vice president, for various other entities affiliated with Syncom I. He also
serves on the board of directors of the National Association of Investment
Companies, Delta Capital Corporation, Sun Delta Capital Access Center and the
Southern African Enterprise Development Fund. Mr. Jones earned a B.S. degree
from Trinity College, an M.S. from George Washington University and an M.B.A.
from Harvard Business School.
Mr. McNeill has been a director of Radio One since 1995. Since 1986, Mr.
McNeill has been a General Partner of Burr, Egan, Deleage & Co., a private
equity firm which specializes in investments in the communications
34
and technology industries. He has served as a director in many radio and
television broadcasting companies such as Tichenor Media Systems, OmniAmerica
Group, Panache Broadcasting and Shockley Communications. From 1979 to 1986, he
worked at the Bank of Boston where he started and managed that institution's
broadcast lending group. Mr. McNeill is a graduate of Holy Cross College and has
earned an M.B.A. from the Amos Tuck School at Dartmouth College.
Mr. Zitelman has been a director of Radio One since 1995. Since 1985, Mr.
Zitelman has been the President and sole principal of the Zitelman Group, Inc.,
a consulting firm. Since 1984, Mr. Zitelman has been involved in the ownership
and financial oversight of various radio stations. Mr. Zitelman is currently a
principal of Spring Broadcasting, L.L.C. which owns and operates nine radio
stations in four markets. From 1985 to 1994, Mr. Zitelman was a principal of
Media Capital, Inc., which invested in, operated and later sold various radio
stations. Mr. Zitelman is a Certified Public Accountant and earned a B.S. from
the Wharton School of Business at the University of Pennsylvania.
COMMITTEES OF THE BOARD OF DIRECTORS
Radio One has formed an Audit Committee and a Compensation Committee of the
board of directors of Radio One, and all of the directors serving on such Audit
Committee and Compensation Committee are directors who are not employees of
Radio One.
ITEM 11. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
COMPENSATION OF DIRECTORS
Non-officer directors of Radio One are reimbursed for all out-of-pocket
expenses related to meetings attended. Non-officer directors receive no
additional compensation for their services as directors of Radio One, except for
Mr. Zitelman, whose consulting firm bills Radio One for the time he spends
attending board meetings at his standard hourly consulting rate. Mr. Zitelman,
through his consulting firm, received a fee for consulting services rendered in
connection with the acquisition of station WPHI-FM. Officers of Radio One who
serve as directors do not receive compensation for their services as directors
other than the compensation they receive as officers of Radio One.
EXECUTIVE COMPENSATION
The following information relates to compensation of Radio One's Chief
Executive Officer and each of its other executive officers of Radio One as to
whom the total annual salary and bonus exceeded $100,000 (the "Named
Executives") during the fiscal years ended December 31, 1997, 1996 and 1995 (as
applicable):
35
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-----------------------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION
- ------------------------------- ------ ---------- --------- -------------
Catherine L. Hughes,
Chairperson of the Board and Secretary.... 1997 $193,269 $50,000 $ 3,050
1996 150,000 31,477 2,161
1995 150,000 -- 2,604
Alfred C. Liggins, III,
Chief Executive Officer, President and
Treasurer................................. 1997 $193,269 $50,000 $ 3,125
1996 150,000 -- 3,091
1995 150,000 -- 3,124
Scott R. Royster,
Executive Vice President and
Chief Financial Officer................... 1997 $148,077 $25,000 --
1996 55,577(a) -- --
- ----------
(a) Mr. Royster provided consulting services to Radio One in July 1996 and
joined Radio One as a full-time employee in August 1996. Disclosed compensation
represents consulting fees received by Mr. Royster and the portion of his
$125,000 annual salary paid during 1996.
Ms. Catherine L. Hughes is Radio One's Chairperson of the Board. Effective
May 26, 1997 for the remainder of the fiscal year ended December 31, 1997, Radio
One paid Ms. Hughes an annual salary of $225,000 and reimbursed her in the
aggregate amount of $3,050 for various expenses incurred by Ms. Hughes, which
represents additional compensation. Additionally, during 1997, a performance
bonus of $50,000 (which is scheduled to be paid during the first half of 1998)
was earned by Ms. Hughes. In 1998, Radio One anticipates Ms. Hughes continuing
to serve as Radio One's Chairperson of the Board with an annual base
compensation of $225,000, subject to an annual increase and an annual bonus at
the discretion of Radio One's board of directors.
Mr. Alfred C. Liggins, III is Radio One's Chief Executive Officer and
President. Effective May 26, 1997 for the remainder of the fiscal year ended
December 31, 1997, Radio One paid Mr. Liggins an annual salary of $225,000 and
reimbursed him in the aggregate amount of $3,125 for various expenses incurred
by Mr. Liggins which represents additional compensation. Additionally, during
1997, a performance bonus of $50,000 (which is scheduled to be paid during the
first half of 1998) was earned by Mr. Liggins. In 1998, Radio One anticipates
Mr. Liggins continuing to serve as Radio One's Chief Executive Officer and
President with an annual base compensation of $225,000, subject to an annual
increase and an annual bonus at the discretion of Radio One's board of
directors.
Mr. Scott R. Royster is Radio One's Executive Vice President and Chief
Financial Officer. Effective May 26, 1997 for the remainder of the fiscal year
ended December 31, 1997, Radio One paid Mr. Royster an annual salary of
$165,000. Additionally, during 1997, a performance bonus of $25,000 (which was
paid during the first quarter of 1998) was earned by Mr. Royster. In 1998, Radio
One anticipates Mr. Royster continuing to serve as Radio One's Executive Vice
President and Chief Financial Officer with an annual base compensation of
$165,000, subject to an annual increase and an annual bonus at the discretion of
management.
Ms. Mary Catherine Sneed joined Radio One effective January 1, 1998, as
Chief Operating Officer of Radio One. Ms. Sneed's annual base compensation is
$200,000 subject to an annual increase and an annual bonus payable at the
discretion of management.
Ms. Linda J. Eckard joined Radio One effective January 21, 1998, as its
General Counsel. Ms. Eckard's annual base compensation is $150,000 subject to an
annual increase and an annual bonus payable at the discretion of management.
36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 10, 1998, Radio One's authorized capital stock consists of (i)
2,000 authorized shares of Common Stock, $.01 par value (the "Common Stock"),
which consists of (a) 1,000 shares of Class A Common Stock (the "Class A Common
Stock"), of which 138.45 shares are issued and outstanding, and (b) 1,000 shares
of Class B Common Stock the ("Class B Common Stock"), of which no shares are
issued and outstanding and (ii) 250,000 authorized shares of Senior Preferred
Stock, which consists of (a) 140,000 shares of Series A 15% Cumulative
Exchangeable Redeemable Preferred Stock, $.01 par value, of which 84,843.03
shares are issued and outstanding, and (b) 150,000 shares of Series B 15%
Cumulative Exchangeable Redeemable Preferred Stock, $.01 par value (Series B
Preferred Stock and together with the Series A Preferred Stock, the "Senior
Preferred Stock"), of which 124,467.10 shares are issued and outstanding. There
is no established trading market for the Common Stock or the Senior Preferred
Stock.
The following table sets forth as of the date hereof information regarding
Radio One's capital stock, including the beneficial ownership of the Common
Stock and Senior Preferred Stock by (i) each person beneficially owning more
than 5% of the outstanding shares of Common Stock or the Senior Preferred Stock,
(ii) each of Radio One's directors, (iii) each of the Named Executives in the
table under "Compensation of Directors and Executive Officers-Summary
Compensation Table," and (iv) all of Radio One's directors and executive
officers as a group.
SHARES OF COMMON STOCK
BENEFICIALLY OWNED,
WITHOUT SHARES OF COMMON STOCK
GIVING EFFECT TO EXERCISE BENEFICIALLY OWNED AFTER
OF THE GIVING EFFECT TO EXERCISE SHARES OF SENIOR PREFERRED
WARRANTS(A) OF THE WARRANTS(A) STOCK BENEFICIALLY OWNED
------------------------- -------------------------- ---------------------------
PERCENT OF PERCENT OF PERCENT OF
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
SHARES(B) OUTSTANDING SHARES(B) OUTSTANDING SHARES OUTSTANDING
----------- ------------- ----------- ------------- -------------- ------------
Catherine L. Hughes(c)(d) ................ 75.00 54.2% 75.00 26.3% -- --
Alfred C. Liggins, III(c)(d)(h)(p) ....... 62.45 45.1% 63.42 22.2% 2,359.67(q) 1.1%
Terry L. Jones(e)(f) ..................... -- -- 36.12 12.7% 13,595.69(q) 6.5%
Brian W. McNeill (f)(g) .................. -- -- 29.52 10.3% 72,139.57(r) 34.5%
ALTA Subordinated Debt Partners III,
L.P(h)(i) .............................. -- -- 29.52 10.3% 72,139.57(r) 34.5%
Alliance Enterprise Corporation(h)(j) .... -- -- 18.70 6.6% 9,126.55(q) 4.4%
BancBoston Investments Inc.(h)(k) ........ -- -- 20.15 7.1% 49,249.44(r) 23.5%
Capital Dimensions Venture Fund,
Inc.(h)(l) ............................. -- -- 15.24 5.3% 37,258.14(q) 17.8%
Fulcrum Venture Capital Corpora-
tion(h)(m) ............................. -- -- 15.61 5.5% 9,650.09(q) 4.6%
Syncom Capital Corporation(h)(n) ......... -- -- 36.12 12.7% 13,595.69(q) 6.5%
All Directors and Executive Officers of
Radio One as a group(o) ................ 137.45 99.3% 138.42 48.5% -- --
- ----------
(a) The "Warrants" refer to the amended and restated warrants to purchase
147.04 shares of Common Stock issued by Radio One on May 19, 1997. The
information as to beneficial ownership is based on statements furnished to
Radio One by the beneficial owners. As used in this table, "beneficial
ownership" means the sole or shared power to vote or direct the voting of a
security, or the sole or shared investment power with respect to a security
(i.e., the power to dispose of, or direct the disposition of, a security).
Other than with respect to the Warrants, a person is deemed as of any date
to have "beneficial ownership" of any security that such person has the
right to acquire within 60 days of such date. For purposes of computing the
percentage of outstanding shares held by each person named above, other
than with respect to the Warrants, any security that such person has the
right to acquire within 60 days of the date of the calculation is deemed to
be outstanding, but is not deemed to be outstanding for purposes of
computing the percentage ownership of any other person.
(b) The shares of Common Stock are subject to a voting agreement with respect
to the election of Radio One's directors (which is included in the
Warrantholders' Agreement).
(c) The business address for such persons is c/o Radio One, 5900 Princess
Garden Parkway, 8th Floor, Lanham, Maryland 20706.
(d) Ms. Hughes and Mr. Liggins may be deemed to share beneficial ownership of
shares of capital stock owned by each other by virtue of the fact that Ms.
Hughes is Mr. Liggins' mother. Each of Ms. Hughes and Mr. Liggins disclaims
such beneficial ownership.
(e) Represents immediately exercisable Warrants to purchase 36.12 shares of
Common Stock held by Syncom. Mr. Jones is the President of Syncom and his
address is c/o Syncom Capital Corporation, 8401 Colesville Road, Suite 300,
Silver Spring, MD 20910. Mr. Jones may be deemed to share beneficial
ownership of shares of Common Stock issuable to Syncom upon exercise of the
Warrants by virtue of his affiliation with Syncom. Mr. Jones disclaims
beneficial ownership in such shares.
(f) Mr. Jones may be deemed to share beneficial ownership of shares of Senior
Preferred Stock to be owned of record by Syncom by virtue of his
affiliation with Syncom. Mr. Jones disclaims any beneficial ownership of
such shares of Senior Preferred Stock. Mr. McNeill
37
may be deemed to share beneficial ownership of Senior Preferred Stock to be
owned of record by Alta by virtue of his affiliation with Alta. Mr. McNeill
disclaims any beneficial ownership of such shares.
(g) Represents immediately exercisable Warrants to purchase 29.52 shares of
Common Stock held by Alta Subordinated Debt Partners III, L.P. ("Alta").
Mr. McNeill is a general partner of Alta Subordinated Debt Partners III,
L.P. and his address is c/o Alta Subordinated Debt Partners III, L.P., c/o
Burr, Egan, Deleage & Co., One Post Office Square, Boston, MA 02109. Mr.
McNeill may be deemed to share beneficial ownership of shares of Common
Stock issuable to Alta upon exercise of the Warrants by virtue of his
affiliation with Alta. Mr. McNeill disclaims any beneficial ownership of
such shares.
(h) The Warrants are subject to the terms of a Standstill Agreement dated as of
May 19, 1997 among Radio One, the subsidiaries of Radio One, NationsBank of
Texas, N.A., the Trustee, and the other parties named therein (the
"Standstill Agreement") which provides, among other things, that for so
long as the Amended and Restated Credit Agreement, if any, or the Notes are
outstanding, the Warrants are collectively only exercisable for up to (but
not including) 50% of the Common Stock. Although the Warrants are currently
exercisable, the holders of a majority of the outstanding shares of Senior
Preferred Stock must exercise their Warrants if any are to be exercised
prior to the eighth anniversary of the Issue Date.
(i) Represents immediately exercisable Warrants to acquire 29.52 shares of
Common Stock. The principal address of Alta is c/o Burr, Egan, Deleage &
Co., One Post Office Square, Boston, MA 02109.
(j) Represents immediately exercisable Warrants to acquire 18.70 shares of
Common Stock. The principal address of Alliance Enterprise Corporation is
12655 N. Central Expressway, Suite 700, Dallas, TX 75243.
(k) Represents immediately exercisable Warrants to acquire 20.15 shares of
Common Stock. The principal address of BancBoston Investments, Inc. is 100
Federal Street, 32nd Floor, Boston, MA 02110.
(l) Represents immediately exercisable Warrants to acquire 15.24 shares of
Common Stock. The principal address of Capital Dimensions Venture Fund,
Inc. is 2 Appletree Square, Suite 335-T, Minneapolis, MN 55425.
(m) Represents immediately exercisable Warrants to acquire 15.61 shares of
Common Stock. The principal address of Fulcrum Venture Capital Corporation
is 300 Corporate Point, Suite 380, Culver City, CA 90230.
(n) Represents immediately exercisable Warrants to acquire 36.12 shares of
Common Stock. The principal address of Syncom Capital Corporation is 8401
Colesville Road, Suite 300, Silver Spring, MD 20910.
(o) The shares of Common Stock set forth on this line do not include any shares
of Common Stock or Senior Preferred Stock which Mr. Jones and Mr. McNeill
may be deemed to beneficially own. See footnotes (e), (f) and (g), above.
(p) Represents shares of Common Stock held plus immediately exercisable
Warrants to acquire .97 shares of Common Stock.
(q) Represents Series A Preferred Stock.
(r) Represents Series B Preferred Stock.
38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RADIO ONE OF ATLANTA, INC.
Mr. Liggins, who is the Chief Executive Officer and President of Radio One,
is also the President of Radio One of Atlanta, Inc. ("ROA"), which owns and
operates one radio station in Atlanta and operates a second station through an
LMA with Dogwood Communications, Inc. ("Dogwood") in which ROA holds a minority
interest. Dogwood is the owner of radio station WAMJ-FM, located in the Atlanta
market. Mr. Liggins has voting control of ROA, subject to certain conditions,
and owns approximately 47% of the outstanding capital stock of ROA. Ms. Hughes,
who is Chairperson of the Board of Radio One, is a director and the Secretary of
ROA. Ms. Sneed, who is the Chief Operating Officer of Radio One, is also the
General Manager of ROA and receives performance-based bonus compensation and
stock options from ROA as General Manager. Mr. Royster, who is Chief Financial
Officer and Executive Vice President of Radio One, holds those same positions
with ROA. Ms. Eckard, who is General Counsel of Radio One, holds that same
position with ROA. Mr. Jones and Mr. McNeill, who are directors of Radio One,
are also directors of ROA. In addition, Syncom and Burr Egan, companies with
which Mr. Jones and Mr. McNeill, respectively, are associated, are creditors and
shareholders of ROA.
Radio One has entered into a management agreement with ROA whereby Radio
One, through some of its officers and employees, provides accounting, financial
and strategic planning, other general management services and general
programming support services to ROA and Dogwood. In exchange for such corporate
services, Radio One is paid an annual retainer of approximately $100,000 and is
reimbursed for all of its out-of-pocket expenses incurred in connection with the
performance of such corporate services. Radio One expects to receive approval
from the investors in ROA to increase the annual management fee to $300,000 per
annum for fiscal year 1998 and beyond. Radio One believes that the compensation
paid to Radio One under such management agreement and the other material terms
thereof are not materially different than if the agreement were with an
unaffiliated third party.
In addition, Mr. Liggins received a lump sum fee of $50,000 from ROA in
April 1997 as compensation for services he personally provided to ROA. Mr.
Liggins had not previously received any compensation from ROA or Dogwood. During
1997, Radio One's Vice President of Programming, Steve Hegwood, was also
employed by ROA and was paid a salary for programming ROA's radio station in
addition to the salary he received from Radio One. During 1997, Mr. Hegwood
utilized certain resources and the services of certain employees of Radio One in
performing services for ROA.
OFFICE LEASES
Lanham, Maryland
Radio One's principal executive offices and studios for its Washington,
D.C. radio stations ("Lanham Offices") are located in the office building
located at 5900 Princess Garden Parkway, Lanham, Maryland ("Lanham Building").
Radio One leases these offices from National Life Insurance Company, a Vermont
corporation (the "Landlord"). The Landlord has granted Radio One, and Radio One
has exercised, an option to purchase the Lanham Building for $3.75 million, less
a credit of up to $288,000 (related to the tenant improvements Radio One is
making to the Lanham Offices, and the rent payments Radio One is making for the
Lanham Offices) and subject to an increase attributable to Radio One's pro rata
share of the costs paid by the Landlord in connection with entering into each
lease of a portion of the Lanham Building. Closing of Radio One's purchase of
the Lanham Building was to occur on September 30, 1997, if the average monthly
building rents for the Lanham Building for July and August 1997 equaled or
exceeded a stated minimum gross rent amount. The minimum gross rent amount was
not met for such period. Therefore, pursuant to the option, Radio One may waive
the minimum gross rent condition and proceed to close the purchase of the Lanham
Building or elect to postpone the closing, on a month-to-month basis, until
average monthly building rents for a two-month period equal or exceed the
minimum gross rent amount. If the minimum gross rent condition has not been met
and therefore the closing has not occurred on or prior to July 31, 1998, or if,
prior to receipt of notice that the gross rent condition has been met, Radio One
39
delivers written notice that it shall not proceed to closing on or before such
date, Radio One shall have no further obligation to purchase the Lanham Building
and the Landlord shall pay to Radio One an amount, not to exceed $240,000, equal
to Radio One's expenditures for tenant improvements to the Lanham Building. Even
upon termination of the option, Radio One will have the right of first refusal
to match an offer for the Lanham Building, provided that Radio One is not in
default under the lease. Radio One expects to assign its right to purchase the
Lanham Building to Mr. Liggins in order to preserve Radio One's borrowing
capacity. The holders of the Senior Preferred Stock will be provided with an
opportunity to purchase an interest in the Lanham Building at the closing, if
any, of the purchase of the Lanham Building. Mr. Liggins will be assigned the
lease for the Lanham Offices by the Landlord at the closing, if any, of the
purchase of the Lanham Building and Radio One shall continue to make lease
payments to Mr. Liggins (or such assignee). In addition, if the closing of the
purchase of the Lanham Building occurs, Mr. Liggins (or his assignee) will be
required to pay Radio One consideration, in some form, in an amount equal to an
aggregate of $288,000. Such consideration could take the form of a reduction in
Radio One's lease payment obligations in respect of the Lanham Offices, the
transfer of an interest in the Lanham Building to Radio One or some other form.
Radio One's management believes that the terms of the Lanham Lease, should Mr.
Liggins or his assignee acquire the Lanham Building, are not materially
different than if the agreement were with an unaffiliated third party with no
option to purchase the underlying property.
Baltimore, Maryland
Radio One leases office space located at 100 St. Paul Street, Baltimore,
Maryland from Chalrep Limited Partnership, a limited partnership controlled by
Ms. Hughes and Mr. Liggins. Radio One's management believes that the terms of
this lease are not materially different than if the agreement were with an
unaffiliated third party.
OTHER AFFILIATED TRANSACTIONS
The Zitelman Group, Inc. received a fee of $50,000 for consulting services
rendered in connection with the May 19, 1997 acquisition of WPHI-FM in
Philadelphia, Pennsylvania. The Zitelman Group, Inc. is owned by Mr. Zitelman,
who serves as a member of Radio One's board of directors and is a member of
Radio One's Compensation and Audit Committees. The Zitelman Group, Inc. also
receives consulting fees for the time Mr. Zitelman spends attending Radio One's
board meetings and providing other consulting services to Radio One, at his
standard hourly consulting rate.
RADIO ONE OF SAN FRANCISCO, INC.
Mr. Liggins, who is the Chief Executive Officer and President of the
Company, and Mr. Royster, who is the Chief Financial Officer and Executive Vice
President of Radio One, are also President and Executive Vice President,
respectively, of Radio One of San Francisco, Inc., which entered into asset
purchase agreements in December 1997 to acquire two FM stations in the San
Francisco market. In consideration for an opportunity to acquire a financial
interest in Radio One of San Francisco, Inc., Radio One agreed to be responsible
for certain expenses if successful. It is anticipated that these expenses will
not exceed $100,000. Radio One of San Francisco, Inc., subsequently decided not
to consummate the acquisition of the stations.
40
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Financial Statements
The financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.
Index to Financial Statements....................................... F-1
Report of Independent Public Accountants............................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997........ F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.................................. F-4
Consolidated Statements of Changes in Stockholders' Deficit for the
years ended December 31, 1995, 1996 and 1997...................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.................................. F-6
Notes to Consolidated Financial Statements.......................... F-7
(b) Exhibits
3.1 Amended and Restated Certificate of Incorporation of Radio One, Inc.
3.2 Amended and Restated By-laws of Radio One, Inc.*
3.3 Amended and Restated Certificate of Incorporation of Radio One Licenses,
Inc.
3.4 Amended and Restated By-laws of Radio One Licenses, Inc.
4.1 Indenture dated as of May 15, 1997 among Radio One, Inc., Radio One
Licenses, Inc. and United States Trust Company of New York. *
4.2 Purchase Agreement dated as of May 14, 1997 among Radio One, Inc., Radio
One Licenses, Inc., Credit Suisse First Boston Corporation and
NationsBanc Capital Markets, Inc.*
4.3 Registration Rights Agreement dated as of May 14, 1997 among Radio One,
Inc., Radio One Licenses, Inc., Credit Suisse First Boston Corporation
and NationsBanc Capital Markets, Inc.*
4.4 Standstill Agreement dated as of May 19, 1997 among Radio One, Inc.,
Radio One Licenses, Inc., NationsBank of Texas, N.A., United States Trust
Company of New York and the other parties thereto.*
5.1 Form of Opinion and consent of Kirkland & Ellis.*
8.1 Form of Opinion and consent of Kirkland & Ellis.*
10.1 Office Lease dated February 3, 1997 between National Life Insurance
Company and Radio One, Inc. for premises located at 5900 Princess Garden
Parkway, Lanham, Maryland, as amended on February 24, 1997.*
10.2 Purchase Option Agreement dated February 3, 1997 between National Life
Insurance Company and Radio One, Inc. for the premises located at 5900
Princess Garden Parkway, Lanham, Maryland.*
10.3 Asset Purchase Agreement dated December 6, 1996 by and between Jarad
Broadcasting Company of Pennsylvania, Inc. and Radio One, Inc.*
10.4 Office Lease commencing November 1, 1993 between Chalrep Limited
Partnership and Radio One, Inc., with respect to the property located at
100 St. Paul Street, Baltimore, Maryland.*
10.5 Preferred Stockholders' Agreement dated as of May 14, 1997 among Radio
One, Inc., Radio One Licenses, Inc. and the other parties thereto.*
- ----------
* Previously filed
41
10.6 Warrantholders' Agreement dated as of June 6, 1995, as amended by the
First Amendment to Warrantholders' Agreement dated as of May 19, 1997,
among Radio One, Inc., Radio One Licenses, Inc. and the other parties
thereto.*
10.7 Amended and Restated Warrant of Radio One, Inc. dated as of May 19, 1997,
issued to Syncom Capital Corporation.*
10.8 Amended and Restated Warrant of Radio One, Inc. dated as of May 19, 1997,
issued to Alliance Enterprise Corporation.*
10.9 Amended and Restated Warrant of Radio One, Inc. dated as of May 19, 1997,
issued to Greater Philadelphia Venture Capital Corporation, Inc.*
10.10 Amended and Restated Warrant of Radio One, Inc. dated as of May 19, 1997,
issued to Opportunity Capital Corporation.*
10.11 Amended and Restated Warrant of Radio One, Inc. dated as of May 19, 1997,
issued to Capital Dimensions Venture Fund, Inc.*
10.12 Amended and Restated Warrant of Radio One, Inc. dated as of May 19, 1997,
issued to TSG Ventures Inc.*
10.13 Amended and Restated Warrant of Radio One, Inc. dated as of May 19, 1997,
issued to Fulcrum Venture Capital Corporation.*
10.14 Amended and Restated Warrant of Radio One, Inc. dated as of May 19, 1997,
issued to Alta Subordinated Debt Partners III, L.P.*
10.15 Amended and Restated Warrant of Radio One, Inc. dated as of May 19, 1997,
issued to BancBoston Investments, Inc.*
10.16 Amended and Restated Warrant of Radio One, Inc. dated as of May 19, 1997,
issued to Grant M. Wilson.*
10.17 Management Agreement dated as of August 1, 1996 by and between Radio One,
Inc. and Radio One of Atlanta, Inc.*
10.18 Letter of Intent dated March 12, 1997 by and between Radio One, Inc. and
Allied Capital Financial Corporation, as amended by that certain First
Amendment dated as of May 6, 1997, that certain Second Amendment dated as
of May 30, 1997, that certain Third Amendment dated as of June 5, 1997
and that certain Letter Agreement dated as of July 1, 1997.*
10.19 Fifth Amendment dated as of July 31, 1997 to that certain Letter of
Intent dated March 12, 1997 by and between Radio One, Inc. and Allied
Capital Financial Corporation, as amended.*
10.20 Sixth Amendment dated as of September 8, 1997 to that certain Letter of
Intent dated March 12, 1997 by and between Radio One, Inc. and Allied
Capital Financial Corporation, as amended.*
10.21 Time Management and Services Agreement dated March 17, 1998, among WYCB
Acquisition Corporation, Broadcast Holdings, Inc., and Radio One, Inc.
10.22 Stock Purchase Agreement dated December 23, 1997, between the
shareholders of Bell Broadcasting Company and Radio One, Inc.
10.23 Option and Stock Purchase Agreement dated November 19, 1997, among Allied
Capital Financial Corporation, G. Cabell Williams III, Broadcast
Holdings, Inc. and WYCB Acquisition Corporation.
10.24 Amended and Restated Warrant of Radio One, Inc., dated January 9, 1998,
issued to TSG Ventures L.P.
10.25 Stock Purchase Warrant of Radio One, Inc., dated March 16, 1998 issued to
Allied Capital Financial Corporation.
10.26 Amended and Restated Credit Agreement dated May 19, 1997 among several
lenders, NationsBank of Texas, N.A. and Radio One, Inc.
10.27 First Amendment to Credit Agreement dated December 31, 1997 among several
lenders, NationsBank of Texas, N.A. and Radio One, Inc.
10.28 Amendment to Preferred Stockholders' Agreement dated as of December 31,
1997 among Radio One, Inc., Radio One Licenses, Inc. and the other
parties thereto.
- ----------
* Previously filed
42
10.29 Assignment and Assumption Agreement dated October 23, 1997, between
Greater Philadelphia Venture Capital Corporation, Inc. and Alfred C.
Liggins, III.
10.30 Agreement dated February 20, 1998 between WUSQ License Limited
Partnership and Radio One, Inc.
12.1 Statement of Computation of Ratios.
21.1 Subsidiaries of Radio One, Inc.
23.1 Consent of Arthur Andersen, L.L.P.
23.2 Consent of Coopers & Lybrand, L.L.P.*
23.3 Consent of Kirkland & Ellis (included in Exhibit 5.1).*
23.4 Consent of Kirkland & Ellis (included in Exhibit 8.1)*
24.1 Powers of Attorney.*
25.1 Statement of Eligibility of Trustee on Form T-1.*
27.1 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
- ----------
* Previously filed
(c) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 1997.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RADIO ONE, INC.
By: /s/ Scott R. Royster
----------------------------------------------------
Scott R. Royster
Executive Vice President and Chief Financial Officer
Principal Accounting Officer
Date: 3/30/98
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
SIGNATURE TITLE
--------- -----
/s/ Catherine L. Hughes
- ---------------------------------------------------- Chairperson, Director and Secretary
Catherine L. Hughes
Date: 3/30/98
--------
/s/ Alfred C. Liggins, III
- --------------------------------------------------- Chief Executive Officer, President and Director
Alfred C. Liggins, III
Date: 3/30/98
--------
/s/ Terry L. Jones
- ---------------------------------------------------- Director
Terry L. Jones
Date: 3/30/98
--------
/s/ Brian W. McNeill
- ---------------------------------------------------- Director
Brian W. McNeill
Date: 3/30/98
--------
/s/ P. Richard Zitelman
- ---------------------------------------------------- Director
P. Richard Zitelman
Date: 3/30/98
--------
44
RADIO ONE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997.............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997..................................................... F-4
Consolidated Statements of Changes in Stockholders' Deficit for the
Years Ended December 31, 1995, 1996 and 1997............................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997..................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Radio One, Inc.:
We have audited the accompanying consolidated balance sheets of Radio One, Inc.
(a Delaware corporation) and subsidiaries (the Company) as of December 31, 1996
and 1997, and the related consolidated statements of operations, changes in
stockholders' deficit and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Radio One, Inc. and
subsidiaries as of December 31, 1996 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Baltimore, Maryland,
February 19, 1998
F-2
RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
ASSETS 1996 1997
---------------- ----------
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 1,708,000 $ 8,500,000
Trade accounts receivable, net of allowance for doubtful
accounts of $765,000 and $904,000, respectively.......................... 6,420,000 8,722,000
Prepaid expenses and other.................................................. 117,000 315,000
---------------- ----------------
Total current assets.................................................. 8,245,000 17,537,000
PROPERTY AND EQUIPMENT, net..................................................... 3,007,000 4,432,000
INTANGIBLE ASSETS, net.......................................................... 39,358,000 54,942,000
OTHER ASSETS 1,167,000 2,314,000
---------------- ----------------
Total assets.......................................................... $ 51,777,000 $ 79,225,000
================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable............................................................ $ 389,000 $ 258,000
Accrued expenses............................................................ 1,453,000 3,029,000
Current portion of long-term debt........................................... 5,633,000 -
---------------- ---------------
Total current liabilities............................................. 7,475,000 3,287,000
LONG-TERM DEBT AND DEFERRED INTEREST, net of current
portion .................................................................. 59,305,000 74,954,000
---------------- ----------------
Total liabilities..................................................... 66,780,000 78,241,000
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
SENIOR CUMULATIVE REDEEMABLE PREFERRED STOCK:
Series A, $.01 par value, 100,000 shares authorized, 84,843shares...........
issued and outstanding; 9,310,000
Series B, $.01 par value, 150,000 shares.................................... --
authorized, 124,467 shares issued and outstanding 13,658,000
STOCKHOLDERS' DEFICIT:
Common stock - Class A, $.01 par value, 1,000 shares authorized,
138.45 shares issued and outstanding..................................... -- --
Common stock - Class B, $.01 par value, 1,000 shares authorized,
no shares issued and outstanding......................................... -- --
Additional paid-in capital.................................................. 1,205,000 --
Accumulated deficit......................................................... (16,208,000) (21,984,000)
---------------- ----------------
Total stockholders' deficit........................................... (15,003,000) (21,984,000)
---------------- ----------------
Total liabilities and stockholders' deficit........................... $ 51,777,000 $ 79,225,000
================ ===============
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997
---------------- ---------------- ----------
REVENUES:
Broadcast revenues, including barter revenues
of $921,000, $1,122,000 and $1,010,000,
respectively.......................................... $ 24,626,000 $ 27,027,000 $ 36,955,000
Less: Agency commissions................................ 3,171,000 3,325,000 4,588,000
---------------- ---------------- ----------------
Net broadcast revenues............................. 21,455,000 23,702,000 32,367,000
---------------- ---------------- ----------------
OPERATING EXPENSES:
Program and technical.................................... 3,642,000 4,157,000 5,934,000
Selling, general and administrative...................... 8,094,000 9,770,000 12,914,000
Corporate expenses ...................................... 1,995,000 1,793,000 2,155,000
Depreciation and amortization ........................... 3,912,000 4,262,000 5,828,000
---------------- ---------------- ----------------
Total operating expenses........................... 17,643,000 19,982,000 26,831,000
---------------- ---------------- ----------------
Broadcast operating income......................... 3,812,000 3,720,000 5,536,000
INTEREST EXPENSE, including amortization of
deferred financing costs................................. 5,289,000 7,252,000 8,910,000
OTHER (INCOME) EXPENSE, net.................................. (89,000) 77,000 (415,000)
---------------- ---------------- ----------------
Loss before provision for income
taxes and extraordinary item................... (1,388,000) (3,609,000) (2,959,000)
PROVISION FOR INCOME TAXES................................... -- -- --
---------------- ---------------- ---------------
Loss before extraordinary item..................... (1,388,000) (3,609,000) (2,959,000)
EXTRAORDINARY ITEM:
Loss on early retirement of debt......................... 468,000 -- 1,985,000
---------------- ---------------- ----------------
Net loss........................................... $ (1,856,000) $ (3,609,000) $ (4,944,000)
============== ============== ================
The accompanying notes are an integral part of these
consolidated statements.
F-4
RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 1995, 1996 AND 1997
Common Common Additional Total
Preferred Stock Stock Paid-In Accumulated Treasury Stockholders'
Stock Class A Class B Capital Deficit Stock Deficit
----------- ----------- ----------- ------------- --------------- ----------- --------------
BALANCE, as of
December 25,
1994 $ 1,000 $ 1,000 $ -- $ -- $ (4,104,000) $ (265,000) $ (4,367,000)
Net loss -- -- -- -- (1,856,000) -- (1,856,000)
Purchase of
stock warrants -- -- -- -- (6,639,000) -- (6,639,000)
Issuance of stock
options -- -- -- 778,000 -- -- 778,000
Allocation of
detachable
stock warrants -- -- -- 690,000 -- -- 690,000
Cancallation and
issuance of
stock (1,000) (1,000) -- (263,000) -- 265,000 --
----------- ----------- ----------- ----------- -------------- ----------- -------------
BALANCE, as of
December 31,
1995 -- -- -- 1,205,000 (12,599,000) -- (11,394,000)
Net loss -- -- -- -- (3,609,000) -- (3,609,000)
----------- ----------- ----------- ----------- -------------- ----------- --------------
BALANCE, as of
December 31,
1996 -- -- -- 1,205,000 (16,208,000) -- (15,003,000)
Net loss -- -- -- -- (4,944,000) -- (4,944,000)
Effect of
conversion to
C corporation -- -- -- (1,205,000) 1,205,000 -- --
Preferred stock
dividends -- -- -- -- (2,037,000) -- (2,037,000)
----------- ----------- ----------- ----------- -------------- ----------- --------------
BALANCE, as of
December 31,
1997 $ -- $ -- $ -- $ -- $ (21,984,000) $ -- $ (21,984,000)
=========== =========== =========== =========== ============== =========== ==============
The accompanying notes are an integral part of these
consolidated statements.
F-5
RADIO ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997
---------------- ---------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................... $ (1,856,000) $ (3,609,000) $ (4,944,000)
Adjustments to reconcile net loss to net cash from
operating activities:.....................................
Depreciation and amortization............................. 3,912,000 4,262,000 5,828,000
Amortization of debt financing costs and
unamortized discount.................................. 208,000 366,000 2,166,000
Compensation expense from stock options granted........... 778,000 -- --
Loss on disposals......................................... -- 153,000 --
Loss on extinguishment of debt............................ -- -- 1,985,000
Deferred interest......................................... 235,000 2,639,000 1,104,000
Effect of change in operating assets and liabilities-
Trade accounts receivable............................. (2,065,000) (656,000) (2,302,000)
Prepaid expenses and other............................ (85,000) 114,000 (198,000)
Other assets.......................................... (24,000) (71,000) (147,000)
Accounts payable...................................... 605,000 (818,000) (131,000)
Accrued expenses...................................... 214,000 234,000 1,576,000
---------------- ---------------- ----------------
Net cash flows from operating activities.......... 1,922,000 2,614,000 4,937,000
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................... (225,000) (252,000) (2,035,000)
Proceeds from disposal of property and equipment............. 62,000 -- --
Deposits and payments for station purchases.................. (33,770,000) (1,000,000) (21,164,000)
---------------- ---------------- ----------------
Net cash flows from investing activities............... (33,933,000) (1,252,000) (23,199,000)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt............................................ (23,049,000) (2,408,000) (45,599,000)
Proceeds from new debt....................................... 65,000,000 51,000 72,750,000
Deferred debt financing cost................................. (2,015,000) -- (2,148,000)
Financed equipment purchases................................. -- -- 51,000
Purchase of stock and stock warrants......................... (6,639,000) -- --
---------------- ---------------- ---------------
Net cash flows from financing activities........... 33,297,000 (2,357,000) 25,054,000
---------------- ---------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................................. 1,286,000 (995,000) 6,792,000
CASH AND CASH EQUIVALENTS, beginning of year..................... 1,417,000 2,703,000 1,708,000
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, end of year........................... $ 2,703,000 $ 1,708,000 $ 8,500,000
============== ============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:.................................................
Cash paid for
Interest.................................................. $ 5,103,000 $ 4,815,000 $ 4,413,000
============== ============== ================
Income taxes.............................................. $ 35,000 $ 50,000 $ --
============== ============== ===============
The accompanying notes are an integral part of these
consolidated statements.
F-6
RADIO ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Business
Radio One, Inc. (a Delaware corporation referred to as Radio One) and its
subsidiaries, Radio One Licenses, Inc. (successor by merger to Radio One License
LLC) and WYCB Acquisition Corporation (Delaware corporations) (collectively
referred to as the Company) were organized to acquire, operate and maintain
radio broadcasting stations. The Company owns and operates three radio stations
in Washington, D.C.; WOL-AM, WMMJ-FM and WKYS-FM, four radio stations in
Baltimore, Maryland; WWIN-AM, WWIN-FM, WOLB-AM and WERQ-FM and one radio station
in Philadelphia, Pennsylvania; WPHI-FM. The Company is highly leveraged, which
requires substantial semi-annual interest payments and may impair the Company's
ability to obtain additional working capital financing. The Company's operating
results are significantly affected by its market share in the markets that it
has stations.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Radio
One, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
accompanying consolidated financial statements are presented on the accrual
basis of accounting in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. While
actual results could differ from those estimates, management believes that
actual results will not be materially different from amounts provided in the
accompanying consolidated financial statements.
Reporting Periods
Prior to the year ended December 31, 1996, the Company's financial reporting
period was based on a fifty-two/fifty-three week period ending on the last
Sunday of the calendar year. During 1996, the Company elected to end its year on
December 31 of each year. The effect of this change was not material.
Acquisition of WPHI-FM
On May 19, 1997, Radio One acquired the broadcast assets of WDRE-FM licensed to
Jenkintown, Pennsylvania, for approximately $16,000,000. In connection with the
purchase, Radio One entered into a three-year noncompete agreement totaling
$4,000,000 with the former owners. Radio One financed this purchase with a
portion of the proceeds from the issuance of approximately $85,500,000 of 12%
Senior Subordinated Notes due 2004. Radio One assumed operational responsibility
of WDRE-FM on February 8, 1997, under a local marketing agreement with the
former owners of the station. Following this acquisition, Radio One converted
the call letters of the radio station from WDRE-FM to WPHI-FM.
F-7
The unaudited pro forma summary consolidated results of operations for the years
ended December 31, 1996 and 1997, assuming the acquisition of WPHI-FM had
occurred in the beginning of each fiscal year, are as follows:
1996 1997
-------------- ---------------
Net broadcast revenues.............................................. $ 26,558,000 $ 32,642,000
Operating expenses, excluding depreciation and
amortization.................................................... 18,071,000 21,285,000
Depreciation and amortization....................................... 7,347,000 6,872,000
Interest expense.................................................... 8,692,000 8,910,000
Other expense (income), net......................................... 77,000 (415,000)
Provision for income taxes.......................................... -- --
Extraordinary loss.................................................. -- 1,985,000
-------------- --------------
Net loss..................................................... $( 7,629,000) $( 5,995,000)
============== ==============
Acquisition of WKYS-FM
On June 6, 1995, Radio One purchased WKYS-FM for approximately $34,410,000.
Radio One accounted for the acquisition by allocating the purchase price paid to
the assets acquired based upon the appraised value of the assets. The excess
purchase price over the appraised value of assets acquired of approximately
$3,846,000 was allocated to goodwill. The financial activities of WKYS-FM for
the periods prior to June 6, 1995, are not included in the accompanying
consolidated statements of operations.
The unaudited pro forma summary consolidated results of operations for the year
ended December 31, 1995, assuming the acquisition of WKYS-FM had occurred in the
beginning of the fiscal year, is as follows:
1995
--------------
Net broadcast revenues.............................................. $ 23,926,000
Operating expenses, excluding depreciation and
amortization.................................................... 15,524,000
Depreciation and amortization....................................... 5,107,000
Interest expense.................................................... 6,724,000
Other (income) expense, net......................................... (89,000)
Provision for income taxes.......................................... --
Extraordinary loss.................................................. 468,000
--------------
Net loss..................................................... $ (3,808,000)
===============
F-8
Proposed Acquisitions
On November 19, 1997, WYCB Acquisition Corporation entered into an Option and
Stock Purchase Agreement to acquire all of the outstanding stock of Broadcast
Holdings, Inc., owner of radio station WYCB-AM, located in Washington, D.C., for
a total consideration, which will consist of a note, of $3,750,000. WYCB
Acquisition Corporation expects to complete this purchase in early 1998.
During December 1997, Radio One signed an agreement to purchase all of the
outstanding stock of a company which owns three radio stations for approximately
$34,200,000. Radio One expects to finalize the purchase during 1998. Radio One
made a $2,000,000 nonrefundable deposit towards the purchase price. This deposit
is included in other assets in the accompanying consolidated balance sheet as of
December 31, 1997.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and money market accounts at various
commercial banks. All cash equivalents have original maturities of 90 days or
less. For cash and cash equivalents, cost approximates market value.
Property and Equipment
Property and equipment are recorded at cost and are being depreciated on a
straight-line basis over various periods. The components of the Company's
property and equipment as of December 31, 1996 and 1997, are as follows:
Period of
1996 1997 Depreciation
---------------- ---------------- ---------------
PROPERTY AND EQUIPMENT:
Land........................................... $ 117,000 $ 117,000 --
Building and improvements...................... 148,000 148,000 31 years
Transmitter towers............................. 2,142,000 2,146,000 7 or 15 years
Equipment...................................... 2,615,000 3,651,000 5 to 7 years
Leasehold improvements......................... 626,000 1,757,000 Life of Lease
--------------- ---------------
5,648,000 7,819,000
Less - Accumulated depreciation................ (2,641,000) (3,387,000)
--------------- ---------------
Property and equipment, net.................... $ 3,007,000 $ 4,432,000
=============== ===============
Depreciation expenses for the fiscal years ended December 31, 1995, 1996 and
1997, were $742,000, $706,000 and $746,000, respectively.
F-9
Revenue Recognition
In accordance with industry practice, revenue for broadcast advertising is
recognized when the commercial is broadcast.
Barter Arrangements
Certain program contracts provide for the exchange of advertising air time in
lieu of cash payments for the rights to such programming. These contracts are
recorded as the programs are aired at the estimated fair value of the
advertising air time given in exchange for the program rights.
The Company broadcasts certain customers' advertising in exchange for equipment,
merchandise and services. The estimated fair value of the equipment, merchandise
or services received is recorded as deferred barter costs and the corresponding
obligation to broadcast advertising is recorded as deferred barter revenues. The
deferred barter costs are expensed or capitalized as they are used, consumed or
received. Deferred barter revenues are recognized as the related advertising is
aired.
Financial Instruments
Financial instruments as of December 31, 1996 and 1997, consist of cash and cash
equivalents, trade accounts receivables, accounts payable, accrued expenses and
long-term debt, all of which the carrying amounts approximate fair value.
Stock Warrants
During 1995, Radio One purchased outstanding stock warrants to acquire Common
Stock of Radio One for approximately $6,639,000. The cost of these warrants
purchased increased the accumulated deficit. Also during 1995, Radio One issued
detachable stock warrants that had an allocated value of $690,000 with certain
subordinated notes (Note 3).
New Accounting Standards
During 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income." The Company has not analyzed the impact
of this new pronouncement on the financial statements; however, management does
not expect this pronouncement to have a significant impact on the financial
statements. Also during 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company is still
reviewing the effects of adoption of this pronouncement and has not determined
the effect on its financial statement presentation. Once management has analyzed
these pronouncements, they will be implemented within the required time frame.
F-10
2. INTANGIBLE ASSETS:
Intangible assets are being amortized on a straight-line basis over various
periods. The intangible asset balances and periods of amortization as of
December 31, 1996 and 1997, are as follows:
Period of
1996 1997 Amortization
--------------- --------------- ------------
FCC broadcast license..................................... $ 40,207,000 $ 56,179,000 7-15 Years
Goodwill.................................................. 7,553,000 7,609,000 15 Years
Debt financing............................................ 2,015,000 2,147,000 Life of Debt
Favorable transmitter site and other intangibles.......... 1,922,000 1,922,000 6-17 Years
Noncompete agreement...................................... 900,000 4,900,000 3 Years
---------------- ----------------
Total.............................................. 52,597,000 72,757,000
Less: Accumulated amortization.................... (13,239,000) (17,815,000)
---------------- ----------------
Net intangible assets.............................. $ 39,358,000 $ 54,942,000
================ ================
Amortization expense for the fiscal years ended December 31, 1995, 1996 and
1997, was $3,170,000, $3,556,000 and $5,082,000, respectively. The amortization
of the deferred financing cost was charged to interest expense.
3. DEBT AND SENIOR CUMULATIVE REDEEMABLE PREFERRED STOCK:
As of December 31, 1996 and 1997, the Company's outstanding debt is as follows:
1996 1997
----------------- ----------------
Senior subordinated notes (net of $10,640,000 unamortized
discount)....................................................... $ -- $ 74,838,000
NationsBank Credit Agreement........................................ 45,597,000 --
Subordinated Notes (net of $579,000 unamortized
discount allocated to detachable stock warrants)................ 16,421,000 --
Deferred interest on subordinated notes............................. 2,874,000 --
Notes payable....................................................... 46,000 35,000
Capital lease obligations........................................... -- 81,000
---------------- ----------------
Total........................................................ 64,938,000 74,954,000
Less: Current portion....................................... (5,633,000) --
---------------- ---------------
Total........................................................ $ 59,305,000 $ 74,954,000
================ ================
To finance the WPHI-FM acquisition (as discussed in Note 1) and to refinance
certain other debt, Radio One issued approximately $85,500,000 of 12% Senior
Subordinated Notes due 2004. The notes were sold at a discount, with the net
proceeds to Radio One of approximately $72,750,000. The notes pay cash interest
at 7% per annum through May 15, 2000, and at 12% thereafter. In connection with
this debt offering, Radio One retired approximately $45,600,000 of debt
outstanding with the proceeds from the offering. Radio One also exchanged
approximately $20,900,000 of 15% Senior Cumulative Redeemable Preferred Stock
which must be redeemed by May 24, 2005, for an equal amount of Radio One's then
outstanding subordinated notes and accrued interest. In connection with these
refinancings, Radio One recognized an extraordinary loss of $1,985,000 during
the year ended December 31, 1997.
F-11
NationsBank Credit Agreement
During 1995, through a revolving credit agreement (the NationsBank Credit
Agreement) with NationsBank of Texas, N.A. and the other lenders who are
parties, Radio One borrowed $53,000,000 which was to mature on March 31, 2002.
The NationsBank Credit Agreement was refinanced on May 19, 1997, as part of the
Senior Subordianted Notes discussed above. The NationsBank Credit Agreement bore
interest at the LIBOR 30-day rate, plus an applicable margin. The average
interest rate for the years ending December 31, 1995, 1996 and 1997, was 8.53%,
8.25% and 9.28%, respectively. The credit agreement was secured by all property
of the Company (other than Unrestricted Subsidiaries) and interest and proceeds
of real estate and Key Man life insurance policies.
Senior Cumulative Redeemable Preferred Stock
On May 19, 1997, concurrent with the debt issuance, all of the holders of Radio
One's Subordinated Promissory Notes converted all of their existing subordinated
notes consisting of approximately $17,000,000, together with all accrued
interest thereon of approximately $3,900,000 and outstanding warrants, for
shares of Senior Cumulative Redeemable Preferred Stock, which must be redeemed
on May 29, 2005, and stock warrants to purchase 147.04 shares of Common Stock.
The Senior Cumulative Redeemable Preferred Stock can be redeemed at 100% of its
liquidation value. The dividends on each share accrues on a daily basis at a
rate of 15% per annum (the Dividend Rate) on the sum of the liquidation value
basis thereof, plus all unpaid accumulated dividends thereon. Preferred stock
dividends of approximately $2,037,000 was accrued as of December 31, 1997. If
Radio One does not redeem all of the issued and outstanding preferred shares on
the mandatory redemption date or upon the occurrence of an event of
noncompliance, the holders may elect to have the Dividend Rate increase to 18%
per annum. In the event Radio One does not meet any required performance target
relating exclusively to the operation of WPHI-FM, the Dividend Rate for each
preferred share shall be increased to 17% per annum.
The Subordinated Promissory Notes bore interest at 15%. Outstanding principal
and interest was due on the maturity date, December 31, 2003. These notes were
subordinate to the NationsBank Credit Agreement.
During 1995, Radio One retired certain subordinated debt with outstanding
detachable warrants. Radio One purchased the outstanding detachable warrants,
which allowed the subordinated debt holders to acquire 52.46% of the outstanding
common stock, for $6,639,000. Radio One issued new debt with detachable warrants
that allow these same subordinated debt holders to acquire 33.66% of outstanding
common stock. The acquisition of the warrants was accounted for by charging the
$6,639,000 to accumulated deficit, and valued the new detachable warrants at the
same value per share as the old warrants acquired. As part of the subordinated
debt acquired in 1995, $10,109,000 was acquired from new lenders which received
detachable warrants to acquire 17.84% of the outstanding common stock of Radio
One. Radio One allocated the proceeds between debt and additional paid-in
capital, based on the pro-rata value of the debt and detachable warrants issued.
As such, $9,419,000 was assigned to debt and $690,000 was assigned to the value
of the warrants. The value assigned to the warrants was recorded as an increase
in additional paid-in capital. The value assigned to debt was discounted and was
to be amortized over the life of the related debt using the effective interest
method.
Notes Payable
During 1996, Radio One entered into two notes totaling $51,000 with NationsBank
to purchase vehicles. These notes bear interest at 8.74% and 8.49%, require
monthly principal and interest payments of $789 and $471 and mature on April 30,
2000, and December 2, 2000.
Refinancing of Debt
During 1995, Radio One retired $22,988,000 of outstanding debt with a portion of
the proceeds from the NationsBank Credit Agreement and the proceeds from the
$17,000,000 in subordinated debt issued in 1995.
F-12
Associated with the retirement of the debt, Radio One incurred certain early
prepayment penalties and legal fees, and had to write-off certain deferred
financing costs associated with the debt retired. These costs amounted to
$468,000 and were recorded as an extraordinary item in the accompanying
statements of operations.
During 1997, Radio One retired $45,600,000 of outstanding debt. Associated with
the retirement of the debt, the Radio One incurred certain early prepayment
penalties and legal fees, and had to write-off certain deferred financing costs
associated with the debt retired. These costs amounted to $1,985,000 and were
recorded as an extraordinary item in the accompanying statements of operations.
4. COMMITMENTS AND CONTINGENCIES:
Leases
Radio One has an operating lease for Baltimore office space with a partnership
in which two of the partners are stockholders of Radio One (Note 7). This lease
expires October 31, 2003. Radio One entered into an operating lease in Lanham,
Maryland, for office and studio space. This lease expires December 31, 2011. The
operating lease for office and studio space in Philadelphia, Pennsylvania,
expired October 31, 1997, and Radio One is currently on a month-to-month basis
and negotiating to renew this lease.
The Company leases, under operating lease agreements, a broadcast tower and
transmitter facilities in Maryland, Washington, D.C. and Pennsylvania. The
leases for the Maryland facilities expire during the period from December 2000
to August 2001. The leases for the Washington, D.C., broadcast tower and
transmitter facilities expire during the period May 1999 to November 2001. In
addition, the Company leases equipment under various leases, which expire over
the next five years.
F-13
The following is a schedule of the future minimum rental payments required under
the operating leases that have an initial or remaining noncancelable lease term
in excess of one year as of December 31, 1997.
For the Year
Ending December 31, Total
------------------- ------
1998................................................................. $ 521,000
1999................................................................. 553,000
2000................................................................. 591,000
2001................................................................. 590,000
2002................................................................. 391,000
Thereafter .......................................................... 3,086,000
--------------
Total.............................................................. $ 5,732,000
==============
Total rent expense for the years ended December 31, 1995, 1996 and 1997, was
$570,000, $777,000 and $809,000, respectively.
FCC Broadcast Licenses
Each of the Company's radio stations operates pursuant to one or more licenses
issued by the Federal Communications Commission (FCC) that have a maximum term
of eight years prior to renewal. The Company's radio operating licenses expire
at various times from August 1, 1998 to October 1, 2003. Although the Company
may apply to renew its FCC licenses, third parties may challenge the Company's
renewal applications. The Company is not aware of any facts or circumstances
that would prevent the Company from having its current licenses renewed.
Litigation
Radio One has been named as a defendant in several legal actions occurring in
the ordinary course of business. It is management's opinion, after consultation
with its legal counsel, that the outcome of these claims will not have a
material adverse effect on the Company's financial position or results of
operations.
Line of Credit
As of December 31, 1997, Radio One had a $7,500,000 outstanding line of credit
which will expire October 31, 2000. If this line of credit is drawn on, the
interest rate will include the NationsBank base rate plus 1.375%. Radio One's
collateral for this line of credit consists of liens and security interest in
all common and voting securities convertible or exchangeable into common stock
of the Company and substantially all of its assets (other than WYCB Acquisition
Corporation and other than common stock of Radio One issued in connection with a
public equity offering). This line of credit was not drawn on as of December 31,
1997.
5. STOCK OPTION PLAN:
Radio One had an Incentive Stock Option Plan (the Plan) which provided for the
issuance of qualified and nonqualified stock options to all full-time key
employees. The Plan allowed the issuance of up to 25% of the authorized common
stock provided certain performance benchmarks are achieved by the Company. Radio
One terminated the Plan on May 12, 1997.
During 1995, options were granted to acquire 63.16 shares of common stock at $1
per share. Of the options granted in 1995, options to acquire 57.45 shares
vested and were exercised during 1995. As the options were granted significantly
below their market value, the Company recognized compensation expense of
$778,000 related to the options granted. During June 1997, the remaining option
of 5.71 shares of common stock expired.
F-14
6. INCOME TAXES:
Effective January 1, 1996, Radio One converted from a C Corporation to an S
Corporation under Subchapter S of the Internal Revenue Code. As an S
Corporation, the stockholders separately account for their pro-rata share of
Radio One's income, deductions, losses and credits. Effective May 19, 1997,
Radio One converted back to a C Corporation.
In connection with the conversion to a C corporation, in accordance with SEC
Staff Accounting Bulletin 4.B, Radio One transferred the amount of the
undistributed losses up to the amount of additional paid in capital at the date
of conversion to additional paid-in capital.
Prior to January 1, 1996, and subsequent to May 19, 1997, the Company accounted
for income taxes in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred
income taxes reflect the impact of temporary differences between the assets and
liabilities recognized for financial reporting purposes and amounts recognized
for tax purposes. Deferred taxes are based on tax laws as currently enacted.
A reconciliation of the statutory federal income taxes to the recorded income
tax provision for the years ended December 31, 1995, 1996 and 1997, is as
follows:
1995 1996 1997
-------------- -------------- ---------
Statutory tax (@ 34% rate)......................... $ (630,000) $ (1,227,000) $ (1,681,000)
Effect of state taxes, net of federal.............. (111,000) (217,000) (245,000)
Effect of stock option compensation
expense ..................................... 275,000 -- --
Establishment of S corporation loss to its
stockholders................................... -- 1,444,000 935,000
Effect of net deferred tax asset in
conversion to C corporation.................... -- -- (1,067,000)
Valuation reserve.................................. 466,000 -- 2,058,000
-------------- -------------- --------------
Provision for income taxes..................... $ -- $ -- $ --
============== ============== =============
F-15
The components of the provision for income taxes for the years ended December
31, 1995 and 1997, are as follows:
1995 1997
-------------- --------------
Current........................................................... $ -- $ --
Deferred.......................................................... (466,000) (991,000)
Establishment of net deferred tax asset in
conversion to C corporation................................... -- (1,067,000)
Valuation reserve................................................. 466,000 2,058,000
-------------- --------------
Provision for income taxes.................................... $ -- $ --
============== =============
Deferred income taxes reflect the net tax effect of temporary differences
between the financial statement and tax basis of assets and liabilities. The
significant components of the Company's deferred tax assets and liabilities as
of December 31, 1997, are as follows:
1997
Deferred tax assets- ----------
FCC and other intangibles amortization.......................................... $ 180,000
Reserve for bad debts........................................................... 353,000
Goodwill........................................................................ 66,000
NOL carryforward................................................................ 1,746,000
Other........................................................................... 2,000
----------
Total deferred tax assets................................................. 2,347,000
Deferred tax liabilities-
Depreciation....................................................................
Other...........................................................................
Total deferred tax liabilities............................................ (279,000)
(10,000)
----------
Net deferred tax asset.............................................................. (289,000)
----------
Less: Valuation reserve............................................................ 2,058,000
Deferred taxes included in the accompanying
consolidated balance sheets......................................................... $(2,058,000)
============
A 100% valuation reserve has been applied against the net deferred tax asset as
its realization was not more likely than not to be realized.
As of December 31, 1997, there was an approximate $5,100,000 of available net
operating loss carryforwards.
F-16
7. RELATED PARTY TRANSACTIONS:
In September 1990, Radio One purchased a building in the name of the majority
stockholder for $73,000. All rental income generated from the office building
was received and used by Radio One. The building was sold during fiscal year
1995. This transaction resulted in no gain or loss to the Company. In addition,
Radio One leases office space for $8,000 per month from a partnership in which
two of the partners are stockholders of Radio One (Note 4). Total rent paid to
the stockholders for fiscal years 1995, 1996 and 1997, was $134,000, $96,000 and
$96,000, respectively. Radio One also has a net receivable as of December 31,
1996 and 1997, of approximately $78,000 and $68,000, respectively, due from
Radio One of Atlanta, Inc. (ROA), of which an executive officer and stockholder
of Radio One holds voting control of the capital stock in ROA. Radio One also
charges ROA a management fee of approximately $100,000 per year.
8. PROFIT SHARING:
Radio One has a 401(k) profit sharing plan for its employees. Radio One can
contribute to the plan at the discretion of its Board of Directors. Radio One
made no contribution to the plan during fiscal year 1995, 1996 or 1997.
F-17
RADIO ONE, INC. AND SUBSIDIARIES
INDEX TO SCHEDULES
Page
----
Report of Independent Public Accountants............................... S-2
Schedule II - Valuation and Qualifying
Accounts............................................................... S-3
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Radio One, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated balance sheets and statements of operations, changes in
stockholders' deficit and cash flows of Radio One, Inc. and subsidiaries (the
Company) included in this Form 10-K registration statement and have issued our
report thereon dated February 19, 1998. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in the accompanying index is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Baltimore, Maryland,
February 19, 1998
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RADIO ONE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED TO AT END
DESCRIPTION OF YEAR EXPENSE DEDUCTIONS OF YEAR
----------- ------- ------- ---------- -------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
1995.................................................... $ 468 $ 298 $ 97 $ 669
1996.................................................... 669 628 532 765
1997.................................................... 765 894 755 904
TAX VALUATION RESERVE:
1995.................................................... 739 328 -- 1,067
1996.................................................... 1,067 -- 1,067 --
1997.................................................... -- 2,058 -- 2,058
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