RADIO ONE INC.

Harvard Business School Case 201-025

Case 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.
Exhibit 2 Radio One's Acquisition Strategy
Market Number of Stations

FM AM
Washington D.C. 2 2
Baltimore, MD 2 2
Philadelphia, PA 1
Detroit, MIa 2 2
Atlanta, GA 2
Cleveland, OH 1 1
St. Louis. MO 1
Richmond, VA 7
Boston, MA 1
TOTAL 19 7
Source: Adapted from numerous SEC 10-K Filings.
a
One station is located in Kingsley, MI.
 Year(s) of Acquisition

1980, 1987, 1995, 1998

1992, 1993
1997
1998
1999
1999
1999
1999
1999
Exhibit 3 African-American Demographic Information

Faster Population Growth

asterIncomGwFh
1995-2010
1980-5
Rate of Grow th (%)

25 21.2
21 10.7
20
10
13.3
15 8
10 64.3
5 4
2
0
0
General Population African-Americans
GenralPoputiAfc-ms
Population
Populatin

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.

 Faster Income Growth
asterIncomGwFh
1980-1995
1980-5
Ra te of Grow th (%)

12 10.7
21 10.7
10
10
8
8
6 4.3
64.3
4
4
2
2
0
0
General Population African-Americans
GenAfrica-mslPoput
Population
Populatin
Exhibit 4 Rising Urban Format Power Ratios 1991 – 2002a

0.90
0.84 0.85
0.85 0.82
0.80 0.81
0.78
0.80 0.76 0.77
Pow er Ratio

0.75 0.73 0.74

0.71 0.70
0.70
0.65
0.60
0.55
0.50

Year

Source: Adapted from Company Reports.

Years 2000– 2002 Estimated

a
Exhibit 5 Radio One's Turnaround Record

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

1997 1998
Revenue

Broadcast revenue, including barter revenue of

$1,010,000, $644,000 and $1,821,000,
respectively $ 36,955,000 $ 52,696,000
Less: Agency commissions 4,588,000 6,587,000
Net broadcast revenue $ 32,367,000 $ 46,109,000

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 $ 26,831,000 $ 35,746,000
Operating income $ 5,536,000 $ 10,363,000
Interest expense, including amortization of deferred
financing costs 8,910,000 11,455,000
Other income, net 415,000 358,000
(Loss) income before (benefit) provision
for income taxes and extraordinary item $ (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 $ 13,519,000 $ 21,608,000
EBITDA (before non-cash compensation) $ 11,364,000 $ 18,808,000
After-tax cash flow $ 2,869,000 $ 7,248,000
Capital expenditures $ 2,035,000 $ 2,236,000
Source: Company Reports
 1999

$ 93,260,000
11,557,000
$ 81,703,000

$ 13,576,000
30,683,000
4,155,000
225,000
17,073,000
$ 65,712,000
$ 15,991,000

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

$ 37,444,000
$ 33,289,000
$ 16,303,000
$ 3,252,000
Exhibit 7 Radio One, Inc. and Subsidiaries—Consolidated Balance Sheets
1997 1998 1999

Assets
Current assets:
Cash and equivalents $ 8,500,000 $ 4,455,000 $ 6,221,000
Investments, available for sale -- 256,390,000
Trade accounts receivable, net of allowance for
doubtful accounts of $1,243,000 and $2,429,000,
respectively $ 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 Equity

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

Series A, $.01 par value, 140,000 shares

authorized, 84,843 shares issued and outstanding 9,310,000 10,816,000 --

Series B, $.01 par value, 150,000 shares

authorized, 124,467 shares issued and outstanding 13,658,000 15,868,000 --
Stockholders’ equity:
Common stock—Class A, $.001 par value,
30,000,000 shares authorized, 0 and 17,221,000
shares issued and outstanding -- -- 17,000
Common stock—Class B, $.001 par value,
30,000,000 shares authorized, 1,572,000 and
2,867,000 shares issued and outstanding -- 2,000 3,000
Common stock—Class C, $.001 par value,
30,000,000 shares authorized, 3,146,000 and
3,184,000 shares issued and outstanding -- 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
Total liabilities and stockholders’ equity $ 79,225,000 $ 153,856,000 $ 527,536,000

Source: Company Reports

Exhibit 8 Radio Industry Trading Multiples as of March, 2000 based on 2001E forecasts
Ticker Company BCFa EBITDAa After-Tax Cash
Flowb
BBGI Beasley Broadcasting Group 11.8 13.7 15.4
CBS CBS 15.1 15.8 22.3
AFM AMFM Inc 14.7 15.4 14.4
CITC Citadel Communcations 14.6 15.7 21.7
CCU Clear Channel Communic. 17.2 17.9 20.1
CXR Cox Radio 17.4 18.7 24.2
CMLS Cumulus Media 17.7 19.2 37.2
EMMS Emmis Broadcasting 11 12 13.2
ETM Entercom Communications 16.6 17.7 21.1
HBCCA Hispanic Broadcasting 42.1 44.5 59.7
INF Infinity Broadcasting 18.8 19.4 26.9
ROIA Radio One 22.1 24.2 36.5
SGA Saga Communications 9.9 11.4 14.5
WOM Westwood One 24.4 25.3 38.6
AVERAGE 18.1 19.4 26.1
Source: Credit Suisse First Boston, Radio One, Inc. Equity Research Report, March 9, 2000 and casewriter estimates.
a
BCF & EBITDA: Adjusted Market Value Multiple to 2001
b
After-Tax Cash Flow: Current Price as a Multiple of 2001

c
Asset 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.
 Asset Betac

NA
1.06
0.96
0.68
0.65
0.27
0.83
0.55
0.3
1.23
0.82
0.82
0.26
1.29
0.75

tio and adding the debt beta

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

----Pro Forma---- ----------------------Projected-------------

1999 2000 2001 2002
Gross Revenue – Existing Markets
Washington 32,221 34,812 37,597 41,357
Baltimore 25,162 26,952 29,108 32,019
Philadelphia (WPHI) 6,239 7,277 8,151 8,966
Philadelphia (WPLY) 8,978 9,500 10,450 11,495
Detroit 8,309 11,075 12,736 14,010
Atlanta 15,811 17,584 19,782 21,760
Cleveland 2,415 5,488 6,311 6,942
St. Louis -- 1,028 2,056 2,467
Richmond 10,713 13,226 15,210 17,492
Boston -- 3,401 4,081 4,693
Existing Gross Revenue 109,848 130,343 145,482 161,201
Gross Revenue – Potential New Marketsa
Charlotte 1,002 1,250 2,250 3,250
Augusta 2,708 2,750 3,200 3,400
Indianapolis 5,173 5,814 6,600 8,200
Los Angeles 38,626 41,117 45,221 49,517
Miami 1,501 1,634 1,634 2,043
Cleveland 13,370 13,750 15,000 16,500
Houston 36,618 39,547 43,502 47,852
Dallas 4,756 6,120 8,500 11,700
Greenville 4,614 4,864 5,418 5,750
Raleigh 12,118 13,538 15,163 16,679
New Markets Gross Revenue 120,486 130,384 146,488 164,891
Direct Expenses – Existing Markets
Washington (4,098) (5,080) (5,486) (5,790)
Baltimore (3,232) (4,018) (4,339) (4,483)
Philadelphia (WPHI) (800) (1,078) (1,207) (1,255)
Philadelphia (WPLY) (921) (1,078) (1,207) (1,379)
Detroit (818) (1,483) (1,705) (1,961)
Atlanta (2,080) (2,436) (2,741) (3,046)
Cleveland (166) (632) (727) (972)
St. Louis -- (163) (326) (345)
Richmond (1,607) (1,982) (2,279) (2,449)
Boston -- (484) (581) (657)
Existing Gross Expenses (13,722) (18,434) (20,598) (22,337)
Direct Expenses – Potential New Marketsa
Charlotte (150) (189) (313) (435)
Augusta (406) (357) (379) (402)
Indianapolis (519) (607) (702) (882)
Los Angeles (5,155) (5,496) (6,045) (6,619)
Miami -- -- -- --
Cleveland (1,707) (1,650) (1,800) (1,980)
Houston (4,479) (4,746) (5,220) (5,742)
Dallas (547) (825) (1,063) (1,463)
Greenville (566) (603) (672) (729)
Raleigh (1,565) (1,770) (1,982) (2,180)
ROI Direct Expenses (15,094) (16,243) (18,176) (20,432)
Net Revenue – Existing Markets
Washington 28,123 29,732 32,111 35,567
Baltimore 21,930 22,934 24,769 27,536
Philadelphia (WPHI) 5,439 6,199 6,944 7,711
Philadelphia (WPLY) 8,057 8,422 9,243 10,116
Detroit 7,491 9,592 11,031 12,048
Atlanta 13,731 15,148 17,041 18,714
Cleveland 2,249 4,856 5,584 5,970
St. Louis -- 865 1,730 2,122
Richmond 9,106 11,244 12,931 15,043
Boston -- 2,917 3,500 4,036
Existing Net Revenue 96,126 111,909 124,884 138,863
Net Revenue – Potential New Marketsa
Charlotte 852 1,061 1,937 2,815
Augusta 2,302 2,393 2,821 2,998
Indianapolis 4,654 5,207 5,898 7,318
Los Angeles 33,471 35,621 39,176 42,898
Miami 1,501 1,634 1,634 2,043
Cleveland 11,663 12,100 13,200 14,520
Houston 32,139 34,802 38,282 42,110
Dallas 4,209 5,295 7,438 10,238
Greenville 4,048 4,261 4,746 5,021
Raleigh 10,553 11,769 13,181 14,499
New Markets Net Revenue 105,392 114,143 128,313 144,460
Operating Expenses – Existing Markets
Washington 13,480 13,827 14,864 15,734
Baltimore 9,860 10,260 11,030 11,737
Philadelphia (WPHI) 3,779 3,957 4,254 4,618
Philadelphia (WPLY) 5,815 3,622 3,743 3,791
Detroit 6,421 6,578 7,071 7,495
Atlanta 6,799 7,503 8,066 8,393
Cleveland 1,774 3,791 4,075 4,234
St. Louis -- 1,440 1,548 1,912
Richmond 5,914 7,648 8,222 9,627
Boston -- 2,243 2,411 2,783
Existing Operating Expenses 53,842 60,869 65,284 70,324
Operating Expenses – Potential New Marketsa
Charlotte 665 1,023 1,249 1,461
Augusta 1,361 1,584 1,669 1,758
Indianapolis 2,954 3,206 3,463 3,848
Los Angeles 14,448 15,621 16,176 16,584
Miami 510 584 584 862
Cleveland 4,862 4,600 4,700 4,958
Houston 10,129 10,592 11,046 11,469
Dallas 4,012 4,195 4,938 5,238
Greenville 1,919 1,928 2,071 1,945
Raleigh 5,516 5,769 5,981 6,627
New Markets Operating Expenses 46,376 49,102 51,877 54,750
BCF – Existing Markets
Washington 14,866 15,904 17,246 19,833
Baltimore 11,846 12,673 13,738 15,799
Philadelphia (WPHI) 1,658 2,242 2,689 3,092
Philadelphia (WPLY) 2,500 4,800 5,500 6,325
Detroit 1,069 3,013 3,959 4,553
Atlanta 6,933 7,645 8,975 10,321
Cleveland 470 1,066 1,510 1,737
St. Louis -- -575 182 209
Richmond 3,192 3,596 4,709 5,415
Boston -- 674 1,090 1,254
Existing BCF 42,534 51,038 59,598 68,538
BCF – Potential New Marketsa
Charlotte 187 38 688 1,354
Augusta 941 809 1,152 1,240
Indianapolis 1,700 2,001 2,435 3,470
Los Angeles 19,023 20,000 23,000 26,314
Miami 991 1,050 1,050 1,181
Cleveland 6,800 7,500 8,500 9,563
Houston 22,009 24,210 27,236 30,641
Dallas 197 1,100 2,500 5,000
Greenville 2,129 2,333 2,675 3,076
Raleigh 5,037 6,000 7,200 7,872
New Markets BCF 59,014 65,041 76,436 89,711

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

Corporate Expenses 6,000 6,000 6,900 7,935

EBITDA 95,548 110,079 129,134 150,314
Non-cash Compensation 225 0 0 0
Depreciation and amortizationb 107,520 107,520 107,500 107,500

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

Source: Adapted from company reports

a
Potential acquisitions in Charlotte and Augusta were from Davis Broadcasting; in Indianapolis from Shirk, Inc and IBL,LLC; an
potential acquisitions were from Clear Channel Communications, Inc.
b
Includes about $90 million of tax deductible depreciation and amortization in each year beginning 2001 and ending in 2015, a
potential acquisitions.

Tax Rate 34%

1997 1998 1999
Receivables 8,722,000.00 12,026,000.00 19,833,000.00
Payables 258,000.00 1,190,000.00 1,663,000.00
NWC 8,464,000.00 10,836,000.00 18,170,000.00
Revenue 32,367,000.00 46,109,000.00 81,703,000.00
NWC/Revenue 26.2% 23.5% 22.2%
NWC/Revenue (Average) 23.96%
CAPM
RF 6.28

RM-RF 7.2
Beta 0.82
Discount rate 12.18%
CE 2100
Annual Increase in Dep 420
Perpetual Growth Rate 5%
Free-Cashflows 2001 2002
BCF_New Markets 76,436 89,711
Corporate Expenses 6,900 7,935
Corporate Expenses (Actual) 3,877.03 4,498.33
EBDITA 72,558.97 85,212.67
Dep 90,420 90,840
EBIT -17,861 -5,627
EBIT*(1-t) (11,788.28) (3,714.04)
Dep 90,420 90,840
Change in NWC 30,748.08 3,869.36
CE 2100 2100

FCFF 45,783.64 81,156.60

Terminal Value 73,136.11

PV of Cashflows $229,957.26
PV of Terminal Value $899,547.90

Value of the acquisition $1,129,505.16

Perpetual Growth
1,129,505.16
4% 1,012,069.42
5% 1,129,505.16
6% 1,284,921.41

Price based on Transaction multiple

BCFa EBITDAa After-Tax Cash

Flowb
Average 18.1 19.4 26.1
Radio One 22.1 24.2 36.5
Value 76,436 72,558.97 73,136
Total value based 1383491.60 1407643.95 1908852.55
Total Value based on Radio One 1,689,235.60 1,755,926.98 2,669,468.12

Low bar low label High bar High Label

DCF 1,012,069.42 1,012,069.42 1,284,921.41 1,284,921.41
BCF 1,383,491.60 1,383,491.60 1,689,235.60 1,689,235.60
EBDITA 1,407,643.95 1,407,643.95 1,755,926.98 1,755,926.98
After Tax cash Flow 1,908,852.55 1,908,852.55 2,669,468.12 2,669,468.12
market
otential New Markets

---------Projected----------------------
2003 2004

45,492 50,042
35,221 38,743
9,863 10,849
12,645 13,909
15,130 16,341
23,936 26,330
7,497 8,097
2,837 3,064
19,241 20,780
5,162 5,575
177,024 193,730

4,250 4,700
3,600 3,800
9,500 11,000
54,221 59,372
2,553 3,191
17,750 19,000
52,638 57,743
13,500 15,188
6,250 6,500
18,347 20,182
182,609 200,676

(6,369) (7,006)
(4,931) (5,424)
(1,381) (1,519)
(1,517) (1,669)
(2,118) (2,288)
(3,351) (3,686)
(1,050) (1,134)
(397) (429)
(2,694) (2,909)
(723) (781)
(24,531) (26,845)

(549) (607)
(426) (452)
(1,078) (1,257)
(7,248) (7,938)
-- --
(2,130) (2,280)
 (6,317) (6,929)
(1,688) (1,898)
(791) (858)
(2,398) (2,638)
(22,624) (24,857)

39,123 43,036
30,290 33,319
8,482 9,330
11,127 12,240
13,012 14,053
20,585 22,644
6,448 6,964
2,440 2,635
16,547 17,871
4,440 4,795
152,494 166,887

3,701 4,093
3,174 3,348
8,422 9,743
46,973 51,436
2,553 3,191
15,620 16,720
46,321 50,814
11,813 13,289
5,459 5,642
15,949 17,544
159,985 175,820

16,316 16,807
12,121 12,425
4,926 5,240
3,853 3,875
7,776 8,032
8,716 8,994
4,451 4,667
2,199 2,358
10,319 10,709
2,998 3,137
73,675 76,244

1,659 1,781
1,851 1,949
4,255 4,639
17,581 18,642
1,224 1,313
5,101 5,149
11,850 12,035
5,500 5,900
1,922 1,574
7,077 7,561
58,020 60,543

22,808 26,229
18,169 20,894
3,556 4,090
 7,274 8,365
5,236 6,021
11,869 13,650
1,997 2,297
241 277
6,228 7,162
1,442 1,658
78,820 90,643

2,042 2,312
1,323 1,399
4,167 5,104
29,393 32,794
1,329 1,878
10,519 11,571
34,471 38,780
6,313 7,389
3,538 4,068
8,871 9,982
101,966 115,277

180,786 205,920

9,125 10,494
171,661 195,426
0 0
107,500 107,500

64,161 87,926

Shirk, Inc and IBL,LLC; and the remaining

001 and ending in 2015, as a result of the

 2003 2004
101,966 115,277
9,125 10,494
5,146.64 5,874.69
96,819.36 109,402.31
91,260 91,680
5,559 17,722
3,669.18 11,696.72
91,260 91,680
3,720.31 3,794.59
2100 2100

89,108.87 97,482.13

1,424,780.55

3,000,000.00 Football Field Analysis

2,500,000.00

2,000,000.00

1,500,000.00

1,000,000.00

500,000.00

-
DCF BCF EBDITA After Tax cash Flow
1,500,000.00

1,000,000.00

500,000.00

-
DCF BCF EBDITA After Tax cash Flow
Exhibit 10 Corporate & Government Bond Rates as of March 1, 2000
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