RADIO ONE INC.Harvard Business School Case 201-025Case Software 201-706 (4th edition)

Copyright © 2000 by the President and Fellows of Harvard College

This case was prepared as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Market Number of Stations

FM AM

Washington D.C. 2 2

Baltimore, MD 2 2

Philadelphia, PA 1

2 2

Atlanta, GA 2

Cleveland, OH 1 1

St. Louis. MO 1

Richmond, VA 7

Boston, MA 1

TOTAL 19 7Source: Adapted from numerous SEC 10-K Filings.

Exhibit 2 Radio One's Acquisition Strategy

Detroit, MIa

aOne station is located in Kingsley, MI.

Year(s) of Acquisition

1980, 1987, 1995, 1998

1992, 1993

1997

1998

1999

1999

1999

1999

1999

Key Demographic Statistics

60% faster Population Growth

Largest Minority Group in the United States

Population projected to reach 40MM by 2010

150% faster Income Growth than General Population

Source: Adapted from Company Reports.

Exhibit 3 African-American Demographic Information

Faster Population Growth 1995-2010

13.3

21.2

0

5

10

15

20

25

General Population African-Americans

Population

Ra

te o

f G

row

th (

%)

Faster Income Growth 1980-1995

4.3

10.7

02468

1012

General Population African-Americans

Population

Rate of Growth (%)

African-American Demographic Information

Faster Income Growth 1980-1995

4.3

10.7

02468

1012

General Population African-Americans

Population

Rate of Growth (%)

Faster Income Growth 1980-1995

4.3

10.7

02468

1012

General Population African-Americans

Population

Ra

te o

f G

row

th (

%)

Source: Adapted from Company Reports.

Exhibit 4 Rising Urban Format Power Ratios 1991 – 2002a

aYears 2000– 2002 Estimated

0.71 0.700.73 0.74

0.76 0.77 0.780.80 0.81 0.82

0.84 0.85

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

Year

Po

we

r R

ati

o

Cost(mm) 96BCF Multiple 99BCF Multiple

Washington DC $46.20 $6.30 7.3x $14.90 3.1x

Baltimore $13.70 $3.30 4.2x $11.80 1.2x

Philadelphia $20.00 $0.20 100x $1.70 11.8x

Atlanta $13.50 $1.20 11.2x $6.90 2.0x

Source: Adapted from Company Reports.

Exhibit 5 Radio One's Turnaround Record

1997 1998

Revenue

### ###

Less: Agency commissions 4,588,000 6,587,000

Net broadcast revenue ### ###

Operating Expenses

Program and technical $ 5,934,000 $ 8,015,000

Selling, general and administrative 12,914,000 16,486,000

Corporate expenses 2,155,000 2,800,000

Stock-based compensation -- --

Depreciation and amortization 5,828,000 8,445,000

Total operating expenses ### ###

Operating income $ 5,536,000 ###

8,910,000 11,455,000

Other income, net 415,000 358,000

$(2,959,000) $ (734,000)

(Benefit) Provision for income taxes -- (1,575,000)

(Loss) income before extraordinary item $(2,959,000) $ 841,000

Extraordinary item

Loss on early retirement of debt 1,985,000 --

Net (loss) income $(4,944,000) $ 841,000

Net loss applicable to common shareholders $(6,981,000) $(2,875,000)

Basic and diluted loss per common share

Loss before extraordinary item ($0.53) ($0.31)

Net loss ($0.74) ($0.31)

Weighted average shares outstanding

Basic and diluted 9,392,000 9,392,000

Other Data:

Broadcast cash flow ### ###

EBITDA (before non-cash compensation) ### ###

After-tax cash flow $ 2,869,000 $ 7,248,000

Capital expenditures $ 2,035,000 $ 2,236,000

Exhibit 6 Radio One, Inc. and Subsidiaries—Consolidated Statements of Operations

Broadcast revenue, including barter revenue of $1,010,000, $644,000 and $1,821,000, respectively

Interest expense, including amortization of deferred financing costs

(Loss) income before (benefit) provision for income taxes and extraordinary item

Source: Company Reports

1999

###

11,557,000

###

###

30,683,000

4,155,000 15.94% 12.96% 11.10%

225,000

17,073,000

###

###

15,279,000

2,149,000

$ 2,861,000

2,728,000

$ 133,000

--

$ 133,000

$(1,343,000)

($0.08)

($0.08)

16,137,000

###

###

###

$ 3,252,000

Radio One, Inc. and Subsidiaries—Consolidated Statements of Operations

1997 1998 1999

AssetsCurrent assets:

Cash and equivalents $ 8,500,000 $ 4,455,000 $ 6,221,000 Investments, available for sale -- 256,390,000

$ 8,722,000 12,026,000 19,833,000 Prepaid expenses and other 315,000 334,000 1,035,000 Deferred income taxes -- 826,000 984,000

Total current assets $ 17,537,000 $ 17,641,000 $ 284,463,000 Property and equipment, net 4,432,000 6,717,000 15,512,000 Intangible assets, net 54,942,000 127,639,000 218,460,000 Other assets 2,314,000 1,859,000 9,101,000

Total assets $ 79,225,000 $ 153,856,000 $ 527,536,000

Liabilities and Stockholder EquityCurrent liabilities:Accounts payable $ 258,000 $ 1,190,000 $ 1,663,000 Accrued expenses $ 3,029,000 3,708,000 6,941,000 Income taxes payable -- 143,000 1,532,000

Total current liabilities $ 3,287,000 $ 5,041,000 $ 10,136,000

74,954,000 131,739,000 82,626,000 Deferred income tax liability -- 15,251,000 14,518,000

Total liabilities $ 78,241,000 $ 152,031,000 $ 107,280,000 Commitments and contingencies

Senior cumulative redeemable preferred stock:

9,310,000 10,816,000 --

13,658,000 15,868,000 --Stockholders’ equity:

-- -- 17,000

-- 2,000 3,000

-- 3,000 3,000 Accumulated comprehensive income adjustments -- -- 40,000 Additional paid-in capital -- -- 446,400,000 Accumulated deficit (21,984,000) (24,864,000) (26,207,000)

Total stockholders’ (deficit) equity $ (984,000) $ (1,825,000) $ 420,256,000

Exhibit 7 Radio One, Inc. and Subsidiaries—Consolidated Balance Sheets

Trade accounts receivable, net of allowance for doubtful accounts of $1,243,000 and $2,429,000, respectively

Long-term debt and deferred interest, net of current portion

Series A, $.01 par value, 140,000 shares authorized, 84,843 shares issued and outstanding

Series B, $.01 par value, 150,000 shares authorized, 124,467 shares issued and outstanding

Common stock—Class A, $.001 par value, 30,000,000 shares authorized, 0 and 17,221,000 shares issued and outstanding

Common stock—Class B, $.001 par value, 30,000,000 shares authorized, 1,572,000 and 2,867,000 shares issued and outstanding

Common stock—Class C, $.001 par value, 30,000,000 shares authorized, 3,146,000 and 3,184,000 shares issued and outstanding

Total liabilities and stockholders’ equity $ 79,225,000 $ 153,856,000 $ 527,536,000

Source: Company Reports

0.156626278

Current Assets $17,222,000 ### ###

Current Liability

$ 3,287,000 ### ###Work. Cap $13,935,000 ### ###

103.08% 53.61% 46.60%43.05% 25.12% 21.36% 23.24%

Ticker Company

BBGI Beasley Broadcasting Group 11.8 13.7 15.4CBS CBS 15.1 15.8 22.3AFM AMFM Inc 14.7 15.4 14.4CITC Citadel Communcations 14.6 15.7 21.7CCU Clear Channel Communic. 17.2 17.9 20.1CXR Cox Radio 17.4 18.7 24.2CMLS Cumulus Media 17.7 19.2 37.2EMMS Emmis Broadcasting 11 12 13.2ETM Entercom Communications 16.6 17.7 21.1HBCCA Hispanic Broadcasting 42.1 44.5 59.7INF Infinity Broadcasting 18.8 19.4 26.9ROIA Radio One 22.1 24.2 36.5SGA Saga Communications 9.9 11.4 14.5WOM Westwood One 24.4 25.3 38.6

AVERAGE 18.1 19.4 26.1Source: Credit Suisse First Boston, Radio One, Inc. Equity Research Report, March 9, 2000 and casewriter estimates.

Exhibit 8 Radio Industry Trading Multiples as of March, 2000 based on 2001E forecasts

BCFa EBITDAa After-Tax Cash Flowb

aBCF & EBITDA: Adjusted Market Value Multiple to 2001bAfter-Tax Cash Flow: Current Price as a Multiple of 2001

cAsset betas are equity betas adjusted for leverage by multiplying the equity beta by the equity-to-value ratio and adding the debt beta (assumed to equal 0.25) times the debt-to-value ratio.

NA1.060.960.680.650.270.830.550.3

1.230.820.820.261.290.75

Radio Industry Trading Multiples as of March, 2000 based on 2001E forecasts

Asset Betac

Asset betas are equity betas adjusted for leverage by multiplying the equity beta by the equity-to-value ratio and adding the debt beta

----Pro Forma---- ----------------------Projected----------------------1999 2000 2001 2002 2003

Gross Revenue – Existing MarketsWashington 32,221 34,812 37,597 41,357 45,492Baltimore 25,162 26,952 29,108 32,019 35,221Philadelphia (WPHI) 6,239 7,277 8,151 8,966 9,863Philadelphia (WPLY) 8,978 9,500 10,450 11,495 12,645Detroit 8,309 11,075 12,736 14,010 15,130Atlanta 15,811 17,584 19,782 21,760 23,936Cleveland 2,415 5,488 6,311 6,942 7,497St. Louis -- 1,028 2,056 2,467 2,837Richmond 10,713 13,226 15,210 17,492 19,241Boston -- 3,401 4,081 4,693 5,162

Existing Gross Revenue 109,848 130,343 145,482 161,201 177,024

Charlotte 1,002 1,250 2,250 3,250 4,250Augusta 2,708 2,750 3,200 3,400 3,600Indianapolis 5,173 5,814 6,600 8,200 9,500Los Angeles 38,626 41,117 45,221 49,517 54,221Miami 1,501 1,634 1,634 2,043 2,553Cleveland 13,370 13,750 15,000 16,500 17,750Houston 36,618 39,547 43,502 47,852 52,638Dallas 4,756 6,120 8,500 11,700 13,500Greenville 4,614 4,864 5,418 5,750 6,250Raleigh 12,118 13,538 15,163 16,679 18,347

New Markets Gross Revenue 120,486 130,384 146,488 164,891 182,609Direct Expenses – Existing MarketsWashington (4,098) (5,080) (5,486) (5,790) (6,369)

Baltimore (3,232) (4,018) (4,339) (4,483) (4,931)

Philadelphia (WPHI) (800) (1,078) (1,207) (1,255) (1,381)

Philadelphia (WPLY) (921) (1,078) (1,207) (1,379) (1,517)

Detroit (818) (1,483) (1,705) (1,961) (2,118)

Atlanta (2,080) (2,436) (2,741) (3,046) (3,351)

Cleveland (166) (632) (727) (972) (1,050)

St. Louis -- (163) (326) (345) (397)

Richmond (1,607) (1,982) (2,279) (2,449) (2,694)

Boston -- (484) (581) (657) (723)

Existing Gross Expenses (13,722) (18,434) (20,598) (22,337) (24,531)

Charlotte (150) (189) (313) (435) (549)

Augusta (406) (357) (379) (402) (426)

Indianapolis (519) (607) (702) (882) (1,078)

Los Angeles (5,155) (5,496) (6,045) (6,619) (7,248)

Miami -- -- -- -- --

Cleveland (1,707) (1,650) (1,800) (1,980) (2,130)

Exhibit 9 Radio One, Inc. Actual and Projected Financial Performance of Existing Markets and Potential New Markets

Gross Revenue – Potential New Marketsa

Direct Expenses – Potential New Marketsa

Houston (4,479) (4,746) (5,220) (5,742) (6,317)

Dallas (547) (825) (1,063) (1,463) (1,688)

Greenville (566) (603) (672) (729) (791)

Raleigh (1,565) (1,770) (1,982) (2,180) (2,398)

ROI Direct Expenses (15,094) (16,243) (18,176) (20,432) (22,624)Net Revenue – Existing MarketsWashington 28,123 29,732 32,111 35,567 39,123Baltimore 21,930 22,934 24,769 27,536 30,290Philadelphia (WPHI) 5,439 6,199 6,944 7,711 8,482Philadelphia (WPLY) 8,057 8,422 9,243 10,116 11,127Detroit 7,491 9,592 11,031 12,048 13,012Atlanta 13,731 15,148 17,041 18,714 20,585Cleveland 2,249 4,856 5,584 5,970 6,448St. Louis -- 865 1,730 2,122 2,440Richmond 9,106 11,244 12,931 15,043 16,547Boston -- 2,917 3,500 4,036 4,440

Existing Net Revenue 96,126 111,909 124,884 138,863 152,494

Charlotte 852 1,061 1,937 2,815 3,701Augusta 2,302 2,393 2,821 2,998 3,174

Indianapolis 4,654 5,207 5,898 7,318 8,422Los Angeles 33,471 35,621 39,176 42,898 46,973Miami 1,501 1,634 1,634 2,043 2,553Cleveland 11,663 12,100 13,200 14,520 15,620Houston 32,139 34,802 38,282 42,110 46,321Dallas 4,209 5,295 7,438 10,238 11,813Greenville 4,048 4,261 4,746 5,021 5,459Raleigh 10,553 11,769 13,181 14,499 15,949

New Markets Net Revenue 105,392 114,143 128,313 144,460 159,985Operating Expenses – Existing MarketsWashington 13,480 13,827 14,864 15,734 16,316Baltimore 9,860 10,260 11,030 11,737 12,121

Philadelphia (WPHI) 3,779 3,957 4,254 4,618 4,926Philadelphia (WPLY) 5,815 3,622 3,743 3,791 3,853Detroit 6,421 6,578 7,071 7,495 7,776Atlanta 6,799 7,503 8,066 8,393 8,716Cleveland 1,774 3,791 4,075 4,234 4,451St. Louis -- 1,440 1,548 1,912 2,199Richmond 5,914 7,648 8,222 9,627 10,319Boston -- 2,243 2,411 2,783 2,998

Existing Operating Expenses 53,842 60,869 65,284 70,324 73,675

Charlotte 665 1,023 1,249 1,461 1,659Augusta 1,361 1,584 1,669 1,758 1,851

Indianapolis 2,954 3,206 3,463 3,848 4,255Los Angeles 14,448 15,621 16,176 16,584 17,581Miami 510 584 584 862 1,224Cleveland 4,862 4,600 4,700 4,958 5,101

Net Revenue – Potential New Marketsa

Operating Expenses – Potential New Marketsa

Houston 10,129 10,592 11,046 11,469 11,850Dallas 4,012 4,195 4,938 5,238 5,500Greenville 1,919 1,928 2,071 1,945 1,922Raleigh 5,516 5,769 5,981 6,627 7,077

New Markets Operating Expenses 46,376 49,102 51,877 54,750 58,020BCF – Existing MarketsWashington 14,866 15,904 17,246 19,833 22,808Baltimore 11,846 12,673 13,738 15,799 18,169Philadelphia (WPHI) 1,658 2,242 2,689 3,092 3,556

Philadelphia (WPLY) 2,500 4,800 5,500 6,325 7,274Detroit 1,069 3,013 3,959 4,553 5,236Atlanta 6,933 7,645 8,975 10,321 11,869Cleveland 470 1,066 1,510 1,737 1,997St. Louis -- -575 182 209 241Richmond 3,192 3,596 4,709 5,415 6,228Boston -- 674 1,090 1,254 1,442

Existing BCF 42,534 51,038 59,598 68,538 78,820

Charlotte 187 38 688 1,354 2,042Augusta 941 809 1,152 1,240 1,323Indianapolis 1,700 2,001 2,435 3,470 4,167Los Angeles 19,023 20,000 23,000 26,314 29,393Miami 991 1,050 1,050 1,181 1,329Cleveland 6,800 7,500 8,500 9,563 10,519Houston 22,009 24,210 27,236 30,641 34,471Dallas 197 1,100 2,500 5,000 6,313Greenville 2,129 2,333 2,675 3,076 3,538Raleigh 5,037 6,000 7,200 7,872 8,871

New Markets BCF 59,014 65,041 76,436 89,711 101,966

Total BCF 101,548 116,079 136,034 158,249 180,786

Corporate Expenses 6,000 6,000 6,900 7,935 9,125EBITDA 95,548 110,079 129,134 150,314 171,661Non-cash Compensation 225 0 0 0 0

107,520 107,520 107,500 107,500 107,500

EBIT (12,197) 2,559 21,634 42,814 64,161

Source: Adapted from company reports

2001 2002 2003 2004 2005Growth Rate 15 15 15 15 14.090909BCF 76,436 89,711 101,966 115,277 131,521

BCF – Potential New Marketsa

Depreciation and amortizationb

aPotential acquisitions in Charlotte and Augusta were from Davis Broadcasting; in Indianapolis from Shirk, Inc and IBL,LLC; and the remaining potential acquisitions were from Clear Channel Communications, Inc.bIncludes about $90 million of tax deductible depreciation and amortization in each year beginning 2001 and ending in 2015, as a result of the potential acquisitions.

Corp Expenses 2025.554 2377.342 2702.099 3054.841 3485.2953Depreciation 90140 90280 90420 90560 90700PBT -15,730 -2,946 8,844 21,662 37,335Tax -5348.04836 -1001.756 3006.926 7365.134 12693.996PAT -10,382 -1,945 5,837 14,297 24,641Capex 2100 2100 2100 2100 2100NWC(gross) 17580.28 20633.53 23452.18 26513.71 30249.733

Delta NWC 17580.28 3053.25 2818.65 3061.53 3736.0228Depreciation 90140 90280 90420 90560 90700FCFE 60,078 83,182 91,338 99,695 109,505

CoA 11.975TV 3416190.09798Final FCFE 60,078 83,182 91,338 99,695 109,505DCF value $1,463,005.09

----------------------Projected----------------------2004

50,04238,74310,84913,90916,34126,330

8,0973,064

20,7805,575

193,730

4,7003,800

11,00059,372

3,19119,00057,74315,188

6,50020,182

200,676

(7,006)

(5,424)

(1,519)

(1,669)

(2,288)

(3,686)

(1,134)

(429)

(2,909)

(781)

(26,845)

(607)

(452)

(1,257)

(7,938)

--

(2,280)

Radio One, Inc. Actual and Projected Financial Performance of Existing Markets and Potential New Markets

(6,929)

(1,898)

(858)

(2,638)

(24,857)

43,03633,319

9,33012,24014,05322,644

6,9642,635

17,8714,795

166,887

4,0933,348

9,74351,436

3,19116,72050,81413,289

5,64217,544

175,820

16,80712,425

5,2403,8758,0328,9944,6672,358

10,709 0.9090913,137

76,244

1,7811,949

4,63918,642

1,3135,149

12,0355,9001,5747,561

60,543

26,22920,894

4,090

8,3656,021

13,6502,297

2777,1621,658

90,643 0.163375 4083.04

5803.952,312 1720.911,399 65,0415,104 0.026459

32,7941,878

11,57138,780

7,3894,0689,982

115,277 0.143293

205,920

10,494195,426 0.050723 0.050142 0.050474 0.050962

0

107,500 8% BCF old +X% BCF new =5%(BCFold+BCFnew)

87,926

0.146784

0.909091

0.53

2006 2007 2008 2009 2010 2011 2012 2013 201413.181818 12.27273 11.36364 10.45455 9.545455 8.636364 7.727273 6.818182 5.909091

148,857 167,126 186,118 205,576 225,199 244,648 263,552 281,522 298,157

Potential acquisitions in Charlotte and Augusta were from Davis Broadcasting; in Indianapolis from Shirk, Inc and IBL,LLC; and the remaining potential acquisitions were from Clear Channel Communications, Inc.

Includes about $90 million of tax deductible depreciation and amortization in each year beginning 2001 and ending

3944.7206 4428.845 4932.123 5447.754 5967.767 6483.165 6984.137 7460.328 7901.16690840 90980 91120 91260 91400 91540 91680 91820 91960

54,073 71,717 90,066 108,868 127,831 146,625 164,888 182,241 198,29618384.704 24383.91 30622.35 37015.08 43462.54 49852.36 56061.99 61962.11 67420.65

35,688 47,333 59,443 71,853 84,368 96,772 108,826 120,279 130,8752100 2100 2100 2100 2100 2100 2100 2100 2100

34237.198 38439.04 42807.11 47282.4 51795.72 56268.98 60617.04 64750.02 68576.16

3987.4648 4201.838 4368.072 4475.289 4513.32 4473.266 4348.058 4132.98 3826.13890840 90980 91120 91260 91400 91540 91680 91820 91960

120,440 132,012 144,095 156,538 169,155 181,739 194,058 205,866 216,909

120,440 132,012 144,095 156,538 169,155 181,739 194,058 205,866 216,909

20155

313,065

8296.22492100

212,66972307.41

140,3612100

72004.97

3428.80892100

226,933

3,643,123

Government Bond Yields

Maturity Rate

3 months 5.36

6 months 5.68

1 year 5.84

3 years 6.14

5 years 6.19

10 years 6.28

30 years 6.35

Corporate Bonds (10-year maturity)

Rating Rate

AAA 7.1

AA 7.18

A 7.34

BBB 7.7

BB 9.1

B 9.68

Source: Federal Reserve Statistical Release; Bloomberg

Exhibit 10 Corporate & Government Bond Rates as of March 1, 2000