The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
Radio One, Inc. (a
Delaware corporation referred to as “Radio One”) and its subsidiaries (collectively, the “Company”) is
an urban-oriented, multi-media company that primarily targets African-American and urban consumers. Our core business is our radio
broadcasting franchise which is the largest radio broadcasting operation that primarily targets African-American and urban listeners.
We currently own and/or operate 56 broadcast stations located in 16 urban markets in the United States. While our
primary source of revenue is the sale of local and national advertising for broadcast on our radio stations, our strategy is to
operate as the premier multi-media entertainment and information content provider targeting African-American and urban consumers.
Thus, we have diversified our revenue streams by making acquisitions and investments in other complementary media properties. Our
other media interests include our ownership of TV One, LLC (“TV One”), an African-American targeted cable television
network; our ownership of Interactive One, LLC (“Interactive One”), our wholly-owned online platform serving the African-American
community through social content, news, information, and entertainment websites, including Global Grind, News One, TheUrbanDaily
and HelloBeautiful, and online social networking websites, including BlackPlanet and MiGente; and our 80.0% ownership interest
in Reach Media, Inc. (“Reach Media”) which operates the Tom Joyner Morning Show and our other syndicated programming
assets, including the Rickey Smiley Morning Show, the Russ Parr Morning Show and the DL Hughley Show. In May 2014, the Company
agreed to invest a minimum of $5 million up to a maximum of $40 million in MGM’s development of a world-class casino property,
MGM National Harbor, located in Prince George’s County, Maryland. On April 10, 2015, the Company made its minimum $5 million
investment and accounted for this investment on a cost basis. Upon completion of the project, currently anticipated to be in December
2016, and satisfaction of final licensing requirements, we will make the remainder of this investment, which will further diversify
our platform in the entertainment industry while still focusing on our core demographic.
As part of our consolidated
financial statements, consistent with our financial reporting structure and how the Company currently manages its businesses, we
have provided selected financial information on the Company’s four reportable segments: (i) radio broadcasting; (ii) Reach
Media; (iii) internet; and (iv) cable television. (See Note 8 –
Segment Information
.)
|
(b)
|
Interim Financial
Statements
|
The
interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (“SEC”). In management’s opinion, the interim financial
data presented herein include all adjustments (which include only normal recurring adjustments) necessary for a fair presentation.
Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and
regulations.
Results
for interim periods are not necessarily indicative of results to be expected for the full year. This Form 10-Q should be read
in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2015 Annual Report
on Form 10-K.
Certain
reclassifications have been made to prior year balances to conform to the current year presentation. These reclassifications had
no effect on any other previously reported or consolidated net income or loss or any other statement of operations, balance sheet
or cash flow amounts. Where applicable, these financial statements have been identified as “As Reclassified.”
|
(c)
|
Financial Instruments
|
Financial
instruments as of September 30, 2016, and December 31, 2015, consisted of cash and cash equivalents, trade accounts receivable,
long-term debt and redeemable noncontrolling interests. The carrying amounts approximated fair value for each of these financial
instruments as of September 30, 2016, and December 31, 2015, except for the Company’s outstanding senior subordinated notes,
secured notes and senior secured credit facility. The 9.25% Senior Subordinated Notes which are due in February 2020 (the “2020
Notes”) had a carrying value of approximately $315.0 million as of September 30, 2016, and approximately $335.0 million as
of December 31, 2015. The 2020 Notes had a fair value of approximately $293.0 million and $258.0 million as of September 30, 2016,
and December 31, 2015, respectively. The 7.375% Senior Secured Notes that are due in March 2022 (the “2022 Notes”)
had a carrying value of approximately $350.0 million as of September 30, 2016, and December 31, 2015, and fair value of approximately
$353.5 million and $311.5 million as of September 30, 2016, and December 31, 2015, respectively. The $350.0 million senior secured
credit facility (the “2015 Credit Facility”) had a carrying value of approximately $345.6 million and $348.3 million
as of September 30, 2016, and December 31, 2015, respectively, and fair value of approximately $343.9 million and $353.0 million
as of September 30, 2016, and December 31, 2015, respectively. The fair values of the 2020 Notes, 2022 Notes and the 2015 Credit
Facility, classified as Level 2 instruments, were determined based on the trading values of these instruments in an inactive market
as of the reporting date. The senior unsecured promissory note in the aggregate principal amount of approximately $11.9 million
(the “Comcast Note”) had a carrying value of approximately $11.9 million as of September 30, 2016, and December 31,
2015. The fair value of the Comcast Note was approximately $11.9 million as of each of September 30, 2016, and December 31, 2015.
The fair value of the Comcast Note, classified as a Level 3 instrument, was determined based on the fair value of a similar instrument
as of the reporting date using updated interest rate information derived from changes in interest rates since inception to the
reporting date. See Note 5 –
Long-Term Debt
for further description of our credit facilities and outstanding notes.
Within our radio broadcasting
and Reach Media segments, the Company recognizes revenue for broadcast advertising when a commercial is broadcast, and the revenue
is reported net of agency and outside sales representative commissions, in accordance with Accounting Standards Codification
(“ASC”) 605, “
Revenue Recognition
”. Agency and outside sales representative commissions
are calculated based on a stated percentage applied to gross billing. Generally, clients remit the gross billing amount to the
agency or outside sales representative, and the agency or outside sales representative remits the gross billing, less their commission,
to the Company. For our radio broadcasting segment, agency and outside sales representative commissions were approximately $6.4 million
and $6.5 million for the three months ended September 30, 2016 and 2015, respectively. Agency and outside sales representative
commissions were approximately $19.0 million and $19.1 million for the nine months ended September 30, 2016 and 2015,
respectively.
Interactive One generates
the majority of the Company’s internet revenue, and derives such revenue principally from advertising services on non-radio
station branded but Company-owned websites. Advertising services include the sale of banner and sponsorship advertisements. Advertising
revenue is recognized either as impressions (the number of times advertisements appear in viewed pages) are delivered, when “click
through” purchases are made, or ratably over the contract period, where applicable. In addition, Interactive One derives
revenue from its studio operations, in which it provides third-party clients with publishing services including digital platforms
and expertise. In the case of the studio operations, revenue is recognized primarily through fixed contractual monthly fees
and/or as a share of the third party’s reported revenue.
TV One derives advertising
revenue from the sale of television air time to advertisers and recognizes revenue when the advertisements are run. TV One also
derives revenue from affiliate fees under the terms of various affiliation agreements based on a per subscriber fee multiplied
by the most recent subscriber counts reported by the applicable affiliate. For our cable television segment, agency and outside
sales representative commissions were approximately $3.8 million and $4.2 million for the three months ended September 30, 2016
and 2015, respectively. Agency and outside sales representative commissions were approximately $11.8 million and $11.4 million
for the nine months ended September 30, 2016 and 2015, respectively.
TV One has entered
into certain affiliate agreements requiring various payments by TV One for launch support. Launch support assets are used to initiate
carriage under affiliation agreements and are amortized over the term of the respective contracts. Launch support amortization
is recorded as a reduction to revenue. TV One did not incur any launch support fees during the nine months ended September 30,
2016. TV One paid $670,000 of launch support for the nine months ended September 30, 2015. The weighted-average amortization period
for launch support is approximately 10.9 years at each of September 30, 2016, and December 31, 2015. The remaining weighted-average
amortization period for launch support is 8.2 years and 8.9 years as of September 30, 2016, and December 31, 2015, respectively.
For the three and nine months ended September 30, 2016, launch support asset amortization of $20,000 and $61,000, respectively,
was recorded as a reduction to revenue. For the three and nine months ended September 30, 2015, launch support asset amortization
of $594,000 and approximately $2.1 million, respectively, was recorded as a reduction to revenue.
For barter transactions,
the Company provides advertising time in exchange for programming content and certain services and accounts for these exchanges
in accordance with ASC 605, “
Revenue Recognition
”. The Company includes the value of such exchanges in both
broadcasting net revenue and station operating expenses. The valuation of barter time is based upon the fair value of the network
advertising time provided for the programming content and services received. For the three months ended September 30, 2016 and
2015, barter transaction revenues were $491,000 and $599,000, respectively. Additionally, for the three months ended September
30, 2016 and 2015, barter transaction costs were reflected in programming and technical expenses of $450,000 and $552,000, respectively,
and selling, general and administrative expenses of $41,000 and $47,000, respectively. For the nine months ended September 30,
2016 and 2015, barter transaction revenues were approximately $1.6 million and $1.7 million, respectively. Additionally, for the
nine months ended September 30, 2016 and 2015, barter transaction costs were reflected in programming and technical expenses of
approximately $1.5 million and $1.6 million, respectively, and selling, general and administrative expenses of $122,000 and $142,000,
respectively.
Basic
earnings per share is computed on the basis of the weighted average number of shares of common stock (Classes A, B, C and D) outstanding
during the period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock
plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. The
Company’s potentially dilutive securities include stock options and unvested restricted stock. Diluted earnings per share
considers the impact of potentially dilutive securities except in periods in which there is a net loss, as the inclusion of the
potentially dilutive common shares would have an anti-dilutive effect.
The following table
sets forth the calculation of basic and diluted earnings per share from continuing operations (in thousands, except share and per
share data):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders
|
|
$
|
(423
|
)
|
|
$
|
(18,145
|
)
|
|
$
|
2,944
|
|
|
$
|
(49,673
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net (loss) income per share - weighted average outstanding shares
|
|
|
47,481,004
|
|
|
|
48,220,262
|
|
|
|
48,066,267
|
|
|
|
47,963,763
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
|
1,173,898
|
|
|
|
—
|
|
Denominator for diluted net (loss) income per share - weighted-average outstanding shares
|
|
|
47,481,004
|
|
|
|
48,220,262
|
|
|
|
49,240,165
|
|
|
|
47,963,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders per share – basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
0.06
|
|
|
$
|
(1.04
|
)
|
Net (loss) income attributable to common stockholders per share –diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
0.06
|
|
|
$
|
(1.04
|
)
|
All
stock options and restricted stock awards were excluded from the diluted calculation for the three months ended September 30,
2016 and 2015, and for the nine months ended September 30, 2015, as their inclusion would have been anti-dilutive. The
following table summarizes the potential common shares excluded from the diluted calculation.
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
September 30, 2015
|
|
|
|
(Unaudited)
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
3,700
|
|
|
|
3,417
|
|
|
|
3,417
|
|
Restricted stock awards
|
|
|
1,117
|
|
|
|
1,671
|
|
|
|
2,062
|
|
|
(h)
|
Fair Value Measurements
|
We report our financial
and non-financial assets and liabilities measured at fair value on a recurring and non-recurring basis under the provisions of
ASC 820,
“Fair Value Measurements and Disclosures.”
ASC 820 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.
The
fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs)
used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires
significant management judgment. The three levels are defined as follows:
Level 1
: Inputs are unadjusted quoted prices
in active markets for identical assets and liabilities that can be accessed at measurement date.
Level 2
: Observable inputs other than those
included in Level 1 (i.e., quoted prices for similar assets or liabilities in active markets or quoted prices for identical
assets or liabilities in inactive markets).
Level 3
: Unobservable inputs reflecting management’s
own assumptions about the inputs used in pricing the asset or liability.
A financial instrument’s level within
the fair value hierarchy is based on the lowest level of any input that is significant to the fair value instrument.
As of September 30, 2016, and December
31, 2015, the fair values of our financial assets and liabilities measured on a recurring basis are categorized as
follows:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
As of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities subject to fair value measurement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment agreement award (a)
|
|
$
|
25,695
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine equity subject to fair value measurement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests (b)
|
|
$
|
12,004
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities subject to fair value measurement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive award plan (c)
|
|
$
|
1,506
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,506
|
|
Employment agreement award (a)
|
|
|
20,915
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,915
|
|
Total
|
|
$
|
22,421
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine equity subject to fair value measurement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests (b)
|
|
$
|
11,286
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,286
|
|
(a) Pursuant to an employment agreement (the “Employment Agreement”) executed in April
2008, the Chief Executive Officer (“CEO”) is eligible to receive an award (the “Employment Agreement Award”)
amount equal to approximately 4% of any proceeds from distributions or other liquidity events in excess of the return of the Company’s
aggregate pre-Comcast Buyout (as defined below) capital contribution in TV One. The Company reviews the factors underlying this
award at the end of each quarter including the valuation of TV One (based on the estimated enterprise fair value of TV One as determined
by a discounted cash flow analysis)
,
and an assessment of the probability that the Employment Agreement will be renewed
and contain this provision. There are probability factors included in the calculation of the award related to the likelihood that
the award will be realized. The Company’s obligation to pay the award was triggered after the Company’s recovery of
the aggregate amount of our pre-Comcast Buyout (as defined below) capital contribution in TV One, and payments are required only
upon actual receipt of distributions of cash or marketable securities or proceeds from a liquidity event. The CEO was fully vested
in the award upon execution of the Employment Agreement, and the award lapses if the CEO voluntarily leaves the Company or
is terminated for cause. A third-party valuation firm assisted the Company in estimating TV One’s fair value using the discounted
cash flow analysis. Significant inputs to the discounted cash flow analysis include forecasted operating results, discount rate
and a terminal value. As noted in our current report on Form 8-K filed October 6, 2014, the Compensation Committee of the Board
of Directors of the Company approved terms for a new employment agreement with the CEO, including a renewal of the Employment Agreement
Award upon similar terms as in the prior Employment Agreement. While a new employment agreement has not been executed as of the
date of this report, the CEO is being compensated according to the new terms approved by the Compensation Committee.
(b) The redeemable noncontrolling
interest in Reach Media is measured at fair value using a discounted cash flow methodology. A third-party valuation firm assisted
the Company in estimating the fair value. Significant inputs to the discounted cash flow analysis include forecasted operating
results, discount rate and a terminal value.
(c) Balance was measured based on
the estimated enterprise fair value of TV One as determined by a discounted cash flow analysis. Significant inputs to the discounted
cash flow analysis include forecasted operating results, discount rate and a terminal value. A third-party valuation firm assisted
the Company in estimating TV One’s fair value using the discounted cash flow analysis.
There were no transfers
in or out of Level 1, 2, or 3 during the three or nine months ended September 30, 2016. The following table presents the changes
in Level 3 liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2016 and 2015, respectively:
|
|
Incentive
Award
Plan
|
|
|
Employment
Agreement
Award
|
|
|
Redeemable
Noncontrolling
Interests
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
1,506
|
|
|
$
|
20,915
|
|
|
$
|
11,286
|
|
Net income attributable to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
1,259
|
|
Distribution
|
|
|
(1,480
|
)
|
|
|
(1,049
|
)
|
|
|
—
|
|
Change in fair value
|
|
|
(26
|
)
|
|
|
5,829
|
|
|
|
(541
|
)
|
Balance at September 30, 2016
|
|
$
|
—
|
|
|
$
|
25,695
|
|
|
$
|
12,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at the reporting date
|
|
$
|
26
|
|
|
$
|
(5,829
|
)
|
|
$
|
—
|
|
|
|
Incentive
Award
Plan
|
|
|
Employment
Agreement
Award
|
|
|
Redeemable
Noncontrolling
Interests
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
1,044
|
|
|
$
|
17,993
|
|
|
$
|
10,836
|
|
Net income attributable to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
1,243
|
|
Dividends paid to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,001
|
)
|
Change in fair value
|
|
|
79
|
|
|
|
2,344
|
|
|
|
(353
|
)
|
Balance at September 30, 2015
|
|
$
|
1,123
|
|
|
$
|
20,337
|
|
|
$
|
10,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of total losses for the period included in earnings attributable to the change in unrealized losses relating to assets and liabilities still held at the reporting date
|
|
$
|
(79
|
)
|
|
$
|
(2,344
|
)
|
|
$
|
—
|
|
Losses
included in earnings were recorded in the consolidated statements of operations as corporate selling, general and administrative
expenses for the three and nine months ended September 30, 2016 and 2015.
For Level 3 assets and liabilities measured
at fair value on a recurring basis, the significant unobservable inputs used in the fair value measurements were as follows:
|
|
|
|
|
|
As of
September 30,
2016
|
|
|
As of
December 31,
2015
|
|
|
As of
September 30,
2015
|
|
Level 3 liabilities
|
|
Valuation Technique
|
|
Significant
Unobservable Inputs
|
|
Significant Unobservable Input Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive award plan
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
|
N/A
|
*
|
|
|
10.8
|
%
|
|
|
10.4
|
%
|
Incentive award plan
|
|
Discounted Cash Flow
|
|
Long-term Growth Rate
|
|
|
N/A
|
*
|
|
|
3.0
|
%
|
|
|
3.0
|
%
|
Employment agreement award
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
|
10.5
|
%
|
|
|
10.8
|
%
|
|
|
10.4
|
%
|
Employment agreement award
|
|
Discounted Cash Flow
|
|
Long-term Growth Rate
|
|
|
2.5
|
%
|
|
|
3.0
|
%
|
|
|
3.0
|
%
|
Redeemable noncontrolling interest
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
|
10.5
|
%
|
|
|
11.8
|
%
|
|
|
11.5
|
%
|
Redeemable noncontrolling interest
|
|
Discounted Cash Flow
|
|
Long-term Growth Rate
|
|
|
1.0
|
%
|
|
|
1.5
|
%
|
|
|
1.5
|
%
|
* Final distribution related
to the incentive award plan occurred during the first quarter of 2016.
Any significant increases
or decreases in discount rate or long-term growth rate inputs could result in significantly higher or lower fair value measurements.
Certain assets and
liabilities are measured at fair value on a non-recurring basis using Level 3 inputs as defined in ASC 820. These assets
are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Included
in this category are goodwill, radio broadcasting licenses and other intangible assets, net, that are written down to fair value
when they are determined to be impaired, as well as content assets that are periodically written down to net realizable value.
The Company concluded these assets were not impaired during the nine months ended September 30, 2016 and 2015, and, therefore,
were reported at carrying value as opposed to fair value.
|
(i)
|
Impact of Recently
Issued Accounting Pronouncements
|
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “
Revenue
from Contracts with Customers
” (“ASU 2014-09”), which supersedes the revenue recognition requirements in
ASC 605, “
Revenue Recognition
” and most industry-specific guidance throughout the codification. The standard
requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB
voted and approved to defer the effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 will be effective for fiscal
years beginning after December 15, 2017, with early adoption permitted but not prior to the original effective date of annual periods
beginning after December 15, 2016. The Company has not yet completed its assessment of the impact of the new standard, including
possible transition alternatives, on its consolidated financial statements. In March 2016, the FASB issued ASU 2016-08, “
Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net
)”
(“ASU 2016-08”). The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent considerations.
ASU 2016-08 is effective for the Company for annual and interim reporting periods beginning July 1, 2018. The Company is currently
evaluating the impact ASU 2016-08 will have on its consolidated financial statements. In April 2016, the FASB issued ASU 2016-10,
“
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
” (“ASU
2016-10”). ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. In May 2016, the FASB
issued ASU 2016-11, “
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance
Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting”
(“ASU 2016-11”) and ASU 2016-12,
“Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients”
(“ASU 2016-12”). ASU 2016-11 and ASU 2016-12 provide additional clarification and
implementation guidance on the previously issued ASU 2014-09. The Company is currently evaluating the impact ASU 2016-10, ASU 2016-11
and ASU 2016-12 will have on its consolidated financial statements.
In April 2015, the
FASB issued ASU 2015-03, “
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance
Costs
” (“ASU 2015-03”). ASU 2015-03 aims to simplify the presentation of debt issuance costs by requiring
debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying
amount of that debt liability, consistent with debt discounts. Prior to ASU 2015-03, debt issuance costs were presented as a deferred
charge under GAAP. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and is to be applied retrospectively,
with early adoption permitted. The Company early adopted ASU 2015-03 during the year ended December 31, 2015, resulting in approximately
$7.4 million of net debt issuance costs presented as a direct reduction to the Company's long-term debt in the consolidated balance
sheet as of December 31, 2015. In August 2015, the FASB issued ASU 2015-15, “
Interest - Imputation of Interest: Presentation
and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
” (“ASU 2015-15”),
which allows companies to continue to defer and present debt issuance costs as an asset that is amortized ratably over the term
of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
The Company adopted ASU 2015-15 on January 1, 2016, and capitalized $421,000 of debt issuance costs for the nine months ended September
30, 2016, associated with its new line of credit arrangement.
In
November 2015, the FASB issued ASU 2015-17, “
Balance Sheet Classification of Deferred Taxes
” (“ASU 2015-17”),
which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities to be classified as
noncurrent in the consolidated balance sheet. ASU 2015-17 is effective for financial statements issued for annual periods beginning
after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted and may be applied either
prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We early adopted ASU 2015-17
in the fourth quarter of 2015 on a retroactive basis and included the current portion of deferred tax liabilities within the noncurrent
portion of deferred tax liabilities within our consolidated balance sheets. However, we did not adjust our prior period consolidated
balance sheet as a result of the adoption of this ASU as the impact was immaterial.
In February 2016,
the FASB issued ASU 2016-02, “
Leases (Topic 842)
” (“ASU 2016-02”), which is a new lease standard
that amends lease accounting. ASU 2016-02 will require lessees to recognize a lease asset and lease liability for leases classified
as operating leases. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within
those fiscal years. Early adoption is permitted. The Company has not yet completed its assessment of the impact of the new standard
on its consolidated financial statements.
In March 2016, the
FASB issued ASU 2016-09, “
Compensation - Stock Compensation (Topic 718)
” (“ASU 2016-09”), which
relates to the accounting for employee share-based payments. This standard provides updated guidance for the accounting for certain
aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, statutory tax withholding
requirements and the classification on the statement of cash flows. This standard will be effective for interim and annual reporting
periods after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. The Company
has not yet completed its assessment of the impact of the new standard on its consolidated financial statements.
In June 2016, the FASB
issued ASU 2016-13, “
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
”
(“ASU 2016-13”). ASU 2016-13 is intended to provide financial statement users with more decision-useful information
about the expected credit losses on financial instruments and other commitments and requires consideration of a broader range of
reasonable and supportable information to inform credit loss estimates. This standard will be effective for interim and annual
reporting periods after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for
annual periods after December 15, 2018. The Company has not yet completed its assessment of the impact of the new standard on its
consolidated financial statements.
In August 2016, the FASB
issued ASU 2016-15, “
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A
Consensus of the Emerging Issues Task Force)
” (“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity
in practice in how certain transactions are classified in the statement of cash flows. This standard will be effective for interim
and annual reporting periods after December 15, 2017, including interim periods within those fiscal years, with early adoption
permitted. The Company has not yet completed its assessment of the impact of the new standard on its consolidated financial statements.
|
(j)
|
Redeemable noncontrolling
interest
|
Redeemable noncontrolling
interests are interests in subsidiaries that are redeemable outside of the Company’s control either for cash or other assets.
These interests are classified as mezzanine equity and measured at the greater of estimated redemption value at the end of each
reporting period or the historical cost basis of the noncontrolling interests adjusted for cumulative earnings allocations. The
resulting increases or decreases in the estimated redemption amount are affected by corresponding charges against retained earnings,
or in the absence of retained earnings, additional paid-in-capital.
TV One has
entered into contracts to acquire entertainment programming rights and programs from distributors and producers. The license
periods granted in these contracts generally run from one year to ten years. Contract payments are made in installments over
terms that are generally shorter than the contract period. Each contract is recorded as an asset and a liability at an amount
equal to its gross contractual commitment when the license period begins and the program is available for its first airing.
Acquired content is generally amortized on a straight-line method over the term of the license which reflects the estimated
usage. For certain content for which the pattern of usage is accelerated, amortization is based upon the actual usage.
The Company also has
programming for which the Company has engaged third parties to develop and produce, and it owns most or all rights (commissioned
programming). Content amortization expense for each period is recognized based on the revenue forecast model, which approximates
the proportion that estimated advertising and affiliate revenues for the current period represent in relation to the estimated
remaining total lifetime revenues.
Acquired program rights
are recorded at the lower of unamortized cost or estimated net realizable value. Estimated net realizable values are based on the
estimated revenues associated with the program materials and related expenses. In evaluating its contracts for recoverability for
the three and nine months ended September 30, 2016, the Company recognized an impairment and recorded additional amortization expense
of $0 and approximately $1.9 million, respectively. In evaluating its contracts for recoverability for the three and nine months
ended September 30, 2015, the Company recognized an impairment and recorded additional amortization expense of $501,000. All produced
and licensed content is classified as a long-term asset, except for the portion of the unamortized content balance that is expected
to be amortized within one year which is classified as a current asset.
Tax incentives offered
by state and local governments that are directly measured based on production activities are recorded as reductions in production
costs.
The Company recognizes
all derivatives at fair value in the consolidated balance sheet as either an asset or liability. The accounting for changes in
the fair value of a derivative, including certain derivative instruments embedded in other contracts, depends on the intended use
of the derivative and the resulting designation.
The Company has accounted
for the Employment Agreement Award as a derivative instrument in accordance with ASC 815,
“Derivatives and Hedging.”
The Company estimated the fair value of the award at September 30, 2016, and December 31, 2015, to be approximately $25.7 million
and $20.9 million, respectively, and accordingly, adjusted its liability to this amount. The long-term portion is recorded in other
long-term liabilities and the current portion is recorded in other current liabilities in the consolidated balance sheets. The
current portion is calculated based on forecasted cash dividends to be received from TV One. The expense associated with the Employment
Agreement Award was recorded in the consolidated statements of operations as corporate selling, general and administrative expenses
and was approximately $1.0 million and $882,000 for the three months ended September 30, 2016, and 2015, respectively, and was
approximately $5.8 million and $2.3 million for the nine months ended September 30, 2016, and 2015, respectively.
The Company’s obligation
to pay the Employment Agreement Award was triggered after the Company’s recovery of the aggregate pre-Comcast Buyout (as
defined below) capital contribution in TV One and payments are only required upon actual receipt of distributions of cash or marketable
securities or proceeds from a liquidity event with respect to the Company’s pre-Comcast Buyout capital contribution in TV
One. The CEO was fully vested in the award upon execution of the Employment Agreement, and the award lapses if the CEO voluntarily
leaves the Company, or is terminated for cause. The Compensation Committee of the Board of Directors of the Company has approved
terms for a new employment agreement with the CEO, including a renewal of the Employment Agreement Award upon similar terms as
in the prior Employment Agreement. While a new Employment Agreement has not been executed as of the date of this report, the CEO
is being compensated according to the new terms approved by the Compensation Committee.
|
(m)
|
Related Party
Transactions
|
Reach Media provides
office facilities (including office space, telecommunications facilities, and office equipment) to the Tom Joyner Foundation, Inc.
(the “Foundation”), a 501(c)(3) entity, and to Tom Joyner, LTD. (“Limited”), Tom Joyner’s production
company. Such services are provided to the Foundation and to Limited on a pass-through basis at cost. Under these arrangements,
as of September 30, 2016 and December 31, 2015, the amounts owed to Reach Media were immaterial.
Reach Media operates
the Tom Joyner Fantastic Voyage, a fund raising event for the Foundation. The terms of the agreement are that Reach Media provides
all necessary operations for the Fantastic Voyage, that the Foundation reimburses the Company for all related expenses, and that
the Foundation pays a fee plus a performance bonus to Reach Media. The fee is up to the first $1.0 million after the Fantastic
Voyage nets $250,000 to the Foundation. The balance of any operating income is earned by the Foundation less a performance bonus
of 50% to Reach Media of any excess over $1.25 million. The Foundation’s remittances to Reach Media under the agreement are
limited to its Fantastic Voyage-related cash revenues; Reach Media bears the risk should the Fantastic Voyage sustain a loss
and bears all credit risk associated with the related customer cabin sales.
The Fantastic Voyage
took place during the second quarters of both 2016 and 2015. For the nine months ended September 30, 2016, Reach Media’s
revenues, expenses, and operating income for the Fantastic Voyage were approximately $8.8 million, $7.8 million, and $1.0 million,
respectively, and for the nine months ended September 30, 2015, approximately $8.7 million, $7.5 million, and $1.2 million, respectively.
As of September 30, 2016 and December 31, 2015, the Foundation owed Reach Media approximately $1.1 million and $1.2 million,
respectively, under the agreement, for operations on the next cruise.
2. ACQUISITIONS AND DISPOSITIONS:
As
of June 2011, our sole Boston radio station was made the subject of a time brokerage agreement (“TBA”), similar in
operation to a local marketing agreement (“LMA”), whereby, we have made available, for a fee, air time on this station
to another party. On February 3, 2014, the Company executed a new TBA, effective December 1, 2013, for the station. The TBA
has a three-year term, and, at the conclusion of the TBA, the station will be conveyed to Radio Boston Broadcasting, Inc., an affiliate
of Pacific Media International, LLC. As a result, the station’s radio broadcasting license was classified as a short-term
other asset as of September 30, 2016, and December 31, 2015, and is being amortized through the anticipated conveyance date.
On
October 20, 2011, we entered into a TBA with WGPR, Inc. (“WGPR”). Pursuant to the TBA, beginning October 24, 2011,
we began to broadcast programs produced, owned or acquired by Radio One on WGPR’s Detroit radio station, WGPR-FM. We pay
certain operating costs of WGPR-FM, and in exchange we retain all revenues from the sale of the advertising within the programming
we provide. The original term of the TBA was through December 31, 2014; however, in September 2014, we entered into an amendment
to the TBA to extend the term of the TBA through December 31, 2019. Under the terms of the TBA, WGPR has also granted us certain
rights of first negotiation and first refusal, with respect to the sale of WGPR-FM by WGPR and with respect to any potential time
brokerage agreement for WGPR-FM covering any time period subsequent to the term of the TBA.
On
April 17, 2015, the Company used the net proceeds from its issuance of its 2022 Notes, along with the 2015 Credit Facility and
Comcast Note, to refinance certain indebtedness and finance the purchase of all the membership interests of an affiliate of Comcast
Corporation (“Comcast”) in TV One (the “Comcast Buyout”). In connection with the Comcast Buyout, the Company
acquired all of Comcast’s membership interest in TV One for approximately $221.7 million which consisted of approximately
$211.1 million in cash paid at closing with a subsequent favorable working capital adjustment of approximately $1.3 million and
the issuance of the Comcast Note in the amount of approximately $11.9 million. As of April 17, 2015, the Company owned a 99.6%
interest in TV One. The Comcast Buyout was treated as an equity transaction in accordance with ASC 810-45-23, as the Company already
had control of TV One. TV One is now wholly-owned, as it has redeemed all management interests that were outstanding.
On November 12, 2015,
the Company entered into a two-station LMA with Wilks Broadcasting Group for 95.5 FM-WZOH and 107.1 FM-WHOK. While under the LMA,
the stations were a variable interest entity (“VIE”) for which we were not the primary beneficiary based on the fact
that we did not have the power to direct the activities of the VIE that most significantly impacted its economic performance.
The Company also entered into an asset purchase agreement to acquire the stations. This acquisition doubled the size of the previously
two-station urban music cluster in Columbus, Ohio. The Company completed the acquisition of the stations on February 3, 2016,
and as a result of the acquisition, the stations are no longer treated as a VIE. Total consideration paid was approximately $2.0
million. The Company’s preliminary purchase accounting to reflect the fair value of assets acquired and liabilities assumed
consisted of approximately $1.9 million to radio broadcasting licenses, $957,000 to property and equipment, $84,000 to other intangible
assets, offset by a lease liability of $909,000. The initial purchase price allocation is preliminarily based upon all information
available to the Company at the present time and is subject to change. The Company continues to review the underlying assumptions
and valuation techniques utilized to calculate the fair value of primarily the radio broadcasting licenses, property and equipment,
and lease liability.
On June 15, 2016, the
Company acquired a translator with the call sign W231BI licensed to Utica, New York (the “Translator”) for $40,000
from Educational Media Foundation. On July 25, 2016, the Company entered into a sale agreement with Beasley Media Group,
Inc. (“Beasley”) for the sale of the Translator for $400,000. The Company completed the sale to Beasley on October
21, 2016.
During the quarter
ended September 30, 2016, the Company entered into a letter of intent to sell certain land, towers and equipment to a third party
which the Company expects to close in the next twelve months. The closing of the transaction is subject to certain customary conditions,
including execution of a definitive agreement. The identified assets have been classified as held for sale in the consolidated
balance sheet at September 30, 2016. The combined net carrying value of $2.3 million for the assets held for sale is included
in other assets in the Company’s consolidated balance sheet at September 30, 2016. The estimated fair value of the assets
to be disposed of are in excess of their carrying value.
3. GOODWILL AND RADIO BROADCASTING LICENSES:
Impairment
Testing
In
accordance with ASC 350,
“Intangibles - Goodwill and Other,”
we do not amortize our indefinite-lived radio broadcasting
licenses and goodwill. Instead, we perform a test for impairment annually across all reporting units, or on an interim basis when
events or changes in circumstances or other conditions suggest impairment may have occurred in any given reporting unit. Other
intangible assets continue to be amortized on a straight-line basis over their useful lives. We perform our annual impairment test
as of October 1 of each year. We evaluate all events and circumstances on an interim basis to determine if a two-step process is
required. The first step of the process involves estimating the fair value of each reporting unit. If the reporting unit’s
fair value is less than its carrying value, a second step is performed to attribute the fair value of the reporting unit to the
individual assets and liabilities of the reporting unit in order to determine the implied fair value of the reporting unit’s
goodwill as of the impairment assessment date. Any excess of the carrying value of the goodwill over the implied fair value of
the goodwill is written off as a charge to operations.
Valuation of
Broadcasting Licenses
During the second
and third quarters of 2016, the total market revenue growth for certain markets in which we operate was below that used in our
2015 annual impairment testing. We deemed that to be an impairment indicator that warranted interim impairment testing of certain
markets’ radio broadcasting licenses, which we performed as of June 30, 2016, and September 30, 2016. There was no impairment
identified as part of this testing. During the second and third quarters of 2015, the total market revenue growth for certain markets
in which we operate was below that used in our 2014 annual impairment testing. We deemed that to be an impairment indicator that
warranted interim impairment testing of certain markets’ radio broadcasting licenses, which we performed as of June 30, 2015,
and September 30, 2015. There was no impairment identified as part of this testing. There were no impairment indicators present
for any of our other radio broadcasting licenses. Below are some of the key assumptions used in the income approach model for estimating
broadcasting licenses fair values for the interim impairment assessments for the quarters ended September 30, 2016 and 2015.
Radio Broadcasting
|
|
September 30,
|
|
|
September 30,
|
|
Licenses
|
|
2016 (a)
|
|
|
2015 (a)
|
|
|
|
|
|
|
|
|
Pre-tax impairment charge (in millions)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
9.0
|
%
|
|
|
9.5
|
%
|
Year 1 Market Revenue Growth Rate Range
|
|
|
0.3% – 0.5
|
%
|
|
|
0.3% – 0.5
|
%
|
Long-term Market Revenue Growth Rate Range (Years 6 – 10)
|
|
|
0.5% – 1.0
|
%
|
|
|
1.0% – 1.5
|
%
|
Mature Market Share Range
|
|
|
8.9% – 14.2
|
%
|
|
|
9.8% – 14.3
|
%
|
Operating Profit Margin Range
|
|
|
31.3% – 34.1
|
%
|
|
|
31.7
|
%
|
|
(a)
|
Reflects changes only to the key assumptions used in
the interim testing for certain units of accounting.
|
Valuation of Goodwill
During
the third quarter of 2016, we identified an impairment indicator at one of our radio markets, and as such, we performed an interim
analysis for that radio market’s goodwill as of September 30, 2016. During the second and third quarters of 2015, we identified
an impairment indicator at one of our radio markets, and as such, we performed an interim analysis for that radio market’s goodwill
as of June 30, 2015 and September 30, 2015. No goodwill impairment was identified during the three or nine months ended September
30, 2016 and 2015. Below are some of the key assumptions used in the income approach model for estimating reporting unit fair values
for the
interim impairment assessments for the quarters ended
September
30,
2016 and 2015.
Goodwill (Radio Market
|
|
September 30,
|
|
|
September 30,
|
|
Reporting Units)
|
|
2016 (a)
|
|
|
2015 (a)
|
|
|
|
|
|
|
|
|
Pre-tax impairment charge (in millions)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
9.0
|
%
|
|
|
9.5
|
%
|
Year 1 Market Revenue Growth Rate Range
|
|
|
0.6
|
%
|
|
|
0.4% – 0.7
|
%
|
Long-term Market Revenue Growth Rate Range (Years 6 – 10)
|
|
|
1.0
|
%
|
|
|
1.0% – 2.0
|
%
|
Mature Market Share Range
|
|
|
9.5
|
%
|
|
|
7.4% – 14.8
|
%
|
Operating Profit Margin Range
|
|
|
18.2% – 33.9
|
%
|
|
|
26.4% – 38.7
|
%
|
|
(a)
|
Reflects changes only to the key assumptions used in
the interim testing for certain units of accounting.
|
During the third quarter
of 2015, the Company performed interim impairment testing on the valuation of goodwill associated with Interactive One. Interactive
One’s net revenues and cash flows declined and internal projections were revised downward, which we deemed to be an impairment
indicator. The Company reduced its operating cash flow projections and assumptions based on Interactive One’s actual results
which did not meet budget. Below are some of the key assumptions used in the income approach model for estimating the fair value
for Interactive One for the interim assessment at September 30, 2015. When compared to discount rates for the radio reporting
units, the higher discount rate used to value the reporting unit is reflective of discount rates applicable to internet media
businesses. As a result of our interim assessment, the Company recorded a goodwill impairment charge of approximately $14.5 million
during the quarter ended September 30, 2015. There were no impairment indicators during the three or nine months ended September
30, 2016.
|
|
September 30,
|
|
Internet Segment Goodwill
|
|
2015
|
|
|
|
|
|
Pre-tax impairment charge (in millions)
|
|
$
|
14.5
|
|
|
|
|
|
|
Discount Rate
|
|
|
14.0
|
%
|
Year 1 Revenue Growth Rate
|
|
|
9.6
|
%
|
Long-term Revenue Growth Rate (Year 10)
|
|
|
2.5
|
%
|
Operating Profit Margin Range
|
|
|
4.5% – 23.9
|
%
|
We did not identify
any impairment indicators for the three or nine months ended September 30, 2016 and 2015, at our Reach Media or TV One reportable
segments.
Goodwill Valuation Results
The table below presents
the changes in the Company’s goodwill carrying values for its four reportable segments:
|
|
Radio
Broadcasting
Segment
|
|
|
Reach
Media
Segment
|
|
|
Internet
Segment
|
|
|
Cable
Television
Segment
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Gross goodwill
|
|
$
|
154,863
|
|
|
$
|
30,468
|
|
|
$
|
23,004
|
|
|
$
|
165,044
|
|
|
$
|
373,379
|
|
Accumulated impairment losses
|
|
|
(84,436
|
)
|
|
|
(16,114
|
)
|
|
|
(14,545
|
)
|
|
|
—
|
|
|
|
(115,095
|
)
|
Net goodwill at December 31, 2015 and September 30, 2016
|
|
$
|
70,427
|
|
|
$
|
14,354
|
|
|
$
|
8,459
|
|
|
$
|
165,044
|
|
|
$
|
258,284
|
|
4. INVESTMENTS:
The company liquidated
its investment portfolio during 2015. Prior to liquidation of the portfolio, investments consisted primarily of corporate fixed
maturity securities and mutual funds.
Debt securities were
classified as “available-for-sale” and reported at fair value. Investment income was recognized when earned and reported
net of investment expenses. Unrealized gains and losses were excluded from earnings and were reported as a separate component of
accumulated other comprehensive income (loss) until realized, unless the losses were deemed to be other than temporary. Realized
gains or losses, including any provision for other-than-temporary declines in value, were included in the statements of operations.
For purposes of computing realized gains and losses, the specific-identification method of determining cost was used.
Available-for-sale
securities were sold as follows:
|
|
Nine Months Ended
September 30, 2015
|
|
|
|
(In thousands)
|
|
|
|
|
|
Proceeds from sales
|
|
$
|
3,524
|
|
Gross realized gains
|
|
|
19
|
|
Gross realized losses
|
|
|
133
|
|
5. LONG-TERM DEBT:
Long-term debt
consists of the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
2015 Credit Facility
|
|
$
|
345,625
|
|
|
$
|
348,250
|
|
9.25% Senior Subordinated Notes due February 2020
|
|
|
315,000
|
|
|
|
335,000
|
|
7.375% Senior Secured Notes due April 2022
|
|
|
350,000
|
|
|
|
350,000
|
|
Comcast Note due April 2019
|
|
|
11,872
|
|
|
|
11,872
|
|
Total debt
|
|
|
1,022,497
|
|
|
|
1,045,122
|
|
Less: current portion of long-term debt
|
|
|
(3,500
|
)
|
|
|
(3,500
|
)
|
Less: original issue discount and issuance costs
|
|
|
(16,714
|
)
|
|
|
(20,785
|
)
|
Long-term debt, net
|
|
$
|
1,002,283
|
|
|
$
|
1,020,837
|
|
2022 Notes and 2015 Credit Facilities
On April 17, 2015,
the Company closed its private offering of $350.0 million aggregate principal amount of 7.375% senior secured notes due in April
2022 (the “2022 Notes”). The 2022 Notes were offered at an original issue price of 100.0% plus accrued interest from
April 17, 2015, and will mature on April 15, 2022. Interest on the 2022 Notes accrues at the rate of 7.375% per annum and is payable
semiannually in arrears on April 15 and October 15, which commenced on October 15, 2015. The 2022 Notes are guaranteed, jointly
and severally, on a senior secured basis by the Company’s existing and future domestic subsidiaries, including TV One, that
guarantee any of its new $350.0 million senior secured credit facility (the “2015 Credit Facility”) entered into concurrently
with the closing of the 2022 Notes.
The 2015 Credit Facility
matures on December 31, 2018. At the Company’s election, the interest rate on borrowings under the 2015 Credit Facility is
based on either (i) the then applicable base rate plus 3.5% (as defined in the 2015 Credit Facility) as, for any day, a rate per
annum (rounded upward, if necessary, to the next 1/100th of 1%) equal to the greater of (a) the prime rate published in the Wall
Street Journal, (b) 1/2 of 1% in excess rate of the overnight Federal Funds Rate at any given time, and (c) the one-month LIBOR
rate commencing on such day plus 1.00%), or (ii) the then applicable LIBOR rate plus 4.5% (as defined in the 2015 Credit Facility).
The average interest rate was approximately 5.14% for the three months ended September 30, 2016. Quarterly installments of 0.25%,
or $875,000, of the principal balance on the term loan are payable on the last day of each March, June, September and December
beginning on September 30, 2015. During the three and nine months ended September 30, 2016, the Company repaid $875,000 and approximately
$2.6 million, respectively, under the 2015 Credit Facility.
In connection with
the closing of the financing transactions, the Company and the guarantor parties thereto entered into a Fourth Supplemental Indenture
to the indenture governing the 2020 Notes (as defined below). Pursuant to this Fourth Supplemental Indenture, TV One, which previously
did not guarantee the 2020 Notes, became a guarantor under the 2020 Notes indentures. In addition, the closing of the financing
transactions caused a “Triggering Event” (as defined in the 2020 Notes Indenture) and, as a result, the 2020 Notes
became an unsecured obligation of the Company and the subsidiary guarantors and rank equal in right of payment with the Company’s
other senior indebtedness.
The Company used the
net proceeds from the 2022 Notes, along with term loan borrowings under the 2015 Credit Facility, to refinance its 2011 Credit
Agreement, refinance the TV One Notes (as defined below), finance the buyout of membership interests of Comcast in TV One and to
pay the related accrued interest, premiums, fees and expenses associated therewith.
The 2015 Credit Facility
contains affirmative and negative covenants that the Company is required to comply with, including:
(a) maintaining
an interest coverage ratio of no less than:
|
§
|
1.25 to 1.00 on June 30, 2015 and the last day of each fiscal quarter thereafter.
|
(b) maintaining
a senior leverage ratio of no greater than:
|
§
|
5.85 to 1.00 on June 30, 2015 and the last day of each fiscal quarter thereafter.
|
(c) limitations
on:
|
§
|
payment of dividends; and
|
As
of September 30, 2016, the Company was in compliance with all of its financial covenants under the 2015 Credit Facility.
As of September 30,
2016, the Company had outstanding approximately $345.6 million on its 2015 Credit Facility. The original issue discount is being reflected
as an adjustment to the carrying amount of the debt obligations and amortized to interest expense over the term of the credit
facility. The Company early adopted ASU 2015-03 during the year ended December 31, 2015, resulting in approximately $7.4 million
of net debt issuance costs presented as a direct reduction to the Company's long-term debt in the consolidated balance sheet as
of December 31, 2015. The amortization of deferred financing costs was charged to interest expense for all periods presented.
The amount of deferred financing costs included in interest expense for the three months ended September 30, 2016 and 2015 was
approximately $1.3 million and $1.2 million, respectively. The amount of deferred financing costs included in interest expense
for the nine months ended September 30, 2016 and 2015 was approximately $3.9 million and $3.6 million, respectively.
2011 Credit
Facilities
On
March 31, 2011, the Company entered into a senior secured credit facility (the “2011 Credit Agreement”) with a syndicate
of banks, and simultaneously borrowed $386.0 million to retire all outstanding obligations under the Company’s previous amended
and restated credit agreement and to fund a past obligation with respect to a capital call initiated by TV One. The
total amount available under the 2011 Credit Agreement was $411.0 million, initially consisting of a $386.0 million term loan facility
that matured on March 31, 2016, and a $25.0 million revolving loan facility that matured on March 31, 2015. Borrowings under the
2011 Credit Agreement were subject to compliance with certain covenants including, but not limited to, certain financial covenants.
Proceeds from the 2011 Credit Agreement could be used for working capital, capital expenditures made in the ordinary course of
business, a common stock repurchase program, permitted direct and indirect investments and other lawful corporate purposes. On
December 19, 2012, the Company entered into an amendment to the 2011 Credit Agreement (the “December 2012 Amendment”).
The December 2012 Amendment: (i) modified financial covenant levels with respect to the Company's total-leverage, secured-leverage,
and interest-coverage ratios; (ii) increased the amount of cash the Company can net for determination of its net indebtedness
tests; and (iii) extended the time for certain of the 2011 Credit Agreement's call premium while reducing the time for its later
and lower premium.
On
January 21, 2015, the Company entered into a second amendment to the 2011 Credit Agreement (the “Second Amendment”)
with its lenders. The provisions of the 2011 Credit Agreement relating to the call premium were revised by the Second Amendment
to extend the call protection from April 1, 2015, until maturity. The Second Amendment provided a call premium of 101.5%
if the 2011 Credit Agreement were refinanced with proceeds from a notes offering and 100.5% if the 2011 Credit Agreement was refinanced
with proceeds from any other repayment, including proceeds from a new term loan. The call premium was payable at the
earlier of any refinancing or final maturity.
The
2011 Credit Agreement, as amended, contained affirmative and negative covenants with which the Company was required to comply,
including financial covenants. In accordance with the 2011 Credit Agreement, as amended, the calculations for the ratios did not
include the operating results or related debt of TV One, but rather included our proportionate share of cash dividends received
from TV One for periods presented.
Under
the terms of the 2011 Credit Agreement, as amended, interest on base rate loans was payable quarterly and interest on LIBOR loans
was payable monthly or quarterly. The base rate was equal to the greater of: (i) the prime rate; (ii) the Federal Funds Effective
Rate plus 0.50%; or (iii) the one-month LIBOR Rate plus 1.00%. The applicable margin on the 2011 Credit Agreement was between
(i) 4.50% and 5.50% on the revolving portion of the facility and (ii) 5.00% (with a base rate floor of 2.5% per annum) and 6.00%
(with a LIBOR floor of 1.5% per annum) on the term portion of the facility. The average interest rate was 7.50% for the first quarter
of 2015 prior to the refinancing. Quarterly installments of 0.25%, or $957,000, of the principal balance on the term loan were
payable on the last day of each March, June, September and December.
On
February 24, 2015, the Company entered into a letter of credit reimbursement and security agreement. As of September 30, 2016,
the Company had letters of credit totaling $933,000 under the agreement for certain operating leases and certain insurance policies.
Letters of credit issued under the agreement are required to be collateralized with cash.
During
the year ended December 31, 2015, the Company repaid approximately $368.5 million under the 2011 Credit Agreement, as amended.
The original issue discount was being reflected as an adjustment to the carrying amount of the debt obligations and amortized
to interest expense over the term of the credit facility. According to the terms of the Credit Agreement, as amended, the Company
did not make an excess cash flow payment in April 2015.
As
noted above, the Company used the net proceeds from the private offering of the 2022 Notes, along with term loan borrowings under
the 2015 Credit Facility, to refinance its 2011 Credit Agreement, as amended. The Company recorded a loss on retirement of debt
of approximately $7.1 million for the year ended December 31, 2015. This amount included a write-off of approximately $1.3 million
of previously capitalized debt financing costs, a write-off of $844,000 of original issue discount associated with the 2011 Credit
Agreement, as amended, as well as $827,000 associated with the call premium to refinance the credit facility, $106,000 associated
with the consent to the existing holders of the 2020 Notes and approximately $4.0 million of costs associated with the financing
transactions.
Senior Subordinated
Notes
On
February 10, 2014, the Company closed a private placement offering of $335.0 million aggregate principal amount of 9.25%
senior subordinated notes due 2020 (the “2020 Notes”). The 2020 Notes were offered at an original issue price of
100.0% plus accrued interest from February 10, 2014. The 2020 Notes mature on February 15, 2020. Interest accrues at the rate
of 9.25% per annum and is payable semiannually in arrears on February 15 and August 15 in the amount of approximately $15.5
million, which commenced on August 15, 2014. Subsequent to the repurchase of a portion of the 2020 Notes (as described
below), the semiannual interest payment is approximately $14.6 million. The 2020 Notes are guaranteed by certain of the
Company’s existing and future domestic subsidiaries and any other subsidiaries that guarantee the existing senior
credit facility or any of the Company’s other syndicated bank indebtedness or capital markets securities. The Company
used the net proceeds from the offering to repurchase or otherwise redeem all of the amounts then outstanding under its
12.5%/15% Senior Subordinated Notes due May 2016 and to pay the related accrued interest, premiums, fees and expenses
associated therewith. During the quarter ended June 30, 2016, the Company repurchased approximately $20 million of its 2020
Notes at an average price of approximately 86% of par. The Company recorded a gain on retirement of debt of
approximately $2.6 million for the quarter ended June 30, 2016. As of September 30, 2016, and December 31, 2015, the Company
had $315.0 million and $335.0 million, respectively, of 2020 Notes outstanding.
The
indenture that governs the 2020 Notes contains covenants that restrict, among other things, the ability of the Company to incur
additional debt, purchase common stock, make capital expenditures, make investments or other restricted payments, swap or sell
assets, engage in transactions with related parties, secure non-senior debt with assets, or merge, consolidate or sell all or substantially
all of its assets.
TV One Senior Secured Notes
TV
One issued $119.0 million in senior secured notes on February 25, 2011 (“TV One Notes”). The proceeds from the notes
were used to purchase equity interests from certain financial investors and TV One management. The notes accrued interest at 10.0%
per annum, which was payable monthly, and the entire principal amount was due on March 15, 2016. In connection with the closing
of the financing transactions on April 17, 2015, the TV One Notes were repaid.
Comcast Note
The
Company also has outstanding a senior unsecured promissory note in the aggregate principal amount of approximately $11.9 million
due to Comcast (“Comcast Note”). The Comcast Note bears interest at 10.47%, is payable quarterly in arrears, and the
entire principal amount is due on April 17, 2019.
Asset-Backed Credit Facility
On April 21, 2016,
the Company entered into a senior credit agreement governing an asset-backed credit facility (the “ABL Facility”) among
the Company, the lenders party thereto from time to time and Wells Fargo Bank National Association, as administrative agent (the
“Administrative Agent”). The ABL Facility provides for $25 million in revolving loan borrowings in order to provide
for the working capital needs and general corporate requirements of the Company. As of September 30, 2016, the Company does not
have any borrowings outstanding on its ABL Facility.
At the Company’s
election, the interest rate on borrowings under the ABL Facility are based on either (i) the then applicable margin relative to
Base Rate Loans (as defined in the ABL Facility) or (ii) the then applicable margin relative to LIBOR Loans (as defined in the
ABL Facility) corresponding to the average availability of the Company for the most recently completed fiscal quarter.
Advances under the
ABL Facility are limited to (a) eighty-five percent (85%) of the amount of Eligible Accounts (as defined in the ABL Facility),
less the amount, if any, of the Dilution Reserve (as defined in the ABL Facility), minus (b) the sum of (i) the Bank Product Reserve
(as defined in the ABL Facility), plus (ii) the aggregate amount of all other reserves, if any, established by Administrative Agent.
All obligations under
the ABL Facility are secured by first priority lien on all (i) deposit accounts (related to accounts receivable), (ii) accounts
receivable, (iii) all other property which constitutes ABL Priority Collateral (as defined in the ABL Facility). The obligations
are also secured by all material subsidiaries of the Company.
The ABL Facility matures
on the earlier to occur of: (a) the date that is five (5) years from the effective date of the ABL Facility and
(b) the date that is thirty (30) days prior to the earlier to occur of (i) the "Term Loan Maturity Date" of the Company’s
existing term loan, and (ii) the "Stated Maturity" of the Company’s existing notes. As of the effective date
of the ABL Facility, the "Term Loan Maturity Date" is December 31, 2018, and the "Stated Maturity" is April
15, 2022.
Finally, the ABL Facility
is subject to the terms of the Intercreditor Agreement (as defined in the ABL Facility) by and among the Administrative Agent,
the administrative agent for the secured parties under the Company’s term loan and the trustee and collateral trustee under
the senior secured notes indenture.
The
Company conducts a portion of its business through its subsidiaries. Certain of the Company’s subsidiaries have fully and
unconditionally guaranteed the Company’s 2022 Notes, 2020 Notes and the Company’s obligations under the 2015 Credit
Facility.
The
2022 Notes are the Company’s senior secured obligations and rank equal in right of payment with all of the Company’s
and the guarantors’ existing and future senior indebtedness, including obligations under the 2015 Credit Facility and the
Company’s 2020 Notes. The 2022 Notes and related guarantees are equally and ratably secured by the same collateral
securing the 2015 Credit Facility and any other parity lien debt issued after the issue date of the 2022 Notes, including any additional
notes issued under the Indenture, but are effectively subordinated to the Company’s and the guarantors’ secured indebtedness
to the extent of the value of the collateral securing such indebtedness that does not also secure the 2022 Notes. Collateral includes
substantially all of the Company’s and the guarantors’ current and future property and assets for accounts receivable,
cash, deposit accounts, other bank accounts, securities accounts, inventory and related assets including the capital stock of each
subsidiary guarantor. Finally, the Company also has the Comcast Note which is a general but senior unsecured obligation of the
Company.
Future
scheduled minimum principal payments of debt as of September 30, 2016, are as follows:
|
|
Comcast Note
due April 2019
|
|
|
2015
Credit Facility
|
|
|
9.25% Senior
Subordinated
Notes due
February 2020
|
|
|
7.375% Senior
Secured Notes due
April 2022
|
|
|
Total
|
|
|
|
(In thousands)
|
|
October – December 2016
|
|
$
|
—
|
|
|
$
|
875
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
875
|
|
2017
|
|
|
—
|
|
|
|
3,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,500
|
|
2018
|
|
|
—
|
|
|
|
341,250
|
|
|
|
—
|
|
|
|
—
|
|
|
|
341,250
|
|
2019
|
|
|
11,872
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,872
|
|
2020
|
|
|
—
|
|
|
|
—
|
|
|
|
315,000
|
|
|
|
—
|
|
|
|
315,000
|
|
2021 and thereafter
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
350,000
|
|
|
|
350,000
|
|
Total Debt
|
|
$
|
11,872
|
|
|
$
|
345,625
|
|
|
$
|
315,000
|
|
|
$
|
350,000
|
|
|
$
|
1,022,497
|
|
6. INCOME TAXES:
The Company recorded
tax expense of approximately $8.3 million on pre-tax income from continuing operations of approximately $12.5 million for the nine
months ended September 30, 2016, based on the actual effective tax rate for the current period. Because our income tax expense
does not have a correlation to our pre-tax earnings, small changes in those earnings can have a significant impact on the income
tax expense we recognize. The Company continues to estimate a range of possible outcomes due to the proportion of deferred
tax expense from indefinite-lived intangible assets over pre-tax earnings. As a result, we believe the actual effective tax rate
best represents the estimated effective rate for the nine months ended September 30, 2016, in accordance with ASC 740-270, “
Interim
Reporting
.”
As of September 30,
2016, the Company continues to maintain a full valuation allowance on its deferred tax assets for substantially all entities and
jurisdictions, but excludes deferred tax liabilities related to indefinite-lived intangible assets. In accordance with ASC 740,
“
Accounting for Income Taxes
”, the Company continually assesses the adequacy of the valuation allowance by assessing
the likely future tax consequences of events that have been realized in the Company’s financial statements or tax returns,
tax planning strategies, and future profitability. As of September 30, 2016, the Company does not believe it is more likely
than not that the deferred tax assets will be realized. As part of the assessment, the Company has not included the deferred
tax liability related to indefinite-lived intangible assets as a source of future taxable income to support realization of the
deferred tax assets.
7. STOCKHOLDERS’
EQUITY:
Stock Repurchase
Program
In December 2015,
the Company’s Board of Directors authorized a repurchase of shares of the Company’s Class A and Class D common stock
(the “December 2015 Repurchase Authorization”). Under the December 2015 Repurchase Authorization, the Company is authorized,
but is not obligated, to repurchase up to $3.5 million worth of its Class A and/or Class D common stock. On March 25, 2016, the
Company’s Board of Directors reaffirmed the December 2015 Repurchase Authorization without any limitation on price, and
on September 23, 2016 increased the authorization to $7.0 million. As of September 30, 2016, the Company had approximately $7.0
million remaining under the authorization with respect to its Class A and Class D common stock. Repurchases may be made from time
to time in the open market or in privately negotiated transactions in accordance with applicable laws and regulations. The timing
and extent of any repurchases will depend upon prevailing market conditions, the trading price of the Company’s Class A
and/or Class D common stock and other factors, and subject to restrictions under applicable law. The Company executes upon the
stock repurchase program in a manner consistent with market conditions and the interests of the stockholders, including maximizing
stockholder value. In addition, the Company has limited but ongoing authority to purchase shares of Class D common stock (in one
or more transactions at any time there remain outstanding grants) under the Company’s 2009 Stock Plan (as defined below)
to satisfy any employee or other recipient tax obligations in connection with the exercise of an option or a share grant under
the 2009 Stock Plan, to the extent that the Company has capacity under its financing agreements (i.e., its current credit facilities
and indentures) (each a “Stock Vest Tax Repurchase”). During the nine months ended September 30, 2016, the Company
executed a Stock Vest Tax Repurchase of 330,111 shares of Class D Common Stock in the amount of $568,000 at an average price of
$1.72 per share. During the nine months ended September 30, 2015, the Company executed a Stock Vest Tax Repurchase of 345,293
shares of Class D Common Stock in the amount of approximately $1.4 million at an average price of $4.12 per share. During the
three months ended September 30, 2016, the Company did not repurchase any Class A common stock and repurchased 619,418 shares
of Class D common stock in the amount of approximately $1.9 million at an average price of $3.01 per share. During the nine months
ended September 30, 2016, the Company did not repurchase any Class A common stock and repurchased 1,255,592 shares of Class D
common stock in the amount of approximately $3.0 million at an average price of $2.40 per share. During the three months ended
September 30, 2015, the Company did not repurchase any Class A Common Stock or Class D Common Stock.
Stock Option and Restricted Stock
Grant Plan
A stock option and
restricted stock plan (“the 2009 Stock Plan”) was approved by the stockholders at the Company’s annual meeting
on December 16, 2009. The Company had the authority to issue up to 8,250,000 shares of Class D Common Stock under
the 2009 Stock Plan. On September 26, 2013, the Board of Directors adopted, and our stockholders approved on November 14,
2013, certain amendments to and restatement of the 2009 Stock Plan (the “Amended and Restated 2009 Stock Plan”). The
amendments under the Amended and Restated 2009 Stock Plan primarily affected (i) the number of shares with respect to which options
and restricted stock grants may be granted under the 2009 Stock Plan and (ii) the maximum number of shares that can be awarded
to any individual in any one calendar year. The Amended and Restated 2009 Stock Plan increased the authorized plan shares remaining
available for grant to 7,000,000 shares of Class D common stock after giving effect to the issuances prior to the amendment. Prior
to the amendment, under the 2009 Plan, in any one calendar year, the compensation committee could not grant to any one participant
options to purchase, or grants of, a number of shares of Class D common stock in excess of 1,000,000. Under the Amended
and Restated 2009 Stock Plan, this limitation was eliminated. The purpose of eliminating this limitation is to provide
the compensation committee with maximum flexibility in setting executive compensation. On April 13, 2015, the Board of Directors
adopted, and our stockholders approved on June 2, 2015, a further amendment to the Amended and Restated 2009 Stock Plan. This further
amendment increased the authorized plan shares remaining available for grant to 8,250,000 shares of Class D common stock. As of
September 30, 2016, 8,012,932 shares of Class D common stock were available for grant under the Amended and Restated 2009 Stock
Plan.
On September 30, 2014,
the Compensation Committee (“Compensation Committee”) of the Board of Directors of the Company approved the principal
terms of new employment agreements for each of the Company’s named executive officers which included the granting of restricted
shares and stock options under a long-term incentive plan (“LTIP”) as follows, effective October 6, 2014:
Cathy Hughes, Founder
and Executive Chairperson was awarded 456,000 restricted shares of the Company’s Class D common stock vesting in approximately
equal 1/3 tranches on April 20, 2015, December 31, 2015 and December 31, 2016, and stock options to purchase 293,000 shares of
the Company’s Class D common stock, vesting in approximately equal 1/3 tranches on April 6, 2015, December 31, 2015 and December
31, 2016.
Alfred C. Liggins,
President and Chief Executive Officer of Radio One, Inc. and TV One, LLC was awarded 913,000 restricted shares of the Company’s
Class D common stock vesting in approximately equal 1/3 tranches on April 20, 2015, December 31, 2015 and December 31, 2016, and
stock options to purchase 587,000 shares of the Company’s Class D common stock, vesting in approximately equal 1/3 tranches
on April 6, 2015, December 31, 2015 and December 31, 2016.
Peter Thompson, Executive
Vice President and Chief Financial Officer was awarded 350,000 restricted shares of the Company’s Class D common stock with
200,000 shares vesting on April 20, 2015, and with the remaining shares vesting in equal 75,000 share tranches on December 31,
2015 and December 31, 2016, and stock options to purchase 225,000 shares of the Company’s Class D common stock vesting in
equal 112,500 share tranches on December 31, 2015 and December 31, 2016.
Linda Vilardo, Executive
Vice President and Chief Administrative Officer was awarded 225,000 restricted shares of the Company’s Class D common stock
vesting in equal 75,000 share tranches on April 20, 2015, December 31, 2015 and December 31, 2016.
Also on September
30, 2014, the Compensation Committee awarded 410,000 shares of restricted stock to certain employees pursuant to the Company’s
LTIP. The grants were effective October 6, 2014, and will vest in three installments, with the first installment of 33%
vesting on April 6, 2015, and the second installment vesting on December 31, 2015. The remaining installment will vest on
December 31, 2016. Pursuant to the terms of the 2009 Stock Option and Restricted Stock Grant Plan, as amended and restated
as of December 31, 2013, and subject to the Company’s insider trading policy, a portion of each recipient’s vested
shares may be sold in the open market for tax purposes on or about the vesting dates.
On October 26, 2015,
the Compensation Committee awarded David Kantor, Chief Executive Officer, Radio Division, 100,000 restricted shares of the Company’s
Class D common stock, and stock options to purchase 300,000 shares of the Company’s Class D common stock. The grants were
effective November 5, 2015, and will vest in approximately equal 1/3 tranches on November 5, 2016, November 5, 2017 and November
5, 2018.
Stock-based
compensation expense for the three months ended September 30, 2016 and 2015, was $782,000 and approximately $1.0 million, respectively,
and for the nine months ended September 30, 2016 and 2015, was approximately $2.3 million and $3.8 million, respectively.
The Company did not
grant stock options during the nine months ended September 30, 2016. The Company granted 50,000 stock options during the three
and nine months ended September 30, 2015.
Transactions
and other information relating to stock options for the nine months ended September 30, 2016, are summarized below:
|
|
Number of
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual Term
(In Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2015
|
|
|
3,712,000
|
|
|
$
|
2.06
|
|
|
|
5.20
|
|
|
$
|
733,000
|
|
Grants
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled/expired
|
|
|
(12,000
|
)
|
|
$
|
10.66
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2016
|
|
|
3,700,000
|
|
|
$
|
2.03
|
|
|
|
4.47
|
|
|
$
|
4,140,000
|
|
Vested and expected to vest at September 30, 2016
|
|
|
3,589,000
|
|
|
$
|
2.02
|
|
|
|
4.34
|
|
|
$
|
4,077,000
|
|
Unvested at September 30, 2016
|
|
|
756,000
|
|
|
$
|
2.45
|
|
|
|
8.50
|
|
|
$
|
441,000
|
|
Exercisable at September 30, 2016
|
|
|
2,944,000
|
|
|
$
|
1.93
|
|
|
|
3.43
|
|
|
$
|
3,699,000
|
|
The aggregate intrinsic
value in the table above represents the difference between the Company’s stock closing price on the last day of trading during
the three months ended September 30, 2016, and the exercise price, multiplied by the number of shares that would have been received
by the holders of in-the-money options had all the option holders exercised their options on September 30, 2016. This amount changes
based on the fair market value of the Company’s stock. There were no options exercised during the three and nine months ended
September 30, 2016. There were no options that vested during the three and nine months ended September 30, 2016. There were no
options exercised during the three and nine months ended September 30, 2015. No options vested during the three months ended September
30, 2015, and 293,338 options vested during the nine months ended September 30, 2015.
As of September 30,
2016, $694,000 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average
period of 7.5 months. The stock option weighted-average fair value per share was $1.39 at September 30, 2016.
The Company did not grant shares of restricted stock during
the three months ended September 30, 2016, and granted 157,728 shares of restricted stock during the nine months ended September
30, 2016. The Company granted 25,000 shares of restricted stock during the three months ended September 30, 2015, and 93,680 shares
of restricted stock during the nine months ended September 30, 2015. Each of the four non-executive directors received 18,182 shares
of restricted stock or $50,000 worth of restricted stock based upon the closing price of the Company’s Class D common stock
on June 16, 2016. Each of the five non-executive directors received 13,736 shares of restricted stock or $50,000 worth of restricted
stock based upon the closing price of the Company’s Class D common stock on June 16, 2015. As noted above, during the year
ended December 31, 2014, 2,424,000 restricted shares were issued to the Company’s Executives and other LTIP participants.
During the years ended December 31, 2015 and 2014, respectively, 68,680 and 56,050 shares of restricted stock were issued to the
Company’s non-executive directors as a part of their 2014 and 2015 compensation packages. All of the restricted stock grants
vest over a two-year period in equal 50% installments.
Transactions and other
information relating to restricted stock grants for the nine months ended September 30, 2016, are summarized below:
|
|
Shares
|
|
|
Average
Fair Value
at Grant
Date
|
|
Unvested at December 31, 2015
|
|
|
953,000
|
|
|
$
|
2.76
|
|
Grants
|
|
|
158,000
|
|
|
$
|
2.07
|
|
Vested
|
|
|
(50,000
|
)
|
|
$
|
4.01
|
|
Forfeited/cancelled/expired
|
|
|
(45,000
|
)
|
|
$
|
2.75
|
|
Unvested at September 30, 2016
|
|
|
1,016,000
|
|
|
$
|
2.81
|
|
The restricted stock
grants were included in the Company’s outstanding share numbers on the effective date of grant. As of September 30, 2016,
approximately $1.2 million of total unrecognized compensation cost related to restricted stock grants is expected to be recognized
over a weighted-average period of 6.8 months.
8. SEGMENT INFORMATION:
The Company has four
reportable segments: (i) radio broadcasting; (ii) Reach Media; (iii) internet; and (iv) cable television. These segments operate
in the United States and are consistently aligned with the Company’s management of its businesses and its financial reporting
structure.
The radio broadcasting
segment consists of all broadcast results of operations. The Reach Media segment consists of the results of operations for the
Tom Joyner Morning Show and related activities and operations of other syndicated shows. The internet segment includes the results
of our online business, including the operations of Interactive One. The cable television segment consists of TV One’s results
of operations. Corporate/Eliminations represents financial activity associated with our corporate staff and offices and intercompany
activity among the four segments.
Operating loss or
income represents total revenues less operating expenses, depreciation and amortization, and impairment of long-lived assets. Intercompany
revenue earned and expenses charged between segments are recorded at estimated fair value and eliminated in consolidation.
The accounting policies
described in the summary of significant accounting policies in Note 1 –
Organization and Summary of Significant Accounting
Policies
are applied consistently across the segments.
Detailed segment data for the three
and nine months ended September 30, 2016 and 2015, is presented in the following tables:
|
|
Three Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
(As
reclassified)
|
|
Net Revenue:
|
|
|
|
|
|
|
|
|
Radio Broadcasting
|
|
$
|
47,703
|
|
|
$
|
50,880
|
|
Reach Media
|
|
|
12,530
|
|
|
|
13,486
|
|
Internet
|
|
|
5,374
|
|
|
|
5,503
|
|
Cable Television
|
|
|
46,822
|
|
|
|
47,571
|
|
Corporate/Eliminations*
|
|
|
(1,573
|
)
|
|
|
(1,547
|
)
|
Consolidated
|
|
$
|
110,856
|
|
|
$
|
115,893
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses (including stock-based compensation and excluding depreciation and amortization
and impairment of long-lived assets):
|
|
|
|
|
|
|
|
|
Radio Broadcasting
|
|
$
|
27,768
|
|
|
$
|
31,833
|
|
Reach Media
|
|
|
10,423
|
|
|
|
11,061
|
|
Internet
|
|
|
5,438
|
|
|
|
5,427
|
|
Cable Television
|
|
|
28,596
|
|
|
|
31,987
|
|
Corporate/Eliminations
|
|
|
5,629
|
|
|
|
5,671
|
|
Consolidated
|
|
$
|
77,854
|
|
|
$
|
85,979
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
Radio Broadcasting
|
|
$
|
1,035
|
|
|
$
|
1,145
|
|
Reach Media
|
|
|
59
|
|
|
|
(394
|
)
|
Internet
|
|
|
417
|
|
|
|
446
|
|
Cable Television
|
|
|
6,559
|
|
|
|
6,554
|
|
Corporate/Eliminations
|
|
|
399
|
|
|
|
526
|
|
Consolidated
|
|
$
|
8,469
|
|
|
$
|
8,277
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets:
|
|
|
|
|
|
|
|
|
Radio Broadcasting
|
|
$
|
—
|
|
|
$
|
—
|
|
Reach Media
|
|
|
—
|
|
|
|
—
|
|
Internet
|
|
|
—
|
|
|
|
14,545
|
|
Cable Television
|
|
|
—
|
|
|
|
—
|
|
Corporate/Eliminations
|
|
|
—
|
|
|
|
—
|
|
Consolidated
|
|
$
|
—
|
|
|
$
|
14,545
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Radio Broadcasting
|
|
$
|
18,900
|
|
|
$
|
17,902
|
|
Reach Media
|
|
|
2,048
|
|
|
|
2,819
|
|
Internet
|
|
|
(481
|
)
|
|
|
(14,915
|
)
|
Cable Television
|
|
|
11,667
|
|
|
|
9,030
|
|
Corporate/Eliminations
|
|
|
(7,601
|
)
|
|
|
(7,744
|
)
|
Consolidated
|
|
$
|
24,533
|
|
|
$
|
7,092
|
|
* Includes Corporate network revenue in 2015. Intercompany
revenue included in segment net revenues above is as follows:
Radio Broadcasting
|
|
$
|
(250
|
)
|
|
$
|
(801
|
)
|
Reach Media
|
|
|
(430
|
)
|
|
|
(433
|
)
|
Internet
|
|
|
(882
|
)
|
|
|
(933
|
)
|
TV One
|
|
|
(12
|
)
|
|
|
—
|
|
Capital expenditures by segment are as follows:
Radio Broadcasting
|
|
$
|
740
|
|
|
$
|
1,087
|
|
Reach Media
|
|
|
110
|
|
|
|
36
|
|
Internet
|
|
|
253
|
|
|
|
185
|
|
Cable Television
|
|
|
172
|
|
|
|
108
|
|
Corporate/Eliminations
|
|
|
369
|
|
|
|
79
|
|
Consolidated
|
|
$
|
1,644
|
|
|
$
|
1,495
|
|
|
|
September 30,
2016
|
|
|
December
31, 2015
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands)
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
Radio Broadcasting
|
|
$
|
784,241
|
|
|
$
|
781,022
|
|
Reach Media
|
|
|
42,270
|
|
|
|
36,989
|
|
Internet
|
|
|
16,663
|
|
|
|
18,427
|
|
Cable Television
|
|
|
461,626
|
|
|
|
445,660
|
|
Corporate/Eliminations
|
|
|
54,729
|
|
|
|
64,426
|
|
Consolidated
|
|
$
|
1,359,529
|
|
|
$
|
1,346,524
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
(As reclassified)
|
|
Net Revenue:
|
|
|
|
|
|
|
|
|
Radio Broadcasting
|
|
$
|
145,597
|
|
|
$
|
149,093
|
|
Reach Media
|
|
|
42,328
|
|
|
|
42,508
|
|
Internet
|
|
|
15,668
|
|
|
|
15,763
|
|
Cable Television
|
|
|
143,858
|
|
|
|
138,898
|
|
Corporate/Eliminations*
|
|
|
(4,788
|
)
|
|
|
(4,785
|
)
|
Consolidated
|
|
$
|
342,663
|
|
|
$
|
341,477
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses (including stock-based compensation and excluding depreciation and amortization
and impairment of long-lived assets):
|
|
|
|
|
|
|
|
|
Radio Broadcasting
|
|
$
|
88,762
|
|
|
$
|
96,881
|
|
Reach Media
|
|
|
35,816
|
|
|
|
36,041
|
|
Internet
|
|
|
15,769
|
|
|
|
16,342
|
|
Cable Television
|
|
|
85,888
|
|
|
|
87,348
|
|
Corporate/Eliminations
|
|
|
19,645
|
|
|
|
16,503
|
|
Consolidated
|
|
$
|
245,880
|
|
|
$
|
253,115
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
Radio Broadcasting
|
|
$
|
3,256
|
|
|
$
|
3,469
|
|
Reach Media
|
|
|
148
|
|
|
|
137
|
|
Internet
|
|
|
1,299
|
|
|
|
1,559
|
|
Cable Television
|
|
|
19,664
|
|
|
|
19,600
|
|
Corporate/Eliminations
|
|
|
1,356
|
|
|
|
1,580
|
|
Consolidated
|
|
$
|
25,723
|
|
|
$
|
26,345
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets:
|
|
|
|
|
|
|
|
|
Radio Broadcasting
|
|
$
|
—
|
|
|
$
|
—
|
|
Reach Media
|
|
|
—
|
|
|
|
—
|
|
Internet
|
|
|
—
|
|
|
|
14,545
|
|
Cable Television
|
|
|
—
|
|
|
|
—
|
|
Corporate/Eliminations
|
|
|
—
|
|
|
|
—
|
|
Consolidated
|
|
$
|
—
|
|
|
$
|
14,545
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Radio Broadcasting
|
|
$
|
53,579
|
|
|
$
|
48,743
|
|
Reach Media
|
|
|
6,364
|
|
|
|
6,330
|
|
Internet
|
|
|
(1,400
|
)
|
|
|
(16,683
|
)
|
Cable Television
|
|
|
38,306
|
|
|
|
31,950
|
|
Corporate/Eliminations
|
|
|
(25,789
|
)
|
|
|
(22,868
|
)
|
Consolidated
|
|
$
|
71,060
|
|
|
$
|
47,472
|
|
* Includes Corporate network revenue in 2015. Intercompany
revenue included in segment net revenues above is as follows:
Radio Broadcasting
|
|
$
|
(842
|
)
|
|
$
|
(2,708
|
)
|
Reach Media
|
|
|
(1,281
|
)
|
|
|
(1,192
|
)
|
Internet
|
|
|
(2,643
|
)
|
|
|
(2,743
|
)
|
TV One
|
|
|
(22
|
)
|
|
|
—
|
|
Capital expenditures by segment are as follows:
Radio Broadcasting
|
|
$
|
2,574
|
|
|
$
|
4,223
|
|
Reach Media
|
|
|
332
|
|
|
|
258
|
|
Internet
|
|
|
969
|
|
|
|
976
|
|
Cable Television
|
|
|
313
|
|
|
|
228
|
|
Corporate/Eliminations
|
|
|
790
|
|
|
|
320
|
|
Consolidated
|
|
$
|
4,978
|
|
|
$
|
6,005
|
|
9. COMMITMENTS AND CONTINGENCIES:
Royalty Agreements
The Company has historically
entered into fixed and variable fee music license agreements with performance rights organizations including the Society of European
Stage Authors and Composers (“SESAC”), American Society of Composers, Authors and Publishers (“ASCAP”)
and Broadcast Music, Inc. (“BMI”). Our ASCAP and BMI licenses expire December 31, 2016. The Company has authorized
the Radio Music License Committee (the “RMLC”) to negotiate on its behalf with respect to its licenses with SESAC,
ASCAP and BMI including the ASCAP and BMI licenses expiring December 31, 2016. The RMLC is currently in negotiations with ASCAP and
BMI for license terms of January 1, 2017 through December 31, 2021. The RMLC is in preparation for a binding rate arbitration
with SESAC. This arbitration will be completed by the end of the first calendar quarter of 2017 and the rate decision will
have retroactive application to January 1, 2016. In the interim, we continue payments to SESAC at the existing 2015 rates
and, SESAC may not increase our fees for any reason prior to the rate arbitration decision being issued. In connection with all
performance rights organization agreements, the Company incurred expenses of approximately $1.0 million and $2.7 million for the
three month periods ended September 30, 2016 and 2015, respectively, and approximately $6.1 million and $7.7 million for the nine
month periods ended September 30, 2016 and 2015, respectively.
Other Contingencies
The
Company has been named as a defendant in several legal actions arising 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.
Off-Balance Sheet Arrangements
On February 24, 2015,
the Company entered into a letter of credit reimbursement and security agreement. As of September 30, 2016, the Company had letters
of credit totaling $933,000 under the agreement for certain operating leases and certain insurance policies. Letters of credit
issued under the agreement are required to be collateralized with cash.
Noncontrolling Interest Shareholders’ Put Rights
Beginning on January
1, 2018, the noncontrolling interest shareholders of Reach Media have an annual right to require Reach Media to purchase all or
a portion of their shares at the then current fair market value for such shares (the “Put Right”). Beginning
in 2018, this annual right is exercisable for a 30-day period beginning January 1 of each year. The purchase price for such shares
may be paid in cash and/or registered Class D common stock of Radio One, at the discretion of Radio One.
10. SUBSEQUENT EVENTS:
On June 15, 2016, the
Company acquired a translator with the call sign W231BI licensed to Utica, New York (the “Translator”) for $40,000
from Educational Media Foundation. On July 25, 2016, the Company entered into a sale agreement with Beasley Media Group,
Inc. (“Beasley”) for the sale of the Translator for $400,000. The Company completed the sale to Beasley on October
21, 2016.
On November 3, 2016,
during the course of its conference call to discuss its results for the third fiscal quarter of 2016, the Company announced that
it would be changing its corporate name and that effective January 1, 2017, the Company would be called “Urban One, Inc.”
to better reflect its multi-media platform.
During the quarter ended September 30, 2016, the Company entered into a letter of intent
to sell certain land, towers and equipment to a third party which the Company expects to close in the next twelve months. The
closing of the transaction is subject to certain customary conditions, including execution of a definitive agreement. The
identified assets have been classified as held for sale in the consolidated balance sheet at September 30, 2016. The combined
net carrying value of $2.3 million for the assets held for sale is included in other assets in the Company’s consolidated
balance sheet at September 30, 2016. The estimated fair value of the assets to be disposed of are in excess of their carrying
value.