URBAN ONE, INC. quarterly report, Q1 FY2012

Business context and reporting period

Radio One, Inc. (the registrant named in this filing) filed this unaudited Form 10-Q for the three months ended March 31, 2012. It operated 54 radio stations in 16 U.S. markets and reported four segments: Radio Broadcasting, Reach Media, Internet, and Cable Television (TV One). Comparisons with Q1 2011 are materially affected by TV One’s consolidation beginning April 14, 2011; TV One revenue and expenses are included in Q1 2012 but not in reported Q1 2011 results.

Financial performance

• Revenue increased 58.5%, mainly because Q1 2012 included $32.2 million of TV One revenue. Radio Broadcasting revenue rose 9.3%; excluding Gospel Cruise timing, core radio revenue including syndicated programming increased 6.4%. Reach Media revenue fell 8.0%, while Internet revenue grew 64.6%.
• Operating expenses rose 50.2% to $89.3 million, including higher programming, selling and administrative costs and $5.6 million more depreciation and amortization. Management cited TV One consolidation, content amortization, talent costs, payroll, and event timing.
• Station operating income, a company-defined non-GAAP measure, increased to $33.1 million from $17.8 million; its margin rose to 32.1% from 27.5%. Adjusted EBITDA, also non-GAAP, was $23.5 million versus $10.6 million. TV One contributed approximately $14.0 million of station operating income in Q1 2012.
• The reported tax expense drove the large net loss despite the pre-tax loss being smaller than in Q1 2011. Approximately $64.0 million of Q1 2012 tax expense related to deferred tax liabilities on indefinite-lived intangibles; the company maintained a full valuation allowance on deferred tax assets for entities other than Reach Media.

Balance sheet, debt and liquidity

• At March 31, 2012, total assets were $1.481 billion, total liabilities $1.129 billion, and total equity $328.3 million. Current assets of $159.2 million exceeded current liabilities of $65.2 million.
• Total debt was $821.7 million gross ($810.7 million long-term debt, net of current portion and original issue discount). Major balances included $382.1 million of senior bank term debt, $319.8 million of 12.5%/15% senior subordinated notes, and $119.0 million of TV One 10% secured notes. Debt increased from $815.7 million at year-end, primarily reflecting approximately $7.0 million of notes issued as payment-in-kind interest.
• The company paid $15.5 million of cash interest during the quarter and issued approximately $7.0 million of additional subordinated notes under its PIK election. The PIK option was to end after May 15, 2012; thereafter interest was to be paid entirely in cash at 12.5%.
• Cash from operations was $23.2 million; investing activities used $10.2 million and financing activities used $5.1 million, including $4.1 million of dividends to TV One noncontrolling interest holders. Cash increased by $7.9 million during the quarter. Capital expenditures and content asset purchases totaled approximately $13.7 million.
• The company reported $23.8 million available under its revolving facility after covenant considerations. It was in compliance with financial covenants at quarter-end: senior secured leverage was 4.19x against a 4.75x maximum, total leverage 7.93x against a 9.00x maximum, and interest coverage 1.76x against a 1.25x minimum. These covenant calculations excluded Reach Media and TV One operating results and related debt.

Changes, outlook and risks

• The reported year-over-year improvement in revenue, operating income, and operating cash flow is not directly comparable because TV One was consolidated only from April 2011. Conversely, interest expense and amortization also increased with the consolidation and financing structure.
• No specific earnings or revenue guidance is provided. Management said it expected to remain in compliance with credit covenants over the next 12 months based on current projections.
• Key risks include high leverage and refinancing needs, tightening covenant limits, variable-rate bank debt, advertising demand and economic conditions, competition and audience measurement changes, and dependence on talent and content. Management also highlighted potential impairment exposure: goodwill and broadcast licenses totaled approximately $949.4 million, or 64.1% of assets. No impairment was recorded in Q1 2012.
• Reach Media’s noncontrolling shareholders have annual put rights beginning in 2012. They did not exercise the right in the period ending March 29, 2012, but a future exercise could require cash or registered Class D shares and constrain resources. The CEO’s TV One award liability was valued at $10.7 million; negotiations for a new employment agreement were ongoing.
• Management considered ordinary-course litigation not material. The IPO-related shareholder litigation settlement became final in January 2012, with the company’s share expected to be funded by insurance. Four letters of credit totaling $1.2 million and a $0.5 million Reach Media letter of credit were outstanding.
• Subsequent to quarter-end, the company made an approximately $2.0 million term-loan principal repayment on April 13, 2012. The filing states disclosure controls were effective and reports no material change in internal control over financial reporting.

Key facts for investors to verify

1. Separate the effects of TV One consolidation from underlying segment performance, especially in year-over-year revenue, margins, cash flow, and debt comparisons.
2. Verify the company’s ability to meet cash interest obligations after the PIK option ended and to refinance or repay debt due in 2016.
3. Track covenant headroom and the basis for covenant EBITDA, noting that Reach Media and TV One are excluded from the reported covenant ratios.
4. Assess the sustainability of the large deferred-tax expense and the assumptions supporting deferred tax liabilities and valuation allowances.
5. Monitor Reach Media performance, affiliate agreement changes, put rights, and the sensitivity of goodwill and broadcast-license valuations to operating assumptions.