<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported):
November 18, 1999
CLEAR CHANNEL COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 1-9645 74-1787536
(State or other jurisdiction (Commission File Number) (IRS Employer
incorporation) Identification No.)
200 CONCORD PLAZA, SUITE 600
SAN ANTONIO, TEXAS 78216
(Address of principal executive
offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (210) 822-2828
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<PAGE> 2
ITEM 5. OTHER EVENTS.
On October 2, 1999, Clear Channel Communications, Inc., a Texas corporation
(the "Company" or "Clear Channel"), AMFM Inc., a Delaware corporation ("AMFM"),
and CCU Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary
of the Company ("Sub"), entered into an Agreement and Plan of Merger (the
"Merger Agreement"), pursuant to which Sub will be merged (the "Merger") with
and into AMFM, with AMFM surviving the Merger and continuing its operations as a
wholly-owned subsidiary of the Company. The Merger will be a tax-free,
stock-for-stock transaction.
Upon the terms and subject to the conditions set forth in the Merger
Agreement, upon consummation of the Merger, each share of AMFM common stock will
be converted into the right to receive .94 shares of the Company's common stock.
1
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Historical Financial Statements of business acquired.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of
Chancellor Media Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholder's equity and cash
flows present fairly, in all material respects, the financial position of
Chancellor Media Corporation and its subsidiaries at December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 10, 1999, except as to Note 16,
which is as of March 15, 1999
2
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Chancellor Media Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Chancellor Media Corporation (formerly
Evergreen Media Corporation) and subsidiaries for the year ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Chancellor Media Corporation and subsidiaries for the year ended
December 31, 1996 in conformity with generally accepted accounting principles.
KPMG LLP
Dallas, Texas
January 31, 1997
3
<PAGE> 5
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 16,584 $ 12,256
Accounts receivable, less allowance for doubtful accounts
of $12,651 in 1997 and $15,580 in 1998................. 239,744 352,646
Other current assets (note 3)............................. 34,811 59,909
---------- ----------
Total current assets.............................. 291,139 424,811
Property and equipment, net (note 4)........................ 159,797 1,388,156
Intangible assets, net (note 5)............................. 4,404,443 5,056,047
Other assets, net (note 3).................................. 113,496 358,893
---------- ----------
$4,968,875 $7,227,907
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (note 6)............ $ 178,415 $ 236,618
Long-term debt (note 7)..................................... 2,573,000 4,096,000
Deferred tax liabilities (note 10).......................... 361,640 453,134
Other liabilities........................................... 44,405 50,325
---------- ----------
Total liabilities................................. 3,157,460 4,836,077
---------- ----------
Commitments and contingencies (notes 2, 7 and 11)
Redeemable preferred stock (note 8):
Redeemable senior cumulative exchangeable preferred stock
of subsidiary, par value $.01 per share; 1,000,000
shares authorized, issued and outstanding in 1997;
liquidation preference of $121,274..................... 119,445 --
Redeemable cumulative exchangeable preferred stock of
subsidiary, par value $.01 per share; 3,600,000 shares
authorized and 2,117,629 shares issued and outstanding
in 1997; liquidation preference of $223,519............ 211,763 --
Stockholders' equity (note 9):
Preferred stock, $.01 par value. 2,200,000 shares of 7%
convertible preferred stock authorized, issued and
outstanding............................................ 110,000 110,000
Preferred stock, $.01 par value. 6,000,000 shares
authorized; 5,990,000 shares of $3.00 convertible
exchangeable preferred stock issued and outstanding.... 299,500 299,500
Common stock, $.01 par value. Authorized 200,000,000
shares; issued and outstanding 119,921,814 shares in
1997 and 142,847,674 shares in 1998.................... 1,199 1,428
Paid-in capital........................................... 1,226,930 2,259,583
Accumulated deficit....................................... (157,422) (278,681)
---------- ----------
Total stockholders' equity........................ 1,480,207 2,391,830
---------- ----------
$4,968,875 $7,227,907
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Gross revenues.............................................. $337,405 $663,804 $1,440,357
Less agency commissions................................... 43,555 81,726 166,501
-------- -------- ----------
Net revenues........................................... 293,850 582,078 1,273,856
-------- -------- ----------
Operating expenses:
Operating expenses, excluding depreciation and
amortization........................................... 174,344 316,248 682,061
Depreciation and amortization............................. 93,749 185,982 446,338
Corporate general and administrative...................... 7,797 21,442 36,722
Executive severance charge (note 13)...................... -- -- 63,661
-------- -------- ----------
Operating expenses..................................... 275,890 523,672 1,228,782
-------- -------- ----------
Operating income....................................... 17,960 58,406 45,074
-------- -------- ----------
Other (income) expense:
Interest expense.......................................... 37,527 85,017 217,136
Interest income........................................... (477) (1,922) (15,650)
Gain on disposition of assets (note 2).................... -- (18,380) (123,845)
Gain on disposition of representation contracts........... -- -- (32,198)
Other (income) expense, net............................... -- 383 (3,221)
-------- -------- ----------
Other (income) expense, net............................ 37,050 65,098 42,222
-------- -------- ----------
Income (loss) before income taxes and extraordinary
item................................................. (19,090) (6,692) 2,852
Income tax expense (benefit) (note 10)...................... (2,896) 7,802 33,751
Dividends on preferred stock of subsidiary (note 8)......... -- 12,901 17,601
-------- -------- ----------
Loss before extraordinary item............................ (16,194) (27,395) (48,500)
Extraordinary loss, net of income tax benefit (notes 7 and
8)........................................................ -- 4,350 47,089
-------- -------- ----------
Net loss.......................................... (16,194) (31,745) (95,589)
Preferred stock dividends (note 9(a))....................... 3,820 12,165 25,670
-------- -------- ----------
Net loss attributable to common stockholders.............. $(20,014) $(43,910) $ (121,259)
======== ======== ==========
Basic and diluted loss per common share (notes 1(m) and 9):
Before extraordinary item................................. $ (.33) $ (.41) $ (.54)
Extraordinary item........................................ -- (.05) (.34)
-------- -------- ----------
Net loss.......................................... $ (.33) $ (.46) $ (.88)
======== ======== ==========
Weighted average common shares outstanding.................. 60,414 95,636 137,979
======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK
--------------------- -------------------- ------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- -------- ----------- ------ ---------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995...... 1,610,000 $ 80,500 49,859,058 $ 499 6,232,132 $62 $ 317,014 $ (93,498)
Issuance of Common Stock in
public offering (note 9(b)).... -- -- 18,000,000 180 -- -- 264,056 --
Conversion of 1993 Preferred
Stock (note 9(a)).............. (1,608,297) (80,415) 10,051,832 100 -- -- 80,315 --
Redemption of 1993 Preferred
Stock (note 9(a)).............. (1,703) (85) -- -- -- -- (5) --
Exercise of common stock options
(note 9(d)).................... -- -- 166,806 2 -- -- 700 --
Convertible preferred stock
dividends (note 9(a)).......... -- -- -- -- -- -- -- (3,820)
Net loss......................... -- -- -- -- -- -- -- (16,194)
---------- -------- ----------- ------ ---------- --- ---------- ---------
Balances at December 31, 1996...... -- -- 78,077,696 781 6,232,132 62 662,080 (113,512)
Issuance of $3.00 Convertible
Preferred Stock (note 9(a)).... 5,990,000 299,500 -- -- -- -- (11,692) --
Issuance of Common Stock in
merger (note 9(b))............. -- -- 34,617,460 346 -- -- 536,225 --
Issuance of common stock options
in merger (note 9(d)).......... -- -- -- -- -- -- 34,977 --
Issuance of 7% Preferred Stock in
merger (note 9(a))............. 2,200,000 110,000 -- -- -- -- -- --
Conversion of Class B Common
Stock (note 9(b)).............. -- -- 6,232,132 62 (6,232,132) (62) -- --
Exercise of common stock options
(note 9(d)).................... -- -- 994,526 10 -- -- 5,340 --
Convertible preferred stock
dividends (note 9(a)).......... -- -- -- -- -- -- -- (12,165)
Net loss......................... -- -- -- -- -- -- -- (31,745)
---------- -------- ----------- ------ ---------- --- ---------- ---------
Balances at December 31, 1997...... 8,190,000 409,500 119,921,814 1,199 -- -- 1,226,930 (157,422)
Issuance of Common Stock (note
9(b)).......................... -- -- 21,850,000 219 -- -- 994,423 --
Exercise of common stock options
(note 9(c)).................... -- -- 1,075,860 10 -- -- 22,230 --
Stock option compensation (note
9(c)).......................... -- -- -- -- -- -- 16,000 --
Convertible preferred stock
dividends (note 9(a)).......... -- -- -- -- -- -- -- (25,670)
Net loss......................... -- -- -- -- -- -- -- (95,589)
---------- -------- ----------- ------ ---------- --- ---------- ---------
Balances at December 31, 1998...... 8,190,000 $409,500 142,847,674 $1,428 -- $-- $2,259,583 $(278,681)
========== ======== =========== ====== ========== === ========== =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balances at December 31, 1995...... $ 304,577
Issuance of Common Stock in
public offering (note 9(b)).... 264,236
Conversion of 1993 Preferred
Stock (note 9(a)).............. --
Redemption of 1993 Preferred
Stock (note 9(a)).............. (90)
Exercise of common stock options
(note 9(d)).................... 702
Convertible preferred stock
dividends (note 9(a)).......... (3,820)
Net loss......................... (16,194)
----------
Balances at December 31, 1996...... 549,411
Issuance of $3.00 Convertible
Preferred Stock (note 9(a)).... 287,808
Issuance of Common Stock in
merger (note 9(b))............. 536,571
Issuance of common stock options
in merger (note 9(d)).......... 34,977
Issuance of 7% Preferred Stock in
merger (note 9(a))............. 110,000
Conversion of Class B Common
Stock (note 9(b)).............. --
Exercise of common stock options
(note 9(d)).................... 5,350
Convertible preferred stock
dividends (note 9(a)).......... (12,165)
Net loss......................... (31,745)
----------
Balances at December 31, 1997...... 1,480,207
Issuance of Common Stock (note
9(b)).......................... 994,642
Exercise of common stock options
(note 9(c)).................... 22,240
Stock option compensation (note
9(c)).......................... 16,000
Convertible preferred stock
dividends (note 9(a)).......... (25,670)
Net loss......................... (95,589)
----------
Balances at December 31, 1998...... $2,391,830
==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 8
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
--------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $ (16,194) $ (31,745) $ (95,589)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation........................................ 7,707 14,918 47,027
Amortization of goodwill, intangible assets and
other
assets........................................... 86,042 171,064 399,311
Executive severance................................. -- -- 16,000
Provision for doubtful accounts..................... 2,179 5,174 5,684
Deferred income tax expense (benefit)............... (4,353) (3,829) 28,718
Gain on sale of representation contracts............ -- -- (32,198)
Gain on disposition of assets....................... -- (18,380) (123,845)
Dividends on preferred stock of subsidiary.......... 12,901 17,601
Extraordinary loss, net of income tax benefit....... -- 4,350 47,089
Changes in certain assets and liabilities, net of
effects of acquisitions:
Accounts receivable.............................. (28,146) (29,977) (89,392)
Other current assets............................. (2,804) 733 (7,964)
Accounts payable and accrued expenses............ 3,991 20,004 58,027
Other assets..................................... (354) (4,283) (6,461)
Other liabilities................................ (587) (1,416) 3,623
--------- ----------- -----------
Net cash provided by operating activities...... 47,481 139,514 267,631
--------- ----------- -----------
Cash flows from investing activities:
Acquisitions, net of cash acquired.................... (458,332) (1,631,505) (1,995,991)
Issuance of note receivable........................... -- -- (150,000)
Escrow deposits on pending acquisitions............... (17,000) (4,655) --
Proceeds from sale of assets.......................... 32,000 269,250 --
Payments made on purchases of representation
contracts........................................... -- (31,456) (32,410)
Payments for cost basis investments................... -- -- (30,000)
Payments received on sales of representation
contracts........................................... -- 9,296 26,500
Capital expenditures.................................. (6,543) (11,666) (43,461)
Other................................................. (12,063) (22,273) (65,807)
--------- ----------- -----------
Net cash used by investing activities.......... (461,938) (1,423,009) (2,291,169)
--------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.............. 447,750 2,945,250 3,596,000
Principal payments on long-term debt.................. (290,750) (1,901,250) (2,073,000)
Net proceeds from issuance of common stock, preferred
stock and warrants.................................. 264,938 293,158 1,003,784
Dividends on preferred stock.......................... (3,820) (14,572) (57,039)
Payments for debt issuance costs...................... (3,941) (25,567) (47,318)
Redemption of exchange debentures..................... -- -- (403,217)
Redemption of preferred stock......................... (90) -- --
--------- ----------- -----------
Net cash provided by financing activities...... 414,087 1,297,019 2,019,210
--------- ----------- -----------
Increase (decrease) in cash and cash equivalents........ (370) 13,524 (4,328)
Cash and cash equivalents at beginning of year.......... 3,430 3,060 16,584
--------- ----------- -----------
Cash and cash equivalents at end of year................ $ 3,060 $ 16,584 $ 12,256
========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 9
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Chancellor Media Corporation (formerly known as Evergreen Media
Corporation) ("Chancellor Media") (together with its subsidiaries, the
"Company") is a diversified media company with operations in radio broadcasting,
outdoor advertising and media representation. As of December 31, 1998, the
Chancellor Radio Group portfolio (including 13 stations operated under time
brokerage agreements) consisted of 119 radio stations (89 FM and 30 AM)
concentrated in the top 30 markets in the United States and in Puerto Rico and a
national radio network, the AMFM Radio Networks, which broadcasts advertising
and syndicated programming shows to a national audience of approximately 66
million listeners in the United States (including approximately 39 million
listeners from the Company's portfolio of stations). As of December 31, 1998,
Chancellor Outdoor Group operated approximately 38,000 outdoor advertising
display faces in 37 states. The media representation business consists of Katz
Media Group, Inc. ("Katz"), a full-service media representation firm that sells
national spot advertising time for clients in the radio and television
industries throughout the United States and for the Company's portfolio of
stations.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Chancellor
Media and its subsidiaries, all of which are wholly owned. Significant
intercompany balances and transactions have been eliminated in consolidation.
(c) Prepaid Land Leases
The majority of the Company's outdoor advertising structures are located on
leased land. Land rent is typically paid in advance for periods ranging from one
to twelve months. Prepaid land leases are expensed ratably over the related
rental term.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets. Repair and maintenance costs are charged to expense as
incurred.
(e) Intangible Assets
Intangible assets consist primarily of broadcast licenses, goodwill and
other identifiable intangible assets. Intangible assets resulting from
acquisitions are valued based upon estimated fair values. The Company amortizes
such intangible assets using the straight-line method over estimated useful
lives ranging from one to 40 years. The Company continually evaluates the
propriety of the carrying amount of goodwill and other intangible assets and
related amortization periods to determine whether current events or
circumstances warrant adjustments to the carrying value and/or revised estimates
of amortization periods. These evaluations consist of the projection of
undiscounted cash flows over the remaining amortization periods of the related
intangible assets. The projections are based on historical trend lines of actual
results, adjusted for expected changes in operating results. To the extent such
projections indicate that undiscounted cash flows is not expected to be adequate
to recover the carrying amounts of the related intangible assets, such carrying
amounts are written down by charges to expense. At this time, the Company
believes that no impairment of goodwill or other intangible assets has occurred
and that no revisions to the amortization periods are warranted.
8
<PAGE> 10
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Debt Issuance Costs
Costs related to the issuance of debt are capitalized and amortized over
the terms of the related debt. In 1996, 1997 and 1998, the Company recorded
amortization of debt issuance costs of $1,113, $1,337 and $3,768 respectively,
which amounts are included in depreciation and amortization expense.
(g) Barter Transactions
The Company trades commercial air time and outdoor advertising space for
goods and services used principally for promotional, sales and other business
activities. An asset and liability is recorded at the fair market value of the
goods or services received. Barter revenue is recorded and the liability
relieved when commercials are broadcast or outdoor advertising space is
utilized. Barter expense is recorded and the asset relieved when goods or
services are received or used. Barter amounts are not significant to the
Company's consolidated financial statements.
(h) Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts more likely than not to
be realized. Income tax expense is the total of tax payable for the period and
the change during the period in deferred tax assets and liabilities which
impacted operations.
(i) Revenue Recognition
Radio broadcast revenue is derived from the sale of advertising time to
local and national advertisers and is recognized as advertisements are
broadcast. Outdoor advertising revenue is derived from contracts with
advertisers for the rental of outdoor advertising space and is recognized on an
accrual basis ratably over the terms of the contracts, which generally cover
periods of one month up to five years. Media representation revenue is derived
from commissions on sales of advertising time for radio and television stations
under representation contracts by the Company's media representation firm, Katz,
and is recognized as advertisements are broadcast.
Fees received or paid pursuant to time brokerage agreements are recognized
as gross revenues or amortized to expense, respectively, over the term of the
agreement.
(j) Representation Contracts
Representation contracts typically may be terminated by either party upon
written notice one year after receipt of such notice. In accordance with
industry practice, in lieu of termination, a buyout agreement is typically
entered into for the purchase of such contracts by the successor representation
firm. The purchase price paid by the successor representation firm is based upon
the historical commission income projected over the remaining contract period,
including the evergreen or notice period, plus two months.
Costs of obtaining representation contracts are deferred and amortized over
the related period of benefit. Amortization of costs of obtaining representation
contracts included in depreciation and amortization was $380 and $10,862 for the
years ended December 31, 1997 and 1998, respectively. Gains on the disposition
of representation contracts are recognized on the effective date of the buyout
agreement as a component of other (income) expense.
9
<PAGE> 11
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(k) Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers
temporary cash investments purchased with original maturities of three months or
less to be cash equivalents.
The Company paid approximately $37,042, $84,610 and $191,674 for interest
in 1996, 1997 and 1998, respectively. Cash payments (refunds) for income taxes
were $733, $11,079 and ($79) for 1996, 1997 and 1998, respectively.
(l) Derivative Financial Instruments
The Company's derivative financial instruments are used to manage
well-defined interest rate risks related to interest on the Company's
outstanding debt and are not used for trading purposes.
As interest rates change under interest rate swap and collar agreements,
the differential to be paid or received is recognized as an adjustment to
interest expense. The Company's exposure to credit loss is minimal as its
interest rate swap agreements are with the participating banks under the
Company's senior credit facility.
(m) Basic and Diluted Loss Per Common Share
Basic and diluted loss per common share is based on the weighted average
shares of common stock outstanding during each year. Stock options, the $3.00
Convertible Exchangeable Preferred Stock and the 7% Convertible Preferred Stock
are not included in the calculation as their effect would be antidilutive.
On August 8, 1996, the Company declared a three-for-two stock split
effected in the form of a stock dividend payable on August 26, 1996 to
shareholders of record at the close of business on August 19, 1996. On December
18, 1997, the Company declared a two-for-one stock split effected in the form of
a stock dividend payable on January 12, 1998 to shareholders of record at the
close of business on December 29, 1997. All share and per share data (other than
authorized share data) has been adjusted to give effect to the stock dividends.
(n) Disclosure of Certain Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In the opinion of management, credit risk with respect to trade receivables
is limited due to the large number of diversified customers and the geographic
diversification of the Company's customer base. The Company performs ongoing
credit evaluations of its customers and believes that adequate allowances for
any uncollectible trade receivables are maintained. At December 31, 1997 and
1998, no receivable from any customer exceeded 5% of stockholders' equity and no
customer accounted for more than 10% of net revenues in 1996, 1997 or 1998.
(o) Stock Option Plan
The Company accounts for its stock-based award plans in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, under which compensation expense is
recorded to the extent that the current market price of the underlying stock
exceeds the exercise price. Note 9(c) provides pro forma net income and pro
forma earnings per share disclosures as if the stock-based awards had been
accounted for using the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation.
10
<PAGE> 12
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(p) Recently Issued Accounting Principle
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. Management does not anticipate that
this Statement will have a material impact on the Company's consolidated
financial statements.
(q) Reclassifications
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the current year presentation.
(2) ACQUISITIONS AND DISPOSITIONS
(a) Completed Transactions
On January 17, 1996, the Company acquired Pyramid Communications, Inc.
("Pyramid"), a radio broadcasting company with nine FM and three AM radio
stations in five radio markets (Chicago, Philadelphia, Boston, Charlotte and
Buffalo) (the "Pyramid Acquisition"). The Pyramid Acquisition was effected
through the merger of a wholly-owned subsidiary of the Company with and into
Pyramid, with Pyramid surviving the merger as a wholly-owned subsidiary of the
Company. The total purchase price, including closing costs, allocated to net
assets acquired was approximately $316,343 in cash.
On May 3, 1996, the Company acquired WKLB-FM in Boston from Fairbanks
Communications for $34,000 in cash plus various other direct acquisition costs.
On November 26, 1996, the Company exchanged WKLB-FM in Boston (now known as
WROR-FM) for WGAY-FM in Washington, D.C. The exchange was accounted for as a
like-kind exchange and no gain or loss was recognized upon consummation of the
transaction. The Company had previously been operating WGAY-FM under a time
brokerage agreement and selling substantially all of the broadcast time of
WKLB-FM under a time brokerage agreement, in each case since June 17, 1996,
pending completion of the exchange.
On July 19, 1996, the Company sold WHTT-FM and WHTT-AM in Buffalo to
Mercury Radio for $19,500 in cash, and on August 1, 1996, the Company sold
WSJZ-FM in Buffalo to American Radio Systems for $12,500 in cash (collectively,
the "Buffalo Stations"). The assets of the Buffalo Stations were classified as
assets held for sale in the Pyramid Acquisition and no gain or loss was
recognized by the Company upon consummation of the sales. The combined net
income of the Buffalo stations of approximately $733 has been excluded from the
consolidated statement of operations for the year ended December 31, 1996. The
excess of the proceeds over the carrying amounts at the dates of sale
approximated $2,561 (including interest costs during the holding period of
approximately $1,169) and has been accounted for as an adjustment to the
original purchase price of the Pyramid Acquisition. The Company had previously
entered into time brokerage agreements (effective April 15, 1996 for WSJZ-FM and
April 25, 1996 for WHTT-FM and WHTT-AM) to sell substantially all of the
broadcast time of these stations pending completion of the sales.
On August 14, 1996, the Company acquired KYLD-FM in San Francisco from
Crescent Communications for $44,000 in cash plus various other direct
acquisition costs. The Company had previously been operating KYLD-FM under a
time brokerage agreement since May 1, 1996.
On October 18, 1996, the Company acquired WEDR-FM in Miami from affiliates
of the Rivers Group for $65,000 in cash plus various other direct acquisition
costs.
On January 31, 1997, the Company acquired WWWW-FM and WDFN-AM in Detroit
from affiliates of Chancellor Broadcasting Company ("CBC") for $30,000 in cash
plus various other direct acquisition costs. The Company had previously provided
certain sales and promotional functions to WWWW-FM and
11
<PAGE> 13
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WDFN-AM under a joint sales agreement since February 14, 1996 and subsequently
operated the stations under a time brokerage agreement since April 1, 1996.
On January 31, 1997, the Company acquired KKSF-FM and KDFC-FM/AM in San
Francisco from affiliates of the Brown Organization for $115,000 in cash plus
various other direct acquisition costs. The Company had previously been
operating KKSF-FM and KDFC-FM/AM under a time brokerage agreement since November
1, 1996. On July 21, 1997, the Company sold KDFC-FM to Bonneville International
Corporation ("Bonneville") for $50,000 in cash. The assets of KDFC-FM were
classified as assets held for sale in connection with the purchase price
allocation of the acquisition of KKSF-FM and KDFC-FM/AM and no gain or loss was
recognized by the Company upon consummation of the sale. The combined net income
of KDFC-FM of approximately $934 has been excluded from the consolidated
statement of operations for the year ended December 31, 1997. The excess of the
proceeds over the carrying amount at the date of sale approximated $739
(including interest costs during the holding period of approximately $1,750) and
has been accounted for as an adjustment to the original purchase price of the
acquisition of KKSF-FM and KDFC-FM/AM.
On April 1, 1997, the Company acquired WJLB-FM and WMXD-FM in Detroit from
Secret Communications, L.P. ("Secret") for $168,000 in cash plus various other
direct acquisition costs. The Company had previously been operating WJLB-FM and
WMXD-FM under time brokerage agreements since September 1, 1996.
On April 3, 1997, the Company exchanged WQRS-FM in Detroit (which the
Company acquired on April 3, 1997 from Secret for $32,000 in cash plus various
other direct acquisition costs), to affiliates of Greater Media Radio, Inc. in
return for WWRC-AM in Washington, D.C. and $9,500 in cash. The exchange was
accounted for as a like-kind exchange and no gain or loss was recognized upon
consummation of the transaction. The net purchase price to the Company of
WWRC-AM was therefore $22,500. The Company had previously been operating WWRC-AM
under a time brokerage agreement since June 17, 1996.
On May 1, 1997, the Company acquired WDAS-FM/AM in Philadelphia from
affiliates of Beasley FM Acquisition Corporation for $103,000 in cash plus
various other direct acquisition costs.
On May 15, 1997, the Company exchanged five of its six stations in
Charlotte, North Carolina (WPEG-FM, WBAV-FM/AM, WRFX-FM and WFNZ-AM) for two FM
stations in Philadelphia (WIOQ-FM and WUSL-FM) owned by EZ Communications, Inc.
("EZ") in Philadelphia (the "Charlotte Exchange"), and also sold the Company's
sixth radio station in Charlotte, WNKS-FM, to EZ for $10,000 in cash and
recognized a gain of $3,536. The Charlotte Exchange was accounted for as a
like-kind exchange and no gain or loss was recognized upon consummation of the
transaction.
On May 30, 1997, the Company acquired WPNT-FM in Chicago from affiliates of
Century Broadcasting Company for $75,740 in cash (including $1,990 for the
purchase of the station's accounts receivable) plus various other direct
acquisition costs. On June 19, 1997, the Company sold WPNT-FM in Chicago to
Bonneville for $75,000 in cash and recognized a gain of $529.
On June 3, 1997, the Company sold WEJM-FM in Chicago to affiliates of
Crawford Broadcasting for $14,750 in cash and recognized a gain of $9,258.
On July 2, 1997, the Company acquired WLTW-FM and WAXQ-FM in New York and
WMZQ-FM, WJZW-FM, WZHF-AM and WBZS-AM in Washington, D.C. from Viacom
International, Inc. ("Viacom") for approximately $612,388 in cash including
various other direct acquisition costs (the "Viacom Acquisition"). The Viacom
Acquisition was financed with (i) bank borrowings under the Senior Credit
Facility (as defined) of $552,559; (ii) $53,750 in escrow funds paid by the
Company on February 19, 1997 and (iii) $6,079 financed through working capital.
In June 1997, the Company issued 5,990,000 shares of $3.00 Convertible
Exchangeable Preferred Stock for net proceeds of $287,808 which were used to
repay
12
<PAGE> 14
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
borrowings under the Senior Credit Facility and subsequently were reborrowed on
July 2, 1997 as part of the financing of the Viacom Acquisition. On July 7,
1997, the Company sold WJZW-FM in Washington, D.C. to affiliates of Capital
Cities/ABC Radio for $68,000 in cash. The assets of WJZW-FM, as well as the
assets of WZHF-AM and WBZS-AM, which were sold on August 13, 1997, were
accounted for as assets held for sale in connection with the purchase price
allocation of the Viacom Acquisition and no gain or loss was recognized by the
Company upon consummation of the sales. The combined net income of WJZW-FM,
WZHF-AM and WBZS-AM of approximately $153 has been excluded from the
consolidated statement of operations for the year ended December 31, 1997. The
excess of the carrying amounts over the proceeds at the dates of sale
approximated $894 and has been accounted for as an adjustment to the original
purchase price of the Viacom Acquisition.
On July 7, 1997, the Company sold the Federal Communications Commission
("FCC") authorizations and certain transmission equipment previously used in the
operation of KYLD-FM in San Francisco to Susquehanna Radio Corporation
("Susquehanna") for $44,000 in cash and recognized a gain of $1,726.
Simultaneously therewith, CBC sold the call letters "KSAN-FM" (which CBC
previously used in San Francisco) to Susquehanna. On July 7, 1997, the Company
and CBC entered into a time brokerage agreement to enable the Company to operate
KYLD-FM on the frequency previously assigned to KSAN-FM, and on July 7, 1997,
CBC changed the call letters of KSAN-FM to KYLD-FM. Upon the consummation of the
Chancellor Merger (as defined herein), the Company changed the format of the new
KYLD-FM to the format previously operated on the old KYLD-FM.
On July 14, 1997, the Company completed the disposition of WLUP-FM in
Chicago to Bonneville for net proceeds of $80,000 which were held by a qualified
intermediary pending the completion of the deferred exchange of WLUP-FM for
KZPS-FM and KDGE-FM in Dallas. On October 7, 1997, the Company applied the net
proceeds from the disposition of WLUP-FM of $80,000 in cash, plus an additional
$3,500 and various other direct acquisition costs, in a deferred exchange of
WLUP-FM for KZPS-FM and KDGE-FM in Dallas. The exchange was accounted for as a
like-kind exchange and no gain or loss was recognized upon consummation of the
transaction. The Company had previously operated KZPS-FM and KDGE-FM under time
brokerage agreements effective August 1, 1997.
On July 21, 1997, the Company entered into a time brokerage agreement with
CBC whereby the Company began managing certain limited functions of CBC's
stations KISQ-FM (formerly KBGG-FM), KNEW-AM and KABL-FM in San Francisco
pending the consummation of the Chancellor Merger (as defined herein), which
occurred on September 5, 1997.
On August 13, 1997, the Company sold WBZS-AM and WZHF-AM in Washington,
D.C. (acquired as part of the Viacom Acquisition) for $13,000 and KDFC-AM in San
Francisco for $5,000 to affiliates of Douglas Broadcasting ("Douglas") for a
total sales price of $18,000 in the form of a note receivable. The note
receivable bears interest at 7 3/4%, with a balloon principal payment due four
years after closing. At closing, Douglas was required to post a $1,000 letter of
credit for the benefit of the Company that will remain outstanding until all
amounts due under the promissory note are paid.
On August 27, 1997, the Company sold WEJM-AM in Chicago to Douglas for
$7,500 in cash and recognized a gain of $3,331.
On September 5, 1997, pursuant to an Amended and Restated Agreement and
Plan of Merger, dated as of February 19, 1997 and amended and restated on July
31, 1997 (the "Chancellor Merger Agreement"), among CBC, Chancellor Radio
Broadcasting Company ("CRBC"), Evergreen Media Corporation ("Evergreen"),
Evergreen Mezzanine Holdings Corporation ("EMHC") and Evergreen Media
Corporation of Los Angeles ("EMCLA"), (i) CBC was merged (the "Parent Merger")
with and into EMHC, a direct, wholly-owned subsidiary of Evergreen, with EMHC
remaining as the surviving corporation and (ii) CRBC was merged (the "Subsidiary
Merger") with and into EMCLA, a direct, wholly-owned subsidiary of EMHC, with
13
<PAGE> 15
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMCLA remaining as the surviving corporation (collectively, the "Chancellor
Merger"). Upon consummation of the Parent Merger, the Company was renamed
Chancellor Media Corporation and EMHC was renamed Chancellor Mezzanine Holdings
Corporation ("CMHC"). Upon consummation of the Subsidiary Merger, EMCLA was
renamed Chancellor Media Corporation of Los Angeles ("CMCLA"). Consummation of
the Chancellor Merger added 52 radio stations (36 FM and 16 AM) to the Company's
portfolio of stations, including 13 stations in markets in which the Company
previously operated. The total purchase price allocated to net assets acquired
was approximately $1,998,383 which included (i) the conversion of each
outstanding share of CBC Common Stock into 0.9091 shares of the Company's Common
Stock, resulting in the issuance of 34,617,460 shares of the Company's Common
Stock at $15.50 per share, (ii) the assumption of long-term debt of CRBC of
$949,000 which included $549,000 of borrowings outstanding under the CRBC senior
credit facility, $200,000 of CRBC's 9 3/8% Senior Subordinated Notes due 2004
and $200,000 of CRBC's 8 3/4% Senior Subordinated Notes due 2007 (iii) the
issuance of 2,117,629 shares of CMCLA's 12% Exchangeable Preferred Stock in
exchange for CRBC's substantially identical securities with a fair value of
$215,570 including accrued and unpaid dividends of $3,807, (iv) the issuance of
1,000,000 shares of CMCLA's 12 1/4% Series A Senior Cumulative Exchangeable
Preferred Stock in exchange for CRBC's substantially identical securities with a
fair value of $120,217 including accrued and unpaid dividends of $772, (v) the
issuance of 2,200,000 shares of the Company's 7% Convertible Preferred Stock in
exchange for CBC's substantially identical securities with a fair value of
$111,048 including accrued and unpaid dividends of $1,048, (vi) the assumption
of stock options issued to CBC stock option holders with a fair value of $34,977
and (vii) estimated acquisition costs of $31,000.
On October 28, 1997, the Company acquired Katz, a full-service media
representation firm, in a tender offer transaction for a total purchase price of
approximately $379,101 (the "Katz Acquisition") which included (i) the
conversion of each outstanding share of Katz Common Stock into the right to
receive $11.00 in cash, resulting in total cash payments of $149,601, (ii) the
assumption of long-term debt of Katz and its subsidiaries of $222,000 which
included $122,000 of borrowings outstanding under the Katz senior credit
facility and $100,000 of 10 1/2% Senior Subordinated Notes due 2007 of Katz
Media Corporation (a subsidiary of Katz) and (iii) estimated acquisition costs
of $7,500.
On December 29, 1997, the Company acquired five radio stations from Pacific
and Southern Company, Inc., a subsidiary of Gannett Co., Inc., consisting of
WGCI-FM/AM in Chicago for $140,000, KKBQ-FM/AM in Houston for $110,000 and
KHKS-FM in Dallas for $90,000, for an aggregate purchase price of $340,000 in
cash plus various other direct acquisition costs.
On January 30, 1998, the Company acquired KXPK-FM in Denver from Ever Green
Wireless LLC for $26,000 in cash plus various other direct acquisition costs, of
which $1,655 was previously paid by the Company as escrow funds and are
classified as other assets at December 31, 1997. The Company had previously been
programming KXPK-FM under a time brokerage agreement since September 1, 1997.
On April 3, 1998, the Company exchanged WTOP-AM in Washington, KZLA-FM in
Los Angeles and WGMS-FM in Washington plus $63,000 in cash (including $3,000
previously paid by the Company as escrow funds and classified as other assets at
December 31, 1997) to Bonneville for WTJM-FM in New York, KLDE-FM in Houston and
KBIG-FM in Los Angeles and recognized a gain of $123,845. The Company had
previously operated KLDE-FM and KBIG-FM under time brokerage agreements since
October 1, 1997 and WTJM-FM since October 10, 1997, and had sold substantially
all of the broadcast time of WTOP-AM, KZLA-FM and WGMS-FM to Bonneville since
October 1, 1997.
On May 29, 1998, as part of the Capstar/SFX Transaction (defined below),
the Company exchanged WAPE-FM and WFYV-FM in Jacksonville (valued at $53,000)
for Capstar Broadcasting Corporation (together with its subsidiaries, "Capstar")
station KODA-FM in Houston (the "Houston Exchange"). As part of the transaction,
the Company also paid cash of $90,250 to the owners of KVET-AM, KVET-FM and
KASE-FM, who simultaneously transferred such stations to Capstar.
14
<PAGE> 16
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 1, 1998, the Company acquired WWDC-FM/AM in Washington, D.C. from
Capitol Broadcasting Company and its affiliates for $74,062 in cash (including
$2,062 for the purchase of the stations' accounts receivable) plus various other
direct acquisition costs.
On June 15, 1998, the Company's national radio network, The AMFM Radio
Networks, acquired the syndicated programming shows of Global Satellite Network
for $14,000 in cash plus various other direct acquisition costs. The syndicated
programming shows acquired include "Rockline", "Modern Rock Live", "Reelin' in
the Years" and the concert series "Live from the Pit".
On July 31, 1998, the Company acquired Martin Media L.P., Martin &
MacFarlane, Inc. and certain affiliated companies ("Martin") for a total
purchase price of $615,117 which consisted of $612,848 in cash including various
other direct acquisition costs and the assumption of notes payable of $2,270.
Martin is an outdoor advertising company with over 13,700 billboards and outdoor
displays in 12 states serving 23 markets. As part of the Martin transaction, the
Company acquired an asset purchase agreement with Kunz & Company and paid an
additional $6,000 in cash for a purchase option deposit previously paid by
Martin.
On August 28, 1998, the Company acquired various syndicated programming
shows of Casey Kasem and the related programming libraries for $7,150 in cash
and $7,000 in the form of a note payable due August 2000. The note is payable in
two equal annual installments of $3,500 each on August 28, 1999 and August 28,
2000.
On October 23, 1998, the Company acquired Primedia Broadcast Group, Inc.
and certain of its affiliates, which own and operate eight FM radio stations in
Puerto Rico, for a purchase price of $75,619 including various other direct
acquisition costs.
On November 13, 1998, the Company acquired approximately 1,000 billboards
and outdoor display faces from Kunz & Company for $40,264 in cash, of which
$6,000 was previously paid as a purchase option deposit in connection with the
Martin acquisition on July 31, 1998. The Company had previously been operating
these properties under a management agreement effective July 31, 1998.
On December 1, 1998, the Company acquired the assets and working capital of
the outdoor advertising division of Whiteco Industries, Inc. ("Whiteco"),
including approximately 22,500 billboards and outdoor displays in 34 states, for
$981,698 in cash including various other direct acquisition costs.
Between September and December 1998, the Company acquired approximately 670
additional billboards and outdoor displays in various markets for approximately
$23,582 in cash.
The acquisitions discussed above were accounted for as purchases, and are
subject to certain adjustments. Accordingly, the accompanying consolidated
financial statements include the results of operations of the acquired entities
accounted for as purchases from the dates of acquisition.
15
<PAGE> 17
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the net assets acquired follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Cash and cash equivalents......................... $ 1,011 $ 9,724 $ 7,826
Accounts receivable, net.......................... 13,618 129,907 31,223
Other current assets.............................. 1,125 27,596 16,098
Property and equipment............................ 11,519 118,371 1,238,365
Assets held for sale.............................. 32,000 131,000 --
Intangible assets................................. 465,824 3,823,746 1,133,062
Other assets...................................... -- 26,742 1,195
Accounts payable and accrued expenses............. (4,536) (100,422) (14,973)
Deferred tax liabilities.......................... (61,218) (279,371) (98,042)
Other liabilities................................. -- (39,681) (12)
-------- ---------- ----------
Total net assets acquired............... 459,343 3,847,612 2,314,742
Less:
Cash and cash equivalents acquired.............. 1,011 9,724 7,826
Prior year escrow payments...................... -- 17,000 4,655
Notes payable................................... -- -- 9,270
Long-term debt assumed.......................... -- 1,171,000 --
Redeemable preferred stock issued............... -- 335,787 --
Preferred stock issued.......................... -- 111,048 --
Common stock issued............................. -- 536,571 --
Stock options assumed........................... -- 34,977 --
Gain on exchange................................ -- -- 123,845
Assets transferred in exchange.................. -- -- 173,155
-------- ---------- ----------
Cash paid for acquisitions........................ $458,332 $1,631,505 $1,995,991
======== ========== ==========
</TABLE>
The pro forma consolidated condensed results of operations data for 1997
and 1998, as if the 1997 and 1998 acquisitions and dispositions discussed above,
the 1997 preferred stock offering described in note 9, the 8 1/8% Notes offering
described in note 7(f), the 9% Notes offering described in note 7(g), the 8%
Senior Notes offering described in note 7(b) and the amendment and restatement
of the Senior Credit Facility described in note 7(a) occurred at January 1,
1997, follow:
<TABLE>
<CAPTION>
UNAUDITED
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Net revenues................................................ $1,227,083 $1,460,968
Net loss.................................................... (200,485) (92,054)
Basic and diluted loss per common share..................... (1.67) (0.85)
</TABLE>
The pro forma results are not necessarily indicative of the financial
results which would have occurred if the transactions had been in effect for the
entire periods presented.
On January 21, 1999 and February 9, 1999, the Company acquired
approximately 4,500 outdoor display faces from Triumph Outdoor Holdings and
certain affiliated companies for $36,345 in cash including working capital and
various other direct acquisition costs and is subject to certain adjustments.
On January 28, 1999, the Company acquired Wincom Broadcasting Corporation
which owns WQAL-FM in Cleveland. The Company had previously been operating
WQAL-FM under a time brokerage agreement effective October 1, 1998. On February
2, 1999, the Company acquired five additional radio stations in Cleveland
including (i) WDOK-FM and WRMR-AM from Independent Group Limited
16
<PAGE> 18
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Partnership, (ii) WZAK-FM from Zapis Communications and (iii) Zebra Broadcasting
Corporation which owns WZJM-FM and WJMO-AM. The six Cleveland stations were
acquired for an aggregate purchase price of $282,970 in cash including working
capital and is subject to certain adjustments.
Subsequent to January 1, 1999, the Company acquired approximately 100
additional billboards and outdoor displays in various markets for approximately
$8,178 in cash.
(b) Pending Transactions
On February 20, 1998, the Company entered into an agreement to acquire from
Capstar KTXQ-FM and KBFB-FM in Dallas/Ft. Worth, KODA-FM, KKRW-FM and KQUE-AM in
Houston, KPLN-FM and KYXY-FM in San Diego and WDRV-FM, WJJJ-FM, WXDX-FM and
WDVE-FM in Pittsburgh (collectively, "the Capstar/SFX Stations") for an
aggregate purchase price of approximately $637,500 in a series of purchases and
exchanges over a period of three years (the "Capstar/SFX Transaction"). The
Capstar/ SFX Stations were acquired by Capstar as part of Capstar's acquisition
of SFX on May 29, 1998. On May 29, 1998, the Company completed the Houston
Exchange (defined above) and began programming the remaining ten Capstar/SFX
Stations under time brokerage agreements. The purchase price for the remaining
ten Capstar/SFX Stations will be approximately $494,250. The Company is
currently assessing whether the terms of the Capstar/SFX Transaction will be
modified upon the consummation of the Capstar Merger.
On August 14, 1998, the Company entered into an agreement to sell WMVP-AM
in Chicago to ABC, Inc. for $21,000 in cash. The Company entered into a time
brokerage agreement to sell substantially all of the broadcast time of WMVP-AM
effective September 10, 1998. Although there can be no assurance, the Company
expects that the disposition of WMVP-AM will be consummated in the second
quarter of 1999.
On August 26, 1998, the Company and Capstar entered into an agreement to
merge in a stock-for-stock transaction that will create the nation's largest
radio broadcasting entity (the "Capstar Merger"). Pursuant to this agreement, as
amended, the Company will acquire Capstar in a merger of Capstar into a
wholly-owned subsidiary of Chancellor Media. Each share of Chancellor Media
common stock will represent one share in the combined entity. Each share of
Capstar common stock will entitle the holder thereof to 0.4955 of a share of
common stock of Chancellor Media. Upon consummation of its pending transactions,
Capstar will own and operate or program approximately 340 radio stations serving
81 mid-sized markets nationwide. On February 1, 1999, the Company began
operating WKNR-AM in Cleveland, a station owned by Capstar, under a time
brokerage agreement. The Capstar Merger is subject to stockholder approval of
both the Company and Capstar. Although there can be no assurance, the Company
expects that the Capstar Merger will be consummated in the second quarter or
early third quarter of 1999.
On September 15, 1998, the Company entered into an agreement to acquire
KKFR-FM and KFYI-AM in Phoenix from The Broadcast Group, Inc. for $90,000 in
cash. The Company began operating KKFR-FM and KFYI-AM under a time brokerage
agreement effective November 5, 1998. Although there can be no assurance, the
Company expects that the Phoenix acquisition will be consummated in the second
quarter of 1999.
Consummation of each of the transactions discussed above is subject to
various conditions, including, in most cases, approval from the FCC and the
expiration or early termination of any waiting period required under the HSR
Act. The Company believes that such conditions will be satisfied in the ordinary
course, but there can be no assurance that this will be the case.
(c) Other Transactions
On April 13, 1998, the Company and Secret entered into a settlement
agreement regarding WFLN-FM in Philadelphia. Previously in August 1996, the
Company and Secret had entered into an agreement under which the Company would
acquire WFLN-FM from Secret for $37,750 in cash. In April 1997, the Company
17
<PAGE> 19
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
entered into an agreement to sell WFLN-FM to Greater Media for $41,800 in cash.
On July 16, 1997, Secret purported to terminate the sale of WFLN-FM to the
Company. The Company subsequently brought suit against Secret to enforce its
rights to acquire WFLN-FM. Pursuant to a court settlement entered in August 1997
and the settlement agreement between the Company and Secret entered on April 13,
1998, (i) Secret sold WFLN-FM directly to Greater Media for $37,750, (ii)
Greater Media deposited $4,050 (the difference between the Company's proposed
acquisition price for WFLN-FM from Secret and the Company's proposed sale price
for WFLN-FM to Greater Media) with the court and (iii) the Company received
$3,500 of such amount deposited by Greater Media with the court, plus applicable
interest (the "WFLN Settlement"), and Secret received the balance of $550, plus
applicable interest.
On May 29, 1998, Capstar sold KKPN-FM in Houston (acquired by Capstar as
part of Capstar's acquisition of SFX Broadcasting, Inc. ("SFX")) due to the
attributable ownership of Hicks Muse in both Capstar and the Company in order to
comply with the FCC's multiple ownership limits. In connection with Capstar's
sale of KKPN-FM, the Company received a commission from Capstar of $1,730.
(3) OTHER ASSETS
Other current assets consist of the following at December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Prepaid expenses and other.................................. $18,348 $42,451
Representation contracts receivable......................... 16,463 17,458
------- -------
$34,811 $59,909
======= =======
</TABLE>
Other assets consist of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Note receivable -- Capstar(a)............................... $ -- $150,000
Note receivable -- Douglas (note 2)......................... 18,000 18,000
Deferred debt issuance costs, less accumulated amortization
of $943 in 1997 and $4,711 in 1998........................ 24,624 66,959
Deferred costs on purchases of representation contracts,
less accumulated amortization of $380 in 1997 and $11,242
in 1998................................................... 35,411 56,719
Investments at cost(b)...................................... -- 30,000
Representation contracts receivable......................... 12,187 14,181
Escrow deposits (note 2).................................... 4,655 --
Other....................................................... 18,619 23,034
-------- --------
$113,496 $358,893
======== ========
</TABLE>
- ---------------
(a) On May 29, 1998, the Company provided a loan (the "Capstar Loan") to Capstar
in the principal amount of $150,000 as part of the Capstar/SFX Transaction.
The Capstar Loan bears interest at the rate of 12% per annum (subject to
increase in certain circumstances), and is secured by a senior pledge of
common stock of Capstar's direct subsidiary. A portion of the Capstar Loan
will be prepaid by Capstar in connection with the Company's acquisition of,
and the proceeds of such prepayment would be used by the Company as a
portion of the purchase price for, each Capstar/SFX Station. Hicks Muse,
which is a substantial shareholder of the Company, controls Capstar, and
certain officers and directors of the Company are directors and/or executive
officers of Capstar and/or Hicks Muse.
(b) On October 9, 1998, the Company acquired a non-voting interest in Z-Spanish
Media Corporation for $25,000 in cash, which is accounted for under the cost
method. Z-Spanish Media is the owner and
18
<PAGE> 20
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operator of 22 Hispanic format radio stations in California, Texas, Arizona
and Illinois and provides Hispanic format network programming to an
additional 28 affiliated radio stations. Also, on December 18, 1998, the
Company acquired an interest in USA Digital Radio for $5,000 in cash, which
is accounted for under the cost method. USA Digital Radio is a leading
developer of In-Band On-Channel(TM) AM and FM digital audio broadcasting
technology, which is designed to allow radio broadcasters to transmit both
analog and digital signals simultaneously using existing frequency spectrum
allocations.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997 and
1998:
<TABLE>
<CAPTION>
ESTIMATED USEFUL LIFE 1997 1998
--------------------- -------- ----------
<S> <C> <C> <C>
Advertising structures....................... 15 years $ -- $1,178,751
Transmitter and studio equipment............. 3-20 years 90,493 96,515
Buildings and improvements................... 3-35 years 36,914 58,491
Land......................................... -- 23,122 46,062
Furniture and fixtures....................... 5-7 years 15,554 24,765
Construction in progress..................... -- -- 13,114
Vehicles..................................... 5-7 years 2,870 7,625
Other equipment.............................. Various 23,576 35,914
-------- ----------
192,529 1,461,237
Less accumulated depreciation................ 32,732 73,081
-------- ----------
$159,797 $1,388,156
======== ==========
</TABLE>
(5) INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
ESTIMATED USEFUL LIFE 1997 1998
--------------------- ---------- ----------
<S> <C> <C> <C>
Broadcast licenses......................... 15-40 years $3,593,384 $4,110,469
Goodwill................................... 15-40 years 631,739 1,086,083
Other...................................... 1-40 years 491,272 532,011
---------- ----------
4,716,395 5,728,563
Less accumulated amortization.............. 311,952 672,516
---------- ----------
$4,404,443 $5,056,047
========== ==========
</TABLE>
Other intangible assets include: (i) premium advertising revenue base (the
value of the higher radio advertising revenues in certain of the Company's
markets as compared to other markets of similar population); (ii) advertising
client base (the value of the well-established advertising base in place at the
time of acquisition of certain stations); (iii) talent contracts (the value of
employment contracts between certain stations and their key employees); (iv)
fixed asset delivery premium (the benefit expected from the Company's ability to
operate fully constructed and operational stations from the date of
acquisition), (v) premium audience growth pattern (the value of expected
above-average population growth in a given market) and (vi) the fair market
value of media representation contracts acquired in connection with the
acquisition of Katz.
19
<PAGE> 21
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Accounts payable............................................ $ 78,990 $113,362
Accrued interest............................................ 18,130 43,221
Accrued payroll............................................. 34,274 36,858
Representation contracts payable............................ 21,680 24,859
Notes payable............................................... -- 4,198
Accrued dividends........................................... 16,120 2,353
Other accrued expenses...................................... 9,221 11,767
-------- --------
$178,415 $236,618
======== ========
</TABLE>
(7) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Senior Credit Facility(a)................................... $1,573,000 $1,596,000
8% Senior Notes(b).......................................... -- 750,000
9 3/8% Notes(c)............................................. 200,000 200,000
8 3/4% Notes(d)............................................. 200,000 200,000
10 1/2% Notes(e)............................................ 100,000 100,000
8 1/8% Notes(f)............................................. 500,000 500,000
9% Notes(g)................................................. -- 750,000
---------- ----------
Total long-term debt.............................. $2,573,000 $4,096,000
========== ==========
</TABLE>
(a) Senior Credit Facility
The Company's senior credit facility, as amended on November 9, 1998 (the
"Senior Credit Facility") provides for aggregate commitments under a revolving
loan facility and a term loan facility of $1,600,000 and $900,000, respectively.
In connection with the amendment and restatement of the Senior Credit Facility
on April 25, 1997, the Company wrote off the unamortized balance of deferred
debt issuance costs of $4,350 (net of a tax benefit of $2,343) as an
extraordinary charge in 1997.
Borrowings under the Senior Credit Facility bear interest at a rate which,
at the option of the Company, is based on the participating banks' prime rate or
Eurodollar rate, plus an incremental rate. Without giving effect to the interest
rate swap and cap agreements described below, the interest rate on the $900,000
outstanding under the term loan facility at December 31, 1998 was 7.31%, based
on Eurodollar rates, and the interest rate on the $680,000 and $16,000 of
advances outstanding under the revolving loan facility were 7.31% on a blended
basis and 8.5%, respectively, at December 31, 1998, based on the Eurodollar and
prime rates, respectively. The Company pays fees ranging from 0.25% to 0.375%
per annum on the aggregate unused portion of the loan commitment based upon the
leverage ratio for the most recent quarter end, in addition to an annual agent's
fee.
Pursuant to the Senior Credit Facility, the Company is required to enter
into interest hedging agreements that result in fixing or placing a cap on the
Company's floating rate debt so that no less than 50% of the principal amount of
total debt outstanding has a fixed or capped rate. At December 31, 1998,
interest rate swap agreements covering a notional balance of $1,810,000 were
outstanding. These outstanding swap agreements mature from 1999 through 2002 and
require the Company to pay fixed rates of 4.70% to 6.63%
20
<PAGE> 22
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
while the counterparty pays a floating rate based on the three-month London
Interbank Borrowing Offered Rate ("LIBOR"). During the years ended December 31,
1996, 1997 and 1998, the Company recognized charges under its interest rate swap
agreements of $111, $2,913 and $5,134 respectively. The Company's exposure to
credit loss is minimal as its interest rate swap agreements are with the
participating banks under the senior credit facility.
The term loan facility is payable in quarterly installments commencing on
September 30, 2000 and ending June 30, 2005. The revolving loan facility
requires scheduled annual reductions of the commitment amount, payable in
quarterly installments commencing on September 30, 2000 and ending on June 30,
2005. The capital stock of the Company's subsidiaries is pledged to secure the
performance of the Company's obligations under the Senior Credit Facility, and
each of the Company's domestic subsidiaries have guaranteed those obligations.
(b) 8% Senior Notes
On November 17, 1998, the Company issued $750,000 aggregate principal
amount of 8% Senior Notes due 2008 (the "8% Senior Notes") for estimated net
proceeds of $730,000 in a private placement. Interest on the 8% Senior Notes is
payable semiannually, commencing on May 1, 1999. The 8% Senior Notes mature on
November 1, 2008 and are redeemable, in whole or in part, at the option of the
Company at a redemption price equal to 100% plus the Applicable Premium (as
defined in the indenture governing the 8% Senior Notes) plus accrued and unpaid
interest. In addition, on or prior to November 1, 2001, the Company may redeem
up to 25% of the original aggregate principal amount of the 8% Senior Notes at a
redemption price equal to 108% plus accrued and unpaid interest with the net
proceeds of one or more public equity offerings of Chancellor Media, CMHC or
CMCLA. Upon the occurrence of a change in control (as defined in the indenture
governing the 8% Senior Notes), the holders of the 8% Senior Notes have the
right to require the Company to repurchase all or any part of the 8% Senior
Notes at a purchase price equal to 101% plus accrued and unpaid interest.
(c) 9 3/8% Notes
Upon consummation of the Chancellor Merger, on September 5, 1997, the
Company assumed CRBC's $200,000 aggregate principal amount of 9 3/8% Senior
Subordinated Notes due 2004 (the "9 3/8% Notes"). Interest on the 9 3/8% Notes
is payable semiannually, commencing on April 1, 1996. The 9 3/8% Notes mature on
October 1, 2004 and are redeemable, in whole or in part, at the option of the
Company on or after February 1, 2000, at redemption prices ranging from 104.688%
at February 1, 2000 and declining to 100% on or after February 1, 2003, plus in
each case accrued and unpaid interest. In addition, on or prior to January 31,
1999, the Company may redeem up to 25% of the original aggregate principal
amount of the 9 3/8% Notes at a redemption price of 107.031% plus accrued and
unpaid interest with the net proceeds of one or more public equity offerings of
CMHC or CMCLA. Upon the occurrence of a change in control (as defined in the
indenture governing the 9 3/8% Notes), the holders of the 9 3/8% Notes have the
right to require the Company to repurchase all or any part of the 9 3/8% Notes
at a purchase price equal to 101% plus accrued and unpaid interest.
(d) 8 3/4% Notes
Upon consummation of the Chancellor Merger, on September 5, 1997, the
Company assumed CRBC's $200,000 aggregate principal amount of 8 3/4% Senior
Subordinated Notes due 2007 (the "8 3/4% Notes"). Interest on the 8 3/4% Notes
is payable semiannually, commencing on December 15, 1997. The 8 3/4% Notes
mature on June 15, 2007 and are redeemable, in whole or in part, at the option
of the Company on or after June 15, 2002, at redemption prices ranging from
104.375% at June 15, 2002 and declining to 100% on or after June 15, 2005, plus
in each case accrued and unpaid interest. In addition, prior to June 15, 2000,
the Company
21
<PAGE> 23
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
may redeem up to 25% of the original aggregate principal amount of the 8 3/4%
Notes at a redemption price of 108.75% plus accrued and unpaid interest with the
net proceeds of one or more public equity offerings of CMHC or CMCLA. Upon the
occurrence of a change in control (as defined in the indenture governing the
8 3/4% Notes) on or prior to June 15, 2000, the 8 3/4% Notes may be redeemed as
a whole at the option of the Company at a redemption price of 100% plus the
Applicable Premium (as defined in the indenture governing the 8 3/4% Notes) and
accrued and unpaid interest. Upon the occurrence of a change in control after
June 15, 2000, the holders of the 8 3/4% Notes have the right to require the
Company to repurchase all or any part of the 8 3/4% Notes at a purchase price
equal to 101% plus accrued and unpaid interest.
(e) 10 1/2% Notes
Upon consummation of the Katz Acquisition, on October 28, 1997, the Company
assumed Katz Media Corporation's $100,000 aggregate principal amount of 10 1/2%
Senior Subordinated Notes due 2007 (the "10 1/2% Notes"). Interest on the
10 1/2% Notes is payable semiannually, commencing on July 15, 1997. The 10 1/2%
Notes mature on January 15, 2007 and are redeemable, in whole or in part, at the
option of the Company on or after January 15, 2002, at redemption prices ranging
from 105.25% at January 15, 2002 and declining to 100% on or after January 15,
2006, plus in each case accrued and unpaid interest. In addition, prior to
January 15, 2000, the Company may redeem up to 35% of the original aggregate
principal amount of the 10 1/2% Notes at a redemption price of 109.5% plus
accrued and unpaid interest with the net proceeds of one or more offerings of
equity interests of Chancellor Media, CMHC or CMCLA. Upon the occurrence of a
change in control (as defined in the indenture governing the 10 1/2% Notes), the
holders of the 10 1/2% Notes have the right to require the Company to repurchase
all or any part of the 10 1/2% Notes at a purchase price equal to 101% plus
accrued and unpaid interest.
(f) 8 1/8% Notes
On December 22, 1997, the Company issued $500,000 aggregate principal
amount of 8 1/8% Senior Subordinated Notes due 2007 (the "8 1/8% Notes") for
estimated net proceeds of $485,000 in a private placement and subsequently
registered the 8 1/8% Notes on May 8, 1998. Interest on the 8 1/8% Notes is
payable semiannually, commencing on June 15, 1998. The 8 1/8% Notes mature on
December 15, 2007 and are redeemable, in whole or in part, at the option of the
Company on or after December 15, 2002, at redemption prices ranging from
104.063% at December 15, 2002 and declining to 100% on or after December 15,
2005, plus in each case accrued and unpaid interest. In addition, prior to
December 15, 2000, the Company may redeem up to 35% of the original aggregate
principal amount of the 8 1/8% Notes at a redemption price of 108.125% plus
accrued and unpaid interest with the net proceeds of one or more public equity
offerings of Chancellor Media, CMHC or CMCLA. Also, upon the occurrence of a
change in control (as defined in the indenture governing the 8 1/8% Notes), the
8 1/8% Notes may be redeemed as a whole at the option of the Company at a
redemption price of 100% plus the Applicable Premium (as defined in the
indenture governing the 8 1/8% Notes) and accrued and unpaid interest. Upon the
occurrence of a change in control after December 15, 2000, the holders of the
8 1/8% Notes have the right to require the Company to repurchase all or any part
of the 8 1/8% Notes at a purchase price equal to 101% plus accrued and unpaid
interest.
(g) 9% Notes
On September 30, 1998, the Company issued $750,000 aggregate principal
amount of 9% Senior Subordinated Notes due 2008 (the "9% Notes") for estimated
net proceeds of $730,000 in a private placement and subsequently registered the
9% Notes on December 10, 1998. Interest on the 9% Notes is payable semiannually,
commencing on April 1, 1999. The 9% Notes mature on October 1, 2008 and are
redeemable, in whole or in part, at the option of the Company on and after
October 1, 2003, at redemption prices ranging from 106.5% at October 1, 2003 and
declining to 100% on October 1, 2008, plus in each case accrued and unpaid
interest. In addition, on or prior to October 1, 2000, the Company may redeem up
to 25%
22
<PAGE> 24
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the original aggregate principal amount of the 9% Notes at a redemption price
of 109% plus accrued and unpaid interest with the net proceeds of one or more
public equity offerings of Chancellor Media, CMHC or CMCLA. Upon the occurrence
of a change in control (as defined in the indenture governing the 9% Notes), the
9% Notes may be redeemed, on or prior to October 1, 2000, as a whole at the
option of the Company at a redemption price of 100% plus the Applicable Premium
(as defined in the indenture governing the 9% Notes) and accrued and unpaid
interest. Upon the occurrence of a change in control after October 1, 2000, the
holders of the 9% Notes have the right to require the Company to repurchase all
or any part of the 9% Notes at a purchase price equal to 101% plus accrued and
unpaid interest.
(h) Other
The 9 3/8% Notes, the 8 3/4% Notes, the 10 1/2% Notes, the 8 1/8% Notes and
the 9% Notes (collectively, the "Subordinated Notes") are unsecured obligations
of the Company, subordinated in right of payment to all existing and any future
senior indebtedness of the Company. The Subordinated Notes are fully and
unconditionally guaranteed, on a joint and several basis, by all of the
Company's direct and indirect subsidiaries other than certain inconsequential
subsidiaries (the "Subsidiary Guarantors"). The Subsidiary Guarantors are
wholly-owned subsidiaries of the Company.
The 8% Senior Notes are senior unsecured obligations of the Company and
rank equal in right of payment to the obligations of the Company under the
Senior Credit Facility and existing and all other indebtedness of the Company
not expressly subordinated to the 8% Senior Notes. However, because the 8%
Senior Notes are unsecured, the 8% Senior Notes are effectively subordinated in
right of payment to the Company's secured debt, including the Senior Credit
Facility. The 8% Senior Notes are fully and unconditionally guaranteed, on a
joint and several basis, by the Subsidiary Guarantors.
The Senior Credit Facility and the indentures governing the 8% Senior Notes
and the Subordinated Notes contain customary restrictive covenants, which, among
other things and with certain exceptions, limit the ability of the Company and
its subsidiaries to incur additional indebtedness and liens in connection
therewith, enter into certain transactions with affiliates, pay dividends,
consolidate, merge or effect certain asset sales, issue additional stock, effect
an asset swap and make acquisitions. The Company is required under the Senior
Credit Facility to maintain specified financial ratios, including leverage, cash
flow and debt service coverage ratios (as defined).
A summary of the future maturities of long-term debt at December 31, 1998
follows:
<TABLE>
<S> <C>
1999........................................................ $ --
2000........................................................ 67,500
2001........................................................ 157,500
2002........................................................ 180,000
2003........................................................ 316,000
Thereafter.................................................. 3,375,000
</TABLE>
(8) REDEEMABLE PREFERRED STOCK
(a) 12 1/4% Preferred Stock
Upon consummation of the Chancellor Merger on September 5, 1997, the
Company issued 1,000,000 shares of CMCLA's 12 1/4% Series A Senior Cumulative
Exchangeable Preferred Stock (the "12 1/4% Preferred Stock") in exchange for
CRBC's substantially identical securities with a fair value of $120,217
including accrued and unpaid dividends of $772. The liquidation preference of
each share of 12 1/4% Preferred Stock was $119.445 plus accrued and unpaid
dividends of $1,829 at December 31, 1997. The dividend rate on the 12 1/4%
Preferred Stock was 12.25% per annum of the liquidation preference and was
payable quarterly.
23
<PAGE> 25
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 20, 1998, CMCLA completed a consent solicitation (the "12 1/4%
Preferred Stock Consent Solicitation") to modify certain timing restrictions on
its ability to exchange all shares of its 12 1/4% Preferred Stock for its
12 1/4% Subordinated Exchange Debentures due 2008 (the "12 1/4% Debentures").
Consenting holders of 12 1/4% Preferred Stock received payments of $0.05 per
share of 12 1/4% Preferred Stock. On July 23, 1998, CMCLA exchanged the shares
of 12 1/4% Preferred Stock for 12 1/4% Debentures (the "12 1/4% Exchange"). In
connection with the 12 1/4% Preferred Stock Consent Solicitation and 12 1/4%
Exchange, CMCLA incurred approximately $170 in transaction costs which were
recorded as deferred debt issuance costs.
On August 19, 1998, CMCLA completed a cash tender offer (the "12 1/4%
Debentures Tender Offer") for all of its 12 1/4% Debentures for an aggregate
repurchase cost of $143,836 which included (i) the principal amount of the
12 1/4% Debentures of $119,445, (ii) premiums on the repurchase of the 12 1/4%
Debentures of $22,683, (iii) accrued and unpaid interest on the 12 1/4%
Debentures from July 23, 1998 through August 19, 1998 of $1,138 and (iv)
estimated transaction costs of $570. In connection with the 12 1/4% Debentures
Tender Offer, CMCLA recorded an extraordinary charge of $15,224 (net of a tax
benefit of $8,199) consisting of the premiums, estimated transaction costs and
the write-off of the unamortized balance of deferred debt issuance costs.
(b) 12% Preferred Stock
Upon consummation of the Chancellor Merger, on September 5, 1997, the
Company issued 2,117,629 shares of CMCLA's 12% Exchangeable Preferred Stock (the
"12% Preferred Stock") in exchange for CRBC's substantially identical securities
with a fair value of $215,570 including accrued and unpaid dividends of $3,807.
The liquidation preference of each share of 12% Preferred Stock was $100.00 plus
accrued and unpaid dividends of $11,756 at December 31, 1997. The dividend rate
on the 12% Preferred Stock was 12% per annum of the liquidation preference and
was payable semi-annually.
On May 8, 1998, CMCLA completed a consent solicitation (the "12% Preferred
Stock Consent Solicitation") to modify certain timing restrictions on its
ability to exchange all shares of its 12% Preferred Stock for its 12%
Subordinated Exchange Debentures due 2009 (the "12% Debentures"). Consenting
holders of 12% Preferred Stock received payments of $0.05 per share of 12%
Preferred Stock. On May 13, 1998, CMCLA exchanged the shares of 12% Preferred
Stock for 12% Debentures (the "12% Exchange"). In connection with the 12%
Preferred Stock Consent Solicitation and 12% Exchange, CMCLA incurred
approximately $270 in transaction costs which were recorded as deferred debt
issuance costs.
On June 10, 1998, CMCLA completed a cash tender offer (the "12% Debentures
Tender Offer") for all of its 12% Debentures for an aggregate repurchase cost of
$262,495 which included (i) the principal amount of the 12% Debentures of
$211,763, (ii) premiums on the repurchase of the 12% Debentures of $47,798,
(iii) accrued and unpaid interest on the 12% Debentures from May 13, 1998
through June 10, 1998 of $1,976 and (iv) estimated transaction costs of $958. In
connection with the 12% Debentures Tender Offer, CMCLA recorded an extraordinary
charge of $31,865 (net of a tax benefit of $17,158) consisting of the premiums,
estimated transaction costs and the write-off of the unamortized balance of
deferred debt issuance costs.
(9) STOCKHOLDERS' EQUITY
(a) Preferred Stock
(i) 1993 Convertible Preferred Stock
In October 1993, the Company issued 1,610,000 shares of $3.00 Convertible
Exchangeable Preferred Stock (the "1993 Convertible Preferred Stock") for net
proceeds of approximately $76,645. The Company converted 1,608,297 shares of the
1993 Convertible Preferred Stock into 10,051,832 shares of the Company's Common
Stock and redeemed the remaining 1,703 shares of 1993 Convertible Preferred
Stock at $52.70 per share in 1996 (the "1996 Preferred Stock Conversion"). The
1993 Convertible Preferred Stock had a
24
<PAGE> 26
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liquidation preference of $50.00 per share plus accrued and unpaid dividends and
a dividend rate of $3.00 per share, payable quarterly.
(ii) $3.00 Convertible Exchangeable Preferred Stock
In June 1997, the Company issued 5,990,000 shares of Chancellor Media's
$3.00 Convertible Exchangeable Preferred Stock (the "$3.00 Convertible Preferred
Stock") for net proceeds of $287,808. The liquidation preference of each share
of Convertible Preferred Stock is $50.00 plus accrued and unpaid dividends of
$749 at December 31, 1997 and 1998. Dividends on the $3.00 Convertible Preferred
Stock are cumulative and payable quarterly commencing September 15, 1997 at a
rate per annum of $3.00 per share, when, as and if declared by the Board of
Directors of the Company. The $3.00 Convertible Preferred Stock is convertible
at the option of the holder at any time unless previously redeemed or exchanged,
into the Company's Common Stock, par value $.01 per share at a conversion price
of $25.00 per share, subject to adjustment in certain events. The $3.00
Convertible Preferred Stock is redeemable in whole or in part, at the option of
the Company, on or after June 16, 1999, at redemption prices ranging from 104.8%
and declining to 100% of the liquidation preference on or after June 15, 2007,
plus in each case accrued and unpaid dividends, provided that on or prior to
June 15, 2000, the closing price of the Common Stock has equaled or exceeded
150% of the conversion price for 20 out of any 30 consecutive trading days. The
$3.00 Convertible Preferred Stock is exchangeable, subject to certain
conditions, at the option of the Company, in whole but not in part, commencing
September 15, 2000, for 6% Convertible Subordinated Exchange Debentures due 2012
(the "6% Exchange Debentures") at a rate of $50.00 principal amount of 6%
Exchange Debentures for each share of $3.00 Convertible Preferred Stock. Upon
the occurrence of a change in control (as defined in the certificate of
designation governing the $3.00 Convertible Preferred Stock), holders will have
special conversion rights, subject to cash redemption by the Company. The $3.00
Convertible Preferred Stock is senior in liquidation preference to the Common
Stock of Chancellor Media and pari passu with the 7% Convertible Preferred
Stock.
(iii) 7% Convertible Preferred Stock
Upon consummation of the Chancellor Merger, on September 5, 1997, the
Company issued 2,200,000 shares of Chancellor Media's 7% Convertible Preferred
Stock (the "7% Convertible Preferred Stock") in exchange for Chancellor's
substantially identical securities with a fair value of $111,048 including
accrued and unpaid dividends of $1,048. The liquidation preference of each share
of 7% Convertible Preferred Stock is $50.00 plus accrued and unpaid dividends of
$1,604 at December 31, 1997 and 1998. Dividends on the 7% Convertible Preferred
Stock are cumulative and payable quarterly, commencing July 15, 1997. The 7%
Convertible Preferred Stock is convertible at the option of the holder at any
time unless previously redeemed or exchanged, into the Company's Common Stock,
par value $.01 per share at a conversion price of $18.095 per share, subject to
adjustment in certain events. The 7% Convertible Preferred Stock is redeemable
in whole or in part, at the option of the Company, on or after January 15, 2000,
at redemption prices ranging from 104.9% at January 15, 2000 and declining to
100% of the liquidation preference on or after January 15, 2007, plus in each
case accrued and unpaid dividends. Upon the occurrence of a change in control
(as defined in the certificate of designation governing the 7% Convertible
Preferred Stock), the holders of the 7% Convertible Preferred Stock have the
right to require the Company to repurchase all or any part of the 7% Convertible
Preferred Stock at a price of 101% of the liquidation preference, plus accrued
and unpaid dividends. The 7% Convertible Preferred Stock is senior in
liquidation preference to the Common Stock of Chancellor Media and pari passu
with the $3.00 Convertible Preferred Stock.
(b) Common Stock
On October 17, 1996, the Company completed a secondary public offering of
18,000,000 shares of its Common Stock (the "1996 Offering"). The net proceeds to
the Company in connection with the 1996
25
<PAGE> 27
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Offering of approximately $264,236 were used to reduce borrowings under the
Company's prior senior credit facility.
On September 5, 1997, the Company issued 34,617,460 shares of Common Stock
at $15.50 per share in connection with the Chancellor Merger. In addition, upon
consummation of the Chancellor Merger, each share of the Company's formerly
outstanding Class A Common Stock and Class B Common Stock was reclassified,
changed and converted into one share of Common Stock.
On August 8, 1996, the Company declared a three-for-two stock split
effected in the form of a stock dividend payable on August 26, 1996 to
shareholders of record at the close of business on August 19, 1996. On December
18, 1997, the Company declared a two-for-one stock split effected in the form of
a stock dividend payable on January 12, 1998 to shareholders of record at the
close of business on December 29, 1997. All share and per share data (other than
authorized share data) contained in the accompanying consolidated financial
statements have been retroactively adjusted to give effect to the stock
dividend.
On March 13, 1998, the Company completed an offering of 21,850,000 shares
of its Common Stock for net proceeds of approximately $994,642. The net proceeds
were used to reduce bank borrowings under the revolving credit portion of the
Senior Credit Facility (as defined) and the excess proceeds were initially
invested in short-term investment grade securities. The Company subsequently
used the excess proceeds for general corporate purposes, including the financing
of certain acquisitions and exchanges.
(c) Stock Options
The Company has established the 1992, 1993, 1995 and 1998 Key Employee
Stock Option Plans (the "Employee Option Plans") which provide for the issuance
of stock options to officers and other key employees of the Company and its
subsidiaries. The Employee Option Plans make available for issuance an aggregate
of 15,105,000 shares of Common Stock. Options issued under the Employee Option
Plans have varying vesting periods as provided in separate stock option
agreements and generally carry an expiration date of ten years subsequent to the
date of issuance. Options issued under the 1993, 1995 and 1998 Employee Option
Plans are required to have exercise prices equal to or in excess of the fair
market value of the Company's Common Stock on the date of issuance unless
approved by the Compensation Committee of the Company's Board of Directors.
In May 1995, the Company also established the Stock Option Plan for
Non-Employee Directors (the "Director Plan") which provides for the issuance of
stock options to non-employee directors of the Company. The Director Plan makes
available for issuance an aggregate of 900,000 shares of Common Stock. Options
issued under the Director Plan have exercise prices equal to the fair market
value of the Company's Common Stock on the date of issuance, vest over a three
year period and have an expiration date of ten years subsequent to the date of
issuance.
In connection with the BPI Acquisition, the Company assumed outstanding
options to purchase 310,276 shares of the Company's Common Stock (the "BPI
Options"). The BPI Options vested and became exercisable on May 12, 1996 and
have an expiration date of ten years subsequent to the original date of issuance
by BPI.
In connection with the Chancellor Merger, the Company assumed outstanding
options to purchase 3,526,112 shares of the Company's Common Stock (the
"Chancellor Options") with a fair value of $34,977. The Chancellor Options have
varying vesting periods as provided in separate stock option agreements and
generally carry an expiration date of ten years subsequent to the original date
of issuance by CBC.
The total options available for grant were 1,115,894 and 2,171,939 at
December 31, 1997 and 1998, respectively.
26
<PAGE> 28
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of activity in the employee option plans and
agreements discussed above for the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year....................... 2,579,748 $ 3.46 3,559,984 $ 5.97 8,826,696 $12.98
Granted.................... 1,174,500 11.56 2,773,590 22.89 7,392,000 39.28
Assumed in acquisitions.... -- -- 3,526,112 9.29 -- --
Exercised.................. (166,806) 4.27 (994,526) 5.43 (1,075,860) 9.55
Canceled................... (27,458) 4.96 (38,464) 19.46 (316,847) 20.82
--------- --------- ----------
Outstanding at end of
year..................... 3,559,984 $ 5.97 8,826,696 $12.98 14,825,989 $26.03
========= ========= ==========
Options exercisable at year
end...................... 1,935,484 5,687,960 10,211,090
========= ========= ==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- --------------------------------
NUMBER NUMBER
OUTSTANDING AT WEIGHTED AVERAGE WEIGHTED EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1998 CONTRACTUAL LIFE EXERCISE PRICE 1998 EXERCISE PRICE
--------------- -------------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$0.01................ 645,000 3.6 years $ 0.01 645,000 $ 0.01
$4.13 to 6.17........ 1,850,688 5.5 years 4.60 1,850,688 4.60
$10.67 to 15.81...... 2,121,349 7.2 years 11.50 1,537,488 11.49
$17.05 to 24.13...... 3,459,002 8.6 years 22.26 2,639,914 22.16
$26.38 to 32.13...... 1,095,000 9.5 years 30.26 338,000 29.31
$37.31 to 48.38...... 5,654,950 9.4 years 42.96 3,200,000 41.96
---------- ----------
14,825,989 $26.03 10,211,090 $22.42
========== ==========
</TABLE>
The weighted-average fair value of options granted during 1996, 1997 and
1998 which have exercise prices equal to or in excess of the market value of the
Company's common stock on the date of issuance was $5.25, $10.25 and $17.50,
respectively. The weighted-average fair value of options granted during 1998
which have exercise prices less than the market value of the Company's common
stock on the date of issuance was $28.19.
27
<PAGE> 29
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its Employee
Option Plans and, accordingly, no compensation cost is recognized in the
consolidated financial statements for stock options which have exercise prices
equal to or in excess of the market value of the Company's Common Stock on the
date of issuance. A charge for stock compensation expense of $16,000 is included
in executive severance charge for the year ended December 31, 1998 (see note
13). Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Net loss:
As reported....................................... $(16,194) $(31,745) $ (95,589)
Pro forma......................................... (19,249) (44,639) (160,687)
Basic and diluted loss per common share:
As reported....................................... (.33) (.46) (.88)
Pro forma......................................... (.38) (.59) (1.35)
</TABLE>
Pro forma net loss reflects only options granted subsequent to December 31,
1994. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss amounts
presented above.
The fair value for the stock options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997 and 1998: expected stock volatility ranging from
39.9% to 44.5%; risk-free interest rates ranging from 4.8% to 6.0%; dividend
yields of 0%; and expected lives ranging from three to seven years.
(10) INCOME TAXES
Income tax expense (benefit) from continuing operations consists of the
following:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Current tax expense:
Federal............................................... $ 485 $ 6,840 $ --
State................................................. 972 4,791 5,033
------- ------- -------
Total current tax expense............................... 1,457 11,631 5,033
Deferred tax expense (benefit).......................... (4,353) (3,829) 28,718
------- ------- -------
Total income tax expense (benefit)...................... $(2,896) $ 7,802 $33,751
======= ======= =======
</TABLE>
During 1997 and 1998, the Company incurred extraordinary losses in
connection with various refinancings. The tax benefit related to the
extraordinary losses were approximately $2,343 and $25,357 for the years ended
December 31, 1997 and 1998, respectively. This tax benefit, which reduced
current taxes payable, is separately allocated to the extraordinary item. See
Note 7(a) and Note 8. During 1998, the Company reduced current taxes payable by
$13,098 due to a tax benefit received from the exercise of certain stock
options.
28
<PAGE> 30
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total income tax expense (benefit) differed from the amount computed by
applying the U.S. federal statutory income tax rate of 35% to loss from
continuing operations for the years ended December 31, 1996, 1997 and 1998 as a
result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)............... $(6,682) $(2,342) $ 998
Amortization of goodwill................................ 2,477 5,744 11,728
State income taxes, net of federal benefit.............. 632 2,533 4,919
Non-deductible executive compensation................... -- -- 13,221
Non-deductible meals and entertainment.................. 729 1,028 2,312
Other, net.............................................. (52) 839 573
------- ------- -------
$(2,896) $ 7,802 $33,751
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
1998 are presented below:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforwards............... $ 38,552 $ 76,755
Accrued executive compensation and stock options.......... 1,720 10,452
Differences in book and tax bases related to media
representation contracts............................... 39,908 27,233
Differences in book and tax bases of lease liabilities.... 4,727 4,727
Other..................................................... 3,147 1,754
--------- ---------
Total deferred tax assets......................... 88,054 120,921
--------- ---------
Deferred tax liabilities:
Property and equipment and intangibles, primarily related
to acquisitions........................................ (445,992) (567,221)
Other..................................................... (3,702) (6,834)
--------- ---------
Total deferred tax liabilities.................... (449,694) (574,055)
--------- ---------
Net deferred tax liability........................ $(361,640) $(453,134)
========= =========
</TABLE>
Deferred tax assets and liabilities are computed by applying the U.S.
federal and state income tax rate in effect to the gross amounts of temporary
differences and other tax attributes, such as net operating loss carryforwards.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. The Company expects the
deferred tax assets at December 31, 1998 to be realized as a result of the
reversal during the carryforward period of existing taxable temporary
differences giving rise to deferred tax liabilities and the generation of
taxable income in the carryforward period.
At December 31, 1998, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $176,600, expiring
from 2001 to 2018 and has alternative minimum tax credit carryforwards of
approximately $4,700 that do not expire. Approximately $102,800 and $2,800 of
the net operating loss and tax credit carryforwards, respectively, at December
31, 1998 are subject to annual use limitations under tax rules governing changes
of ownership.
29
<PAGE> 31
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES
The Company has long-term operating leases for office space, certain
broadcasting facilities and equipment and the majority of the land occupied by
its outdoor advertising structures. The leases expire at various dates,
generally during the next ten years, and have varying options to renew and
cancel. Rental expense for operating leases (excluding those with lease terms of
one month or less that were not renewed) was approximately $5,462, $10,913 and
$39,427 for 1996, 1997 and 1998, respectively. Future minimum lease payments
under noncancelable operating leases (with initial or remaining lease terms in
excess of one year) as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999...................................................... $ 67,218
2000...................................................... 66,957
2001...................................................... 64,904
2002...................................................... 63,501
2003...................................................... 62,992
Thereafter................................................ 1,501,398
</TABLE>
In July 1998, a stockholder derivative action was commenced in the Delaware
Court of Chancery by a stockholder purporting to act on behalf of the Company.
The defendants in the case include Hicks, Muse, Tate & Furst Incorporated
("Hicks Muse"), LIN Television and some of Chancellor Media's directors. The
plaintiff alleges that, among other things, (1) Hicks Muse allegedly caused the
Company to pay too high of a price for LIN because Hicks Muse had allegedly paid
too high of a price when it acquired LIN; and (2) the transaction therefore
allegedly constitutes a breach of fiduciary duty and a waste of corporate assets
by Hicks Muse, which is alleged to control the Company, and the directors of the
Company named as defendants. The plaintiff seeks to enjoin consummation or
rescission of the transaction, compensatory damages, an order requiring that the
directors named as defendants "carry out their fiduciary duties," and attorneys'
fees and other costs. Plaintiff, defendants and the Company had reached a
tentative settlement of this lawsuit. However, as a result of the decision by
the Boards of Directors of the Company and LIN to terminate the LIN Merger, the
settlement will not proceed as planned.
In September 1998, a stockholder class action complaint was filed in the
Delaware Court of Chancery by a stockholder purporting to act individually and
on behalf of all other persons, other than defendants, who own securities of
Chancellor Media and are similarly situated. The defendants in the case are
named as Chancellor Media, Hicks Muse, Thomas O. Hicks, Jeffrey A. Marcus, James
E. de Castro, Eric C. Neuman, Lawrence D. Stuart, Jr., Steven Dinetz, Thomas J.
Hodson, Perry Lewis, John H. Massey and Vernon E. Jordan, Jr. The plaintiff
alleges breach of fiduciary duties, gross mismanagement, gross negligence or
recklessness, and other matters relating to the defendants' actions in
connection with the proposed Capstar merger. The plaintiff seeks to certify the
complaint as a class action, enjoin consummation of the Capstar merger, order
defendants to account to plaintiff and other alleged class members for damages,
and award attorneys' fees and other costs. The Company believes that the lawsuit
is without merit and intends to vigorously defend the action.
On July 10, 1998, the Company entered into an agreement to acquire a 50%
economic interest in Grupo Radio Centro, S.A. de C.V., an owner and operator of
radio stations in Mexico, for approximately $120,500 in cash and $116,500 in
Chancellor Media common stock. On October 15, 1998, the Company announced that
it had provided notice to Grupo Radio that it was terminating the acquisition
agreement in accordance with its terms. The Company has received notice from
Grupo Radio requesting arbitration under the terms of the acquisition agreement
of allegations that Chancellor Media wrongfully terminated that agreement, and
the parties have commenced the arbitration process. The Company believes that it
had a proper basis for terminating the agreement in accordance with its terms
and intends to contest these allegations vigorously.
30
<PAGE> 32
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is also involved in various other claims and lawsuits which are
generally incidental to its business. The Company is also vigorously contesting
all of these matters and believes that the ultimate resolution of these matters
and those mentioned above will not have a material adverse effect on its
consolidated financial position or results of operations.
The Company offers substantially all of its employees voluntary
participation in a 401(k) Plan. The Company may make discretionary contributions
to the plans; however, no such contributions were made by the Company during
1996, 1997 or 1998.
(12) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
(a) Interest Rate Risk Management
The Company enters into interest rate swaps and collars to diversify its
risk associated with interest rate fluctuations. Under interest rate swaps, the
Company agrees with other parties to exchange, at specified intervals, the
difference between fixed rate and floating rate interest amounts calculated by
reference to an agreed notional principal amount.
Under interest rate collars, the Company agrees with other parties to
exchange, at specified intervals and interest rate levels, the difference
between fixed rate and floating rate interest amounts calculated by reference to
an agreed notional principal amount. If the index rate is between the cap rate
and floor rate, the Company does not receive or make any payments.
(b) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1997 and 1998. The fair
value of a financial instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
1997 1998
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Notes receivable.......................... $ 18,000 $ 18,000 $ 168,000 $ 182,600
Long-term debt -- Senior Credit
Facility................................ 1,573,000 1,573,000 1,596,000 1,596,000
Long-term debt -- 8% Senior Notes......... -- -- 750,000 761,250
Long-term debt -- 9 3/8% Notes............ 200,000 209,000 200,000 208,000
Long-term debt -- 8 3/4% Notes............ 200,000 205,000 200,000 204,000
Long-term debt -- 10 1/2% Notes........... 100,000 110,000 100,000 110,000
Long-term debt -- 8 1/8% Notes............ 500,000 500,000 500,000 495,000
Long-term debt -- 9% Notes................ -- -- 750,000 787,500
Interest rate swaps and collars
liability............................... -- 3,919 -- 12,799
Redeemable preferred stock -- 12 1/4%
Preferred Stock......................... 119,445 133,000 -- --
Redeemable preferred stock -- 12%
Preferred Stock......................... 211,763 239,821 -- --
Preferred stock -- $3.00 Convertible
Preferred Stock......................... 299,500 473,959 299,500 567,553
Preferred stock -- 7% Convertible
Preferred Stock......................... 110,000 237,875 110,000 285,626
</TABLE>
31
<PAGE> 33
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and cash equivalents, accounts receivable and accounts
payable: The carrying amount of these assets and liabilities approximates
fair value because of the short maturity of these instruments.
Notes receivable: The fair value of notes receivable is estimated by
discounting the expected future cash flows at interest rates commensurate
with the creditworthiness of the third party.
Long-term debt: The fair values of the Company's 8% Senior Notes,
9 3/8% Notes, 8 3/4% Notes, 10 1/2% Notes, 8 1/8% Notes, and 9% Notes are
based on quoted market prices at December 31, 1997 and 1998. As amounts
outstanding under the Company's Senior Credit Facility agreements bear
interest at current market rates, their carrying amounts approximate fair
market value.
Interest rate swaps and collars: The fair value of the interest rate
swap and collar contracts is estimated by obtaining quotations from
brokers. The fair value is an estimate of the amounts that the Company
would (receive) pay at the reporting date if the contracts were transferred
to other parties or canceled by either party.
Redeemable preferred stock: The fair values of the Company's 12 1/4%
Preferred Stock and 12% Preferred Stock are based on December 31, 1997
quoted market prices.
Preferred stock: The fair values of the Company's $3.00 Convertible
Preferred Stock and 7% Convertible Preferred Stock are based on quoted
market prices at December 31, 1997 and 1998.
(13) RELATED PARTY AND OTHER TRANSACTIONS
As of December 31, 1998, Thomas O. Hicks and affiliates of Hicks Muse
beneficially owned an aggregate 16,944,371 shares of Common Stock of the
Company. Mr. Hicks is Chairman of the Board and a director of the Company.
The Company is subject to a financial monitoring and oversight agreement,
dated April 1, 1996, as amended on September 4, 1997, with Hicks, Muse & Co.
Partners, L.P. ("Hicks Muse Partners"), an affiliate of Hicks Muse. In
connection with the financial monitoring and oversight agreement, the Company
pays to Hicks Muse Partners an annual fee of not less than $1,000, subject to
increase or decrease (but not below $1,000), based upon changes in the consumer
price index. Hicks Muse Partners is also entitled to reimbursement for any
out-of-pocket expenses incurred in connection with rendering services under the
financial monitoring and oversight agreement. The financial monitoring and
oversight agreement provides that the agreement will terminate at the time as
Thomas O. Hicks and his affiliates collectively cease to beneficially own at
least two-thirds of the number of shares of Chancellor Media common stock
beneficially owned by them, collectively, at the effective time of the
Chancellor Merger. The Company paid Hicks Muse Partners $333 and $1,019 in 1997
and 1998, respectively, in connection with the financial monitoring and
oversight agreement which is included in corporate general and administrative
expense.
In connection with the consummation of the Chancellor Merger, a financial
advisory agreement among CBC, CRBC and HM2/Management Partners, L.P.
("HM2/Management"), an affiliate of Hicks Muse, was terminated. In consideration
thereof, in lieu of any payments required to be made under the financial
advisory agreement in respect of the transactions contemplated by the Chancellor
Merger, HM2/Management was paid a fee of $10,000 in cash upon consummation of
the Chancellor Merger in 1997 which was accounted for as a direct acquisition
cost. As part of the termination of the financial advisory agreement, the
Company paid Hicks Muse Partners $1,500 for financial advisory services in
connection with the acquisition of Katz in 1997 which was accounted for as a
direct acquisition cost.
32
<PAGE> 34
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Vernon E. Jordan, Jr., a director of the Company, also serves on the board
of directors of Bankers Trust Company and Bankers Trust Corporation. BT Alex.
Brown Incorporated, an affiliate of Bankers Trust Company and Bankers Trust
Corporation, was engaged by the Company in January 1999 as a financial advisor
to explore strategic alternatives in an effort to maximize shareholder value. In
addition, affiliates of Bankers Trust Company and Bankers Trust Corporation have
in the past provided a variety of commercial banking, investment banking and
financial advisory services to the Company, and expect to continue to provide
services to the Company in the future. Fees paid to BT Alex. Brown in 1998 were
approximately $10,275.
In connection with the Capstar/SFX Transaction, the Company (i) began
programming ten radio stations owned by Capstar under time brokerage agreements
effective May 29, 1998 and paid fees of $28,831 to Capstar related to these
agreements during 1998 and (ii) provided a loan to Capstar in the principal
amount of $150,000 (see note 3). Interest income on this note receivable was
$10,600 during 1998. The Company also began operating Capstar's WKNR-AM in
Cleveland under a time brokerage agreement effective February 1, 1999.
The Company recorded revenue of $365 for the period October 28, 1997 to
December 31, 1997 and $6,836 for the year ended December 31, 1998 for providing
media representation services to Capstar. The Company paid or accrued $11,157 in
1998 in connection with Capstar's participation in the Company's AMFM Radio
Networks and other transactions. The Company had a net receivable balance from
Capstar of $748 at December 31, 1997, and a net payable to Capstar of $162 at
December 31, 1998.
In October and November 1998, LIN purchased two airplanes and subsequently
entered into two lease agreements with respect to those airplanes with the
Company. The leases expire in October 1999 and 2003, respectively, and in 1998,
the Company paid approximately $415 to LIN under the leases.
On April 14, 1998, Scott K. Ginsburg resigned as President and Chief
Executive Officer of the Company, and on April 20, 1998, Mr. Ginsburg resigned
as director of the Company and from all appointments and positions with its
respective subsidiaries. On April 20, 1998, Mr. Ginsburg and the Company entered
into a separation and consulting agreement. Following Mr. Ginsburg's
resignation, the Company entered into new employment agreements with James E. de
Castro, the Company's Chief Operating Officer, and Matthew E. Devine, the
Company's Chief Financial Officer, each effective April 17, 1998. On April 29,
1998, Jeffrey A. Marcus was named President and Chief Executive Officer, and the
Company entered into an employment agreement with Mr. Marcus effective June 1,
1998. In connection with Mr. Ginsburg's resignation, the Company incurred a
one-time executive severance charge of $59,475 which consists of (i) a lump sum
severance payment of $20,000 to Mr. Ginsburg; (ii) compensation expense of
$16,000 related to the grant of 800,000 stock options to Mr. Ginsburg at an
exercise price of $23.25 per share, (iii) consulting fees of $12,500 to be paid
to Mr. Ginsburg over five years, (iv) one-time cash payments of $5,000 and
$2,000 to Mr. de Castro and Mr. Devine, respectively, (v) execution bonuses of
$1,000 each paid to Mr. de Castro, Mr. Devine and Mr. Marcus and (vi) other
costs incurred in connection with Mr. Ginsburg's resignation of $975.
Subsequently, Matthew E. Devine resigned as Senior Vice President and Chief
Financial Officer of the Company and from all appointments and positions with
its respective subsidiaries and entered into a termination agreement with the
Company. In connection with Mr. Devine's resignation, the Company incurred a
one-time executive severance charge of $4,186 which consists of (i) a one-time
cash payment of $2,000, (ii) bonus payments totaling $2,033 and (iii) other
costs of $153.
(14) SEGMENT DATA
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, effective January 1, 1998. This statement
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments.
33
<PAGE> 35
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 131 also requires disclosures about products and services, geographic
areas, and major customers. The adoption of SFAS No. 131 did not affect the
results of operations or financial position of the Company, but did affect the
disclosure of segment information. Certain information disclosed in the prior
year has been restated to conform to the provisions of SFAS No. 131.
Intersegment revenue is included in the segment totals for internal reporting.
This intercompany revenue is eliminated in consolidation. The accounting
policies of the segments are the same as those described in note 1.
The Company conducts business in three distinct operating segments
consisting of radio broadcasting, outdoor advertising and media representation.
Information about each of the operating segments follows:
(a) Chancellor Radio Group -- radio broadcasting
The Chancellor Radio Group portfolio consisted of 119 radio stations (89 FM
and 30 AM) concentrated in the top 30 markets in the United States and in Puerto
Rico at December 31, 1998, including 13 stations operated under time brokerage
agreements. As of December 31, 1998, the Chancellor Radio Group owned
superduopolies (clusters of four or five FM stations) in 11 of the nation's 15
largest radio markets - New York, Los Angeles, Chicago, San Francisco,
Philadelphia, Detroit, Dallas/Ft. Worth, Washington, D.C., Houston, Puerto Rico
and Phoenix and in four other large markets - Minneapolis-St. Paul, Pittsburgh,
Denver and Orlando. The Chancellor Radio Group also operates a national radio
network, the AMFM Radio Networks, which broadcasts advertising and syndicated
programming shows to a national audience of approximately 66 million listeners
in the United States (including approximately 39 million listeners from the
Company's portfolio of stations).
(b) Chancellor Outdoor Group -- outdoor advertising
The Chancellor Outdoor Group owned and operated approximately 38,000
outdoor advertising billboards and display faces in 37 states at December 31,
1998. The Company entered into the outdoor advertising business with the
acquisition of Martin on July 31, 1998 and further expanded its outdoor
advertising segment with the acquisition of Whiteco on December 1, 1998. The
Chancellor Outdoor Group segment data includes the results of operations of each
of the acquired entities from the date of acquisition.
(c) Katz -- media representation
The Company entered into the media representation business with the
acquisition of Katz on October 28, 1997. Katz is a full-service media
representation firm that sells national spot advertising time for its clients in
the radio, television and cable industries throughout the United States. Katz is
retained on an exclusive basis by radio stations, television stations and cable
television systems in over 200 designated market areas throughout the United
States, including at least one radio or television station in each of the 50
largest designated market areas. The media representation segment data includes
the results of operations of Katz from the date of acquisition.
34
<PAGE> 36
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Separate financial data for each of the Company's three business segments
is provided below. The Company evaluates the performance of its segments based
on the following:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Chancellor Radio Group -- radio broadcasting:
Net revenues.................................... $293,850 $ 548,856 $1,057,044
Operating expenses.............................. 174,344 297,085 551,037
Depreciation and amortization................... 83,765 168,597 376,833
Operating income................................ 32,493 75,450 122,188
Capital expenditures............................ 6,015 10,544 18,736
Identifiable assets............................. 875,768 4,265,038 4,649,127
Chancellor Outdoor Group -- outdoor advertising:
Net revenues.................................... -- -- 47,605
Operating expenses.............................. -- -- 23,505
Depreciation and amortization................... -- -- 25,986
Operating loss.................................. -- -- (3,871)
Capital expenditures............................ -- -- 5,344
Identifiable assets............................. -- -- 1,743,254
Katz -- media representation:
Net revenues.................................... -- 35,901 192,794
Operating expenses.............................. -- 21,842 131,106
Depreciation and amortization................... -- 4,210 29,630
Operating income................................ -- 8,399 25,299
Capital expenditures............................ -- 436 15,190
Identifiable assets............................. -- 495,951 528,238
</TABLE>
The segment financial data includes intersegment revenues and expenses
which must be excluded to reconcile to the Company's consolidated financial
statements. In addition, certain depreciation and amortization expenses,
corporate general and administrative expenses, executive severance expenses,
corporate capital expenditures and general corporate assets were not allocated
to business segments and must be included to reconcile to the Company's
consolidated financial statements. Reconciling financial data is provided below:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Intersegment net revenues............................. $ -- $ 2,679 $23,587
Intersegment operating expenses....................... -- 2,679 23,587
Unallocated depreciation and amortization............. 9,984 13,175 13,889
Unallocated corporate general and administrative
expenses............................................ 4,549 12,268 20,992
Unallocated executive severance....................... -- -- 63,661
Unallocated corporate capital expenditures............ 528 686 4,191
Unallocated general corporate assets.................. 145,191 207,886 307,288
</TABLE>
35
<PAGE> 37
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
1997:
Net revenues..................................... $ 81,897 $106,364 $145,022 $248,795
Operating income................................. 568 16,968 15,002 25,868
Income (loss) before extraordinary item.......... (6,011) 9,870 (6,000) (25,254)
Net income (loss) attributable to common
stockholders.................................. (6,011) 4,821 (11,049) (31,671)
Basic and diluted income (loss) per common share:
Before extraordinary item..................... (0.07) 0.11 (0.12) (0.27)
Net income (loss)............................. (0.07) 0.06 (0.12) (0.27)
1998:
Net revenues..................................... $233,557 $321,710 $343,829 $374,760
Operating income (loss).......................... (13,201) (18,072) 38,010 38,337
Income (loss) before extraordinary item.......... (68,571) 40,401 6,262 (26,592)
Net income (loss) attributable to common
stockholders.................................. (74,988) 2,118 (15,379) (33,010)
Basic and diluted income (loss) per common share:
Before extraordinary item..................... (0.60) 0.23 -- (0.23)
Net income (loss)............................. (0.60) 0.01 (0.11) (0.23)
</TABLE>
Basic and diluted loss per common share for the years ended December 31,
1997 and 1998 differs from the sum of basic and diluted loss per common share
for the quarters during the respective year due to the different periods used to
calculate weighted average shares outstanding.
(16) SUBSEQUENT EVENTS
LIN Merger Termination. On July 7, 1998, the Company entered into a merger
agreement with the indirect parent of LIN Television Corporation ("LIN") to
acquire LIN in a stock for stock transaction (the "LIN Merger"). On March 15,
1999, the Boards of Directors of the Company and LIN agreed to terminate the LIN
merger agreement.
On April 8, 1998, the Company entered into an agreement to acquire Petry
Media Corporation, an independent television representation firm, for
approximately $127,000 in cash and on September 3, 1998, the Company entered
into an agreement to acquire Pegasus Broadcasting of San Juan, L.L.C., a
television broadcasting company, for approximately $69,600 in cash. In
connection with the termination of the LIN merger, on March 15, 1999, the
Company's Board of Directors approved the negotiation of the assignment of the
Company's agreements to acquire Petry and Pegasus to LIN Television Corporation.
The assignment of these agreements is subject to negotiation of definitive
documentation, third-party approval and various other conditions, including
governmental approvals and, accordingly, there can be no assurance that such
agreements will be assigned by the Company at all.
Executive Management Realignment. On March 15, 1999, the Company announced
the following executive management changes:
- the appointments of Thomas O. Hicks as Chief Executive Officer of the
Company, of James E. de Castro as President and Chief Executive Officer
of a newly created Chancellor Radio and Outdoor Group and of R. Steven
Hicks, currently President and Chief Executive Officer of Capstar, as
President and Chief Executive Officer of the newly created Chancellor
Media Services Group;
36
<PAGE> 38
CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- the creation of an Office of the Chairman of the Company's Board of
Directors, in which Mr. de Castro and Mr. Steven Hicks will join the
Company's Chairman, Mr. Thomas Hicks, as Vice Chairmen;
- the resignation of Jeffrey A. Marcus as the Company's President and Chief
Executive Officer effective March 15, 1999;
- the appointments of Kenneth J. O'Keefe as Chief Operating Officer of
Chancellor Radio Group and James A. McLaughlin as President and Chief
Operating Officer of Chancellor Outdoor Group;
- the appointment of D. Geoffrey Armstrong, currently Chief Operating
Officer of Capstar, as acting Chief Financial Officer, replacing Thomas
P. McMillin, who also resigned from his executive positions with the
Company effective March 15, 1999;
- the resignation of Eric C. Neuman as the Company's Senior Vice
President -- Strategic Development effective March 15, 1999;
- the appointment of William S. Banowsky, Jr., currently Executive Vice
President and General Counsel of Capstar, as the Company's General
Counsel, replacing Richard A. B. Gleiner, who also resigned from his
executive positions with the Company effective March 15, 1999.
The Company is expected to record a significant non-recurring charge in the
first quarter of 1999 in connection with the termination for the LIN Merger and,
if completed, assignment of the Petry Media Corporation and Pegasus Broadcasting
purchase agreements to LIN and the executive management realignment discussed
above.
See note 11 for the current status of certain litigation related to the LIN
Merger.
37
<PAGE> 39
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 12,256 $ 86,512
Accounts receivable, less allowance for doubtful accounts
of $15,580 in 1998 and $23,447 in 1999.................. 352,646 486,651
Other current assets...................................... 59,909 106,742
---------- -----------
Total current assets............................... 424,811 679,905
Property and equipment, net................................. 1,388,156 467,736
Intangible assets, net...................................... 5,056,047 10,527,440
Investments in non-consolidated affiliates.................. -- 1,129,389
Other assets, net........................................... 358,893 242,340
---------- -----------
$7,227,907 $13,046,810
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 236,618 $ 389,252
Current portion of long-term debt......................... -- 54,625
---------- -----------
Total current liabilities.......................... 236,618 443,877
Long-term debt, net of current portion...................... 4,096,000 5,645,670
Deferred tax liabilities.................................... 453,134 1,740,476
Other liabilities........................................... 50,325 51,176
---------- -----------
Total liabilities.................................. 4,836,077 7,881,199
---------- -----------
Commitments and contingencies
Minority interest in consolidated subsidiary................ -- 3,704
Redeemable preferred stock:
Redeemable senior exchangeable preferred stock of
subsidiary, par value $.01 per share; 10,000,000 shares
authorized, 1,254,618 shares issued and outstanding;
liquidation preference of $129,226...................... -- 148,542
Redeemable series E cumulative exchangeable preferred
stock of subsidiary, par value $.01 per share; 4,150,000
shares authorized, 1,430,989 shares issued and
outstanding; liquidation preference of $146,863......... -- 169,281
Stockholders' equity:
Preferred stock, $.01 par value. 2,200,000 shares of 7%
convertible preferred stock authorized, issued and
outstanding............................................. 110,000 110,000
Preferred stock, $.01 par value. 6,000,000 shares
authorized in 1998; 5,990,000 shares of $3.00
convertible exchangeable preferred stock issued and
outstanding in 1998..................................... 299,500 --
Common stock, $.01 par value. 200,000,000 shares and
750,000,000 shares authorized in 1998 and 1999,
respectively; 142,847,674 shares and 209,619,958 shares
issued and outstanding in 1998 and 1999, respectively... 1,428 2,096
Paid-in capital........................................... 2,259,583 5,094,432
Accumulated deficit....................................... (278,681) (362,444)
---------- -----------
Total stockholders' equity......................... 2,391,830 4,844,084
---------- -----------
$7,227,907 $13,046,810
========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
38
<PAGE> 40
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Gross revenues............................ $389,551 $ 667,300 $1,015,562 $1,552,143
Less agency commissions................. 45,722 74,863 116,466 175,295
-------- --------- ---------- ----------
Net revenues.................... 343,829 592,437 899,096 1,376,848
-------- --------- ---------- ----------
Operating expenses:
Operating expenses, excluding
depreciation and amortization........ 175,062 303,492 491,924 731,260
Depreciation and amortization........... 120,648 236,842 315,772 529,725
Corporate general and administrative.... 10,109 13,491 25,188 44,103
Non-cash compensation................... -- 6,148 -- 6,148
Merger and non-recurring costs.......... -- 30,977 59,475 59,956
-------- --------- ---------- ----------
Operating expenses................... 305,819 590,950 892,359 1,371,192
-------- --------- ---------- ----------
Operating income..................... 38,010 1,487 6,737 5,656
-------- --------- ---------- ----------
Other (income) expense:
Interest expense, net................... 48,624 124,094 135,709 296,205
Gain on disposition of assets........... -- (208,950) (123,845) (221,356)
Gain on disposition of representation
contracts............................ (18,497) (9,431) (29,767) (18,284)
Other (income) expense.................. -- -- (3,559) --
-------- --------- ---------- ----------
Other (income) expense, net.......... 30,127 (94,287) (21,462) 56,565
-------- --------- ---------- ----------
Income (loss) before income taxes.... 7,883 95,774 28,199 (50,909)
Income tax expense........................ 722 36,167 32,507 8,818
Dividends on preferred stock of
subsidiaries............................ 899 7,940 17,601 7,940
-------- --------- ---------- ----------
Income (loss) before equity in net loss
of affiliates and minority interest
and extraordinary item............... 6,262 51,667 (21,909) (67,667)
Equity in net loss of affiliates and
minority interest....................... -- 1,885 -- 2,085
-------- --------- ---------- ----------
Income (loss) before extraordinary
item................................. 6,262 49,782 (21,909) (69,752)
Extraordinary loss, net of income tax
benefit................................. 15,224 -- 47,089 --
-------- --------- ---------- ----------
Net income (loss)............... (8,962) 49,782 (68,998) (69,752)
Preferred stock dividends................. 6,417 1,176 19,252 14,011
-------- --------- ---------- ----------
Net income (loss) attributable to common
stockholders......................... $(15,379) $ 48,606 $ (88,250) $ (83,763)
======== ========= ========== ==========
Basic income (loss) per common share:
Before extraordinary item............... $ -- $ 0.25 $ (0.31) $ (0.52)
Extraordinary item...................... (0.11) -- (0.34) --
-------- --------- ---------- ----------
Net income (loss)............... $ (0.11) $ 0.25 $ (0.65) $ (0.52)
======== ========= ========== ==========
Diluted income (loss) per common share:
Before extraordinary item............... $ -- $ 0.23 $ (0.31) $ (0.52)
Extraordinary item...................... (0.11) -- (0.34) --
-------- --------- ---------- ----------
Net income (loss)............... $ (0.11) $ 0.23 $ (0.65) $ (0.52)
======== ========= ========== ==========
Weighted average common shares
outstanding............................. 142,345 194,662 136,427 160,511
======== ========= ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
39
<PAGE> 41
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
---------------------- -------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- --------- ----------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998....... 8,190,000 $ 409,500 142,847,674 $1,428 $2,259,583 $(278,681) $2,391,830
Issuance of common
stock -- Capstar merger......... -- -- 53,553,966 536 2,420,182 -- 2,420,718
Conversion of preferred stock..... (5,990,000) (299,500) 11,979,800 120 299,375 -- (5)
Assumption of stock options and
warrants -- Capstar merger...... -- -- -- -- 81,481 -- 81,481
Exercise of common stock
options......................... -- -- 1,238,518 12 37,700 -- 37,712
Non-cash compensation expense..... -- -- -- -- 6,148 -- 6,148
Convertible preferred stock
dividends....................... -- -- -- -- -- (14,011) (14,011)
Net loss.......................... -- -- -- -- -- (69,752) (69,752)
Other............................. -- -- -- -- (10,037) -- (10,037)
---------- --------- ----------- ------ ---------- --------- ----------
Balances at September 30, 1999...... 2,200,000 $ 110,000 209,619,958 $2,096 $5,094,432 $(362,444) $4,844,084
========== ========= =========== ====== ========== ========= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
40
<PAGE> 42
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1999
------------- -------------
<S> <C> <C>
Net cash provided by operating activities................... $ 146,459 $ 234,442
----------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired........................ (905,264) (495,746)
Proceeds from sale of assets.............................. -- 744,254
Purchases of property and equipment....................... (21,684) (53,290)
Payments made on purchases of representation contracts.... (25,724) (27,151)
Payments received on sales of representation contracts.... 20,283 18,193
Issuance of note receivable from affiliate................ (150,000) --
Payments for equity basis investments..................... -- (6,500)
Other..................................................... (39,750) (16,663)
----------- ---------
Net cash provided by (used by) investing
activities...................................... (1,122,139) 163,097
----------- ---------
Cash flows from financing activities:
Proceeds of long-term debt................................ 1,973,000 643,000
Payments on long-term debt................................ (1,528,000) (968,713)
Net proceeds from issuance of common stock................ 1,000,645 22,016
Repurchase of 12% and 12 1/4% Exchange Debentures......... (403,213) --
Dividends on preferred stock.............................. (50,436) (14,802)
Redemption of preferred stock............................. -- (1,345)
Payments for debt issuance costs.......................... (19,837) --
Other..................................................... -- (3,439)
----------- ---------
Net cash provided by (used by) financing
activities...................................... 972,159 (323,283)
----------- ---------
Increase (decrease) in cash and cash equivalents............ (3,521) 74,256
Cash and cash equivalents at beginning of period............ 16,584 12,256
----------- ---------
Cash and cash equivalents at end of period.................. $ 13,063 $ 86,512
=========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
41
<PAGE> 43
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements include the
accounts of AMFM Inc. (formerly Chancellor Media Corporation) and its
wholly-owned and majority-owned subsidiaries (collectively, the "Company" or
"AMFM"). All significant intercompany balances and transactions have been
eliminated in consolidation and in the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary to present fairly the
financial position, results of operations and cash flows have been recorded.
Investments in which the Company owns 20 percent to 50 percent of the voting
common stock or otherwise exercises significant influence over operating and
financial policies of the company are accounted for using the equity method.
Interim period results are not necessarily indicative of results to be expected
for the year.
These financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. The
year-end consolidated balance sheet data was derived from the audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
Income (loss) per common share is based on the weighted average shares of
common stock outstanding during the period. The calculation for diluted income
per common share for the three months ended September 30, 1999 includes the
assumed exercise of stock options and warrants, the effect of which would be to
increase average shares outstanding by 6.5 million shares, and the assumed
conversion of the $3.00 Convertible Exchangeable Preferred Stock and the 7%
Convertible Preferred Stock into common stock at the beginning of the period,
the effect of which would be to decrease preferred stock dividends by $1,176 and
increase average shares outstanding by 13.2 million shares. The $3.00
Convertible Exchangeable Preferred Stock, the 7% Convertible Preferred Stock and
stock options (during loss periods) are not included in the calculation of loss
per common share for the three months ended September 30, 1998 and the nine
months ended September 30, 1998 and 1999 as their effect would be antidilutive.
Weighted average shares excluded from the calculation that related to
potentially dilutive securities amounted to approximately 18.1 million for the
three months ended September 30, 1998 and approximately 23.7 million and 21.9
million for the nine months ended September 30, 1998 and 1999, respectively.
Certain reclassifications have been made to prior period condensed
consolidated financial statements to conform to the current period presentation.
2. CLEAR CHANNEL MERGER AGREEMENT
On October 2, 1999, the Company and Clear Channel Communications, Inc.
("Clear Channel") entered into a definitive merger agreement. Under the terms of
the merger agreement, AMFM stockholders will receive 0.94 shares of Clear
Channel common stock, on a fixed exchange basis, for each share of the Company's
common stock held on the record date of the transaction. Pursuant to the
Telecommunications Act of 1996 and other regulatory guidelines, it is expected
that, collectively, Clear Channel and the Company will need to divest
approximately 100 radio stations to obtain antitrust and Federal Communications
Commission approval for the merger. Consummation of the merger is also subject
to stockholder approval by both companies and other conditions. Although there
can be no assurance, the Company expects that the Clear Channel merger will be
consummated during the second half of 2000.
42
<PAGE> 44
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS AND DISPOSITIONS
(a) Capstar Merger
On July 13, 1999, the Company acquired Capstar Broadcasting Corporation
("Capstar Broadcasting"), a Delaware corporation, through the merger (the
"Capstar Merger") of a wholly-owned subsidiary of the Company into Capstar
Broadcasting, with Capstar Broadcasting surviving as a wholly-owned subsidiary
of the Company. Concurrent with the Capstar Merger, the Company was renamed AMFM
Inc. As a result of the Capstar Merger, all of the then outstanding shares of
Capstar Broadcasting common stock were converted, in a tax-free exchange, into
0.4955 of a share of the Company's common stock, or approximately 53.6 million
shares of the Company's common stock in the aggregate. The Company added 338
radio stations (239 FM and 99 AM) to its portfolio and also assumed the
outstanding options, warrants and other equity rights in Capstar Broadcasting
which represented up to an additional 3.3 million shares of the Company's common
stock. Approximately $2,200,000 of Capstar Broadcasting's debt and preferred
stock remained outstanding after the Capstar Merger, as discussed in Note 4.
(b) Outdoor Activity and Sale of Outdoor Advertising Business to Lamar
On September 15, 1999, the Company completed the sale to Lamar Advertising
Company ("Lamar") of all of the outstanding common stock of Chancellor Media
Outdoor Corporation and Chancellor Media Whiteco Outdoor Corporation, indirect
wholly-owned subsidiaries of the Company, which together held all of the
Company's assets used in its outdoor advertising business. The Company received
cash proceeds of $700,000, subject to a net working capital adjustment, and
26,227,273 shares of class A common stock, par value $.01 per share, of Lamar
("Lamar Common Stock"). During the three months ended September 30, 1999, the
Company recognized a pre-tax gain of $209,970 related to the sale.
The Company owns approximately 30% of the aggregate number of outstanding
shares and approximately 11% of the voting shares of Lamar, based upon the
number of shares of Lamar common stock outstanding as of September 30, 1999.
Lamar, the Company and the controlling stockholder of Lamar entered into a
stockholders agreement under which (1) the Company designated Thomas O. Hicks
and James E. de Castro as its representatives on the Lamar board of directors,
increasing the size of Lamar's board to ten members, (2) the Company agreed not
to sell any of the Lamar Common Stock for a period of 12 months from the closing
date, which ends on September 15, 2000 and (3) Lamar agreed, subject to certain
exceptions, not to take any action without the prior written consent of the
Company that would result in a change of control of Lamar or the acquisition or
disposition of assets worth in excess of $500,000. Due to the Company's ability
to exercise significant influence over the operating and financial policies of
Lamar, the Company is accounting for its investment in Lamar using the equity
method. Lamar and the Company entered into a registration rights agreement which
gives the Company the right to require Lamar to register the sale of the Lamar
Common Stock under applicable securities laws in some circumstances.
At September 30, 1999, the market value of the Company's common stock of
Lamar, based on the closing sale price of unrestricted class A common stock of
Lamar as reported by The Nasdaq Stock Market, was $1,298,250, and the investment
was carried at $1,109,671. The excess of the Company's carrying value over the
underlying equity in net assets is being amortized over 15 years. The Company's
share of undistributed losses of Lamar totaled $219 at September 30, 1999.
During 1999, prior to the sale of the Company's outdoor advertising
business, the Company acquired approximately 4,800 billboards and outdoor
displays in various transactions for approximately $51,000 in cash, including
certain working capital and direct acquisition costs. On May 24, 1999, the
Company sold 466 billboards and outdoor displays in various markets to PNE
Media, LLC for approximately $25,600 in cash. These assets were accounted for as
assets held for sale and no gain or loss was recognized by the
43
<PAGE> 45
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company upon consummation of the sale. The excess of the carrying amount over
the proceeds was accounted for as an adjustment to the original purchase price
of the billboards and outdoor displays.
(c) Other Completed Transactions
On January 15, 1999, the Company acquired the music production library and
related license agreements of Brown Bag Productions for a purchase price of
$8,483 including direct acquisition costs.
On January 28, 1999, the Company acquired Wincom Broadcasting Corporation
which owns WQAL-FM in Cleveland. The Company had previously been operating
WQAL-FM under a time brokerage agreement effective October 1, 1998. On February
2, 1999, the Company acquired five additional radio stations in Cleveland
including (i) WDOK-FM and WRMR-AM from Independent Group Limited Partnership,
(ii) WZAK-FM from Zapis Communications and (iii) Zebra Broadcasting Corporation
which owned WZJM-FM and WJMO-AM. The six Cleveland stations were acquired for an
aggregate purchase price of $283,758 in cash, including working capital and
direct acquisition costs.
On April 16, 1999, the Company sold WMVP-AM in Chicago to ABC, Inc. for
$21,000 in cash and recognized a pre-tax gain of $14,466. The Company had
previously entered into a time brokerage agreement effective September 10, 1998
to sell the broadcast time of WMVP-AM pending completion of the sale.
On July 1, 1999, the Company acquired KKFR-FM and KFYI-AM in Phoenix from
The Broadcast Group, Inc. for $90,000 in cash. The Company began operating
KKFR-FM and KFYI-AM under a time brokerage agreement effective November 5, 1998.
On September 1, 1999, the Company acquired WTPA-FM and WNCE-FM in
Harrisburg, Pennsylvania from Quaker State Broadcasting Corporation for
approximately $15,443 in cash. Additionally, the Company acquired KRYL-FM (now
known as KASZ-FM) in Killeen, Texas and KMXJ-FM in Ft. Smith, Arkansas and
disposed of KKTK-AM in Waco, Texas for a net cost of approximately $595 in cash.
The foregoing acquisitions were accounted for as purchases. Accordingly,
the accompanying consolidated financial statements include the results of
operations of the acquired entities from their respective dates of acquisition.
44
<PAGE> 46
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the net assets acquired in the nine-month period ended
September 30, 1999 follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1999
-------------
<S> <C>
Cash and cash equivalents................................... $ 20,845
Accounts receivable, net.................................... 132,768
Other current assets........................................ 13,702
Property and equipment...................................... 308,428
Intangible assets........................................... 6,363,754
Other assets................................................ 42,426
Accounts payable and accrued expenses....................... (88,426)
Deferred tax liabilities.................................... (1,386,381)
Other....................................................... 6,575
-----------
Total net assets acquired......................... 5,413,691
Less:
Cash and cash equivalents acquired........................ 20,845
Common stock issued....................................... 2,399,018
Long-term debt............................................ 2,081,091
Redeemable preferred stock................................ 312,836
Stock options and warrants................................ 103,180
Other liabilities assumed................................. 725
Notes payable............................................. 250
-----------
Cash paid for acquisitions.................................. $ 495,746
===========
</TABLE>
The unaudited pro forma condensed consolidated results of operations data
for the nine months ended September 30, 1998 and 1999, as if the acquisitions
and dispositions through September 30, 1999 occurred at January 1, 1998, follow:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1999
------------- -------------
<S> <C> <C>
Net revenues............................................... $1,384,171 $1,546,115
Loss before extraordinary item............................. (335,425) (251,600)
Net loss................................................... (382,514) (251,600)
Basic and diluted loss per common share -- before
extraordinary item....................................... (1.87) (1.34)
Basic and diluted loss per common share.................... (2.11) (1.34)
</TABLE>
The pro forma results are not necessarily indicative of the financial
results which would have occurred if the transactions had been in effect for the
entire periods presented.
On August 30, 1999, the Company contributed $37,500 and certain rights to
the Company's Internet web sites for an approximate 92% interest in AMFM
Interactive Inc. AMFM Interactive Inc. was organized to develop the Company's
Internet web sites and stream online broadcasts of the Company's on-air
programming and other media.
45
<PAGE> 47
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Pending Transactions
On August 6, 1999, the Company entered into an agreement to sell Capstar
Broadcasting's radio stations KIOK-FM, KALE-AM and KEGX-FM in Richland,
Washington and KTCR-AM in Kennewick, Washington to New Northwest Broadcasters
II, Inc. for $4,000 payable in cash. Although there can be no assurance, the
Company expects to complete the sale of these stations in the fourth quarter of
1999.
On August 30, 1999, the Company entered into an agreement with Cox Radio,
Inc. ("Cox") to acquire KOST-FM and KFI-AM in Los Angeles plus $3,000 in cash
payable by Cox in exchange for 13 of its radio stations including Chancellor
Media Corporation of Los Angeles ("CMCLA", an indirect subsidiary of the
Company) stations WEDR-FM in Miami and WFOX-FM in Atlanta, and Capstar
Broadcasting stations WEFX-FM, WNLK-AM, WKHL-FM and WSTC-AM in Stamford/Norwalk,
WFYV-FM, WAPE-FM, WBWL-AM, WKQL-FM, WMXQ-FM and WOKV-AM in Jacksonville and
WPLR-FM and the local sales rights of a 14th Capstar Broadcasting station,
WYBC-FM in New Haven. The Company began programming KOST-FM and KFI-AM in Los
Angeles and Cox began programming the 13 Company stations under time brokerage
agreements effective October 1, 1999. Although there can be no assurance, the
Company expects that the Cox exchange will be consummated in the first quarter
of 2000.
On September 14, 1999, the Company entered into an agreement to acquire
radio station KQOD-FM in Stockton, California from Carson Group, Inc. for a
purchase price of $5,150 payable in cash. KQOD-FM will become part of Capstar
Broadcasting's station portfolio. The Company began programming KQOD-FM under a
local marketing agreement on September 20, 1999. Although there can be no
assurance, the Company expects to complete the acquisition in the fourth quarter
of 1999.
On September 22, 1999, the Company entered into an agreement to sell the
capital stock of its Puerto Rico subsidiaries to Spanish Broadcasting System of
Puerto Rico, Inc. ("Spanish Broadcasting") for $90,000 payable in cash. The
Company owns and operates eight radio stations in Puerto Rico. Pending
completion of the sale, Spanish Broadcasting will program these eight stations
under a time brokerage agreement. Although there can be no assurance, the
Company expects to complete the sale of these subsidiaries in the fourth quarter
of 1999.
4. LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK
Long-term debt consists of the following at December 31, 1998 and September
30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
CMCLA's Senior Credit Facility.............................. $1,596,000 $1,282,500
8% Senior Notes............................................. 750,000 750,000
9 3/8% Notes................................................ 200,000 200,000
8 3/4% Notes................................................ 200,000 200,000
10 1/2% Notes............................................... 100,000 100,000
8 1/8% Notes................................................ 500,000 500,000
9% Notes.................................................... 750,000 750,000
Capstar Broadcasting's Credit Facility...................... -- 1,230,250
12 3/4% Capstar Partners Notes.............................. -- 239,406
9 1/4% Capstar Radio Notes.................................. -- 129,474
10 3/4% Capstar Communications Notes........................ -- 318,199
11 3/8% Capstar Communications Notes........................ -- 466
---------- ----------
4,096,000 5,700,295
Less current portion........................................ -- (54,625)
---------- ----------
$4,096,000 $5,645,670
========== ==========
</TABLE>
46
<PAGE> 48
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's long-term debt balance at September 30, 1999 includes Capstar
Broadcasting debt that remained outstanding subsequent to the Capstar Merger. In
addition, the Company's financial statements at September 30, 1999 include the
12% Capstar Broadcasting Partners, Inc. ("Capstar Partners," an indirect
subsidiary of the Company) Senior Exchangeable Preferred Stock and the 12 5/8%
Capstar Communications, Inc. ("Capstar Communications," an indirect subsidiary
of the Company) Series E Cumulative Exchangeable Preferred Stock. A description
of the long-term debt and redeemable preferred stock additions is included
below.
Capstar Broadcasting's Credit Facility. Capstar Broadcasting is a party to
a credit facility under which Capstar Radio Broadcasting Partners, Inc.
("Capstar Radio"), an indirect subsidiary of the Company, is the borrower.
Capstar Broadcasting's credit facility consists of a $500,000 revolving loan, a
$450,000 A Term Loan and a $400,000 B Term Loan. Pursuant to Capstar
Broadcasting's credit facility and subject to bank availabilities and approvals,
Capstar Broadcasting may request additional term loans and revolving credit
loans in an aggregate amount up to $550,000. The interest rate under Capstar
Broadcasting's credit facility is a floating rate. As of September 30, 1999,
Capstar Broadcasting had borrowings of $1,230,250 outstanding under its credit
facility, of which $54,625 is current. The outstanding balance includes $396,500
in revolving loans, $438,750 under the A Term Loan and $395,000 under the B Term
Loan, with a weighted average effective interest rate of 7.48% per annum. As of
September 30, 1999, the remaining required scheduled annual principal payments
on the A Term Loan, payable quarterly, were $11,250 in 1999, $56,250 in 2000,
$67,500 in 2001, $78,750 in 2002, $90,000 in 2003 and $135,000 in 2004. As of
September 30, 1999, the remaining required scheduled annual principal payments
on the B Term Loan, payable quarterly, were $1,000 in 1999, $4,000 in years 2000
through 2002, $92,000 in 2003, $190,000 in 2004 and $100,000 in 2005. In April
1999, Capstar Broadcasting's credit facility was amended to, among other things,
permit the Capstar Merger; increase the leverage ratio required to be maintained
by Capstar Radio during the period from April 1, 1999 through September 30,
2000; increase the pricing of Capstar Broadcasting's credit facility beginning
January 1, 2000; and permit Capstar Broadcasting's April 30, 1999 acquisition of
Triathlon Broadcasting Company.
Capstar Broadcasting's credit facility is collateralized by granting a
first priority perfected pledge of Capstar Radio's assets, including the capital
stock of its subsidiaries, excluding the assets of Capstar Communications.
Capstar Partners, Capstar Broadcasting and all of the direct and indirect
subsidiaries of Capstar Partners (other than Capstar Communications) have
guaranteed Capstar Broadcasting's credit facility and have collateralized their
guarantees by granting a first priority perfected pledge of substantially all of
their assets.
12 3/4% Capstar Partners Notes. In February 1997, Capstar Partners issued
its 12 3/4% Senior Discount Notes due 2009 which are carried at a discount from
their aggregate principal amount at maturity of $273,350. The carrying value of
the 12 3/4% Capstar Partners Senior Discount Notes due 2009 will increase
through accretion until February 1, 2002. As of September 30, 1999, the carrying
value was $239,406. Beginning on August 1, 2002, Capstar Partners will pay
interest of approximately $17,426 semi-annually on February 1 and August 1 of
each year until maturity.
The 12 3/4% Capstar Partners Senior Discount Notes due 2009 may be redeemed
at any time on or after February 1, 2002, in whole or in part, at the option of
Capstar Partners at prices ranging from 106.375% at February 1, 2002 and
declining to 100% on February 1, 2007 (expressed as a percentage of the accreted
value on the redemption date), plus in each case accrued and unpaid interest. In
addition, prior to February 1, 2001, Capstar Partners may, at its option, redeem
up to 25% of the principal amount at maturity of its 12 3/4% Senior Discount
Notes due 2009 at a redemption price of 112.75% of the accreted value, out of
the proceeds of one or more public equity offering or major asset sales. Upon
the occurrence of a change in control (as defined in the indenture of the
12 3/4% Capstar Partners Senior Discount Notes due 2009), the holders of the
12 3/4% Capstar Partners Senior Discount Notes due 2009 have the right to
require Capstar Partners to purchase all or a
47
<PAGE> 49
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
portion of the 12 3/4% Capstar Partners Senior Discount Notes due 2009 at a
purchase price equal to (i) 101% of the accreted value if the change in control
occurs before February 1, 2002 or (ii) 101% of the principal amount at maturity,
plus accrued and unpaid interest, if the change in control occurs after February
1, 2002. The indenture of the 12 3/4% Capstar Partners Senior Discount Notes due
2009 contains limitations on incurrence of additional indebtedness, issuance of
preferred stock of subsidiaries and restricted payments, as well as other
restrictive covenants.
9 1/4% Capstar Radio Notes. In June 1997, Capstar Radio issued its 9 1/4%
Senior Subordinated Notes due 2007 with a principal amount outstanding at
September 30, 1999 of $125,775. Capstar Radio pays interest of approximately
$5,817 on its 9 1/4% Senior Subordinated Notes due 2007 semi-annually on January
1 and July 1 of each year.
Capstar Radio's 9 1/4% Senior Subordinated Notes due 2007 may be redeemed
at any time on or after July 1, 2002, in whole or in part, at the option of
Capstar Radio at prices ranging from 104.625% at July 1, 2002 and declining to
100% on or after July 1, 2005, plus in each case accrued and unpaid interest. In
addition, prior to July 1, 2001, Capstar Radio may redeem up to 25% of the
original aggregate principal amount of its 9 1/4% Senior Subordinated Notes due
2007 at a redemption price of 109.25% plus accrued and unpaid interest with net
proceeds of one or more public equity offerings or major asset sales. Upon the
occurrence of a change of control (as defined in the indenture of the 9 1/4%
Capstar Radio Senior Subordinated Notes due 2007), the holders of the 9 1/4%
Capstar Radio Senior Subordinated Notes due 2007 have the right to require
Capstar Radio to purchase all or a portion of its 9 1/4% Senior Subordinated
Notes due 2007 at a price equal to 101% plus accrued and unpaid interest. The
indenture of the 9 1/4% Capstar Radio Senior Subordinated Notes due 2007
contains limitations on incurrence of additional indebtedness, issuance of
preferred stock of subsidiaries and restricted payments, as well as other
restrictive covenants.
10 3/4% Capstar Communications Notes and 11 3/8% Capstar Communications
Notes. Capstar Communications has outstanding its 10 3/4% Senior Subordinated
Notes due 2006 and its 11 3/8% Senior Subordinated Notes due 2000. Capstar
Communications pays interest of approximately $15,792 on its 10 3/4% Senior
Subordinated Notes due 2006 semi-annually on May 15 and November 15 of each year
and pays interest of approximately $27 on its 11 3/8% Senior Subordinated Notes
due 2000 semi-annually on April 1 and October 1 of each year. As of September
30, 1999, the outstanding principal balances were $293,816 and $466 on the
10 3/4% Capstar Communications Senior Subordinated Notes due 2006 and the
11 3/8% Capstar Communications Senior Subordinated Notes due 2000, respectively.
On November 12, 1999, Capstar Communications completed a cash tender offer to
acquire all of its outstanding 10 3/4% Senior Subordinated Notes due 2006.
Approximately $293,641 in aggregate principal amount of the notes, representing
99.9% of the outstanding notes, was accepted for payment for an aggregate
repurchase cost of $327,750 plus accrued interest of $15,169. The repurchase was
funded with borrowings under the senior credit facility of CMCLA.
Capstar Communications' 10 3/4% Senior Subordinated Notes due 2006 and its
11 3/8% Senior Subordinated Notes due 2000 are fully, unconditionally, jointly
and severally guaranteed by every direct and indirect wholly-owned subsidiary of
Capstar Communications. Capstar Communications is a holding company with no
assets, liabilities or operations other than its investment in its subsidiaries.
12% Capstar Partners Preferred Stock. In June 1997, Capstar Partners issued
1,000,000 shares of its 12% Senior Exchangeable Preferred Stock. Capstar
Partners is required to pay dividends on its 12% Senior Exchangeable Preferred
Stock semi-annually on January 1 and July 1 of each year at a rate of $12.00 per
share. Until July 1, 2002, dividends may be paid, at Capstar Partners' option,
either in cash or in additional shares of 12% Capstar Partners Senior
Exchangeable Preferred Stock. Since issuance, Capstar Partners has paid the
required dividend in additional shares. However, Capstar Partners intends to pay
all future dividends in cash beginning January 1, 2000. As of September 30,
1999, 1,254,618 shares of the 12% Capstar Partners
48
<PAGE> 50
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Senior Exchangeable Preferred Stock were issued and outstanding with a
liquidation preference equal to $100.00 per share plus accrued and unpaid
dividends.
The 12% Capstar Partners Senior Exchangeable Preferred Stock is redeemable
at Capstar Partners' option, in whole or in part at any time on or after July 1,
2002, at prices ranging from 106% at July 1, 2002 and declining to 100% after
July 1, 2007, plus, without duplication, accumulated and unpaid dividends to the
date of redemption. In addition, subject to certain exceptions, prior to July 1,
2001, Capstar Partners may, at its option, redeem up to 25% of its 12% Senior
Exchangeable Preferred Stock with the net cash proceeds from one or more Public
Equity or Major Asset Sales (both as defined in the certificate of designation
governing the 12% Capstar Partners Senior Exchangeable Preferred Stock), at the
redemption prices set forth in the certificate of designation, plus, without
duplication, accumulated and unpaid dividends to the redemption date. The 12%
Capstar Partners Senior Exchangeable Preferred Stock is subject to mandatory
redemption in whole on July 1, 2009 at a price equal to 100% of the liquidation
preference thereof, plus all accrued and unpaid dividends.
Capstar Partners may, at its option, subject to certain conditions, on any
scheduled dividend payment date, exchange its 12% Senior Exchangeable Preferred
Stock, in whole but not in part, for 12% Capstar Partners Exchange Debentures.
Holders of the 12% Capstar Partners Senior Exchangeable Preferred Stock will be
entitled to receive $1.00 principal amount of 12% Capstar Partners Exchange
Debentures for each $1.00 in liquidation preference of 12% Capstar Partners
Senior Exchangeable Preferred Stock.
12 5/8% Capstar Communications Series E Preferred Stock. Capstar
Communications has outstanding its 12 5/8% Series E Cumulative Exchangeable
Preferred Stock. Capstar Communications is required to pay dividends on its
12 5/8% Series E Cumulative Exchangeable Preferred Stock semi-annually on
January 15 and July 15 of each year at the rate per share of $12.625 per year.
Until January 15, 2002, Capstar Communications may pay dividends either in cash
or in additional shares of its 12 5/8% Series E Cumulative Exchangeable
Preferred Stock. Since July 15, 1998, Capstar Communications has paid the
required dividend in additional shares. However, Capstar Communications intends
to pay all future dividends in cash. As of September 30, 1999, 1,430,989 shares
of the 12 5/8% Capstar Communications Series E Cumulative Exchangeable Preferred
Stock were issued and outstanding with a liquidation preference equal to $100.00
per share plus accrued and unpaid dividends. On October 12, 1999, Capstar
Communications commenced a consent solicitation to modify certain timing
restrictions on its ability to exchange all shares of its 12 5/8% Series E
Cumulative Exchangeable Preferred Stock for its 12 5/8% Senior Subordinated
Exchange Debentures due 2006. If at least a majority of the holders consent to
the proposed modifications, then consenting holders of 12 5/8% Capstar
Communications Series E Cumulative Exchangeable Preferred Stock will be entitled
to receive consent payments of $0.25 per share of 12 5/8% Capstar Communications
Series E Cumulative Exchangeable Preferred Stock. If the requisite consents are
obtained and certain other conditions are satisfied, Capstar Communications
intends to exchange the outstanding shares of 12 5/8% Series E Cumulative
Exchangeable Preferred Stock for its 12 5/8% Senior Subordinated Exchange
Debentures in November 1999.
Change in Legal Structure and Refinancing
Through a series of related transactions, including capital contributions
of stock and mergers of subsidiaries, the Company intends to combine the
outstanding bonds, bank indebtedness and preferred stock of its direct and
indirect subsidiaries into fewer entities (the "Reorganization"). After
completion of the Reorganization, Capstar Communications will assume and/or be
liable for all of its remaining outstanding bonds, as well as the bonds and bank
indebtedness of Capstar Radio and CMCLA, which will be combined with Capstar
Communications in the fourth quarter of 1999. The Reorganization also includes
the tender offer for the 10 3/4% Capstar Communications Senior Subordinated
Notes due 2006 and the possible exchange of the 12 5/8% Capstar Communications
Series E Cumulative Exchangeable Preferred Stock for 12 5/8% Capstar
49
<PAGE> 51
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Communications Senior Subordinated Debentures due 2006 described above. The
Reorganization is expected to be completed during the fourth quarter of 1999.
Also as part of the Reorganization, the Company intends to refinance
CMCLA's senior credit facility and Capstar Broadcasting's credit facility with a
new credit facility. Several banks entered into a commitment letter with CMCLA
on November 3, 1999 and agreed to provide Capstar Communications with a senior
credit facility. The Company expects that Capstar Communications' senior credit
facility will be entered into in November 1999. Capstar Communications' senior
credit facility will include commitments for a revolving loan facility of
$600,000 and a term loan facility of $2,600,000. The proceeds of such facilities
may be used to repay the existing credit facilities of CMCLA and Capstar
Broadcasting, to repay, repurchase or redeem other debt and equity securities of
the Company and its subsidiaries and for other general corporate purposes. Both
the revolving loan facility and the term loan facility of Capstar Communications
will mature two years after the date of Capstar Communications' senior credit
facility. No scheduled amortization of principal will be required prior to
maturity. Both the revolving loan facility and the term loan facility of Capstar
Communications will bear interest at fluctuating rates based upon the prime rate
or the eurodollar rate. The margin above the applicable prime rate or the
eurodollar rate will be determined by reference to Capstar Communications' ratio
of consolidated debt to consolidated earnings before interest, taxes,
depreciation and amortization, provided that such margins will be fixed at .50%
and 1.50%, respectively, until delivery of Capstar Communications' financial
statements for the fiscal quarter ending March 31, 2000, and capped at .50% and
1.50%, respectively, thereafter so long as the Clear Channel merger agreement
has not been terminated. Capstar Communications' senior credit facility will be
guaranteed by most of the direct and indirect subsidiaries, other than Capstar
Communications, of Chancellor Mezzanine Holdings Corporation ("Chancellor
Mezzanine"), a direct subsidiary of the Company, and will be secured by (a) a
non-recourse pledge of the stock of Chancellor Mezzanine, (b) a recourse pledge
of the stock of Capstar Partners, (c) a recourse pledge of the stock of Capstar
Communications and most of the subsidiaries of Capstar Communications, and (d) a
pledge of the common stock of Lamar to be held by Capstar Communications after
the Reorganization. Capstar Communications' senior credit facility will be
subject to affirmative and negative covenants, including (i) limitations on
indebtedness, mergers, acquisitions and dispositions of assets, dividends, stock
repurchases, other restricted payments, investments and liens, and (ii)
financial maintenance covenants. The merger of the Company and Clear Channel
will be an event of default under Capstar Communications' senior credit facility
and will require refinancing at the effective time of the merger.
5. PREFERRED STOCK CONVERSION
On August 6, 1999, the Company gave notice to the holders of its $3.00
Convertible Exchangeable Preferred Stock of the Company's election to redeem all
of the outstanding shares of its $3.00 Convertible Exchangeable Preferred Stock
at a per share redemption price of $52.40, plus accrued and unpaid dividends.
Each holder had the right to convert each share of $3.00 Convertible
Exchangeable Preferred Stock held by it into two shares of common stock of the
Company in lieu of being redeemed. On August 24, 1999, preferred holders
converted 5,989,900 shares of $3.00 Convertible Exchangeable Preferred Stock
into 11,979,800 shares of the Company's common stock, and the Company redeemed
the remaining 100 shares of $3.00 Convertible Exchangeable Preferred Stock for
$5 in the aggregate.
50
<PAGE> 52
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. MERGER AND NON-RECURRING COSTS
During the first quarter of 1999, the Company recorded a charge of $28,979
for merger and non-recurring costs, of which approximately $1,493 is accrued as
of September 30, 1999, which consisted of the following:
<TABLE>
<S> <C>
Write-off of LIN Merger and Petry transaction costs(a)...... $16,783
Executive severance costs(b)................................ 12,196
-------
Total............................................. $28,979
=======
</TABLE>
- ---------------
(a) On July 7, 1998, the Company entered into a merger agreement with the
indirect parent of LIN Television Corporation, a Delaware corporation
("LIN"), to acquire LIN by merger. On April 8, 1998, the Company entered
into an agreement to acquire Petry Media Corporation ("Petry"), a leading
independent television representation firm, for approximately $127,000.
Effective March 15, 1999, the Company and LIN agreed to terminate the LIN
merger agreement. The Company subsequently assigned to LIN its contract to
acquire Petry. The Company recorded a charge of $16,783 to write off
transaction costs incurred in connection with the LIN merger agreement and
Petry transaction.
(b) On March 15, 1999, the Company announced an executive realignment which
included (i) the resignation of Jeffrey A. Marcus as the Company's
President and Chief Executive Officer; (ii) the resignation of Thomas P.
McMillin as the Company's Chief Financial Officer; (iii) the departure of
Richard A. B. Gleiner as the Company's General Counsel; and (iv) the
resignation of Eric C. Neuman as the Company's Senior Vice
President -- Strategic Development, each effective March 15, 1999. In
connection with the executive realignment, the Company recorded a charge of
$12,196 for executive severance and other costs.
During the third quarter of 1999, the Company recorded a charge of $30,977
for merger and non-recurring costs which consisted of the following:
<TABLE>
<S> <C>
Personnel changes, format changes and other non-recurring
costs incurred in connection with the implementation of the
Company's clustering strategy(a)............................ $ 6,027
Personnel changes and contractual obligations in exiting
certain non-core business ventures(b)..................... 23,555
Other(c).................................................... 1,395
-------
Total............................................. $30,977
=======
</TABLE>
- ---------------
(a) The Company has announced its new clustering strategy whereby each cluster
of stations in a market will be managed as a single business unit. In
connection with this strategy, certain personnel have been terminated and
other personnel-related costs have been incurred to align formats within a
market to target certain demographics. Of the total costs incurred, $5,694
related to personnel costs. At September 30, 1999, $2,269 of those costs
were accrued and are expected to be paid during the fourth quarter of 1999.
(b) Previously, the Company has announced that it would sharpen its focus on
domestic radio and new media operations. As a result, management decided to
discontinue Katz Media's international operations and streamline its
television representation business, sell its outdoor advertising business,
terminate its contracts to acquire Grupo Radio and assign to LIN its
contract to acquire Petry. Of the $23,555 incurred, $3,814 related to
personnel costs and the remainder related to the termination of contractual
obligations, such as leases, and legal and advisory fees. At September 30,
1999, $3,312 of the total costs are accrued and are expected to be paid
during the fourth quarter of 1999.
(c) During the third quarter of 1999, developmental costs of $1,395 were
incurred related to Galaxy and Star Performance, the Company's proprietary
traffic system and sales training program.
51
<PAGE> 53
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. CONTINGENCIES
On August 29, 1997, two lawsuits were commenced against Capstar
Communications (formerly SFX Broadcasting, Inc.) and its directors in the Court
of Chancery of the State of Delaware (New Castle County). The plaintiffs in the
lawsuits are Harbor Finance Partners (C.A. No. 15891) and Steven Lieberman (C.A.
No. 15901). The complaints are identical and allege that the consideration to be
paid as a result of the acquisition of Capstar Communications to the holders of
the class A common stock of Capstar Communications was unfair and that the
individual defendants breached their fiduciary duties. Both complaints sought to
have the actions certified as class actions and sought to enjoin the acquisition
of Capstar Communications by Capstar Broadcasting or, in the alternative,
monetary damages. The parties agreed that the lawsuits could be consolidated in
one action entitled In Re SFX Broadcasting, Inc. Shareholders Litigation (C.A.
No. 15891). On March 17, 1998, the parties entered into a Memorandum of
Understanding, pursuant to which the parties reached an agreement providing for
a settlement of the lawsuit. Pursuant to the settlement, Capstar Communications
agreed not to seek an amendment to the Capstar Communications merger agreement
with Capstar Broadcasting to reduce the consideration to be received by the
stockholders of Capstar Communications in the Capstar Communications acquisition
in order to offset the indemnity obligations of SFX Entertainment, Inc., a
former subsidiary of Capstar Communications. The settlement also provides for
Capstar Communications to pay plaintiff's counsel an aggregate of $950,
including all fees and expenses as approved by the court. The settlement is
conditioned on court approval. Pursuant to the settlement, the defendants have
denied, and continue to deny, that they have acted in bad faith or breached any
fiduciary duty. The parties expect to submit the settlement document soon to the
court for its approval. There can be no assurance that the court will approve
the settlement.
On July 13, 1998, Noddings Investment Group, Inc. and Noddings Warrant
Limited Partnership filed Civil Action No. 16538 in the Court of Chancery of the
State of Delaware in and for New Castle County against Capstar Communications.
Noddings, which allegedly holds 415,900 warrants, alleges that Capstar
Communications breached a warrant agreement that Noddings contends requires
Capstar Communications to permit Noddings, after payment of an $11.50 purchase
price, to exercise warrants in exchange for cash and shares of stock of SFX
Entertainment, Inc., a former subsidiary of Capstar Communications.
Specifically, Noddings alleges that Capstar Communications has violated the
warrant agreement by permitting Noddings to receive cash in exchange for its
warrants, but refusing to convey shares of stock of SFX Entertainment. In March
1999, the Chancery Court held that Noddings is entitled to 0.2983 shares of SFX
Entertainment, Inc. stock per warrant in addition to the $22.3725 in cash, after
Noddings' payment of the $11.50 purchase price. Capstar Communications appealed
to the Supreme Court of the State of Delaware. In September 1999, the Supreme
Court affirmed the Chancery Court's decision.
On July 24, 1998, in connection with Capstar Broadcasting's then pending
acquisition of Triathlon Broadcasting Company, Capstar Broadcasting was notified
of an action filed on behalf of all holders of depository shares of Triathlon
against Triathlon, Triathlon's directors, and Capstar Broadcasting. The action
was filed in the Court of Chancery of the State of Delaware (Civil Action No.
16560) in and for New Castle County, Delaware by Herbert Behrens. The complaint
alleges that Triathlon and its directors breached their fiduciary duties to the
class of depository shareholders by agreeing to a transaction with Capstar
Broadcasting that allegedly favored the class A common stockholders at the
expense of the depository stockholders. Capstar Broadcasting is accused of
knowingly aiding and abetting the breaches of fiduciary duties allegedly
committed by the other defendants. The complaint sought to have the action
certified as a class action and sought to enjoin the Triathlon acquisition, or
in the alternative, sought monetary damages in an unspecified amount. On
February 12, 1999, the parties signed a memorandum of understanding that
provided for the settlement of the lawsuit. The amount of the settlement will
equal $0.11 in additional consideration for each depositary share owned by any
class member at the effective time of the Triathlon acquisition. Capstar
Broadcasting also agreed not to oppose plaintiff's counsel's application for
attorney fees and expenses in the aggregate amount of
52
<PAGE> 54
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$150. The proposed settlement is contingent upon confirmatory discovery by the
plaintiff, execution of a definitive settlement agreement, and court approval.
In September 1998, a stockholder class action complaint was filed in the
Delaware Court of Chancery by a stockholder purporting to act individually and
on behalf of all other persons, other than defendants, who own securities of the
Company and are similarly situated. The defendants named in the case are the
Company, Hicks, Muse, Tate & Furst Incorporated Thomas O. Hicks, Jeffrey A.
Marcus, James E. de Castro, Eric C. Neuman, Lawrence D. Stuart, Jr., Steven
Dinetz, Thomas J. Hodson, Perry Lewis, John H. Massey and Vernon E. Jordan, Jr.
The plaintiff alleges breach of fiduciary duties, gross mismanagement, gross
negligence or recklessness, and other matters relating to the defendants'
actions in connection with the Capstar Merger. The plaintiff sought to certify
the complaint as a class action, enjoin consummation of the Capstar Merger,
order defendants to account to plaintiff and other alleged class members for
damages, and award attorneys' fees and other costs. The Company believes that
the lawsuit is without merit and intends to vigorously defend the action.
The Company is also involved in various other claims and lawsuits which are
generally incidental to its business. The Company is also vigorously contesting
all of these matters and believes that the ultimate resolution of these matters
and those mentioned above will not have a material adverse effect on its
consolidated financial position or results of operations.
8. SEGMENT DATA
During the nine months ended September 30, 1999, the Company conducted
business in three distinct operating segments consisting of radio broadcasting,
new media and outdoor advertising. Following the sale of the Company's outdoor
advertising business to Lamar on September 15, 1999, the Company operates in
only the radio broadcasting and new media segments. Information about each of
the operating segments follows:
(a) AMFM Radio Group -- radio broadcasting
The AMFM Radio Group portfolio consisted of 455 radio stations (328 FM and
127 AM) at September 30, 1999, including eleven stations operated under time
brokerage or joint sales agreements. The AMFM Radio Group also operates a
national radio network, The AMFM Radio Networks, which broadcasts advertising
and syndicated programming shows to a national audience of approximately 68
million listeners in the United States, and the Chancellor Marketing Group, a
full-service sales promotion firm developing integrated marketing programs for
Fortune 1000 companies.
(b) AMFM New Media Group -- media representation and Internet
The AMFM New Media Group includes Katz Media, a full-service media
representation firm that sells national spot advertising time for its clients in
the radio and television industries primarily throughout the United States and
for the Company's portfolio of stations. The Company's Internet initiative
focuses on developing the Company's Internet web sites, streaming online
broadcasts of the Company's on-air programming and other media, and promoting
emerging Internet and new media concerns.
(c) Chancellor Outdoor Group -- outdoor advertising
The Company's outdoor advertising business was formed on July 31, 1998 with
the acquisition of Martin Media and Martin & MacFarlane, Inc., and also included
the assets of the outdoor advertising division of Whiteco Industries, Inc.,
acquired on December 1, 1998. On September 15, 1999, the Company completed the
sale of its outdoor advertising business to Lamar, as discussed in Note 3(b).
The Chancellor Outdoor Group segment data includes the results of operations of
the outdoor advertising business through September 15, 1999.
53
<PAGE> 55
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Separate financial data for each of the Company's operating segments is
provided below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
AMFM Radio Group -- radio broadcasting:
Net revenues................................ $287,704 $516,232 $778,901 $1,115,880
Operating expenses, excluding depreciation
and amortization......................... 140,682 252,822 420,745 573,241
Depreciation and amortization............... 98,476 185,167 271,265 391,269
Operating income............................ 46,799 70,455 81,651 136,209
Capital expenditures........................ NA NA 10,754 19,104
AMFM New Media Group -- media representation
and Internet:
Net revenues................................ 46,764 52,999 122,127 141,535
Operating expenses, excluding depreciation
and amortization......................... 32,994 36,750 81,086 100,001
Depreciation and amortization............... 7,155 15,914 22,727 31,382
Operating income (loss)..................... 5,076 (5,469) 13,427 1,322
Capital expenditures........................ NA NA 8,616 5,262
Chancellor Outdoor Group -- outdoor
advertising:
Net revenues................................ 15,086 45,737 15,086 156,627
Operating expenses, excluding depreciation
and amortization......................... 7,111 25,822 7,111 84,583
Depreciation and amortization............... 11,022 30,536 11,022 94,062
Operating loss.............................. (3,504) (13,731) (3,504) (31,007)
Capital expenditures........................ NA NA -- 22,716
</TABLE>
The segment financial data includes intersegment revenues and expenses
which must be excluded to reconcile to the Company's consolidated financial
statements. In addition, certain depreciation and amortization expenses,
corporate general and administrative expenses, non-cash compensation, merger and
non-recurring costs, and corporate capital expenditures were not allocated to
operating segments and must be included to reconcile to the Company's
consolidated financial statements. Reconciling financial data is provided below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Intersegment net revenues............... $5,725 $22,531 $17,018 $37,194
Intersegment operating expenses,
excluding depreciation and
amortization.......................... 5,725 11,902 17,018 26,565
Unallocated depreciation and
amortization.......................... 3,995 5,225 10,758 13,012
Unallocated corporate general and
administrative expenses............... 6,366 7,589 14,604 21,923
Unallocated non-cash compensation....... -- 6,148 -- 6,148
Unallocated merger and non-recurring
costs................................. -- 20,177 59,475 49,156
Unallocated corporate capital
expenditures.......................... NA NA 2,314 6,208
</TABLE>
54
<PAGE> 56
AMFM INC. AND SUBSIDIARIES
(FORMERLY CHANCELLOR MEDIA CORPORATION AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total identifiable assets of the Company's operating segments at September
30, 1999 were $11,081,480 and $638,772 for the AMFM Radio Group and the AMFM New
Media Group, respectively. Unallocated corporate identifiable assets at
September 30, 1999 were $1,326,558.
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. Management does not anticipate that this
statement will have a material impact on the Company's consolidated financial
statements.
55
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Capstar Broadcasting Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Capstar Broadcasting Corporation and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Austin, Texas
February 26, 1999, except as to Note 3,
which is as of March 15, 1999
56
<PAGE> 58
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 70,059 $ 17,117
Accounts receivable, net of allowance for doubtful
accounts of $2,889 and $8,352, respectively............ 40,350 112,846
Prepaid expenses and other current assets................. 4,285 20,121
---------- ----------
Total current assets.............................. 114,694 150,084
Property and equipment, net................................. 106,717 248,920
Intangibles and other, net.................................. 881,545 4,240,378
Other non-current assets.................................... 18,500 23,620
---------- ----------
Total assets...................................... $1,121,456 $4,663,002
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 1,388 $ 29,834
Accounts payable.......................................... 13,641 15,387
Accrued liabilities....................................... 16,826 68,269
Income taxes payable...................................... 2,417 30,471
---------- ----------
Total current liabilities......................... 34,272 143,961
Long-term debt, net of current portion.................... 593,184 1,748,755
Deferred income taxes..................................... 160,422 1,163,156
---------- ----------
Total liabilities................................. 787,878 3,055,872
Commitments and contingencies (Note 15)
Redeemable preferred stock of subsidiaries:
Capstar Broadcasting Partners, Inc., $.01 par value,
10,000 shares authorized, 1,000 and 1,196 shares issued
and outstanding respectively, aggregate liquidation
preference of $106,560 and $118,460 respectively....... 101,493 113,699
Capstar Communications, Inc., Series E Cumulative
Exchangeable Preferred Stock, $.01 par value, 4,150
shares authorized, 1,266 shares issued and outstanding,
aggregate liquidation preference of $133,944........... -- 148,669
Stockholders' equity:
Preferred stock, $.10 par value, 1,000 shares
authorized, none issued............................... -- --
Common stock, Class A, voting $.01 par value, 750,000
shares authorized, 2,579 and 33,986 shares issued and
outstanding, respectively............................. 26 340
Common stock, Class B, nonvoting, $.01 par value,
150,000 shares authorized, 4,818 and 6,082 shares
issued and outstanding, respectively.................. 48 61
Common stock, Class C, voting, $.01 par value, 150,000
shares authorized, 22,812 and 67,538 shares issued and
outstanding, respectively............................. 228 675
Additional paid-in capital............................. 291,324 1,503,201
Stock subscriptions receivable......................... (4,374) (2,694)
Unearned compensation.................................. -- (4,893)
Accumulated deficit.................................... (55,167) (151,928)
---------- ----------
Total stockholders' equity........................ 232,085 1,344,762
---------- ----------
Total liabilities and stockholders' equity........ $1,121,456 $4,663,002
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
57
<PAGE> 59
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Gross broadcast revenue.................................... $ 47,200 $189,820 $568,050
Less agency commissions.................................... 4,334 14,375 50,583
-------- -------- --------
Net broadcast revenue.................................... 42,866 175,445 517,467
-------- -------- --------
Operating expenses:
Programming, technical and news.......................... 9,313 43,073 94,019
Sales and promotion...................................... 12,808 48,156 137,632
General and administrative............................... 8,360 30,906 72,914
Corporate expenses......................................... 2,523 14,221 23,678
Corporate expenses -- noncash compensation................. 6,176 10,575 21,260
LMA fees................................................... 834 2,519 4,103
Depreciation and amortization.............................. 4,141 26,415 96,207
Merger, nonrecurring and systems development expense....... -- 4,729 12,970
-------- -------- --------
Operating income (loss).................................... (1,289) (5,149) 54,684
Other income (expense):
Interest expense......................................... (8,907) (47,012) (121,145)
Interest income.......................................... 34 4,572 3,423
Loss on sale of broadcasting property.................... -- (908) --
Loss on investments in limited liability companies....... -- -- (28,565)
Other.................................................... (929) -- (183)
-------- -------- --------
Loss before benefit for income taxes, dividends and
accretion on preferred stock of subsidiaries and
extraordinary item....................................... (11,091) (48,497) (91,786)
Benefit for income taxes................................... 322 11,720 24,317
Dividends and accretion on preferred stock of
subsidiaries............................................. -- 6,560 21,987
-------- -------- --------
Loss before extraordinary item............................. (10,769) (43,337) (89,456)
Extraordinary loss on early extinguishment of debt, net of
tax benefit of $707, $1,473, and $3,282, respectively.... 1,188 2,403 7,305
-------- -------- --------
Net loss................................................... (11,957) (45,740) (96,761)
Dividends, accretion and redemption of preferred stocks.... 1,350 7,071 --
-------- -------- --------
Net loss attributable to common stock...................... $(13,307) $(52,811) $(96,761)
======== ======== ========
Basic and diluted loss per common share:
Before extraordinary loss................................ $ (1.37) $ (1.98) $ (1.02)
Extraordinary loss....................................... (0.13) (0.09) (0.08)
-------- -------- --------
Net loss.............................................. $ (1.50) $ (2.07) $ (1.10)
======== ======== ========
Weighted average common shares outstanding................. 8,880 25,455 87,678
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
58
<PAGE> 60
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GULFSTAR COMMUNICATIONS, INC.
-----------------------------------------------------------------------------
CLASS A CLASS B CLASS C
COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK
----------------- ----------------- ----------------- -----------------
NUMBER OF PAR NUMBER OF PAR NUMBER OF PAR NUMBER OF PAR
SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE
--------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GULFSTAR COMMUNICATIONS, INC.:
Balance at January 1, 1996......... 1 $ 1 4 $ 1 1 $-- -- $--
Issuance of Common stock.......... -- -- -- -- -- -- -- --
Issuance of Class A Common
stock........................... -- -- -- -- -- -- -- --
Issuance of Class B Common
stock........................... -- -- -- -- -- -- -- --
Issuance of Class C Common
stock........................... -- -- -- -- -- -- -- 1
Conversion of Common stock to
Class A Common stock............ (1) -- 1 -- -- -- -- --
Conversion of Class A and B Common
stock to Common stock........... 1 -- -- -- (1) -- -- --
Issuance of warrants.............. -- -- -- -- -- -- -- --
Accrued interest on Stock
subscriptions receivable........ -- -- -- -- -- -- -- --
Dividends and accretion on
Redeemable preferred stock...... -- -- -- -- -- -- -- --
Unearned compensation -- stock
issued for nonrecourse notes.... -- -- -- -- -- -- -- --
CAPSTAR BROADCASTING CORPORATION*:
Issuance of common stock.......... -- -- -- -- -- -- -- --
Issuance of warrants.............. -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
-- --- -- --- -- --- -- ---
Balance at December 31, 1996....... 1 1 5 1 -- -- -- 1
GULFSTAR COMMUNICATIONS, INC.:
Issuance of Common stock.......... -- -- -- -- -- -- -- --
Conversion of Class A Common stock
to Class C Common stock......... -- -- (4) -- -- -- 4 --
Conversion of Class C Common stock
to Class A Common stock......... -- -- 1 -- -- -- (1) --
Dividends and accretion on
Redeemable preferred stock...... -- -- -- -- -- -- -- --
Accrued interest on Stock
subscriptions receivable........ -- -- -- -- -- -- -- --
Payments received on Stock
subscriptions receivable........ -- -- -- -- -- -- -- --
Compensation expense.............. -- -- -- -- -- -- -- --
CAPSTAR BROADCASTING CORPORATION*:
Issuances of Common stock......... -- -- -- -- -- -- -- --
Repurchase of Common stock........ -- -- -- -- -- -- -- --
Conversion of Class B Common stock
to Class A Common stock......... -- -- -- -- -- -- -- --
Compensation expense -- -- -- -- -- -- -- --
Elimination of Capstar
Broadcasting Partners, Inc.
Common stock.................... -- -- -- -- -- -- -- --
Issuance of Common stock.......... -- -- -- -- -- -- -- --
Repurchase of Common stock........ -- -- -- -- -- -- -- --
Issuance of shares in connection
with merger..................... (1) (1) (2) (1) -- -- (3) (1)
Redemption of Redeemable preferred
stock........................... -- -- -- -- -- -- -- --
Accrued interest on Stock
subscriptions receivable........ -- -- -- -- -- -- -- --
Payments received on Stock
subscriptions receivable........ -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
-- --- -- --- -- --- -- ---
Balance at December 31, 1997....... -- -- -- -- -- -- -- --
Initial public offering, net of
expenses....................... -- -- -- -- -- -- -- --
Other issuances of common
stock.......................... -- -- -- -- -- -- -- --
Repurchase of common stock...... -- -- -- -- -- -- -- --
Conversion of Class C Common
stock to Class A Common
stock.......................... -- -- -- -- -- -- -- --
Conversion of Class B Common
stock to Class C Common
stock.......................... -- -- -- -- -- -- -- --
Unearned compensation related to
shares to be issued to
seller......................... -- -- -- -- -- -- -- --
Unearned compensation related to
granting of employee stock
options........................ -- -- -- -- -- -- -- --
Compensation expense............ -- -- -- -- -- -- -- --
Accrued interest on Stock
subscriptions receivable....... -- -- -- -- -- -- -- --
Payments received on Stock
subscriptions receivable....... -- -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- -- --
-- --- -- --- -- --- -- ---
Balance at December 31, 1998....... -- $-- -- $-- -- $-- -- $--
== === == === == === == ===
<CAPTION>
GULFSTAR COMMUNICATIONS, INC.
-----------------------------------------
ADDITIONAL STOCK
PAID-IN SUBSCRIPTIONS UNEARNED
CAPITAL RECEIVABLE COMPENSATION
---------- ------------- ------------
<S> <C> <C> <C>
GULFSTAR COMMUNICATIONS, INC.:
Balance at January 1, 1996......... $ 365 $ (333) $ --
Issuance of Common stock.......... 1,378 (1,390) --
Issuance of Class A Common
stock........................... 184 -- --
Issuance of Class B Common
stock........................... 31 -- --
Issuance of Class C Common
stock........................... 358 (298) --
Conversion of Common stock to
Class A Common stock............ -- -- --
Conversion of Class A and B Common
stock to Common stock........... -- -- --
Issuance of warrants.............. 3,884 -- --
Accrued interest on Stock
subscriptions receivable........ 69 (69) --
Dividends and accretion on
Redeemable preferred stock...... (1,350) -- --
Unearned compensation -- stock
issued for nonrecourse notes.... 6,950 -- (1,518)
CAPSTAR BROADCASTING CORPORATION*:
Issuance of common stock.......... -- -- --
Issuance of warrants.............. -- -- --
Net loss.......................... -- -- --
-------- ------- -------
Balance at December 31, 1996....... 11,869 (2,090) (1,518)
GULFSTAR COMMUNICATIONS, INC.:
Issuance of Common stock.......... 300 (300) --
Conversion of Class A Common stock
to Class C Common stock......... -- -- --
Conversion of Class C Common stock
to Class A Common stock......... -- -- --
Dividends and accretion on
Redeemable preferred stock...... (1,693) -- --
Accrued interest on Stock
subscriptions receivable........ 131 (131) --
Payments received on Stock
subscriptions receivable........ -- 36 --
Compensation expense.............. 7,232 -- 1,518
CAPSTAR BROADCASTING CORPORATION*: --
Issuances of Common stock......... -- -- --
Repurchase of Common stock........ -- -- --
Conversion of Class B Common stock
to Class A Common stock......... -- -- --
Compensation expense -- -- --
Elimination of Capstar
Broadcasting Partners, Inc.
Common stock.................... -- -- --
Issuance of Common stock.......... -- -- --
Repurchase of Common stock........ -- -- --
Issuance of shares in connection
with merger..................... (12,461) 2,485 --
Redemption of Redeemable preferred
stock........................... (5,378) -- --
Accrued interest on Stock
subscriptions receivable........ -- -- --
Payments received on Stock
subscriptions receivable........ -- -- --
Net loss.......................... -- -- --
-------- ------- -------
Balance at December 31, 1997....... -- -- --
Initial public offering, net of
expenses....................... -- -- --
Other issuances of common
stock.......................... -- -- --
Repurchase of common stock...... -- -- --
Conversion of Class C Common
stock to Class A Common
stock.......................... -- -- --
Conversion of Class B Common
stock to Class C Common
stock.......................... -- -- --
Unearned compensation related to
shares to be issued to
seller......................... -- -- --
Unearned compensation related to
granting of employee stock
options........................ -- --
Compensation expense............ -- -- --
Accrued interest on Stock
subscriptions receivable....... -- -- --
Payments received on Stock
subscriptions receivable....... -- -- --
Net loss........................ -- -- --
-------- ------- -------
Balance at December 31, 1998....... $ -- $ -- $ --
======== ======= =======
</TABLE>
59
<PAGE> 61
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS, EXCEPT PER SHARE AMOUNTS) -- (CONTINUED)
<TABLE>
<CAPTION>
CAPSTAR BROADCASTING CORPORATION
*(CAPSTAR BROADCASTING PARTNERS, INC. THROUGH JUNE 20, 1997)
---------------------------------------------------------
CLASS A CLASS B CLASS C
COMMON STOCK COMMON STOCK COMMON STOCK
----------------- ----------------- -----------------
NUMBER OF PAR NUMBER OF PAR NUMBER OF PAR
SHARES VALUE SHARES VALUE SHARES VALUE
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
GULFSTAR COMMUNICATIONS, INC.:
Balance at January 1, 1996....... -- $ -- -- $ -- -- $ --
Issuance of Common stock......... -- -- -- -- -- --
Issuance of Class A Common
stock.......................... -- -- -- -- -- --
Issuance of Class B Common
stock.......................... -- -- -- -- -- --
Issuance of Class C Common
stock.......................... -- -- -- -- -- --
Conversion of Common stock to
Class A Common stock........... -- -- -- -- -- --
Conversion of Class A and B
Common stock to Common stock... -- -- -- -- -- --
Issuance of warrants............. -- -- -- -- -- --
Accrued interest on Stock
subscriptions receivable....... -- -- -- -- -- --
Dividends and accretion on
Redeemable preferred stock..... -- -- -- -- -- --
Unearned compensation-stock
issued for nonrecourse notes... -- -- -- -- -- --
CAPSTAR BROADCASTING CORPORATION*:
Issuance of common stock......... 9,416 94 -- -- -- --
Issuance of warrants............. -- -- -- -- -- --
Net loss......................... -- -- -- -- -- --
------- ----- ------ ---- ------ ----
Balance at December 31, 1996...... 9,416 94 -- -- -- --
GULFSTAR COMMUNICATIONS, INC.:
Issuance of Common stock......... -- -- -- -- -- --
Conversion of Class A Common
stock to Class C Common
stock.......................... -- -- -- -- -- --
Conversion of Class C Common
stock to Class A Common
stock.......................... -- -- -- -- -- --
Dividends and accretion on
Redeemable preferred stock..... -- -- -- -- -- --
Accrued interest on Stock
subscriptions receivable....... -- -- -- -- -- --
Payments received on Stock
subscriptions receivable....... -- -- -- -- -- --
Compensation expense............. -- -- -- -- -- --
CAPSTAR BROADCASTING CORPORATION*:
Issuances of Common stock........ 3,824 38 1,818 18 -- --
Repurchase of Common stock....... (18) -- -- -- -- --
Conversion of Class B Common
stock to Class A Common
stock.......................... 1,818 18 (1,818) (18) -- --
Compensation expense............. -- -- -- -- -- --
Elimination of Capstar
Broadcasting Partners, Inc.
Common stock................... (15,040) (150) -- -- -- --
Issuance of Common stock......... 960 10 2,656 27 18,187 182
Repurchase of Common stock....... (119) (1) -- -- -- --
Issuance of shares in connection
with merger.................... 1,738 17 2,162 21 4,625 46
Redemption of Redeemable
preferred stock................ -- -- -- -- -- --
Accrued interest on Stock
subscriptions receivable....... -- -- -- -- -- --
Payments received on stock
subscriptions receivable....... -- -- -- -- -- --
Net loss......................... -- -- -- -- -- --
------- ----- ------ ---- ------ ----
Balance at December 31, 1997...... 2,579 26 4,818 48 22,812 228
Initial public offering, net of
expenses....................... 31,000 310 -- -- -- --
Other issuances of common
stock.......................... 172 2 2,464 25 43,797 438
Repurchase of common stock....... (36) (1) -- -- -- --
Conversion of Class C Common
stock to Class A Common
stock.......................... 271 3 -- -- (271) (3)
Conversion of Class B Common
stock to Class C Common
stock.......................... -- -- (1,200) (12) 1,200 12
Unearned compensation related to
shares to be issued to
seller......................... -- -- -- -- -- --
Unearned compensation related to
granting of employee stock
options........................ -- -- -- -- -- --
Compensation expense............. -- -- -- -- -- --
Accrued interest on Stock
subscriptions receivable....... -- -- -- -- -- --
Payments received on Stock
subscriptions receivable....... -- -- -- -- -- --
Net loss......................... -- -- -- -- -- --
------- ----- ------ ---- ------ ----
Balance at December 31, 1998...... 33,986 $ 340 6,082 $ 61 67,538 $675
======= ===== ====== ==== ====== ====
<CAPTION>
CAPSTAR BROADCASTING CORPORATION
*(CAPSTAR BROADCASTING PARTNERS, INC. THROUGH JUNE 20, 1997)
-----------------------------------------
RETAINED
ADDITIONAL STOCK EARNINGS TOTAL
PAID-IN SUBSCRIPTIONS UNEARNED (ACCUMULATED STOCKHOLDERS'
CAPITAL RECEIVABLE COMPENSATION DEFICIT) EQUITY
---------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
GULFSTAR COMMUNICATIONS, INC.:
Balance at January 1, 1996....... $ -- $ -- $ -- $ 2,530 $ 2,564
Issuance of Common stock......... -- -- -- -- (12)
Issuance of Class A Common
stock.......................... -- -- -- -- 184
Issuance of Class B Common
stock.......................... -- -- -- -- 31
Issuance of Class C Common
stock.......................... -- -- -- -- 61
Conversion of Common stock to
Class A Common stock........... -- -- -- -- --
Conversion of Class A and B
Common stock to Common stock... -- -- -- -- --
Issuance of warrants............. -- -- -- -- 3,884
Accrued interest on Stock
subscriptions receivable....... -- -- -- -- --
Dividends and accretion on
Redeemable preferred stock..... -- -- -- -- (1,350)
Unearned compensation-stock
issued for nonrecourse notes... -- -- -- -- 5,432
CAPSTAR BROADCASTING CORPORATION*:
Issuance of common stock......... 94,061 -- -- -- 94,155
Issuance of warrants............. 744 -- -- -- 744
Net loss......................... -- -- -- (11,957) (11,957)
---------- ------- ------- --------- ----------
Balance at December 31, 1996...... 94,805 -- -- (9,427) 93,736
GULFSTAR COMMUNICATIONS, INC.:
Issuance of Common stock......... -- -- -- -- --
Conversion of Class A Common
stock to Class C Common
stock.......................... -- -- -- -- --
Conversion of Class C Common
stock to Class A Common
stock.......................... -- -- -- -- --
Dividends and accretion on
Redeemable preferred stock..... -- -- -- -- (1,693)
Accrued interest on Stock
subscriptions receivable....... -- -- -- -- --
Payments received on Stock
subscriptions receivable....... -- -- -- -- 36
Compensation expense............. -- -- -- -- 8,750
CAPSTAR BROADCASTING CORPORATION*:
Issuances of Common stock........ 61,942 (1,596) -- -- 60,402
Repurchase of Common stock....... (175) -- -- -- (175)
Conversion of Class B Common
stock to Class A Common
stock.......................... -- -- -- -- --
Compensation expense............. 1,825 -- -- -- 1,825
Elimination of Capstar
Broadcasting Partners, Inc.
Common stock................... 150 -- -- -- --
Issuance of Common stock......... 89,570 (550) -- -- 89,239
Repurchase of Common stock....... (764) -- -- -- (765)
Issuance of shares in connection
with merger.................... 43,823 (2,485) -- -- 31,443
Redemption of Redeemable
preferred stock................ -- -- -- -- (5,378)
Accrued interest on Stock
subscriptions receivable....... 148 (148) -- -- --
Payments received on stock
subscriptions receivable....... -- 405 -- -- 405
Net loss......................... -- -- -- (45,740) (45,740)
---------- ------- ------- --------- ----------
Balance at December 31, 1997...... 291,324 (4,374) -- (55,167) 232,085
Initial public offering, net of
expenses....................... 550,998 -- -- -- 551,308
Other issuances of common
stock.......................... 635,024 -- -- -- 635,489
Repurchase of common stock....... (483) -- -- -- (484)
Conversion of Class C Common
stock to Class A Common
stock.......................... -- -- -- -- --
Conversion of Class B Common
stock to Class C Common
stock.......................... -- -- -- -- --
Unearned compensation related to
shares to be issued to
seller......................... 5,428 -- (5,428) -- --
Unearned compensation related to
granting of employee stock
options........................ 878 -- (878) -- --
Compensation expense............. 19,847 -- 1,413 -- 21,260
Accrued interest on Stock
subscriptions receivable....... 185 (185) -- -- --
Payments received on Stock
subscriptions receivable....... -- 1,865 -- -- 1,865
Net loss......................... -- -- -- (96,761) (96,761)
---------- ------- ------- --------- ----------
Balance at December 31, 1998...... $1,503,201 $(2,694) $(4,893) $(151,928) $1,344,762
========== ======= ======= ========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
60
<PAGE> 62
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (11,957) $ (45,740) $ (96,761)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Loss on early extinguishment of debt................ 1,188 2,403 7,305
Depreciation and amortization....................... 4,141 26,415 96,207
Noncash interest.................................... 2,626 24,047 23,338
Deferred income taxes............................... 547 (12,198) (42,713)
Noncash compensation expense........................ 6,176 10,575 21,260
Write-off of pending acquisition costs.............. 105 -- --
Write-down of investments in limited liability
companies......................................... -- -- 28,565
Provision for uncollectible accounts receivable..... 661 2,044 5,916
Dividends and accretion on preferred stock of
subsidiary........................................ -- 6,560 21,987
Noncash interest income............................. -- (755) --
Loss on sale of broadcasting property............... -- 908 --
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable............................... (5,331) (12,029) (1,683)
Prepaid expenses and other current assets......... (1,002) 252 (1,615)
Accounts payable and accrued expenses............. 507 1,800 (2,639)
Income taxes payable.............................. -- 2,417 (67,229)
--------- --------- -----------
Net cash provided by (used in) operating
activities................................... (2,339) 6,699 (8,062)
--------- --------- -----------
Cash flows from investing activities:
Proceeds from sale of broadcasting property............ -- 35,932 229,180
Purchase of property and equipment..................... (2,478) (10,020) (44,886)
Payments for acquisitions, net of cash acquired........ (149,612) (505,375) (1,675,558)
Payments for pending acquisitions...................... (3,342) (6,895) (18,090)
Income tax liability indemnity payments................ -- -- 92,968
Other investing activities, net........................ (147) (644) (3,812)
--------- --------- -----------
Net cash used in investing activities.......... (155,579) (487,002) (1,420,198)
--------- --------- -----------
Cash flows from financing activities:
Proceeds from long-term debt and credit facilities..... 64,647 556,902 1,324,500
Repayment of long-term debt and credit facilities...... (13,210) (200,249) (983,758)
Payments of financing related costs.................... (2,936) (25,169) (8,887)
Net proceeds from issuance of common stock............. 94,155 145,149 1,186,797
Net proceeds from issuance of preferred stock.......... 20,979 95,071 --
Net proceeds from issuance of warrants................. 3,884 -- --
Payments on subscribed stock........................... -- -- 1,865
Redemption of preferred stock.......................... -- (30,223) (135,207)
Purchase of common stock............................... -- (940) (484)
Preferred stock dividends.............................. -- -- (9,508)
--------- --------- -----------
Net cash provided by financing activities...... 167,519 540,541 1,375,318
--------- --------- -----------
Net increase (decrease) in cash and cash equivalents..... 9,601 60,238 (52,942)
Cash and cash equivalents at beginning of period......... 220 9,821 70,059
--------- --------- -----------
Cash and cash equivalents at end of period............... $ 9,821 $ 70,059 $ 17,117
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
61
<PAGE> 63
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND BUSINESS:
Capstar Broadcasting Corporation ("Capstar Broadcasting"), a holding
company controlled by Hicks, Muse, Tate & Furst Equity Fund III, L.P. ("HM Fund
III") and its affiliates, and its direct and indirect wholly-owned subsidiaries
(collectively, "the Company") operate in a single reportable industry segment,
which segment encompasses the ownership and management of radio broadcast
stations located primarily in mid-sized markets throughout the United States. At
December 31, 1998, the Company owned and operated, provided programming to or
sold advertising on behalf of 220 FM stations and 97 AM stations located in 78
markets.
In June 1997, Capstar Broadcasting was formed and exchanged all of its
shares of common stock for all of the outstanding common stock of Capstar
Broadcasting Partners, Inc. ("Capstar Partners"). The transaction resulted in
the formation of a new holding company and resulted in no change in ownership
and was accounted for as a reorganization at historical cost. After this
transaction was completed Capstar Broadcasting owned 100% of the common equity
of Capstar Partners and Capstar Partners owned 100% of the common equity of
Capstar Radio Broadcasting Partners, Inc. ("Capstar Radio").
On October 16, 1996, Capstar Partners acquired Capstar Radio and its
wholly-owned subsidiaries pursuant to a merger agreement dated June 21, 1996.
The acquisition of Capstar Radio has been accounted for under the purchase
method of accounting and has been included in the consolidated financial
statements since the date of its acquisition on October 16, 1996.
In July 1997, the Company acquired GulfStar Communications, Inc. ("Former
GulfStar"), a company controlled by the general partner of HM Fund III. Pursuant
to the merger agreement, each share of Former GulfStar's common stock was
converted into shares of the Company subject to a conversion ratio calculated
based on the relative value of the Company and Former GulfStar, principally
determined by utilizing projected broadcast cash flows for the year ended
December 31, 1998. As a result of the merger, Former GulfStar became a
wholly-owned subsidiary. Due to the fact that the Company and Former GulfStar
were under common control at the time of the merger, the transfer of the assets
and liabilities of Former GulfStar has been accounted for at historical cost in
a manner similar to a pooling-of-interests except that the acquisition by the
Company of the minority interest of Former GulfStar has been accounted for by
the purchase method. For financial accounting purposes the merger with Former
GulfStar resulted in a change in reporting entity and the restatement of the
financial statements for all periods prior to July 1997, to give retroactive
effect to the merger and present the combined consolidated results of operations
of the Company and its direct and indirect wholly-owned subsidiaries and Former
GulfStar for the periods the entities were under common control.
62
<PAGE> 64
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Separate results of operations of the combining entities to the date of the
merger are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Net broadcast revenue:
Capstar Broadcasting............................... $ 10,303 $ 41,862
GulfStar........................................... 32,563 23,294
-------- --------
$ 42,866 $ 65,156
======== ========
Extraordinary item:
Capstar Broadcasting............................... $ -- $ 851
GulfStar........................................... 1,188 --
-------- --------
$ 1,188 $ 851
======== ========
Net loss:
Capstar Broadcasting............................... $ (3,757) $ (7,156)
GulfStar........................................... (8,200) (8,842)
-------- --------
$(11,957) $(15,998)
======== ========
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its direct and indirect wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The 10 3/4% Senior Subordinated Notes Due 2006 (the "10 3/4% CCI Notes")
and the 11 3/8% Senior Subordinated Notes Due 2000 (the "11 3/8% CCI Notes") are
guaranteed by every direct and indirect subsidiary of Capstar Communications,
Inc. ("CCI"). The guarantees by the guarantor subsidiaries are full,
unconditional, and joint and several. All of the guarantor subsidiaries are
wholly-owned. CCI is a holding company with no assets, liabilities or operations
other than its investment in its subsidiaries. Separate financial statements of
each guarantor have not been included as management has determined that they are
not material to investors.
Cash Equivalents
For purposes of the accompanying consolidated statement of cash flows, the
Company considers highly liquid investments with maturities at date of purchase
of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Equipment under capital lease obligations is recorded at the
lower of cost or fair market value at the inception of the lease. The costs of
assets retired or otherwise disposed of and the related accumulated depreciation
and amortization balances are removed from the accounts and any resulting gain
or loss is included in income. Leasehold improvements are amortized over the
shorter of their useful lives or the terms of the related leases. Amortization
of assets recorded under capital leases is included in depreciation expense.
63
<PAGE> 65
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Intangible Assets
FCC licenses and goodwill represent the excess of cost over the fair values
of the identifiable tangible and other intangible net assets acquired. Other
intangible assets comprise costs incurred for pending acquisitions, noncompete
agreements, deferred financing costs and costs related to favorable tower and
facility leases. Pending acquisition costs are deferred and capitalized as part
of completed acquisitions or expensed in the period in which the pending
acquisition is terminated. Approximately $2,936, $25,169 and $8,887 of new
financing costs were incurred for the years ended December 31, 1996, 1997 and
1998, respectively. Deferred financing costs are amortized by the interest
method over the life of the related debt. Accumulated amortization related to
deferred financing costs at December 31, 1997 and 1998 was approximately $1,209
and $2,366, respectively.
The Company periodically evaluates intangible and other long-lived assets
for potential impairment in accordance with the provisions of APB Opinion 17,
"Intangible Assets," and SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," by analyzing the
operating results, future cash flows on an undiscounted basis, trends and
prospects of the Company's stations, as well as by comparing them to their
competitors. The Company also takes into consideration recent acquisition
patterns within the broadcast industry, the impact of recently enacted or
potential FCC rules and regulations and any other events or circumstances which
might indicate potential impact. At this time, in the opinion of management, no
impairment has occurred.
Exchange of Radio Stations
The Company records the exchange of radio stations in accordance with APB
Opinion No. 16, "Business Combinations". The net book value of the station given
up is removed from the accounts and the station received is recorded at fair
value, with any resulting gain or loss included in results of operations.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period-end based on enacted tax laws and
statutory tax rates applicable to the period in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to be
realized. Income tax expense is the tax payable for the period and the change
during the period in deferred tax assets and liabilities.
Stock Subscriptions Receivable
Stock subscriptions receivable represent promissory notes issued in
connection with the purchase of capital stock. Capital stock issued in
connection with such promissory notes is reported as issued and outstanding and
included in capital stock and additional paid-in capital in the accompanying
consolidated financial statements in the amount of the related promissory note
plus accrued interest. The promissory notes and related accrued interest
receivable are classified as stock subscriptions receivable and included as a
reduction of consolidated stockholder's equity.
Revenue Recognition
Broadcasting operations derive revenue primarily from the sale of program
time and commercial announcements to local, regional and national advertisers.
Revenue is recognized when the programs and commercial announcements are
broadcast.
64
<PAGE> 66
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income (Loss) Per Share
The Company computes earnings per share ("EPS") under the provisions of
SFAS No. 128 which establishes standards for computing and presenting earnings
per share.
At December 31, 1996, 1997, and 1998, the following options and warrants to
purchase shares of common stock were outstanding, but were excluded from the
computation of diluted earnings per share as their inclusion would be
anti-dilutive given the Company's net loss:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Number of options and warrants............................. 1,304 3,189 6,695
Weighted-average exercise price............................ $13.14 $13.58 $15.71
</TABLE>
Advertising Costs
The Company incurs various marketing and promotional costs to add and
maintain listenership. These are expensed as incurred and totaled approximately
$2,668, $5,731 and $27,990 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Local Marketing Agreements ("LMA")/Joint Sales Agreements ("JSA")
From time to time, the Company enters into LMAs and JSAs, with respect to
radio stations owned by third parties including radio stations that it intends
to acquire. Terms of the agreements generally require the Company to pay a
monthly fee in exchange for the right to provide station programming and sell
related advertising time in the case of an LMA or sell advertising in the case
of a JSA. The agreements terminate upon the acquisition of the property. It is
the Company's policy to expense the fees as incurred as a component of operating
income (loss). The Company accounts for payments received pursuant to LMAs of
owned stations as net revenue to the extent that the payment received represents
a reimbursement of the Company's ownership costs.
Barter Transactions
The Company barters advertising time for products and services. Such
transactions are recorded at the estimated fair value of the products or
services received. Barter revenue is recorded when commercials are broadcast and
related expenses are recorded when the bartered product or service is used.
Concentration of Credit Risk
It is the Company's policy to place its cash with high credit quality
financial institutions, which, at times, may exceed federally insured limits.
Management believes that credit risk in these deposits is minimal and has not
experienced any losses in such accounts.
The Company's revenue and accounts receivable primarily relates to
advertising of products and services within the radio stations' broadcast areas.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. Credit
losses have been within management's expectations and adequate allowances for
any uncollectible accounts receivables are maintained.
65
<PAGE> 67
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Uncertainties and Use of Estimates and Assumptions
The radio broadcasting industry is subject to federal regulation by the
Federal Communications Commission ("FCC"). These governmental regulations and
policies could change over time and there can be no assurance that such changes
would not have a material impact upon the Company.
The Company's pending acquisition, exchange and merger agreements are
subject to various governmental approvals, including the Department of Justice
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the FCC under the Communications Act of 1934, as amended.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Segment Information
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 superseded SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS No. 131 did not affect results of operations or financial position but did
affect the disclosure of segment information.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This pronouncement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management does not believe the implementation of
this accounting pronouncement will have a material effect on its consolidated
financial statements.
Reclassifications
Certain amounts in 1996 and 1997 have been reclassified to conform to the
1998 presentation.
3. CHANCELLOR MERGER AGREEMENT
On August 26, 1998, Capstar Broadcasting and Chancellor Media Corporation
("Chancellor Media"), an affiliate of the Company, entered into an agreement to
merge (the "Chancellor Merger") in a stock-for-stock transaction. Under the
merger agreement:
- Chancellor Media will acquire Capstar Broadcasting in a reverse merger in
which Capstar Broadcasting will be renamed Chancellor Media Corporation;
- each share of Class A Common Stock and Class C Common Stock will
represent 0.4955 shares of voting common stock in the combined entity;
- each share of Class B Common Stock will represent 0.4955 shares of
nonvoting common stock of the combined entity;
- each share of Chancellor Media common stock will represent one share of
the combined entity; and
66
<PAGE> 68
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- each share of Chancellor Media preferred stock will represent one share
of preferred stock of the combined entity.
The completion of the merger depends upon the satisfaction of a number of
conditions, including the following:
- stockholder approval of both Capstar Broadcasting and Chancellor Media;
- the expiration or termination of any applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which
waiting period has terminated;
- the receipt of regulatory approval from the FCC, which regulatory
approval has been received;
- the consent of the lenders under the Capstar Broadcasting credit facility
and Chancellor Media's credit facility; and
- other customary conditions.
There can be no assurance that all of the conditions to the merger will be
satisfied. Either company may waive compliance with the conditions at its
discretion if permitted by law.
On September 9, 1998, Capstar Broadcasting was notified of an action filed
on behalf of all owners of securities of Chancellor Media against Chancellor
Media, Hicks Muse and the individual directors of Hicks Muse in the Court of
Chancery of the State of Delaware in and for New Castle County, Delaware. While
the complaint does not name Capstar Broadcasting as a defendant, the complaint
alleges that Chancellor Media and its directors breached their duties to the
alleged class by entering into an "overly generous offer for Capstar assets."
The action is relevant to Capstar Broadcasting because inter alia, the plaintiff
seeks an injunction prohibiting the proposed Chancellor Merger with Capstar
Broadcasting. As Capstar Broadcasting is not a defendant in this action, Capstar
Broadcasting has no obligation to appear or participate.
4. INITIAL PUBLIC OFFERING BY CAPSTAR BROADCASTING
On May 29, 1998, Capstar Broadcasting completed an initial public offering
(the "Offering") in which Capstar Broadcasting sold 31,000 shares of its Class A
Common Stock at $19.00 per share for net proceeds to Capstar Broadcasting of
$551,308 after deducting underwriting discounts and commissions and offering
expenses of $37,692. The shares sold by Capstar Broadcasting represented
approximately 28.8% of the outstanding shares of Capstar Broadcasting on May 29,
1998. Capstar Broadcasting contributed the net proceeds from the Offering to
Capstar Partners which then contributed the net proceeds from the Offering to
Capstar Radio. Capstar Radio used this contribution to fund a portion of the
acquisition of SFX Broadcasting, Inc., a Delaware corporation ("SFX"), as
discussed in Note 5 below.
5. ACQUISITIONS AND DISPOSITIONS OF BROADCASTING PROPERTIES
SFX Acquisition and Related Transactions
On May 29, 1998, SBI Holding Corporation, a Delaware corporation ("SFX
Parent"), acquired SFX, which has been renamed CCI. The acquisition was effected
through the merger (the "SFX Merger") of SBI Radio Acquisition Corporation, a
Delaware corporation and a wholly-owned subsidiary of SFX Parent ("Sub"), with
and into SFX, with SFX as the surviving corporation. The acquisition of SFX by
SFX Parent resulted in a change of control of SFX. As a result of the SFX
Merger, SFX became an indirect wholly-owned subsidiary of Capstar Radio. The
total consideration paid by the Company for SFX was approximately $1,300,000
(the "SFX Merger Consideration"), including direct costs of the acquisition.
Consummation of the SFX Merger and related transactions increased the Company's
portfolio of stations by 81 owned and
67
<PAGE> 69
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
operated radio stations (60 FM and 21 AM) and two radio stations on which the
Company sells commercial time.
The SFX Merger and other related transactions, including (i) certain
station acquisitions and dispositions completed contemporaneously with the SFX
Merger (as discussed below), (ii) the repayment of outstanding indebtedness of
approximately $313,000 of SFX under the existing credit facility of SFX, (iii)
the redemption of approximately $154,000 aggregate principal amount of 10 3/4%
CCI Notes (as discussed in Note 10), and (iv) the redemption of approximately
$119,600 aggregate liquidation preference of CCI's 12 5/8% Series E Cumulative
Exchangeable Preferred Stock, par value $.01 per share ("CCI Series E Preferred
Stock") (as discussed in Note 12), were financed with (A) the net proceeds from
the Offering, (B) borrowings of $590,600 (the "Capstar Loan") under the Capstar
Credit Facility (as defined in Note 10), (C) borrowings of $150,000 from
Chancellor Media, and (D) net proceeds of approximately $221,429 from sales of
certain assets.
On February 20, 1998, Capstar Broadcasting and Chancellor Media entered
into a Letter Agreement (the "Chancellor Exchange Agreement") pursuant to which
Capstar Broadcasting agreed to exchange 11 SFX stations in the Dallas, Houston,
San Diego and Pittsburgh markets ("Chancellor Exchange Stations") having an
aggregate deemed market value of $637,500 for certain stations to be acquired by
Chancellor Media during the three-year period ending February 20, 2001 (the
"Exchange Period"). SFX station KODA-FM, which is a Chancellor Exchange Station,
was exchanged for certain radio stations in the Austin, Texas and the
Jacksonville, Florida markets concurrently with the consummation of the SFX
Merger. The remaining Chancellor Exchange Stations will be exchanged for
mid-sized market radio stations to be identified by Capstar Broadcasting and
paid for by Chancellor Media. Capstar Broadcasting and Chancellor Media intend
for the exchange transactions to qualify as like-kind exchanges under Section
1031 of the Internal Revenue Code of 1986, as amended (the "Code"). Capstar
Broadcasting, however, bears all risks related to the tax treatment of the
exchanges. Capstar Broadcasting has agreed not to solicit, initiate or encourage
the submission of proposals for the acquisition of the Chancellor Exchange
Stations or to participate in any discussions for such purpose during the
Exchange Period, other than as contemplated under the Chancellor Exchange
Agreement. Concurrently with the consummation of the SFX Merger, Chancellor
Media began providing services to the Chancellor Exchange Stations (other than
KODA-FM, which was acquired, via an exchange of radio stations by Chancellor
Media) pursuant to separate local marketing agreements ("LMAs") until such
stations are exchanged. Chancellor Media retains the advertising revenues it
generates while it provides services to the Chancellor Exchange Stations under
such LMAs. The LMA fees earned by the Company will decrease as the Chancellor
Exchange Stations are exchanged. During the pendency of the Chancellor Merger,
the Company does not anticipate effecting any exchanges with Chancellor Media.
On May 21, 1998, SFX completed the acquisition of three radio stations (two
FM and one AM) in the Nashville, Tennessee market from Sinclair Broadcasting
Group for an aggregate purchase price of approximately $35,000 in cash (the
"Nashville Purchase Price"). SFX funded the Nashville Purchase Price with excess
cash on hand.
On May 29, 1998, CCI exchanged station KODA-FM in Houston, Texas for
Chancellor Media radio stations WAPE-FM and WFYV-FM in Jacksonville, Florida and
approximately $90,250 in cash (the "KODA Exchange"). In an exchange under
Section 1031 of the Code, the indirect, wholly-owned subsidiaries of CCI,
through a qualified intermediary, used the $90,250 in cash received from
Chancellor Media to acquire radio stations KASE-FM, KVET-AM and KVET-FM in
Austin, Texas. The deemed value of the KODA Exchange was $143,250.
68
<PAGE> 70
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On May 29, 1998, due to governmental restrictions on multiple station
ownership, the Company completed the sale of the assets of four radio stations
(three FM and one AM) in the Greenville, South Carolina market for approximately
$35,000 in cash to Clear Channel Radio, Inc.
On May 29, 1998, due to governmental restrictions on multiple station
ownership, the Company assigned the assets of four radio stations (two FM and
two AM) in the Fairfield, Connecticut market with an aggregate fair market value
at such date of approximately $15,000 to a trust, whose trustee is Henry M.
Rivera (the "Trustee") and whose beneficiary is Capstar Broadcasting. The
Trustee is currently attempting to sell the stations to a third party. Upon a
sale, the Trustee will distribute the proceeds to the Company.
On May 29, 1998, due to governmental restrictions on multiple station
ownership, CCI completed the sale of the assets of one FM radio station in the
Daytona Beach, Florida market for consideration of approximately $11,500 in cash
to Clear Channel Metroplex, Inc. and Clear Channel Metroplex Licensee, Inc.
On May 29, 1998, due to governmental restrictions on multiple station
ownership, CCI completed the sale of the assets of four radio stations (three FM
and one AM) in the Long Island, New York market for an aggregate sale price of
$46,000 in cash to Cox Radio, Inc.
On May 29, 1998, due to governmental restrictions on multiple station
ownership, CCI completed the sale of the assets of one FM radio station in the
Houston, Texas market for $54,000 in cash to HBC Houston, Inc. and HBC Houston
License Corporation. Pursuant to an agreement with Chancellor Media, CCI paid
50% of the sale proceeds in excess of $50,000, approximately $1,730, to
Chancellor Media.
Other Acquisitions and Dispositions
In addition to the SFX Merger and other related transactions described
above, during the years ended December 31, 1996, 1997 and 1998, the Company
acquired numerous radio stations and related broadcasting property and
equipment, all of which have been accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets and
liabilities acquired based upon their fair values at the date of acquisition.
The excess of purchase price over the fair value of net tangible assets acquired
is allocated to intangible assets, primarily FCC licenses. The results of
operations associated with the acquired radio stations have been included in the
accompanying consolidated financial statements from the dates of acquisition.
The acquisition activity was funded primarily through equity infusions by HM
Fund III and long-term borrowings.
69
<PAGE> 71
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
All consideration paid for the acquisitions scheduled below consisted
solely of cash, notes and the exchange of certain assets except where common
stock was issued as listed. Common stock was valued at the estimated fair value
at the date the terms of the acquisitions were agreed to and announced.
<TABLE>
<CAPTION>
STATIONS
ACQUIRED AMOUNT
--------- DATE OF NUMBER OF ASSIGNED
TRANSACTION FM AM ACQUISITION PURCHASE OF COST SHARES ISSUED PER SHARE
----------- --- --- ----------- ----------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1996:
Sonance Communications(b)..... 6 2 April Stock $ 1,065 0.217(a) $1,130
SBG Communications(b)......... 1 1 July Assets 4,038 -- --
Ranger(b)..................... 2 1 July Assets 6,305 -- --
Tshirhart(b).................. 1 -- July Assets 315 -- --
Eagle of Texas(b)............. 1 -- August Assets 728 -- --
Stansell(b)................... 1 -- August Assets 2,061 0.016(a) $2,000
Steller(b).................... 1 -- September Assets 1,551 -- --
Steller(b).................... 1 -- September Assets 1,812 -- --
Commodore Media............... 18 12 October Stock 122,016 -- --
Adventure Communications...... 4 3 October Assets 12,600 -- --
KWTX Broadcasting(b).......... 1 1 November Assets 4,172 -- --
Comcorp(b).................... 1 -- December Assets 6,385 -- --
----------
$ 163,048
==========
</TABLE>
70
<PAGE> 72
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
STATIONS
ACQUIRED AMOUNT
--------- DATE OF NUMBER OF ASSIGNED
TRANSACTION FM AM ACQUISITION PURCHASE OF COST SHARES ISSUED PER SHARE
----------- --- --- ----------- ----------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1997:
Tippie Communications(b)...... 1 -- January Assets $ 2,490 -- --
South Plains
Broadcasting(b)............. 1 1 February Assets 3,166 -- --
J. Thomas Development(b)...... 3 1 February Assets 6,292 -- --
Osborn Communications......... 12 6 February Stock 102,923 163.636(a) $ 11
Noalmark(b)................... 2 -- March Assets 11,471 -- --
Space Coast: EZY/Roper/City... 3 2 April Assets 12,038 -- --
Taylor Communications......... 1 1 April Assets 1,308 -- --
Ft. Smith(b).................. 1 1 May Assets 3,456 -- --
Miller Broadcasting(b)........ 2 -- May Stock 4,967 -- --
Dixie Broadcasting............ 1 2 May Stock 23,442 -- --
Cavalier Communications....... 4 1 July Assets 8,267 -- --
Community Pacific............. 6 5 July Assets 35,907 -- --
Stephens Radio(b)............. 1 -- July Stock 2,647 -- --
McForhun/Livingston........... 1 1 August Assets 7,968 -- --
Benchmark Communications...... 20 10 August Assets 192,128 157.895(a) $13.30
Emerald City Radio Partners... 1 -- August Assets 10,024 -- --
Madison Radio Group........... 4 2 August Assets 41,662 -- --
Booneville Broadcasting....... 1 -- September Assets 1,648 -- --
WRIS, Inc. ................... 1 -- September Assets 3,374 -- --
American General Media........ 1 -- October Assets 3,409 -- --
Griffith Communications....... 3 -- October Assets 5,789 -- --
KLAW Broadcasting............. 2 -- October Assets 2,539 -- --
Ameron Broadcasting........... 2 1 October Assets 32,606 -- --
KJEM-FM....................... 1 -- October Assets 1,986 -- --
COMCO Broadcasting............ 4 2 November Assets 7,160 -- --
----------
$ 528,667
Acquisition of GulfStar
minority interest........... July Stock 31,695 2,383.093(a) $13.30
----------
$ 560,362
==========
</TABLE>
71
<PAGE> 73
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
STATIONS
ACQUIRED AMOUNT
--------- DATE OF NUMBER OF ASSIGNED
TRANSACTION FM AM ACQUISITION PURCHASE OF COST SHARES ISSUED PER SHARE
----------- --- --- ----------- ----------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1998:
Knight Radio, Inc. and
Affiliates.................. 5 3 January Assets 66,180 -- --
Quass Broadcasting Company.... 2 1 January Stock 16,281 -- --
East Penn Broadcasting,
Inc. ....................... -- 1 January Assets 2,010 -- --
Patterson Broadcasting,
Inc......................... 25 14 January Stock 227,186 -- --
Commonwealth Broadcasting of
Arizona, L.L.C. ............ 2 1 February Assets 5,514 -- --
Brantly Broadcast
Associates.................. 1 -- February Assets 1,735 -- --
KOSO, Inc. ................... 1 -- April Assets 8,472 -- --
Americom II and Americom Las
Vegas Limited Partnership... 3 1 April Assets 26,662 -- --
KDOS, Inc. ................... 1 1 April Assets 3,532 -- --
Grant Radio Group............. -- 1 May Assets 3,440 -- --
SFX Merger.................... 60 21 May Stock 1,279,656 -- --
Class Act of Texas, Inc. ..... 1 1 June Assets 1,068 -- --
KRNA, Inc. ................... 1 -- June Assets 6,398 -- --
The University of Alaska...... 1 -- June Assets 221 -- --
CBS Radio, Inc. .............. 2 2 July Assets 6,505 -- --
Watertown Radio Associates
Limited Partnership and Lake
Champlain Radio
Corporation................. 2 -- July Assets 5,923 -- --
Jacor Broadcasting
Corporation................. -- 1 August Assets 5,000 -- --
Ogallala Broadcasting
Company..................... 2 1 September Assets 4,100 -- --
Boswell Broadcasting
Incorporated................ 1 -- September Assets 11,750 -- --
Foley Broadcasting, LP........ 1 -- October Assets 2,755 -- --
Jim Gibbons Radio, Inc........ 1 1 October Stock 21,226 -- --
SunGroup, Inc. ............... 1 -- October Assets 5,838 -- --
----------
$1,711,452
==========
</TABLE>
- ---------------
(a) Common Stock
(b) Acquired by GulfStar prior to the GulfStar acquisition by the Company
Additionally, in April 1998, the Company acquired Prophet Systems, Inc., a
manufacturer, seller and distributor of combination hardware-software devices
which permit the remote programming of radio station broadcasts, for aggregate
consideration of approximately $15,000 in cash and approximately $500 in
acquisition costs. Pursuant to the asset purchase agreement, Capstar
Broadcasting will issue 286 shares of Class A Common Stock, upon the
satisfaction of certain conditions contained in the asset purchase agreement.
72
<PAGE> 74
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The acquisitions are summarized in the aggregate by period as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
Consideration:
Cash and notes................................... $153,050 $493,353 $ 1,612,052
Common stock (0.233 Former GulfStar shares and
2,705 shares in 1996 and 1997,
respectively)................................. 276 35,595 --
Acquisition costs................................ 9,251 31,414 78,218
Exchange of assets............................... 471 -- 21,182
-------- -------- -----------
Total.................................... $163,048 $560,362 $ 1,711,452
======== ======== ===========
Assets acquired and liabilities assumed:
Cash............................................. $ 6,120 $ 12,297 $ 20,161
Accounts receivable.............................. 9,020 14,657 88,894
Prepaid expenses and other....................... 590 2,853 96,352
Property and equipment........................... 23,471 76,050 131,420
Intangible assets................................ 290,243 578,137 3,657,443
Other assets..................................... 704 1,051 224
Accounts payable................................. (5,811) (7,843) (11,967)
Accrued liabilities.............................. (882) (5,242) (125,612)
Long-term debt................................... (82,706) (20,711) (812,509)
Preferred stock.................................. -- -- (283,605)
Capital lease obligations........................ (127) (465) (619)
Deferred income taxes............................ (77,574) (90,422) (1,048,730)
-------- -------- -----------
Total.................................... $163,048 $560,362 $ 1,711,452
======== ======== ===========
</TABLE>
In addition to the SFX Merger and other related transactions described
above, during the years ended December 31, 1997 and 1998, the Company sold or
otherwise disposed of radio stations and related broadcasting property and
equipment as follows:
<TABLE>
<CAPTION>
STATIONS
DISPOSED
----------- DATE OF
TRANSACTION FM AM DISPOSITION SALE OF SALES PRICE
----------- --- --- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
1997
Osborn Ft. Myers................... 2 1 April Assets $11,000
Bryan Broadcasting Operating
Company, Inc.................... 1 1 September Stock 600
BBR, LLC........................... 1 -- September Assets 40,000
Chinook Concert Broadcasters....... -- 1 November Assets 135
1998:
Clear Channel Radio, Inc........... 1 1 January Assets 29,000
Clear Channel Radio, Inc........... 2 2 February Assets 20,000
SWJDR, Corp........................ 1 -- February Assets 3,335
Westchester Radio, LLC............. 2 1 April Assets 35,103
Americom Las Vegas Limited
Partnership..................... 2 1 April Assets 4,432
Cumulus Broadcasting, Inc.......... 2 -- July Assets 7,750
Jacor Broadcasting Corporation..... -- 1 August Assets 5,000
Boswell Broadcasting
Incorporated.................... 1 -- September Assets 11,750
</TABLE>
73
<PAGE> 75
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following unaudited pro forma summary presents the consolidated results
of operations for the years ended December 31, 1997 and 1998 as if the
acquisitions and dispositions completed as of December 31, 1998 had occurred on
January 1, 1997. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had the acquisitions and dispositions been made as of that date or of results
which may occur in the future.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31
-----------------------
1997 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net broadcast revenue................................. $ 570,944 $ 637,774
Loss before extraordinary item........................ (139,438) (149,158)
Net loss.............................................. (141,841) (156,463)
Net loss attributable to common stock................. (148,912) (156,463)
Basic and diluted loss per common share............... (1.70) (1.78)
</TABLE>
Subsequent to December 31, 1998, the Company acquired 11 FM and 3 AM radio
stations and related broadcast equipment through two acquisitions for aggregate
consideration of approximately $13,600. The acquisitions were funded primarily
through cash on hand. The Company previously operated all 14 of these stations
under either LMA's or JSA's.
On July 23, 1998, the Company agreed to acquire Triathlon Broadcasting
Company ("Triathlon"; Nasdaq: TBCOA, TBCOL) in a transaction valued at
approximately $190,000. The Company will pay approximately $130,000 in cash to
acquire all of the outstanding shares of common and preferred stock of Triathlon
and will assume approximately $60,000 of debt. Triathlon owns and operates or
programs 32 stations in six markets: Wichita, Kansas (4 FM and 2 AM); Colorado
Springs, Colorado (2 FM/2 AM); Lincoln, Nebraska (4 FM); Omaha, Nebraska (3 FM/1
AM); Spokane, Washington (5 FM/3 AM); and Tri-Cities, Washington (4 FM/2 AM).
Triathlon also owns Pinnacle Sports Productions, L.L.C., a regional sports
network that controls the rights to University of Nebraska football and other
sports events.
The Company has entered into numerous agreements, including the Triathlon
agreement discussed above, to acquire additional radio stations (28 FM and 11
AM) and related broadcast equipment for aggregate consideration of approximately
$228,000. The Company currently operates 13 of these stations under either LMA's
or JSA's.
In December 1998, an affiliate of the Company agreed to purchase the assets
of LAN International, Inc.'s business of developing, marketing, selling,
licensing and servicing specialized computer systems and software for use in the
radio and television industry. The purchase price of the acquisition is up to
$27,000 of which $15,000 will be due at the closing of the transaction. The
remaining $12,000 will be due to LAN International if the business meets certain
post-closing financial goals. The Company expects to complete the acquisition in
May 1999.
The Company has also entered into agreements for the disposition of 2 FM
and 5 AM stations for aggregate consideration of approximately $15,500. The
carrying value of net assets to be sold related to these stations approximated
the contract sales price.
74
<PAGE> 76
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ -------
<S> <C> <C>
Barter receivable.......................................... $1,983 $ 6,972
Prepaid expenses........................................... 1,318 5,312
Computer hardware inventory................................ -- 3,024
Other...................................................... 984 4,813
------ -------
$4,285 $20,121
====== =======
</TABLE>
7. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DEPRECIABLE DECEMBER 31,
DEPRECIATION LIFE --------------------
METHOD (YEARS) 1997 1998
------------- ----------- -------- --------
<S> <C> <C> <C> <C>
Buildings and improvements........ Straight-line 5-20 $ 17,006 $ 49,710
Broadcasting and other Straight-line 3-20 85,481 206,815
equipment.......................
Equipment under capital lease Straight-line 3-5 1,356 1,012
obligations.....................
-------- --------
103,843 257,537
Accumulated depreciation and (10,336) (27,912)
amortization....................
-------- --------
93,507 229,625
Land.............................. 13,210 19,295
-------- --------
$106,717 $248,920
======== ========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1996, 1997 and 1998 was approximately $1,535, $8,137 and $18,559, respectively.
75
<PAGE> 77
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. INTANGIBLES
Intangibles consists of the following:
<TABLE>
<CAPTION>
AMORTIZABLE DECEMBER 31,
AMORTIZATION LIFE ----------------------
METHOD (YEARS) 1997 1998
--------------- ----------- -------- ----------
<S> <C> <C> <C> <C>
FCC licenses................. Straight-line 40 $840,374 $4,227,180
Goodwill..................... Straight-line 40 26,576 28,868
Noncompete agreements........ Straight-line 1-3 6,115 17,052
Deferred financing costs..... Interest Method -- 21,358 26,437
Other........................ Straight-line 3-5 7,076 21,792
-------- ----------
901,499 4,321,329
Less accumulated
amortization............... (25,888) (99,041)
-------- ----------
875,611 4,222,288
Pending acquisition costs.... 5,934 18,090
-------- ----------
$881,545 $4,240,378
======== ==========
</TABLE>
Amortization expense of intangible assets for the years ended December 31,
1996, 1997 and 1998 was approximately $2,606, $18,278 and $77,648, respectively.
9. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------- -------
<S> <C> <C>
Accrued compensation...................................... $ 4,252 $ 3,657
Accrued acquisition costs................................. 5,284 9,714
Accrued interest.......................................... 960 27,843
Accrued commissions....................................... 2,403 9,865
Barter payable............................................ 1,082 5,329
Accrued music license fees................................ 437 1,939
Accrued health insurance.................................. 304 1,597
401(k) withholdings....................................... 421 1,000
Accrued property taxes.................................... 397 810
Other..................................................... 1,286 6,515
------- -------
$16,826 $68,269
======= =======
</TABLE>
76
<PAGE> 78
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
-------- ----------
<S> <C> <C>
Capstar Credit Facility..................................... $141,700 $ 909,000
12 3/4% Capstar Partners Notes, $277,000 principal,
including unamortized discount of $110,009 and $87,956,
respectively.............................................. 166,991 189,044
9 1/4% Capstar Radio Notes, $200,000 principal, including
unamortized discount of $762 and $711, respectively....... 199,238 199,289
13 1/4% Capstar Radio Notes................................. 79,816 --
Chancellor Note (due to an affiliate)....................... -- 150,000
10 3/4% CCI Notes, $294,134 principal, including unamortized
premium of $29,339........................................ -- 323,473
11 3/8% CCI Notes........................................... -- 566
Capital lease obligations and other notes payable at various
interest rates............................................ 6,827 7,217
-------- ----------
594,572 1,778,589
Less current portion........................................ (1,388) (29,834)
-------- ----------
$593,184 $1,748,755
======== ==========
</TABLE>
Credit Facility
In connection with the SFX Merger, Capstar Radio, as the borrower, entered
into a new credit agreement, dated as of May 29, 1998, as amended (the "Capstar
Credit Facility"), with Capstar Broadcasting, Capstar Partners, and the
financial institutions party thereto. The Capstar Credit Facility consists of a
$500,000 revolving loan, a $450,000 term loan facility (the "A Term Loan") and a
$400,000 term loan (the "B Term Loan"). The Capstar Credit Facility also
contains mechanisms that permit Capstar Radio to request additional term loans
and revolving credit loans in an aggregate amount up to $550,000; provided,
however, that all such additional loans are subject to future commitment
availability and approval from the banks and are not currently available under
the Capstar Credit Facility. The revolving loan matures on November 30, 2004.
The A Term Loan provides for scheduled loan repayments from August 31, 1999 to
November 30, 2004. The B Term Loan provides for scheduled loan repayments from
August 31, 1998 to May 31, 2005. Up to $150,000 of the revolving loan commitment
is available to Capstar Radio for the issuance of letters of credit. As of
December 31, 1998, $428,955 was available for borrowing under the Capstar Credit
Facility due to an outstanding balance of $909,000 and letters of credit of
$10,045, subject to financial covenants contained in the credit facility and the
indentures that govern the indebtedness of Capstar Broadcasting's subsidiaries.
Due to the Company replacing its previous credit facility with the Capstar
Credit Facility, an extraordinary loss, net of tax, of approximately $2,487 was
recognized in the second quarter of 1998.
The revolving loans and the term loans bear interest at a rate based, at
the option of Capstar Radio, on (i) a base rate defined as the higher of 1/2 of
1% in excess of the federal reserve reported certificate of deposit rate or the
administrative agent bank's prime lending rate, plus an incremental rate or (ii)
the Eurodollar rate, plus an incremental rate. The weighted-average interest
rates on revolving loans outstanding at December 31, 1998 was 7.66%. Capstar
Radio pays fees ranging from 0.25% to 0.50% per annum on the aggregate unused
portion of the loan commitment based on the leverage ratio for the most recent
quarter end. In addition, Capstar Radio is required to pay letter of credit
fees.
The Capstar Credit Facility contains customary restrictive covenants,
which, among other things and with certain exceptions, limit the ability of
Capstar Radio to incur additional indebtedness and liens in connection
therewith, enter into certain transactions with affiliates, pay dividends,
consolidate, merge or effect certain
77
<PAGE> 79
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
asset sales, issue additional stock, make capital expenditures and enter new
lines of business. The Capstar Credit Facility limits the ability of Capstar
Radio and its subsidiaries to make additional acquisitions in excess of $200,000
on an individual basis without the prior consent of a majority of the banks.
Substantially all the assets of Capstar Radio and its subsidiaries are
restricted. Under the Capstar Credit Facility, Capstar Radio is also required to
satisfy certain financial covenants, which require Capstar Radio and its
subsidiaries to maintain specified financial ratios and to comply with certain
financial tests, such as maximum leverage ratio and minimum consolidated EBITDA
to consolidated net cash interest expense.
Capstar Radio has collateralized the Capstar Credit Facility by granting a
first priority perfected pledge of Capstar Radio's assets, including the capital
stock of its subsidiaries, excluding the assets of CCI. Capstar Partners,
Capstar Broadcasting and all of the direct and indirect subsidiaries of Capstar
Partners (other than CCI) have guaranteed the Capstar Credit Facility and have
collateralized their guarantees by granting a first priority perfected pledge of
substantially all of their assets.
12 3/4% Capstar Partners Notes
On February 20, 1997, Capstar Partners issued $277.0 million in aggregate
principal amount at maturity of its 12 3/4% Senior Discount Notes due 2009. The
discount notes issued on February 20, 1997 were issued at a substantial discount
from their aggregate principal amount at maturity, generating gross proceeds to
Capstar Partners of approximately $150.3 million. On September 12, 1997, Capstar
Partners exchanged its 12 3/4% Senior Discount Notes due 2009 (the "12 3/4%
Capstar Partners Notes"), which were registered under the Securities Act of
1933, for all of the outstanding 12 3/4% Senior Discount Notes due 2009
previously issued on February 20, 1997. The terms of the 12 3/4% Capstar
Partners Notes are identical in all material respects to the discount notes
issued on February 20, 1997. The 12 3/4% Capstar Partners Notes are
uncollateralized, senior obligations of Capstar Partners and are limited to
$277.0 million aggregate principal amount at maturity and will mature on
February 1, 2009. No interest will accrue on the 12 3/4% Capstar Partners Notes
prior to February 1, 2002. Thereafter, interest on the 12 3/4% Capstar Partners
Notes will accrue at the rate of 12 3/4% and will be payable in cash
semiannually on February 1 and August 1 commencing on August 1, 2002. The yield
to maturity and the effective interest rate of the 12 3/4% Capstar Partners
Notes is 12 3/4% and 12.42%, respectively, (computed on a semi-annual bond
equivalent basis), calculated from February 20, 1997.
The 12 3/4% Capstar Partners Notes may be redeemed at any time on or after
February 1, 2002, in whole or in part, at the option of Capstar Partners at
prices ranging from 106.375% at February 1, 2002 and declining to 100% on
February 1, 2007 (expressed as a percentage of the accreted value in the
redemption date), plus in each case accrued and unpaid interest. In addition,
prior to February 1, 2001, Capstar Partners may, at its option, redeem up to 25%
of the principal amount at maturity of the 12 3/4% Capstar Partners Notes at a
redemption price of 112.75% of the accreted value, out of the proceeds of one or
more public equity offering or major asset sales. Upon the occurrence of a
change in control (as defined in the 12 3/4% Capstar Partners Note Indenture),
the holders of the 12 3/4% Capstar Partners Notes have the right to require
Capstar Partners to purchase all or a portion of the 12 3/4% Capstar Partners
Notes at a purchase price equal to (i) 101% of the accreted value if the change
in control occurs before February 1, 2002 or (ii) 101% of the principal amount
at maturity, plus accrued and unpaid interest, if the change in control occurs
after February 1, 2002. The 12 3/4% Capstar Partners indenture contains
limitations on incurrence of additional indebtedness, issuance of preferred
stock of subsidiaries and restricted payments, as well as other restrictive
covenants.
9 1/4% Capstar Radio Notes
On June 17, 1997, Capstar Radio issued $200.0 million in aggregate
principal amount of its 9 1/4% Senior Subordinated Notes due July 1, 2007. On
September 16, 1997, Capstar Radio exchanged its 9 1/4% Senior Subordinated Notes
due 2007 (the "9 1/4% Capstar Radio Notes"), which were registered under the
Securities
78
<PAGE> 80
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Act of 1933, for all of the outstanding notes issued on June 17, 1997. The
9 1/4% Capstar Radio Notes are general uncollateralized obligations of Capstar
Radio and are subordinated to all senior indebtedness of Capstar Radio. The
9 1/4% Capstar Radio Notes may be redeemed at anytime on or after July 1, 2002,
in whole or in part, at the option of Capstar Radio at prices ranging from
104.625% at July 1, 2002 and declining to 100% on or after July 1, 2005, plus in
each case accrued and unpaid interest. In addition, prior to July 1, 2001,
Capstar Radio may redeem up to 25% of the original aggregate principal amount of
the 9 1/4% Capstar Radio Notes at a redemption price of 109.25% plus accrued and
unpaid interest with net proceeds of one or more public equity offerings or
major asset sales. Upon the occurrence of a change of control (as defined in the
9 1/4% Capstar Radio Notes indenture), the holders of the 9 1/4% Capstar Radio
Notes have the right to require Capstar Radio to purchase all or a portion of
the 9 1/4% Capstar Radio Notes at a price equal to 101% plus accrued and unpaid
interest. The 9 1/4% Capstar Radio Notes indenture contains limitations on
incurrence of additional indebtedness, issuance of preferred stock of
subsidiaries and restricted payments, as well as other restrictive covenants.
The effective interest rate of the 9 1/4% Capstar Radio Notes is 10.29%,
calculated from June 17, 1997.
13 1/4% Capstar Radio Notes
On March 30, 1998, Capstar Radio announced an offer to purchase for cash
any and all of its $76,808 aggregate principal amount of 13 1/4% Senior
Subordinated Notes due 2003 (the "13 1/4% Capstar Radio Notes"). On April 28,
1998, Capstar Radio purchased all of the outstanding 13 1/4% Capstar Radio Notes
for an aggregate purchase price of $90,200 including a $10,700 purchase premium
and $2,700 of accrued interest, resulting in an extraordinary loss of
approximately $4,818, net of tax, which was recognized in the second quarter of
1998.
Chancellor Note
In connection with the SFX Merger, Capstar Broadcasting borrowed $150,000
from Chancellor Media evidenced by a note (the "Chancellor Note"). The
Chancellor Note bears interest at a rate of 12% per annum (subject to increase
in certain circumstances), payable quarterly, of which 5/6 is payable in cash
and 1/6 is, at Capstar Broadcasting's option, either payable in cash or added to
the principal amount of the Chancellor Note. In addition, Capstar Broadcasting
may elect to defer the 5/6 portion payable in cash, in which case the Chancellor
Note would bear interest at a rate of 14% per annum. If Capstar Broadcasting
elects to pay interest when due, quarterly interest payments will equal $4,500,
payable until maturity. In 1998, Capstar Broadcasting did not elect to defer any
portion of the interest due, and paid approximately $10.6 million to Chancellor
Media. The Chancellor Note will mature on the twentieth anniversary of the date
of issuance, provided that Capstar Broadcasting may prepay all or part of the
outstanding principal balance and, in certain circumstances, Chancellor Media
has the right to require Capstar Broadcasting to prepay part of the outstanding
principal balance. The common stock of Capstar Partners was pledged by Capstar
Broadcasting on a first priority basis to Chancellor Media as collateral for the
Chancellor Note.
10 3/4% CCI Notes and 11 3/8% CCI Notes
After the consummation of the SFX Merger, CCI remained liable for the
$450,000 in aggregate principal amount of the 10 3/4% CCI Notes. Interest is
payable semi-annually on May 15 and November 15 of each year until maturity on
May 15, 2006. The notes are uncollateralized obligations of CCI and are
subordinate to all senior debt of CCI. The effective interest rate of the
10 3/4% CCI Notes is 9.11%.
On July 3, 1998, pursuant to the terms of the indenture governing the
10 3/4% CCI Notes, CCI redeemed $154,000 aggregate principal amount of the
10 3/4% CCI Notes for an aggregate purchase price of $172,800
79
<PAGE> 81
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
including a $16,600 redemption premium and $2,200 of accrued interest. (The
carrying value of the 10 3/4% CCI Notes approximated their fair value at the
date of the SFX Merger).
The SFX Merger resulted in a change of control under the indenture
governing the 10 3/4% CCI Notes and the 11 3/8% CCI Notes. Pursuant to a change
of control offer to acquire all of the outstanding 10 3/4% CCI Notes and 11 3/8%
CCI Notes, each of which commenced on June 8, 1998, CCI purchased on July 10,
1998 $1,866 aggregate principal amount of the 10 3/4% CCI Notes for an aggregate
purchase price of $1,915, including an $18 purchase premium and $31 of accrued
interest. (The carrying value of the 10 3/4% CCI Notes approximated their fair
value at the date of the SFX Merger). No 11 3/8% CCI Notes were tendered for
repurchase.
The 10 3/4% CCI Notes indenture contains restrictive provisions that, among
other things, limit the ability of CCI to incur additional indebtedness, pay
dividends or make certain other restricted payments, or merge or consolidate
with or sell all or substantially all of their assets to any other person.
Substantially all of the assets of CCI are restricted.
The 10 3/4% CCI Notes and 11 3/8% CCI Notes are guaranteed by every direct
and indirect subsidiary of CCI. The guarantees by the guarantor subsidiaries are
full, unconditional, and joint and several. All of the guarantor subsidiaries
are wholly-owned. CCI is a holding company with no assets, liabilities or
operations other than its investment in its subsidiaries.
Other
In January 1997, the Company entered into an interest rate swap agreement
designated as a partial hedge of the Company's portfolio of variable rate debt.
The purpose of the swap is to reduce certain exposures to interest rate
fluctuations. At December 31, 1998, this interest rate swap had a notional
amount of $26,000, and a portfolio of a variable rate debt outstanding in the
amount of $909,000. Under this agreement the Company is receiving a
weighted-average variable rate equal to LIBOR and paying a weighted-average
fixed interest rate of 6.34%. The weighted-average LIBOR rate applicable to this
agreement was 5.07% at December 31, 1998. Interest expense was increased by $124
and $170 for 1997 and 1998, respectively. Notional amounts do not quantify risk
or represent assets or liabilities of the Company, but are used in the
determination of cash settlements under the agreements. The interest rate swap
agreement matures on January 31, 2000.
In conjunction with the merger with Former GulfStar, the Company paid off
the then outstanding Former GulfStar credit facility. As a result, the company
recognized an extraordinary charge relating to the payoff of approximately
$2,403, net of income tax benefit, of unamortized deferred financing costs.
During 1996, Capstar Radio significantly modified the terms of its existing
reducing revolver loans and accelerated the maturity date from March 31, 2003 to
December 31, 1996. In connection with this modification, Capstar Radio
recognized an extraordinary charge relating to the write-off of approximately
$1,188, net of income tax benefit, of unamortized deferred financing costs.
80
<PAGE> 82
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The scheduled maturities of the Company's outstanding long-term debt at
December 31, 1998 for each of the next five years and thereafter are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 29,834
2000........................................................ 63,929
2001........................................................ 71,895
2002........................................................ 82,927
2003........................................................ 182,195
Thereafter.................................................. 1,347,809
----------
$1,778,589
==========
</TABLE>
11. CAPITAL STOCK:
The rights of holders of the Common Stock are identical in all respects,
except for voting rights. The Class A Common Stock and the Class C Common Stock
vote together as a single class on all matters submitted to a vote of
stockholders, with each share of Class A Common Stock entitled to one vote and
each share of Class C Common Stock entitled to ten votes, except (i) the holders
of Class A Common Stock, voting as a separate class, will be entitled to elect
two Class A Directors, (ii) with respect to any proposed "going private"
transaction with Hicks Muse or any of its affiliates, each share of Class A
Common stock and Class C Common Stock shall be entitled to one vote, but the
holders of Class A common stock and Class C Common Stock shall vote together as
a single class in such "going private" transactions, and (iii) as otherwise
required by law. The Class B Common Stock has no voting rights except as
otherwise required by law. Except as otherwise required by law and except in
connection with the election of the directors of the Company, the vote of the
holders of at least a majority in voting power of the outstanding shares then
entitled to vote shall decide any question brought before a meeting of the
stockholders of the Company. The directors of the Company shall be elected at a
meeting of the stockholders at which a quorum is present by a plurality of the
votes of the shares entitled to vote on the election of directors or a class of
directors.
Dividends. Subject to right of the holders of any class of Preferred Stock,
holders of shares of Common Stock are entitled to receive such dividends as may
be declared by the Board of Directors out of fund legally available for such
purpose. No dividend may be declared or paid in cash or property on any share of
any class of Common Stock unless simultaneously the same dividend is declared or
paid on each share of the other class of Common Stock; provided that, in the
event of stock dividends, holders of a specific class of Common Stock shall be
entitled to receive only additional share of such class.
Conversion of Class B Common Stock and Class C Common Stock. The shares of
Class B Common Stock and Class C Common Stock are convertible, in whole or in
part, at the option of the holder or holders thereof at any time into a like
number of shares of Class A Common Stock, subject to certain conditions. Upon
the sale or other transfer if any share or shares of Class B Common Stock or
Class C Common Stock to any person (subject to certain exceptions) other than
Hicks Muse and its affiliates, each share so sold or transferred shall
automatically be converted into one share of Class A Common Stock, subject to
certain conditions.
12. REDEEMABLE PREFERRED STOCK:
Capstar Partners
On June 17, 1997, Capstar Partners issued 1,000 shares of its cumulative
(after July 1, 2002) par value $.01 per share 12% Capstar Partners Preferred
Stock (the "Preferred Stock Offering"). All of the proceeds from the Preferred
Stock Offering were used to finance the GulfStar merger. On September 12, 1997,
Capstar
81
<PAGE> 83
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Partners exchanged its 12% Capstar Partners Preferred Stock (the "12% Capstar
Partners Preferred Stock"), which was registered under the Securities Act, for
all of the outstanding 12% Capstar Partners Preferred Stock previously issued on
June 17, 1997. Capstar Partners has authorized 10,000 shares of the 12% Capstar
Partners Preferred Stock. Dividends on the 12% Capstar Partners Preferred Stock
accumulate from the date of issuance and are payable semi-annually, on January 1
and July 1 of each year, at a rate per annum of 12% of the liquidation
preference, or $12.00, per share. Dividends may be paid, at Capstar Partners'
option, on any dividend payment date occurring on or prior to July 1, 2002
either in cash or in additional shares of the 12% Capstar Partners Preferred
Stock. The liquidation preference of the 12% Capstar Partners Preferred Stock is
$100.00 per share. The 12% Capstar Partners Preferred Stock is redeemable at
Capstar Partners' option, in whole or in part at any time on or after July 1,
2002, at prices ranging from 106% at July 1, 2002 and declining to 100% after
July 1, 2007, plus, without duplication, accumulated and unpaid dividends to the
date of redemption. In addition, subject to certain exceptions, prior to July 1,
2001, Capstar Partners may, at its option, redeem up to 25% of the 12% Capstar
Partners Preferred Stock with the net cash proceeds from one or more Public
Equity or Major Asset Sales (both as defined in the Certificate of Designation
governing the 12% Capstar Partners Preferred Stock), at the redemption prices
set forth in the Certificate of Designation, plus, without duplication,
accumulated and unpaid dividends to the redemption date. The 12% Capstar
Partners Preferred Stock is subject to mandatory redemption in whole on July 1,
2009 at a price equal to 100% of the liquidation preference thereof, plus all
accrued and unpaid dividends.
The 12% Capstar Partners Preferred Stock was recorded at the amount of the
net proceeds of approximately $95 million. The carrying amount is being
accreted, using the interest method, to equal the mandatory redemption amount at
the mandatory redemption date. In 1997 and 1998, Capstar Partners exercised this
option by paying $6,467 and $13,157 of dividends-in-kind. Through December 31,
1998, cash dividends of approximately $2 have been paid to fractional
shareholders. At December 31, 1998, Capstar Partners had no accrued dividends
outstanding.
Capstar Partners may, at its option, subject to certain conditions, on any
scheduled dividend payment date, exchange the 12% Capstar Partners Preferred
Stock, in whole but not in part, for 12% Capstar Exchange Debentures. Holders of
the 12% Capstar Partners Preferred Stock will be entitled to receive $1.00
principal amount of 12% Capstar Exchange Debentures for each $1.00 in
liquidation preference of 12% Capstar Partners Preferred Stock.
The Certificate of Designation provides that, upon the occurrence of a
change of control (as defined in the Capstar Certificate of Designation), each
holder has the right to require Capstar Partners to repurchase all or a portion
of such holder's 12% Capstar Partners Preferred Stock in cash at a purchase
price equal to 101% of the liquidation preference thereof, plus, without
duplication, an amount in cash equal to all accumulated and unpaid dividends per
share to the date of repurchase.
In addition, the Certificate of Designation provides that, prior to July 1,
2002, upon the occurrence of a change of control, Capstar Partners has the
option to redeem the 12% Capstar Partners Preferred Stock in whole but not in
part (a "Change of Control Redemption") at a redemption price equal to 100% of
the liquidation preference thereof, plus the applicable premium (as defined in
the Certificate of Designation).
The Certificate of Designation contains restrictive provisions that, among
other things, limit the ability of Capstar Partners and its subsidiaries to
incur additional indebtedness, pay dividends or make certain other restricted
payments, or merge or consolidate with or sell all or substantially all of their
assets to any other person.
The 12% Capstar Partners Preferred Stock, with respect to dividend rights
and rights on liquidation, winding-up and dissolution, ranks (a) senior to all
classes of common stock of Capstar Partners and to each other series of
preferred stock established after June 17, 1997 (the "Preferred Stock Issuance
Date") by the
82
<PAGE> 84
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Board of Directors of Capstar Partners the terms of which expressly provide that
such class or series will rank junior to the 12% Capstar Partners Preferred
Stock (the "Junior Stock"), subject to certain conditions, (b) on a parity with
each other class of preferred stock established after the Preferred Stock
Issuance Date by the Board of Directors of Capstar Partners the terms of which
expressly provide that such class or series will rank on a parity with the 12%
Capstar Partners Preferred Stock and (c) subject to certain conditions, junior
to each class of Preferred Stock established after the Preferred Stock Issuance
Date by the Board of Directors of Capstar Partners the terms of which expressly
provide that such class will rank senior to the 12% Capstar Partners Preferred
Stock.
CCI
All 2,392 shares of CCI Series E Preferred Stock remained outstanding after
the consummation of the SFX Merger. Dividends on the CCI Series E Preferred
Stock accumulate from the date of issuance at the rate per share of $12.625 per
annum, and are payable semi-annually on January 15 and July 15 of each year.
Dividends may be paid, at CCI's option, on any dividend payment date occurring
on or before January 15, 2002, either in cash or in additional shares of CCI
Series E Preferred Stock having a liquidation preference equal to the amount of
such dividend. In 1998, CCI paid $7,517 of dividends in the form of new shares
and $1 in cash dividends. At December 31, 1998, CCI had $7,327 recorded in
accrued dividends.
The Certificate of Designation contains restrictive provisions that, among
other things, limit the ability of CCI to incur additional indebtedness, pay
dividends or make certain other restricted payments, or merge or consolidate
with or sell all or substantially all of their assets to any other person.
Substantially all of the assets of CCI are restricted.
Subject to certain conditions, the shares of the CCI Series E Preferred
Stock are exchangeable in whole or in part, on a pro rata basis, at the option
of CCI, on any dividend payment date, for CCI's 12 5/8% Senior Subordinated
Exchangeable Debentures due 2006 ("CCI Exchange Notes"), provided that
immediately after giving effect to any partial exchange, there shall be
outstanding CCI Series E Preferred Stock with an aggregate liquidation
preference of not less than $50,000 and not less than $50,000 in aggregate
principal amount of CCI Exchange Notes. CCI is required, subject to certain
conditions, to redeem all of the CCI Series E Preferred Stock outstanding on
October 31, 2006.
On July 3, 1998, pursuant to the terms of the Certificate of Designation
that governs the CCI Series E Preferred Stock (the "CCI Certificate of
Designation"), CCI redeemed $119,600 aggregate liquidation preference, or 1,196
shares, of the CCI Series E Preferred stock for an aggregate purchase price of
$141,700, including a $15,100 redemption premium and $7,000 of accrued
dividends. (The carrying value of the CCI Exchange Notes approximated their fair
value at the date of the SFX Merger.)
The SFX Merger resulted in a change of control under the CCI Certificate of
Designation. Pursuant to change of control offers to acquire all of the
outstanding CCI Series E Preferred Stock, which commenced on June 8, 1998, CCI
Purchased on July 10, 1998 $500 aggregate liquidation preference, or 5 shares,
of the CCI Series E Preferred Stock for an aggregate purchase price of $536,
including a $5 purchase premium and $31 of accrued dividends. (The carrying
value of the CCI Exchange Notes approximated their fair value at the date of the
SFX Merger.)
GulfStar Preferred
In connection with issuance of its 12% redeemable preferred shares, Former
GulfStar granted, to the holders of the preferred shares, warrants for the
purchase of 8 shares of Former GulfStar's common stock at a rate of $.01 per
share.
83
<PAGE> 85
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Of the proceeds received from issuance of the preferred shares, $3,884 was
assigned to the warrants and credited to additional paid-in capital in the
accompanying consolidated financial statements. Such value is being accreted to
redeemable preferred stock using the interest method over the period from
issuance to mandatory redemption. These warrants were exercised in 1997 in
connection with the GulfStar merger.
In conjunction with the merger of GulfStar into a direct subsidiary of
Capstar Broadcasting in July 1997, Capstar Radio redeemed all of the outstanding
shares of redeemable preferred stock of GulfStar. The liquidation value as of
the date of redemption was approximately $29 million, which included $2,817 in
accumulated dividends. The redemption resulted in a charge to additional paid-in
capital of $5,378, for the amount that the liquidation value exceeded the
carrying value.
13. NONCASH COMPENSATION EXPENSE:
Warrants
During 1996 and 1997, the Company issued warrants to the Company's Chief
Executive Officer ("CEO"). In April 1998, Capstar Broadcasting (i) amended and
restated these warrants which give the holder to the right to purchase up to
1,508 shares of Class C Common Stock at exercise prices ranging from $14.40 to
$18.10 per share, (ii) granted two additional warrants to the CEO to purchase up
to 188 shares and 500 shares of Class C Common stock at an exercise price of
$17.10 and $14.00 per share, respectively, and (iii) granted warrants to two
other executive officers of Capstar Broadcasting to purchase up to an aggregate
of 300 shares of Class A Common Stock at an exercise price of $14.00 per share.
In July, 1998, a director of Capstar Broadcasting was granted a warrant to
purchase 200 shares of Class A Common Stock at an exercise price of $14.00 per
share. The warrants expire ten years or less from the date of issue depending on
the warrant agreement. Certain of the warrants can be exercised at any time
prior to the expiration date. The remaining warrants cannot be exercised prior
to a triggering event. Depending on the warrant agreement, the warrant will not
be exercisable until (i) June 30, 2001 or immediately preceding a sale of the
Company (as defined by the warrant agreement) or (2) if the fair market value of
the Class A Common Stock, calculated on a daily basis, equals or exceeds $60.00
per share for a period of 180 consecutive days during the period from the date
of grant of the warrant through May 31, 2003.
The terms of certain of these warrants give rise to variable treatment for
accounting purposes. In accordance with Accounting Principles Board ("APB")
Opinion No. 25, compensation expense is measured at each reporting period and
recognized based on the specific terms of the warrants. The Company recognized
noncash compensation of approximately $744, $1,825 and $8,546 in 1996, 1997 and
1998, respectively.
With the exception of the warrant to purchase 500 shares at $14.00 which
was granted to the CEO, upon consummation of the merger with Chancellor Media,
each warrant will fully vest and be exercisable.
A rollforward of the warrant activity has been included in the equity
instruments tables below.
Stock Subscriptions
Former GulfStar issued approximately 1.6 million shares of common stock
since 1994 for prices ranging from $0.62 to $8.04 per share. In each case,
Former GulfStar received recourse and non-recourse notes for 25% and 75% of the
purchase price, respectively.
Former GulfStar applied APB Opinion No. 25 in accounting for the stock
issued for non-recourse notes. The compensation cost charged against income was
approximately $5,432, $8,750 and $11,217 in 1996, 1997 and 1998, respectively.
For certain of the sales to employees during 1996, compensation expense is
considered unearned until Former GulfStar's rights to repurchase the shares
expire in accordance with the terms of
84
<PAGE> 86
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
underlying securities purchase agreement. Such rights expired during 1997 upon
the merger of Former GulfStar and the Company.
In conjunction with the acquisition of Former GulfStar by Capstar
Broadcasting in July 1997, all of Former GulfStar's then outstanding common
stock and stock subscriptions were exchanged for Capstar Broadcasting common
stock and stock subscriptions.
Stock Options
In 1998, the Company adopted the 1998 Stock Option Plan (the "Plan")
providing for the granting of options to purchase shares of the Company's common
stock to the Company's key employees and eligible non-employees, as defined by
the Plan and determined by the Company's Board Directors. The Plan replaced the
prior stock option plan. The Company applies APB Opinion No. 25 and related
interpretations in accounting for the Plan. In 1995, the FASB issued SFAS No.
123 "Accounting for Stock-Based Compensation," which, if adopted by the Company,
would change the methods the Company applies in recognizing the cost of the
Plan. Adoption of the cost recognition provisions of SFAS No. 123 is optional
and the Company has decided not to elect these provisions of SFAS No. 123.
However, pro forma disclosures as if the Company adopted the cost recognition
provisions of SFAS No. 123 in 1995 are required by SFAS No. 123 and are
presented below.
As of December 31, 1998, an aggregate of 4,700 shares was approved for
issuance under the Plan. The Plan provides for the issuance of both Incentive
Stock Options ("ISOs") as well as options not qualifying as ISOs within the
meaning of the Internal Revenue Code of 1986, as amended. At the time of the
grant, the Company's Board of Directors determines the exercise price and
vesting schedules. Under the terms of the Plan, the option price per share of
ISOs to a person who, at the time such ISO is granted, owns shares of the
Company or any Related Entity, which possess more than 10% of the total combined
voting power of all classes of shares of the Company or of any related entity,
the option exercise price shall not be less than 110% of the fair market value
per share of common stock at the date the option is granted. Options may not be
granted with a term beyond 2008. Generally, 20% of each option is exercisable
one year after the grant and an additional 1/60 becomes exercisable each month
thereafter.
The Plan has been amended to provide that, upon the consummation of the
merger with Chancellor Media, with respect to any outstanding options, if on or
before the second anniversary of the consummation of the merger, the employment
of an optionee is terminated (other than for cause, voluntary resignation, death
or disability) or an optionee resigns after a material diminution of their
duties, the optionee's options will vest in full and the options may be
exercised until the termination of the option.
In April 1998, the Company granted 585 options at an exercise price of
$17.50. Accordingly, the Company recorded unearned compensation of $878 for the
difference between $17.50 and the initial public offering price of $19.00. The
unearned compensation is being expensed ratably over the five year vesting
period.
85
<PAGE> 87
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Equity Instrument Tables
A summary of the status of Capstar Broadcasting's equity instrument (option
and warrant) activity and related information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1997 1998
------------------ ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year..... -- $ -- 1,304 $13.14 3,189 $13.58
Granted.............................. 1,304 13.14 2,067 13.45 3,798 17.36
Exercised or forfeited............... -- -- -- -- 137 12.89
Cancelled............................ -- -- 182 9.02 155 14.84
------ ------ ------ ------ ------ ------
Outstanding at end of year........... 1,304 $13.14 3,189 $13.58 6,695 $15.71
====== ====== ======
Equity instruments exercisable at end
of year............................ 744 1,139 1,664
====== ====== ======
Weighted-average grant-date fair
value of equity instruments granted
equal to market value at date of
grant.............................. $ 4.92 $ 8.38 $14.97
====== ====== ======
Weighted average grant date fair
value of equity instruments granted
greater than market value at date
of grant........................... $ 5.41 $ 5.93 $ 6.60
====== ====== ======
Weighted average grant-date fair
value of equity instruments granted
less than market value at date of
grant.............................. $ -- $ -- $12.87
====== ====== ======
</TABLE>
As required by SFAS No. 123, pro forma information regarding net loss has
been determined as if the Company had accounted for its equity instruments under
the fair value method. The fair value for these equity instruments was estimated
as of the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1996, 1997 and 1998, respectively;
risk free interest rates of 5.84%, 6.16% and 5.41%; no dividend; volatility
factors of the expected market price of the company's common stock of 68.15%;
and weighted-average expected lives of the options of three and five years.
For purposes of pro forma disclosures, the estimated fair value of the
equity instruments is amortized to expense over the options' vesting period. The
impact on the pro forma results which follow may not be representative of
compensation expense in future years when the effect of the amortization of
multiple awards
86
<PAGE> 88
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
may be reflected in the amounts. Had the Company adopted the cost provision of
SFAS No. 123 net loss for 1996, 1997 and 1998 would approximate the pro forma
amounts below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Net loss:
As reported....................................... $(11,957) $(45,740) $ (96,761)
Pro forma......................................... (16,697) (51,095) (107,634)
Net loss attributable to common stock:
As reported....................................... (13,307) (52,811) (96,761)
Pro forma......................................... (18,047) (58,166) (107,634)
Basic and diluted loss per common share:
As reported....................................... (1.50) (2.07) (1.10)
Pro forma......................................... (2.03) (2.29) (1.23)
</TABLE>
The following table summarizes information about Capstar Broadcasting's
equity instruments outstanding at December 31, 1998:
<TABLE>
<CAPTION>
EQUITY INSTRUMENTS OUTSTANDING
--------------------------------------------------------------------
WEIGHTED- NUMBER EXERCISABLE
NUMBER AVERAGE WEIGHTED EXERCISABLE WEIGHTED
OUTSTANDING AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE
------------------------ -------------- ----------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 7.10 - 7.10....................... 47(1) 3.2 $ 7.10 23 $ 7.10
10.00 - 10.00...................... 240 7.9 10.00 157 10.00
11.00 - 11.00...................... 437 4.1 11.00 255 11.00
13.30 - 13.30...................... 729 4.7 13.30 182 13.30
14.00 - 14.00...................... 1,000 4.4 14.00 -- --
14.40 - 14.40...................... 930 7.8 14.40 744 14.40
15.40 - 15.40...................... 255 8.1 15.40 204 15.40
17.10 - 17.10...................... 188 9.3 17.10 -- 17.10
17.50 - 17.50...................... 557 5.5 17.50 -- --
18.10 - 18.10...................... 323 8.5 18.10 99 18.10
19.00 - 19.00...................... 1,989 5.9 19.00 -- --
----- --- ------ ----- ------
6,695 5.8 $15.71 1,664 $13.58
===== =====
</TABLE>
- ---------------
(1) These options were assumed by the Company as part of the merger with Former
GulfStar and were accounted for as a portion of the acquisition of minority
interest.
87
<PAGE> 89
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. INCOME TAXES:
All of the Company's revenues were generated in the United States. The
components of the benefit for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $(1,112) $ 162 $ 11,396
State............................................. 243 316 7,000
Deferred:
Federal........................................... 503 (11,168) (37,266)
State............................................. 44 (1,030) (5,447)
------- -------- --------
Total benefit............................. $ (322) $(11,720) $(24,317)
======= ======== ========
</TABLE>
Approximately $707, $1,473 and $3,282 of benefit for income taxes was
allocated to an extraordinary loss on early extinguishment of debt in the
accompanying consolidated statements of operations for the years ended December
31, 1996, 1997 and 1998, respectively. For purposes of the foregoing components
of benefit for income taxes, such intra-period allocation is treated to have
affected the deferred components.
Income tax benefit differs from the amount computed by applying the federal
statutory income tax rate of 35% to loss before income taxes and extraordinary
items for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
U.S. federal income tax at statutory rate........... $(3,882) $(16,965) $(32,125)
State income taxes, net of federal benefit.......... 189 (1,478) 1,009
Nondeductible compensation expense.................. 1,847 3,325 3,955
Other items, primarily nondeductible expenses and
deferred tax adjustments.......................... 1,524 3,398 2,844
------- -------- --------
$ (322) $(11,720) $(24,317)
======= ======== ========
</TABLE>
The net deferred tax liability consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
-------- ----------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment and intangible asset basis
differences and related depreciation and
amortization.................................... $198,025 $1,238,862
Deferred tax assets:
Miscellaneous...................................... 4,307 9,269
Unamortized discount on long-term debt............. 8,150 26,614
Net operating loss carryforwards................... 32,351 49,884
-------- ----------
Total deferred tax assets.................. 44,808 85,767
Valuation allowance for deferred tax assets........ (7,205) (10,061)
-------- ----------
Net deferred tax asset..................... 37,603 75,706
-------- ----------
Net deferred tax liability................. $160,422 $1,163,156
======== ==========
</TABLE>
88
<PAGE> 90
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities and projected future taxable
income in making this assessment. The Company expects the majority of deferred
tax assets at December 31, 1998 to be realized as a result of the reversal
during the carryforward period of existing taxable temporary differences giving
rise to deferred tax liabilities and the generation of taxable income in the
carryforward period.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $131,000, including approximately $94,300 acquired in connection
with the acquisition of certain subsidiaries. The acquired net operating losses
are SRLY to the acquired subsidiaries that generated the losses. If not
previously utilized, net operating loss carryforwards expire at various dates
from 1999 through 2018. Management considers that it is more likely than not
that a portion of these loss carryforwards will not ultimately be realized, and
has recorded a related valuation allowance as of December 31, 1998.
15. COMMITMENTS AND CONTINGENCIES:
Guarantees of Indebtedness
As of December 31, 1998, the Company had guaranteed the indebtedness of
limited liability companies in the amount of $51,904. The Company holds a 30%
non voting equity interest in each of these entities, and may in the future be
required to repay such indebtedness. Through December 31, 1998, the Company has
performed as guarantor on these notes paying $3,402.
Employee Benefit Plan
During 1997, the Company established a 401(k) Plan for the benefit of all
eligible employees. Eligible participants under this plan are defined as all
full-time employees with three months of service. All eligible participants may
elect to contribute a portion of their compensation to the plan subject to
Internal Revenue Service limitations. The Company makes matching contributions
to the plan at a rate of 25%, to an annual maximum of 6% of each participant's
annual salary. Contribution expense under the plan was $300 and $2,260 for the
years ended December 31, 1997 and 1998, respectively.
Leases
The Company leases real property, office space, broadcasting and office
equipment under various noncancelable operating leases. Certain of the Company's
operating leases contain escalation clauses, renewal options and/or purchase
options. Rent expense was approximately $913, $2,490 and $8,468 for the years
ended December 31, 1996, 1997 and 1998, respectively.
89
<PAGE> 91
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Future minimum payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1999........................................................ $16,289
2000........................................................ 11,794
2001........................................................ 7,640
2002........................................................ 6,276
2003........................................................ 4,810
Thereafter.................................................. 15,980
-------
Total minimum lease payments...................... $62,789
=======
</TABLE>
Employment Agreements
The Company has employment agreements with its executive officers and other
key employees, the terms of which expire at various times through December 2003.
Such agreements provide for minimum salary levels, which may be adjusted from
time to time, as well as for incentive bonuses which are payable if specified
management goals are attained. The aggregate commitment for future salaries at
December 31, 1998, excluding bonuses, was approximately $46,049.
Legal
On July 13, 1998, Noddings Investment Group, Inc. and Noddings Warrant
Limited Partnership filed Civil Action No. 16538 in the Court of Chancery of the
State of Delaware in and for New Castle County against Capstar Communications.
Noddings alleges that Capstar Communications breached a warrant agreement that
Noddings contends requires Capstar Communications to permit Noddings to exercise
warrants in exchange for cash and shares of stock of SFX Entertainment.
Specifically, Noddings alleges that Capstar Communications has violated the
warrant agreement by permitting Noddings to receive cash in exchange for its
warrants, but refusing to convey shares of stock of SFX Entertainment. In
addition to suing on its own behalf, Noddings is seeking to prosecute the action
on behalf of a putative class comprised of all persons who owned equivalent
warrants on April 21, 1998, (the date immediately following the record date of
the distribution of stock of SFX Entertainment to holders of the stock of SFX)
and their transferees and successors in interest. Noddings has requested that
the court:
- declare that on the exercise of its warrants Capstar Communications
transmit to plaintiffs and members of the class that it seeks to
represent $22.3725 in cash per warrant and 0.2983 shares of common stock
of SFX Entertainment per warrant;
- require Capstar Communications to pay 0.2983 shares of common stock of
SFX Entertainment per warrant and, (if not previously paid) $22.3725 in
cash, to any putative class member that has exercised or exercises
warrants after April 20, 1998;
- in the alternative, award plaintiffs and members of the putative class
monetary damages in an amount to be determined at trial; and
- award costs and attorneys' fees.
In March 1999, the court issued an opinion dismissing two of Nodding's
counts and granting summary judgment in favor of Noddings on one count. The
court held that Noddings is entitled to 0.2983 shares of SFX Entertainment stock
per warrant. Capstar Communication intends to continue to defend this action
through a motion for reargument and if necessary an appeal.
90
<PAGE> 92
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not have a material
impact on the consolidated financial position or results of operations or cash
flows of the Company.
Other
The Company is partially self-insured for employee medical insurance risks,
subject to specific retention levels. Self-insurance costs are accrued based
upon the aggregate of the estimated liability for reported claims and estimated
liabilities for claims incurred but not reported. The Company has recorded
approximately $516, $2,658 and $8,079 for self-insurance costs for the years
ended December 31, 1996, 1997 and 1998, respectively.
16. RELATED PARTY TRANSACTIONS:
Monitoring and Oversight Agreements
The Company has entered into monitoring and oversight agreements (the
"Monitoring and Oversight Agreements") with Hicks, Muse & Co. Partners, L.P.
("Hicks Muse Partners"). Pursuant thereto, the Company has agreed to pay to
Hicks Muse Partners an annual fee for ongoing financial oversight and monitoring
services. The annual fee is adjustable upward or downward at the end of each
fiscal year to an amount equal to 0.2% of the budgeted consolidated annual net
sales of the Company for the then-current fiscal year; provided, that such fee
shall at no time be less that $100 per year. For the years ended December 31,
1996, 1997 and 1998, the Company incurred $21, $378 and $819 respectively,
relating to the Monitoring and Oversight Agreements.
The Monitoring and Oversight Agreements make available on an ongoing basis
the resources of Hicks Muse Partners concerning a variety of financial matters.
The services that have been and will continue to be provided, until consummation
of the Chancellor Merger, by Hicks Muse Partners could not otherwise be obtained
by the Company without the addition of personnel or the engagement of outside
professional advisors. The Chancellor Merger Agreement provides that upon the
consummation of the Chancellor Merger, the Monitoring and Oversight Agreements
will be terminated, and in consideration therefore, the Company shall make a
one-time cash payment of $14,202 to Hicks Muse Partners on the date of closing.
Financial Advisory Agreements
The Company is a party to financial advisory agreements (the "Financial
Advisory Agreements") with Hicks Muse Partners. Pursuant to the Financial
Advisory Agreements, Hicks Muse Partners is entitled to receive a fee equal to
1.5% of the transaction value (as defined in the Financial Advisory Agreements)
for each add-on transaction (as defined) in which the Company or any of its
subsidiaries is involved.
Pursuant to the Financial Advisory Agreements, Hicks Muse Partners provides
investment banking, financial advisory and other similar services with respect
to the add-on transactions in which the Company is involved. Such transactions
require additional attention beyond that required to monitor and advise the
Company on an ongoing basis and, accordingly, the Company pays separate
financial advisory fees with respect to such matters in addition to those paid
in connection with the Monitoring and Oversight Agreements. The services that
have been and will continue to be provided by Hicks Muse Partners could not have
otherwise been obtained by the Company without the addition of personnel or the
engagement of outside professional advisors. For the years ended December 31,
1996, 1997 and 1998, the Company incurred financial advisory fees in the amount
of approximately $5,654, $10,586 and $49,473, respectively. The Chancellor
Merger Agreement provides that upon the consummation of the Chancellor Merger,
the Company shall make
91
<PAGE> 93
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
a cash payment of $17,500 to Hicks Muse Partners on the date of closing in
satisfaction of its services performed under the Financial Advisory Agreements
in connection with the Chancellor Merger.
Chancellor Media Transactions
The Company has retained Katz Media Group, Inc. ("Katz") as its media
representative to sell national spot advertising air time. Katz is a
wholly-owned subsidiary of Chancellor Media which was acquired by Chancellor
Media in October of 1997. Since Chancellor Media's acquisition of Katz, the
Company expensed approximately $400 and $4,400, for media representation
services from Katz in 1997 and 1998, respectively. At December 31, 1997 and
1998, the Company had an accrued liability to Katz of approximately $700 and
$3,400, respectively. Also, at December 31, 1998, the Company had a receivable
of approximately $2,200 from Katz.
In 1998, the Company entered into an agreement with The AMFM Radio
Networks, a wholly-owned subsidiary of Chancellor Media. The AMFM Radio Networks
sells airtime of the Company's participating radio stations to national
advertisers, for which the Company receives revenue share. For the year ended
December 31, 1998, the Company recorded $8,257 in related revenue. At December
31, 1998, the Company had a receivable of approximately $1,500 from The AMFM
Radio Networks.
As stated in Note 5, in 1998, the Company began earning LMA revenue from
Chancellor Media under the Chancellor Exchange Agreement. For the year ended
December 31, 1998, the Company earned LMA fees of approximately $28,800 from the
Chancellor Exchange Stations.
As stated in Note 10, in 1998 the Company borrowed $150,000 from Chancellor
Media. For the year ended December 31, 1998, the Company incurred approximately
$10,600 in interest expense.
Former GulfStar
On April 16, 1996, Former GulfStar acquired all of the outstanding capital
stock of Sonance Communications, Inc. ("Sonance") in exchange for 0.542 shares
of Former GulfStar's Class C common stock, 1.626 shares of Former GulfStar's
Class A common stock and approximately $619 of cash. Total consideration for the
acquisition, including acquisition costs, was approximately $1,065. The primary
assets of Sonance were broadcasting properties. Liabilities of Sonance assumed
by Former GulfStar in connection with the acquisition were approximately $7,627.
The controlling stockholder of Former GulfStar is a family member of the
controlling stockholder of Sonance. The majority stockholder of Former GulfStar,
who is a family member of both the controlling stockholder of Former GulfStar
and the controlling stockholder of Sonance, was also the majority stockholder of
Sonance.
Former GulfStar recorded a charge of approximately $771 during 1996 in
connection with the write-off of a receivable from an entity owned by a family
member of the controlling stockholder of Former GulfStar. The charge is included
in other expense in the accompanying consolidated statement of operations.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments for which the estimated fair value of the
instrument differs significantly from its carrying amount
92
<PAGE> 94
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
at December 31, 1997 and 1998. The fair value of a financial instrument is
defined as the amount at which the instrument could be exchanged in a current
transaction between willing parties.
<TABLE>
<CAPTION>
1997 1998
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Long-term debt -- 12 3/4% Capstar
Partners Notes, 9 1/4% and 13 1/4%
Capstar Radio Notes, 10 3/4% CCI Notes
and 11 3/8% CCI Notes.................. $(446,044) $(494,596) $(712,372) $(758,417)
Interest rate swap..................... -- (320) -- (412)
Redeemable preferred stock............. (101,493) (116,000) (262,368) (289,860)
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and short-term debt, and accounts receivable and payable: the
carrying amount approximates fair value because of the short maturity of
these instruments.
Long-term debt: The fair value of the Company's 12 3/4% Capstar
Partners Notes, 9 1/4% and 13 1/4% Capstar Radio Notes, 10 3/4% CCI Notes
and 11 3/8% CCI Notes are based on quoted market prices. As amounts
outstanding under the Company's Credit Facility agreements bear interest at
current market rates, their carrying amounts approximate fair market value.
Interest rate swap: The fair value of the interest rate swap is
estimated by obtaining quotations from brokers. The fair value is an
estimate of the amounts that the Company would receive (pay) at the
reporting date if the contracts were transferred to other parties or
canceled by the broker.
Redeemable preferred stock: The fair value is estimated based on
quoted market prices.
18. MERGER, NONRECURRING AND SYSTEMS DEVELOPMENT EXPENSE
The Company recorded merger, nonrecurring and systems development expense
of $12,970 in 1998 which consisted of (i) $8,105 of investment banking, legal
and other expense related to the pending Chancellor Merger, (ii) $2,095 of
expense, primarily legal, accounting and severance costs associated with
acquisitions and legal reorganization, (iii) $1,422 consisting primarily of
startup costs associated with the Company's sales training initiative and (iv)
$1,348 of current state assessment, business process reengineering and training
expense incurred in connection with the Company's development of a new traffic
system.
The Company recorded merger, nonrecurring and systems development expense
of $4,729 in 1997 which consisted of investment banking, legal and transaction
fees related to the GulfStar Merger.
19. LOSS ON INVESTMENTS IN LIMITED LIABILITY COMPANIES
In 1998 the Company incurred a loss of $28,565 on investments in Limited
Liability Companies ("LLCs") comprised of (i) write-downs of notes receivable
from the LLCs and (ii) certain performance obligations under the LLCs' borrowing
arrangements for which the Company acts as guarantor.
20. SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company is engaged principally in
one line of business-ownership and management of radio broadcast stations
("Radio") which represents more than 95% of consolidated net revenue.
93
<PAGE> 95
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Radio is the Company's only reportable segment. Operating segments categorized
as "Other" include results of insignificant operations and income and expense
not allocated to reportable segments.
The accounting policies of the reportable segment are the same as those
described in the "Summary of Significant Accounting Policies." The Company
evaluates the performance of its operating segments and allocates resources to
them based on their net revenue and broadcast cash flow ("BCF") which consists
of operating income before merger, nonrecurring and systems development expense;
depreciation, amortization, LMA fees, noncash compensation expense, and
corporate expenses.
The Company has developed an operating structure designed to manage a large
and growing number of radio stations throughout the United States. The Radio
segment is operationally organized into six regions.
The table below presents information about the reportable and "Other"
operating segments. The prior years' segment information has been restated to
conform with the current year's presentation. Segment data includes intersegment
revenues.
<TABLE>
<CAPTION>
RADIO OTHER TOTAL
-------- ------- --------
<S> <C> <C> <C>
1996:
Net revenue......................................... $ 42,866 $ -- $ 42,866
BCF................................................. 12,385 -- 12,385
1997:
Net revenue......................................... 155,939 19,506 175,445
BCF................................................. 50,248 3,062 53,310
1998:
Net revenue......................................... 492,053 32,851 524,904
BCF................................................. 208,945 6,680 215,625
</TABLE>
A reconciliation of total segment net revenue to total consolidated net
revenue and of total segment BCF to total consolidated loss before benefit for
income taxes and extraordinary item, for the years ended December 31, 1996, 1997
and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
NET REVENUE
Total segment net revenue........................... $ 42,866 $175,445 $ 524,904
Elimination of intersegment net revenue............. -- -- (7,437)
-------- -------- ---------
Consolidated net revenue.................. $ 42,866 $175,445 $ 517,467
======== ======== =========
BCF
Total BCF for reportable segments................... $ 12,385 $ 53,310 $ 215,625
Corporate Expenses.................................. (2,523) (14,221) (23,678)
Corporate expenses -- noncash compensation.......... (6,176) (10,575) (21,260)
LMA fees............................................ (834) (2,519) (4,103)
Depreciation and Amortization....................... (4,141) (26,415) (96,207)
Merger, nonrecurring and other expense.............. -- (4,729) (12,970)
Nonoperating expenses............................... (9,802) (43,348) (146,470)
Intercompany profit................................. -- -- (2,723)
-------- -------- ---------
Consolidated loss before benefit for
income taxes, dividends and accretion on
preferred stock of subsidiary and
extraordinary item...................... $(11,091) $(48,497) $ (91,786)
======== ======== =========
</TABLE>
94
<PAGE> 96
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
1997:
Net revenues................................. $ 25,102 $ 40,054 $ 51,247 $ 59,041
Operating income (loss)...................... (2,021) (4,163) 3,745 (1,445)
Loss before extraordinary item............... (7,605) (7,629) (14,390) (11,813)
Net loss..................................... (8,203) (7,629) (15,832) (11,923)
Net loss attributable to common stock........ (8,997) (8,518) (21,211) (11,923)
Basic and diluted loss per common share:
Before extraordinary loss................. (0.44) (0.38) (0.67) (0.38)
Extraordinary loss........................ (0.03) -- (0.05) (.01)
Net loss.................................. $ (0.47) $ (0.38) $ (0.72) $ (0.39)
Weighted average common shares
outstanding............................. 19,288 22,493 29,581 30,209
1998:
Net revenues................................. $ 64,075 $111,922 $161,906 $179,564
Operating income (loss)...................... (16,138) 12,633 44,781 13,408
Loss before extraordinary item............... (29,805) (13,590) (20,745) (25,316)
Net loss..................................... (29,805) (20,895) (20,745) (25,316)
Net loss attributable to common stock........ (29,805) (20,895) (20,745) (25,316)
Basic and diluted loss per common share:
Before extraordinary loss................. (0.65) (0.16) (0.19) (0.24)
Extraordinary loss........................ -- (0.08) -- --
Net loss.................................. $ (0.65) $ (0.24) $ (0.19) $ (0.24)
Weighted average common shares outstanding... 46,131 88,499 107,591 107,596
</TABLE>
22. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Cash paid during the period for:
Interest............................................... $7,558 $22,869 $79,064
Income taxes........................................... 999 230 84,218
Noncash investing and financing activities:
Financed property and equipment purchases.............. 89 2,537 --
Book value of assets exchanged in connection with
broadcast property acquisition...................... 471 -- 21,182
Dividends and accretion on preferred stock............. 1,350 7,071 --
Notes receivable and accrued interest taken in
connection with subscribed stock.................... 1,757 2,725 --
Financed or accrued acquisition costs.................. 6,569 7,095 4,430
</TABLE>
95
<PAGE> 97
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 17,117 $ 10,466
Accounts receivable, net of allowance for doubtful
accounts of $8,352 and $7,942, respectively............. 112,846 118,195
Prepaid expenses and other current assets................. 20,121 29,246
---------- ----------
Total current assets............................... 150,084 157,907
Property and equipment, net................................. 248,920 266,480
Intangibles and other, net.................................. 4,240,378 4,438,811
Other non-current assets.................................... 23,620 43,261
---------- ----------
Total assets....................................... $4,663,002 $4,906,459
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 29,834 $ 66,883
Accounts payable.......................................... 15,387 11,523
Accrued liabilities....................................... 68,269 75,985
Income taxes payable...................................... 30,471 4,212
---------- ----------
Total current liabilities.......................... 143,961 158,603
Long-term debt, net of current portion.................... 1,748,755 1,956,398
Deferred income taxes..................................... 1,163,156 1,215,538
---------- ----------
Total liabilities.................................. 3,055,872 3,330,539
Commitments and contingencies
Redeemable preferred stock of subsidiaries:
Capstar Broadcasting Partners, Inc., $.01 par value,
10,000 shares authorized, 1,196 shares issued and
outstanding, aggregate liquidation preference of
$119,624 and $126,800, respectively..................... 113,699 122,183
Capstar Communications, Inc., Series E Cumulative
Exchangeable Preferred Stock, $.01 par value, 4,150
shares authorized, 1,266 and 1,346 shares issued and
outstanding, respectively, aggregate liquidation
preference of $133,944 and $142,398, respectively....... 148,669 156,444
Stockholders' equity:
Preferred stock, $.10 par value, 1,000 shares authorized,
none issued............................................. -- --
Common stock, Class A, voting $.01 par value, 750,000
shares authorized, 33,986 and 34,249 shares issued and
outstanding, respectively............................... 340 342
Common stock, Class B, nonvoting, $.01 par value, 150,000
shares authorized, 6,082 shares issued and
outstanding............................................. 61 61
Common stock, Class C, voting, $.01 par value, 150,000
shares authorized, 67,538 shares issued and
outstanding............................................. 675 675
Additional paid-in capital................................ 1,503,201 1,510,271
Stock subscriptions receivable............................ (2,694) (2,826)
Unearned compensation..................................... (4,893) (3,900)
Accumulated deficit....................................... (151,928) (207,330)
---------- ----------
Total stockholders' equity......................... 1,344,762 1,297,293
---------- ----------
Total liabilities and stockholders' equity......... $4,663,002 $4,906,459
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
96
<PAGE> 98
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Gross broadcast revenue..................................... $194,349 $357,435
Less agency commissions..................................... (18,352) (32,920)
-------- --------
Net broadcast revenue....................................... 175,997 324,515
-------- --------
Operating expenses:
Programming, technical and news........................... 35,710 59,266
Sales and promotion....................................... 48,985 88,724
General and administrative................................ 30,801 45,706
Corporate expenses.......................................... 7,815 13,036
Corporate expenses -- noncash compensation.................. 22,469 6,912
LMA fees.................................................... 3,321 355
Depreciation and amortization............................... 30,401 73,651
Merger, nonrecurring and systems development expense........ -- 10,373
-------- --------
Operating income (loss)..................................... (3,505) 26,492
Other income (expense):
Interest expense.......................................... (38,444) (84,110)
Interest income........................................... 1,410 291
Equity in losses in Muzak Holdings LLC.................... -- (2,144)
Other..................................................... 68 (67)
-------- --------
Loss before benefit for income taxes, dividends and
accretion on preferred stock of subsidiaries and
extraordinary item........................................ (40,471) (59,538)
Benefit for income taxes.................................... 5,581 20,397
Dividends and accretion on preferred stock of
subsidiaries.............................................. 8,505 16,261
-------- --------
Loss before extraordinary item.............................. (43,395) (55,402)
Extraordinary item, loss on early extinguishment of debt.... 7,305 --
-------- --------
Net loss.................................................... $(50,700) $(55,402)
======== ========
Basic and diluted loss per common share:
Before extraordinary loss................................... $ (0.64) $ (0.51)
--------
Extraordinary loss.......................................... (0.11) --
-------- --------
Net loss.................................................... $ (0.75) $ (0.51)
======== ========
Weighted average common shares outstanding.................. 67,432 107,738
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
97
<PAGE> 99
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------
1998 1999
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by (used in) operating
activities...................................... $ 21,196 $ (2,473)
----------- ---------
Cash flows from investing activities:
Proceeds from sale of broadcasting property............... 221,429 11,297
Purchase of property and equipment........................ (15,508) (20,759)
Payments for acquisitions, net of cash acquired........... (1,613,133) (156,474)
Payments for pending acquisitions......................... (10,244) (2,428)
Other investing activities, net........................... (12,162) 6,258
----------- ---------
Net cash used in investing activities............. (1,429,618) (162,106)
----------- ---------
Cash flows from financing activities:
Proceeds from long-term debt and credit facilities........ 846,200 280,500
Repayment of long-term debt and credit facilities......... (650,870) (122,535)
Payments of financing related costs....................... (8,887) (1,932)
Net proceeds from issuance of common stock................ 1,186,815 1,895
Payments on subscribed stock.............................. 1,607 --
Purchase of common stock.................................. (484) --
Dividends paid on preferred stock......................... (2,429) --
----------- ---------
Net cash provided by financing activities......... 1,371,952 157,928
----------- ---------
Net increase (decrease) in cash and cash equivalents........ (36,470) (6,651)
Cash and cash equivalents at beginning of period............ 70,059 17,117
----------- ---------
Cash and cash equivalents at end of period.................. $ 33,589 $ 10,466
=========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
98
<PAGE> 100
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
Information with respect to the six month periods ended June 30, 1998 and
1999 is unaudited. The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the unaudited interim consolidated
financial statements contain all adjustments considered necessary for a fair
presentation. Operating results for the six month period ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999, or for any other interim period. For further
information, refer to the consolidated financial statements and footnotes
thereto for the year ended December 31, 1998 for Capstar Broadcasting included
in the Form 10-K of Capstar Broadcasting (Commission File No. 001-14107).
The consolidated financial statements include the accounts of Capstar
Broadcasting, and its direct and indirect wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
NOTE 2 -- INCOME (LOSS) PER SHARE
Capstar Broadcasting computes earnings per share ("EPS") under the
provisions of SFAS No. 128 which establishes standards for computing and
presenting EPS.
At June 30, 1998 and 1999, Capstar Broadcasting had 3,080 and 6,500 options
and warrants to purchase common shares outstanding, respectively. These options
and warrants were excluded from the computation of diluted earnings per share as
their inclusion would be anti-dilutive given Capstar Broadcasting's net loss.
NOTE 3 -- AMFM MERGER
On July 13, 1999, AMFM Inc. (previously known as Chancellor Media
Corporation), a Delaware corporation ("AMFM"), acquired Capstar Broadcasting.
The acquisition was effected through the merger (the "Merger") of CMC Merger
Sub, Inc., a Delaware corporation and wholly-owned subsidiary of AMFM ("Sub"),
with and into Capstar Broadcasting, with Capstar Broadcasting as the surviving
corporation. The acquisition of Capstar Broadcasting by AMFM resulted in a
change of control of Capstar Broadcasting. As a result of the Merger, Capstar
Broadcasting became an indirect subsidiary of AMFM.
As a result of the Merger, all of the then outstanding shares of Class A
common stock, par value $0.01 per share, of Capstar Broadcasting ("Class A
Common Stock"), Class B common stock, par value $0.01 per share, of Capstar
Broadcasting ("Class B Common Stock"), and Class C common stock, par value $0.01
per share, of Capstar Broadcasting ("Class C Common Stock," and collectively
with the Class A Common Stock and the Class B Common Stock, the "Common Stock"),
were converted to the right to receive 0.4955 of a validly issued, fully paid
and nonassessable share of common stock, par value $0.01 per share, of AMFM
("AMFM Common Stock"). Based upon the number of shares of common stock
outstanding on May 19, 1999, the total consideration paid by AMFM in the Merger
was approximately 53.5 million shares of AMFM Common Stock. Parent also assumed
options, warrants and other equity rights of Capstar Broadcasting which
represent up to an additional 3.3 million shares of Parent Common Stock. Since
the acquisition occurred subsequent to June 30, 1999, no adjustments have been
recorded to the financial statements herein to reflect the acquisitions.
99
<PAGE> 101
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4 -- RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. This
pronouncement, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. Management does not believe the
implementation of this accounting pronouncement will have a material effect on
its consolidated financial statements.
NOTE 5 -- ACQUISITIONS AND DISPOSITIONS OF BROADCASTING PROPERTIES
During the six months ended June 30, 1999, Capstar Broadcasting acquired 35
FM and 13 AM radio stations and related broadcast equipment as well as a
software development concern through several acquisitions, all of which have
been accounted for under the purchase method of accounting. Accordingly, the
purchase price has been allocated to the assets and liabilities acquired based
upon their fair values at the date of acquisition. The excess purchase price
over the fair value of net tangible assets acquired is allocated to intangible
assets, primarily FCC licenses. The results of operations associated with the
acquired radio stations have been included in the accompanying consolidated
financial statements from the dates of acquisition.
Acquisition activity during the six months ended June 30, 1999 was as
follows. All consideration paid for the acquisitions scheduled below consisted
solely of cash.
<TABLE>
<CAPTION>
STATIONS
ACQUIRED
---------
TRANSACTION FM AM DATE OF ACQUISITION PURCHASE OF COST
- ----------- --- --- ------------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Appalachian Broadcasting Company,
Inc.................................... 1 -- February 1999 Assets $ 1,056
Noalmark Broadcasting Corp............. 1 1 March 1999 Assets 3,395
Champion Broadcasting Corporation...... 9 2 March 1999 Assets 12,539
R. Steven Hicks........................ 1 -- April 1999 Assets 9,857
Triathlon Broadcasting Company......... 22 10 April 1999 Stock 143,249
Citadel Broadcasting Company........... 1 -- April 1999 Assets 4,248
LAN International...................... -- -- June 1999 Assets 16,325
--------
$190,669
========
</TABLE>
100
<PAGE> 102
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The acquisitions during the six months ended June 30, 1999 are summarized
in the aggregate as follows:
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED
JUNE 30,
1999
----------
<S> <C>
Consideration:
Cash................................................... $177,782
Acquisition costs...................................... 8,639
Exchange of assets..................................... 4,248
--------
Total.......................................... $190,669
========
Assets acquired:
Cash................................................... $ (858)
Accounts receivable.................................... 7,575
Prepaid expenses and other............................. 980
Property and equipment................................. 18,025
Intangible assets...................................... 304,992
Accounts payable....................................... (5,400)
Long-term debt......................................... (61,892)
Deferred income taxes.................................. (72,753)
--------
Total.......................................... $190,669
========
</TABLE>
On March 18, 1999, Capstar Broadcasting contributed to Muzak Holdings LLC
("Muzak Holdings") Capstar Broadcasting's Muzak affiliate territories in
Atlanta, Albany and Macon, Georgia and Ft. Myers, Florida in exchange for voting
membership units in Muzak Holdings. On May 3, 1999, Capstar Broadcasting
contributed to Muzak Holdings its Muzak affiliate territory located in Omaha,
Nebraska that Capstar Broadcasting acquired from Triathlon Broadcasting Company
on April 30, 1999, in exchange for additional voting membership units in Muzak
Holdings. The value of the membership units in Muzak Holdings that Capstar
Broadcasting then held was approximately $20,500, subject to a working capital
adjustment to be finalized. The investment in Muzak Holdings represents the book
value of the net assets contributed, which approximates fair market value. Upon
completion of the contribution of the Omaha affiliate territory, Capstar
Broadcasting then held approximately 22.87% of the then outstanding voting power
of Muzak Holdings.
During the six months ended June 30, 1999, Capstar Broadcasting disposed of
4 FM and 7 AM radio stations and related broadcast equipment through several
dispositions for aggregate consideration of approximately $18,758, including
$10,500 in cash, $7,559 in dividends to parent and $699 in broadcast properties.
The carrying value of net assets sold related to these stations approximated the
consideration received.
The following unaudited proforma summary presents the consolidated results
of operations for the six months ended June 30, 1998 and 1999 as if all the
acquisitions and dispositions completed through June 30, 1999 had occurred at
the beginning of 1998. These pro forma results have been prepared for
comparative
101
<PAGE> 103
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
purposes only and do not purport to be indicative of what would have occurred
had the acquisitions and dispositions been made as of that date or of results
which may occur in the future.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1998 1999
--------- --------
<S> <C> <C>
Net revenue................................................. $ 303,248 $332,157
Net loss.................................................... (100,215) (67,015)
Basic and diluted loss per common share..................... (0.93) (0.62)
</TABLE>
Subsequent to June 30, 1999, Capstar Broadcasting acquired 3 FM radio
stations and related broadcast equipment through acquisitions for aggregate
consideration in cash of approximately $13,000. These acquisitions were funded
with cash generated from operations.
Additionally, Capstar Broadcasting has entered into the following:
- Three agreements to acquire 3 FM stations for approximately $4,100; and
- Two agreements to dispose of 2 FM and 3 AM stations for a total of
approximately $4,450.
Upon completion of the pending transactions, Capstar Broadcasting will own
and operate 339 stations in primarily mid-sized markets located throughout the
United States. Consummation of each of the pending transactions is subject to
numerous conditions, including governmental approvals. Accordingly, the actual
date of consummation of each of the pending transactions may vary from the
anticipated closing dates. No assurances can be given that any or all of the
pending transactions will be consummated or that, if completed, they will be
successful.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
On July 13, 1998, Noddings Investment Group, Inc. and Noddings Warrant
Limited Partnership filed Civil Action No. 16538 in the Court of Chancery of the
State of Delaware in and for New Castle County against Capstar Communications.
Noddings alleges that Capstar Communications breached a warrant agreement that
Noddings contends requires Capstar Communications to permit Noddings to exercise
warrants in exchange for cash and shares of stock of SFX Entertainment, Inc.
Specifically, Noddings alleges that Capstar Communications, has violated the
warrant agreement by permitting Noddings to receive cash in exchange for its
warrants, but refusing to convey shares of stock of SFX Entertainment. In
addition to suing on its own behalf, Noddings is seeking to prosecute the action
on behalf of a putative class comprised of all persons who owned equivalent
warrants on April 21, 1998 (the date immediately following the record date of
the distribution of stock of SFX Entertainment to holders of the stock of SFX)
and their transferees and successors in interest. Noddings has requested that
the Court:
- declare that on the exercise of its warrants Capstar Communications
transmit to plaintiffs and members of the class that it seeks to
represent $22.3725 in cash per warrant and 0.2983 shares of common stock
of SFX Entertainment per warrant,
- require Capstar Communications to pay 0.2983 shares of common stock of
SFX Entertainment per warrant and, (if not previously paid) $22.3725 in
cash, to any putative class member that has exercised or exercises
warrants after April 20, 1998,
- in the alternative, award plaintiffs and members of the putative class
monetary damages in an amount to be determined at trial, and
- award costs and attorneys' fees.
102
<PAGE> 104
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In March 1999, the court issued an opinion dismissing two of Noddings' counts
and granted summary judgment in favor of Noddings on one count. The court held
that Noddings is entitled to 0.2983 shares of SFX Entertainment, Inc. stock per
warrant. Both parties have filed a notice of appeal.
On July 24, 1998 in connection with the acquisition of Triathlon
Broadcasting Company, Capstar Broadcasting was notified of an action filed on
behalf of all holders of depository shares of Triathlon against Triathlon, its
directors, and Capstar Broadcasting. The action was filed in the Court of
Chancery of the State of Delaware in and for New Castle County, Delaware. The
complaint alleges that Triathlon and its directors breached their fiduciary
duties to the class of depository shareholders by agreeing to a transaction with
Capstar Broadcasting that allegedly favored the Class A common shareholders of
Triathlon at the expense of the depository shareholders. Capstar Broadcasting is
accused of knowingly aiding and abetting the breaches of fiduciary duties
allegedly committed by the other defendants. The complaint seeks to have the
action certified as a class action and seeks to enjoin the Triathlon acquisition
or, in the alternative, seeks monitory damages in an unspecified amount. On
February 12, 1999, the parties signed a Memorandum of Understanding that
provides for the settlement of the lawsuit. The amount of the settlement will
equal $0.11 additional consideration for each depository share owned by any
class member at the effective time of the Triathlon acquisition. Capstar
Broadcasting also agreed not to oppose plaintiff's counsel's application for
attorney's fees and expenses in the aggregate amount of $150. The proposed
settlement is contingent upon a confirmatory discovery by the plaintiff,
executive of a definitive settlement agreement and court approval.
Capstar Broadcasting is subject to various legal proceedings and claims
that arise in the ordinary course of its business. In the opinion of management,
the amount of ultimate liability with respect to these actions will not have a
material impact on the consolidated financial position or results of operations
or cash flows of Capstar Broadcasting.
NOTE 7 -- SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company is engaged principally in
one line of business-ownership and management of radio broadcast stations
("Radio") which represents more than 95% of consolidated net revenue. Radio is
the Company's only reportable segment. Operating segments categorized as "Other"
include results of insignificant operations and income and expense not allocated
to reportable segments.
The Company evaluates the performance of its operating segments and
allocates resources to them based on their net revenue and broadcast cash flow
("BCF") which consists of operating income before merger, nonrecurring and
systems development expense; depreciation, amortization, LMA fees, non-cash
compensation expense, and corporate expenses.
The Company has developed an operating structure designed to manage a large
and growing number of radio stations throughout the United States. The Radio
segment is operationally organized into five regions.
103
<PAGE> 105
CAPSTAR BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The table below presents information about the reportable and "Other"
operating segments. The prior period's segment information has been restated to
conform with the current period's presentation. For the six months ended June
30, 1998 and 1999, segment data includes intersegment revenues.
<TABLE>
<CAPTION>
RADIO OTHER TOTAL
-------- ------- --------
<S> <C> <C> <C>
1998:
Net revenue............................................... $168,912 $ 8,146 $177,058
BCF....................................................... 60,002 1,560 61,562
1999:
Net revenue............................................... 316,827 11,565 328,392
BCF....................................................... 133,465 (950) 132,515
</TABLE>
A reconciliation of total segment net revenue to total consolidated net
revenue and of total segment BCF to total consolidated loss before benefit for
income taxes and extraordinary item, for the six months ended June 30, 1998 and
1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
NET REVENUE
Total segment net revenue................................... $177,058 $328,392
Elimination of intersegment net revenue..................... (1,061) (3,877)
-------- --------
Consolidated net revenue.................................. $175,997 $324,515
======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
BCF
Total BCF for reportable segments........................... $ 61,562 $132,515
Corporate Expenses.......................................... (7,815) (13,036)
Corporate expenses -- noncash compensation.................. (22,469) (6,912)
LMA fees.................................................... (3,321) (355)
Depreciation and Amortization............................... (30,401) (73,651)
Merger, nonrecurring and other expense...................... -- (10,373)
Nonoperating expenses....................................... (36,966) (86,030)
Intercompany profit......................................... (1,061) (1,696)
-------- --------
Consolidated loss before income taxes and dividends and
accretion on preferred stock of subsidiaries and
extraordinary item........................................ $(40,471) $(59,538)
======== ========
</TABLE>
104
<PAGE> 106
(b) Pro forma financial information
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give effect to the merger. For accounting purposes Clear Channel has accounted
for the merger as a purchase of AMFM; accordingly the net assets of AMFM have
been adjusted to their estimated fair values based upon a preliminary purchase
price allocation.
The unaudited pro forma combined condensed balance sheet at September 30,
1999 gives effect to the merger as if it occurred on September 30, 1999. The
unaudited pro forma combined condensed statements of operations for the year
ended December 31, 1998 and for the nine months ended September 30, 1999 give
effect to the merger as if it had occurred on January 1, 1998.
The unaudited pro forma combined condensed balance sheet was prepared based
upon the historical balance sheet of Clear Channel and the historical balance
sheet of AMFM, adjusted for certain financing transactions, as if such
transactions had occurred on September 30, 1999. The unaudited pro forma
combined condensed statement of operations for the year ended December 31, 1998
was prepared based upon the historical statement of operations of Clear Channel,
adjusted to reflect the merger with Universal Outdoor Holding, Inc., the
acquisition of More Group, Plc, and the merger with Jacor Communications, Inc.
as if such mergers and acquisitions had occurred on January 1, 1998 ("1998 Clear
Channel Pro Forma"), and based upon the historical statement of operations of
AMFM, adjusted to reflect the merger with Capstar Broadcasting Corporation, the
acquisition of KKFR-FM and KFYI-AM from The Broadcast Group, Inc., the
disposition of WMVP-AM to ABC, Inc., the disposition of AMFM's outdoor
advertising business to Lamar Advertising Company and certain financing
transactions, as if such transactions had occurred on January 1, 1998 ("1998
AMFM Pro Forma"). The unaudited pro forma combined condensed statement of
operations for the nine months ended September 30, 1999 was prepared based upon
the historical statement of operations of Clear Channel, adjusted to reflect the
merger with Jacor Communications, Inc. as if such merger had occurred on January
1, 1998 ("1999 Clear Channel Pro Forma"), and the historical statement of
operations of AMFM, adjusted to reflect the merger with Capstar Broadcasting
Corporation, the acquisition of KKFR-FM and KFYI-AM from The Broadcast Group,
Inc., the disposition of WMVP-AM to ABC, Inc., the disposition of AMFM's outdoor
advertising business to Lamar Advertising Company and certain financing
transactions as if such transactions had occurred on January 1, 1998 ("1999 AMFM
Pro Forma"). Additionally, both the Clear Channel pro forma financial statements
and the AMFM pro forma financial statements have been adjusted for the expected
divestitures in markets where the combined AMFM and Clear Channel radio stations
exceed the number allowed by the FCC. These divestitures have been recorded
based upon managements' best estimates as to the expected cash sales proceeds
for the stations involved. Certain amounts in the AMFM pro forma financial
statements have been reclassified to conform to Clear Channel's presentation.
The unaudited pro forma combined condensed financial statements should be
read in conjunction with the historical financial statements of AMFM and Clear
Channel.
The unaudited pro forma combined condensed financial statements are not
necessarily indicative of the actual results of operations or financial position
that would have occurred had the merger and the above described acquisitions,
dispositions, financing and merger transactions of Clear Channel and AMFM
occurred on the dates indicated nor are they necessarily indicative of future
operating results or financial position.
105
<PAGE> 107
CLEAR CHANNEL AND AMFM
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
SEPTEMBER 30, 1999
ASSETS
<TABLE>
<CAPTION>
CLEAR CHANNEL
PRO FORMA AND AMFM
CLEAR CHANNEL CLEAR CHANNEL AMFM AMFM MERGER PRO FORMA
HISTORICAL DIVESTITURES(1) PRO FORMA DIVESTITURES(2) ADJUSTMENTS(3) MERGER
------------- --------------- ----------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.... $ 82,678 $ -- $ 86,512 $ -- $ -- $ 169,190
Accounts receivable, net..... 686,684 -- 486,651 -- -- 1,173,335
Other current assets......... 160,345 -- 106,742 -- -- 267,087
----------- --------- ----------- ----------- ----------- -----------
Total Current Assets... 929,707 -- 679,905 -- -- 1,609,612
Property, plant & equipment,
net.......................... 2,414,930 (30,581) 467,736 (59,406) -- 2,792,679
Intangible assets:
Contract valuations.......... 746,567 -- -- -- -- 746,567
Licenses and goodwill........ 11,810,385 (448,367) 11,023,112 (1,735,177) 13,719,330 34,369,283
Other intangible assets...... 78,919 (9,425) 542,028 (40,456) -- 571,066
----------- --------- ----------- ----------- ----------- -----------
12,635,871 (457,792) 11,565,140 (1,775,633) 13,719,330 35,686,916
Less accumulated
amortization................. (603,457) 24,968 (1,037,700) 106,713 930,987 (578,489)
----------- --------- ----------- ----------- ----------- -----------
12,032,414 (432,824) 10,527,440 (1,668,920) 14,650,317 35,108,427
Other assets:
Restricted cash.............. 113,470 -- -- -- -- 113,470
Notes receivable............. 53,675 -- -- -- -- 53,675
Investments in and advances
to nonconsolidated
affiliates................. 353,374 -- 1,129,389 -- 44,258 1,527,021
Other assets................. 230,906 -- 242,340 -- -- 473,246
Other investments............ 313,414 -- -- -- -- 313,414
----------- --------- ----------- ----------- ----------- -----------
TOTAL ASSETS........... $16,441,890 $(463,405) $13,046,810 $(1,728,326) $14,694,575 $41,991,544
=========== ========= =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued
expenses and other current
liabilities................ $ 634,739 $ -- $ 389,252 $ -- $ -- $ 1,023,991
Current portion of long-term
debt....................... 40,351 -- 54,625 -- -- 94,976
----------- --------- ----------- ----------- ----------- -----------
Total Current
Liabilities.......... 675,090 -- 443,877 -- -- 1,118,967
Long-term debt................. 3,917,442 (786,739) 5,825,502 (2,235,231) 85,000 6,805,974
Liquid yield options notes..... 487,093 -- -- -- -- 487,093
Deferred income taxes.......... 1,238,768 (5,039) 1,734,967 (294,365) 3,249,292 5,923,623
Other long-term liabilities.... 171,844 -- 51,176 -- -- 223,020
Minority interest.............. 19,554 -- 3,704 -- -- 23,258
Redeemable preferred stock..... -- -- 148,542 -- -- 148,542
Shareholders' Equity:
Common stock................. 33,848 -- 2,157 -- 18,119 54,124
Additional paid-in capital... 9,239,112 -- 5,209,559 -- 11,770,760 26,219,431
Common stock warrants........ 253,428 -- -- -- -- 253,428
Retained earnings............ 318,950 328,373 (372,674) 801,270 (428,596) 647,323
Other........................ (4,008) -- -- -- -- (4,008)
Unrealized gain on
investments................ 91,481 -- -- -- -- 91,481
Cost of shares held in
treasury................... (712) -- -- -- -- (712)
----------- --------- ----------- ----------- ----------- -----------
Total Shareholders'
Equity............... 9,932,099 328,373 4,839,042 801,270 11,360,283 27,261,067
----------- --------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY............... $16,441,890 $(463,405) $13,046,810 $(1,728,326) $14,694,575 $41,991,544
=========== ========= =========== =========== =========== ===========
</TABLE>
106
<PAGE> 108
CLEAR CHANNEL AND AMFM
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
CLEAR CHANNEL
1998 1998 PRO FORMA AND AMFM
CLEAR CHANNEL CLEAR CHANNEL AMFM AMFM MERGER PRO FORMA
PRO FORMA DIVESTITURES(4) PRO FORMA DIVESTITURES(5) ADJUSTMENT(6) MERGER
------------- --------------- ---------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue.............. $2,364,186 $(81,034) $1,797,024 $(261,426) $ (16,438) $3,802,312
Operating expenses....... 1,448,212 (45,924) 1,006,048 (150,038) (16,438) 2,241,860
Depreciation and
Amortization........... 643,412 (13,666) 790,946 (76,474) 248,849 1,593,067
Noncash compensation
expense................ -- -- 21,260 -- -- 21,260
Merger and nonrecurring
costs.................. -- -- 76,094 -- -- 76,094
Corporate expenses....... 66,040 -- 61,659 -- -- 127,699
---------- -------- ---------- --------- --------- ----------
Operating income
(loss)................. 206,522 (21,444) (158,983) (34,914) (248,849) (257,668)
Interest expense......... 299,719 (39,337) 411,218 (150,878) 4,981 525,703
Gain on disposition of
assets................. -- -- 123,845 -- -- 123,845
Gain on disposition of
representation
contracts.............. -- -- 32,198 -- -- 32,198
Loss on investment in
limited liability
companies.............. -- -- 28,565 -- -- 28,565
Other income (expense) --
net.................... 23,013 -- 11,562 -- -- 34,575
---------- -------- ---------- --------- --------- ----------
Income (loss) before
income taxes........... (70,184) 17,893 (431,161) 115,964 (253,830) (621,318)
Income tax (expense)
benefit................ (56,029) (7,635) 112,027 (65,962) 76,647 59,048
Dividends and accretion
on preferred stock of
subsidiaries........... -- -- 29,809 -- -- 29,809
---------- -------- ---------- --------- --------- ----------
Income (loss) before
equity in earnings
(loss) of
nonconsolidated
affiliates............. (126,213) 10,258 (348,943) 50,002 (177,183) (592,079)
Equity in earnings
(loss) of
nonconsolidated
affiliates............. 8,091 -- (82,674) -- 19,228 (55,355)
---------- -------- - -------- --------- --------- ----------
Net income (loss)........ $ (118,122) $ 10,258 $ (431,617) $ 50,002 $(157,955) $ (647,434)
========== ======== ========== ========= ========= ==========
Net income (loss) before
extraordinary items per
common share:
Basic.................. $ (0.39) $ (1.27)
========== ==========
Diluted................ $ (0.39) $ (1.27)
========== ==========
</TABLE>
107
<PAGE> 109
CLEAR CHANNEL AND AMFM
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
CLEAR CHANNEL
1999 1999 PRO FORMA AND AMFM
CLEAR CHANNEL CLEAR CHANNEL AMFM AMFM MERGER PRO FORMA
PRO FORMA DIVESTITURES(4) PRO FORMA DIVESTITURES(5) ADJUSTMENT(6) MERGER
------------- --------------- ---------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue................... $2,062,282 $(81,030) $1,535,409 $(218,033) $ (14,278) $3,284,350
Operating expenses............ 1,289,248 (45,482) 849,341 (128,068) (14,278) 1,950,761
Depreciation and
amortization................ 570,234 (13,232) 637,008 (75,508) 167,553 1,286,055
Noncash compensation
expense..................... -- -- 26,432 -- -- 26,432
Merger and nonrecurring
costs....................... -- 61,580 -- -- 61,580
Corporate expenses............ 51,958 -- 51,294 -- -- 103,252
---------- -------- ---------- --------- --------- ----------
Operating income (loss)....... 150,842 (22,316) (90,246) (14,457) (167,553) (143,730)
Interest expense.............. 173,590 (29,503) 345,281 (113,159) 3,487 379,696
Gain on disposition of
assets...................... -- -- 12,333 -- -- 12,333
Gain on disposition of
representation contracts.... -- -- 18,284 -- -- 18,284
Other income
(expense) -- net............ 15,711 -- 1,096 -- -- 16,807
---------- -------- ---------- --------- --------- ----------
Income (loss) before income
taxes....................... (7,037) 7,187 (403,814) 98,702 (171,040) (476,002)
Income tax (expense)
benefit..................... (39,551) (3,470) 104,122 (58,452) 51,661 54,310
Dividends and accretion on
preferred stock of
subsidiaries................ -- -- 12,709 -- -- 12,709
---------- -------- ---------- --------- --------- ----------
Income (loss) before equity in
earnings (loss) of non-
consolidated affiliates..... (46,588) 3,717 (312,401) 40,250 (119,379) (434,401)
Equity in earnings (loss) of
nonconsolidated affiliates.. 6,742 -- (64,265) -- 14,422 (43,101)
---------- -------- ---------- --------- --------- ----------
Net income (loss)............. $ (39,846) $ 3,717 $( 376,666) $ 40,250 $(104,957) $ (477,502)
========== ======== ========== ========= ========= ==========
Net income (loss) before
extraordinary items per
common share:
Basic....................... $ (0.12) $ (0.89)
========== ==========
Diluted..................... $ (0,12) $ (0.89)
========== ==========
</TABLE>
108
<PAGE> 110
CLEAR CHANNEL AND AMFM
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Clear Channel and AMFM unaudited pro forma combined condensed financial
statements reflect the merger, accounted for as a purchase, as follows:
<TABLE>
<S> <C>
AMFM common stock outstanding (in whole shares)............. 215,699,046
Share conversion number..................................... 0.94
------------
Clear Channel's common stock to be issued in the merger (in
whole shares)............................................. 202,757,103
Estimated value per share (based on the average price
between September 29, 1999 and October 6, 1999)........... $ 77.3229
------------
$ 15,677,767
Estimated value of common stock options and other equity.... 1,322,827
Estimated transaction costs................................. 85,000
------------
Total estimated purchase price.................... $ 17,085,594
============
</TABLE>
For purpose of these statements the total estimated purchase price was
allocated as follows:
<TABLE>
<S> <C>
Total estimated purchase price.............................. $ 17,085,594
Plus -- deferred tax liability.............................. 3,249,292
Less -- estimated fair value adjustment to investment in and
advances to nonconsolidated affiliates.................... 44,258
Less -- AMFM net assets exchanged in the merger at September
30, 1999 adjusted for the elimination of existing net
licenses and goodwill of $8,356,948....................... (2,716,637)
------------
Estimated excess purchase price (allocated to licenses and
goodwill)................................................. $ 23,007,265
============
</TABLE>
The estimated excess purchase price allocated to licenses and goodwill of
$23,007,265 will be amortized over a 25 year period using the straight-line
method, which will result in annual licenses and goodwill amortization of
$920,291.
Clear Channel and AMFM expect to be required to divest from approximately
100 to 125 radio stations in order to obtain approval to complete this merger
from the DOJ and FCC.
The unaudited pro forma combined condensed balance sheet adjustments do not
include an adjustment of AMFM long-term debt outstanding to fair value as the
carrying value of the long-term debt approximates fair value.
Clear Channel may be required to refinance certain outstanding AMFM long-
term debt.
(1) The pro forma adjustments at September 30, 1999 relating to the sale of
radio stations Clear Channel anticipates divesting, assuming a total of 125
radio stations in the aggregate will be divested, are as follows:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
----------
<S> <C> <C>
(a) Decrease in property, plant and equipment, net of
accumulated depreciation.................................... $ (30,581)
(b) Decrease in licenses and goodwill........................... (448,367)
(c) Decrease in other intangible assets......................... (9,425)
(d) Decrease in accumulated amortization........................ (24,968)
(e) Decrease in long-term debt resulting from the use of net
proceeds.................................................... (786,739)
(f) Decrease in deferred income taxes........................... (5,039)
(g) Increase in retained earnings resulting from the gain on the
sale of stations, net of tax at an assumed rate of 40%...... 328,373
</TABLE>
109
<PAGE> 111
CLEAR CHANNEL AND AMFM
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(2) The pro forma adjustments at September 30, 1999 relating to the sale of
radio stations AMFM anticipates divesting, assuming a total of 125 radio
stations in the aggregate will be divested, are as follows:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
-----------
<S> <C> <C>
(h) Decrease in property, plant and equipment, net of
accumulated depreciation.................................... $ (59,406)
(i) Decrease in licenses and goodwill........................... (1,735,177)
(j) Decrease in other intangible assets......................... (40,456)
(k) Decrease in accumulated amortization........................ (106,713)
(l) Decrease in long-term debt resulting from the use of net
proceeds.................................................... (2,235,231)
(m) Decrease in deferred income taxes........................... (294,365)
(n) Increase in retained earnings resulting from the gain on the
sale of stations, net of tax at AMFM's assumed tax rate of
39%......................................................... 801,270
</TABLE>
(3) The pro forma merger adjustments at September 30, 1999 are as follows:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
-----------
<S> <C> <C>
(o) Increase in goodwill and licenses equal to the excess
purchase price of the merger................................ $13,719,330
(p) Decrease in accumulated amortization resulting from the
elimination of AMFM's existing accumulated amortization on
goodwill.................................................... (930,987)
(q) Increase in investment in and advances to, nonconsolidated
affiliates due to the mark-up to fair value of AMFM's
investments................................................. 44,258
(r) Increase in long-term debt resulting from estimated merger
expenses.................................................... 85,000
(s) Increase in deferred income tax due to fair value write-up
of FCC licenses............................................. 3,249,292
(t) Increase in common stock to account for Clear Channel common
stock given in the merger at $0.10 par value................ 18,119
(u) Increase in additional paid-in capital to account for Clear
Channel common stock given in the merger at $77.3229 per
share less $0.10 par value ($15,657,492) plus the value of
AMFM stock options included in the merger ($1,316,229) less
AMFM's pro forma additional paid-in capital balance
($5,202,961)................................................ 11,770,760
(v) Decrease in retained earnings to eliminate AMFM's existing
retained earnings balance................................... (428,596)
</TABLE>
(4) The pro forma adjustments for the nine months ended September 30, 1999
and the year ended December 31, 1998 relating to the sale of radio stations
Clear Channel anticipates divesting, assuming a total of 125 radio stations will
be divested, are as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
TO INCOME
----------------------------
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C> <C>
(w) Decrease in revenue.................................. $(81,034) $(81,030)
(x) Decrease in operating expenses....................... 45,924 45,482
(y) Decrease in depreciation and amortization............ 13,666 13,232
(z) Decrease in interest expense associated with the
reduction of long-term debt resulting from the use of
net proceeds......................................... 39,337 29,503
(aa) Increase in income tax expense associated with the
tax effect of adjustments (w) through (z) at Clear
Channel's assumed tax rate of 40%.................... (7,635) (3,470)
</TABLE>
110
<PAGE> 112
CLEAR CHANNEL AND AMFM
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(5) The pro forma adjustments for the nine months ended September 30, 1999
and the year ended December 31, 1998 relating to the sale of radio stations AMFM
anticipates divesting, assuming a total of 125 radio stations will be divested,
are as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
TO INCOME
----------------------------
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C> <C>
(ab) Decrease in revenue................................ $(261,426) $(218,033)
(ac) Decrease in operating expenses..................... 150,038 128,068
(ad) Decrease in depreciation and amortization.......... 76,474 75,508
(ae) Decrease in interest expense associated with the
reduction of long-term debt resulting from the use
of net proceeds.................................... 150,878 113,159
(af) Increase in income tax expense associated with the
tax effect of adjustments (ab) through (ae) at
AMFM's assumed tax rate of 39%..................... (65,962) (58,452)
</TABLE>
(6) The pro forma merger adjustment for the nine months ended September 30,
1999 and the year ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
TO INCOME
----------------------------
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C> <C>
(ag) Decrease in revenue due to the elimination of
services AMFM provided to Clear Channel and
services Clear Channel provided to AMFM............ $ (16,438) $ (14,278)
(ah) Decrease in operating expense due to the
elimination of services AMFM provided to Clear
Channel and services Clear Channel provided to
AMFM............................................... 16,438 14,278
(ai) Increase in amortization expense resulting from the
additional goodwill created by the merger and a
change in the life of goodwill amortization from 15
years (AMFM's policy) to 25 years (Clear Channel's
policy). This amortization expense results in a
permanent difference and will not be deductible for
federal income tax purposes........................ (248,849) (167,553)
(aj) Increase in interest expense associated with the
increased long-term debt resulting from the
estimated merger expenses of $85,000............... (4,981) (3,487)
(ak) Decrease in income tax expense associated with the
tax effect of the adjustments in note (ai) and (aj)
at Clear Channel's assumed tax rate of 40%......... 76,647 51,661
(al) Increase in equity in net income of nonconsolidated
affiliates caused by changing the life of excess
cost amortization from 15 years (AMFM's policy) to
25 years (Clear Channel's policy). This increase is
partially offset by the markup of excess cost to
fair value......................................... 19,228 14,422
</TABLE>
111
<PAGE> 113
CLEAR CHANNEL AND AMFM
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma basic and diluted share information is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Basic
Clear Channel pro forma weighted average shares
outstanding............................................ 306,423 331,609
AMFM pro forma weighted average shares outstanding........ 209,592 215,003
Decrease weighted average common stock outstanding to
account for Clear Channel's common stock given in the
merger at the share conversion number of 0.94.......... (6,835) (12,246)
------- -------
Clear Channel and AMFM Pro Forma Merger................... 509,180 534,366
======= =======
Diluted
Clear Channel pro forma weighted average shares
outstanding............................................ 324,319 359,572
AMFM pro forma weighted average shares outstanding........ 216,662 221,704
Decrease weighted average common stock outstanding to
account for Clear Channel common stock given in the
merger and to account for the dilution effect of AMFM's
common stock warrants, employee stock options and other
dilutive shares have on the Company at the share
conversion number of 0.94.............................. (7,864) (12,651)
------- -------
Clear Channel and AMFM Pro Forma Merger................... 533,117 568,625
======= =======
</TABLE>
112
<PAGE> 114
CLEAR CHANNEL
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL
NATIONWIDE
SIX MONTHS
CLEAR ENDED
CHANNEL UNIVERSAL PRO FORMA MORE PRO FORMA JACOR JUNE 30,
HISTORICAL HISTORICAL ADJUSTMENT(1) HISTORICAL ADJUSTMENT(2) HISTORICAL 1998
---------- ---------- ------------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue................. $1,350,940 $55,292 $ -- $144,674 $ -- $754,468 $50,171
Operating expenses.......... 767,265 30,826 -- 110,827 -- 497,861 39,623
Depreciation and
amortization.............. 304,972 15,517 7,720 15,699 11,565 120,392 5,044
Noncash compensation
expense................... -- 106 (106) 3,476 (3,476) -- --
Corporate expenses.......... 37,825 1,414 -- 5,711 -- 19,684 1,406
---------- ------- ------- -------- -------- -------- -------
Operating income (loss)..... 240,878 7,429 (7,614) 8,961 (8,089) 116,531 4,098
Interest expense............ 135,766 13,159 -- 3,715 22,352 107,295 (452)
Other income
(expense) -- net.......... 12,810 (23) -- (9,576) -- 19,806 (4)
---------- ------- ------- -------- -------- -------- -------
Income (loss) before income
taxes..................... 117,922 (5,753) (7,614) (4,330) (30,441) 29,042 4,546
Income tax (expense)
benefit................... (72,353) -- -- (3,301) 6,728 (28,100) (1,546)
---------- ------- ------- -------- -------- -------- -------
Income (loss) before equity
in earnings (loss) of
nonconsolidated
affiliates................ 45,569 (5,753) (7,614) (7,631) (23,713) 942 3,000
Equity in earnings (loss) of
non-consolidated
affiliates................ 8,462 -- -- (371) -- -- --
---------- ------- ------- -------- -------- -------- -------
Net income (loss)........... $ 54,031 $(5,753) $(7,614) $ (8,002) $(23,713) $ 942 $ 3,000
========== ======= ======= ======== ======== ======== =======
Net income (loss) per common
share:
Basic..................... $ 0.23
==========
Diluted................... $ 0.22
==========
<CAPTION>
1998
NATIONWIDE ACQUISITION PRO FORMA CLEAR
PRO FORMA PRO FORMA MERGER CHANNEL
ADJUSTMENTS(3) ADJUSTMENTS(3) ADJUSTMENT(4) PRO FORMA
-------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Net revenue................. $ -- $ 8,641(k) $ -- $2,364,186
Operating expenses.......... (738)(g) 2,548(k)(l) -- 1,448,212
Depreciation and
amortization.............. 299(g) 4,565(h) 157,639 643,412
Noncash compensation
expense................... -- -- -- --
Corporate expenses.......... -- -- -- 66,040
----- -------- --------- ----------
Operating income (loss)..... 439 1,528 (157,639) 206,522
Interest expense............ -- 14,954(i) 2,930 299,719
Other income
(expense) -- net.......... -- -- -- 23,013
----- -------- --------- ----------
Income (loss) before income
taxes..................... 439 (13,426) (160,569) (70,184)
Income tax (expense)
benefit................... -- 5,371(i) 37,172 (56,029)
----- -------- --------- ----------
Income (loss) before equity
in earnings (loss) of
nonconsolidated
affiliates................ 439 (8,055) (123,397) (126,213)
Equity in earnings (loss) of
non-consolidated
affiliates................ -- -- -- 8,091
----- -------- --------- ----------
Net income (loss)........... $ 439 $ (8,055) $(123,397) $ (118,122)
===== ======== ========= ==========
Net income (loss) per common
share:
Basic..................... $ (0.39)
==========
Diluted................... $ (0.39)
==========
</TABLE>
113
<PAGE> 115
CLEAR CHANNEL
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
JACOR 1999
CLEAR HISTORICAL CLEAR
CHANNEL 1/1 TO 5/4 PRO FORMA CHANNEL
HISTORICAL 1999 ADJUSTMENT(4) PRO FORMA
---------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Net revenue................................... $1,790,635 $271,647 $ -- $2,062,282
Operating expenses............................ 1,097,171 192,077 -- 1,289,248
Depreciation and amortization................. 473,654 46,951 49,629 570,234
Corporate expenses............................ 44,585 7,373 -- 51,958
---------- -------- --------- ----------
Operating income (loss)....................... 175,225 25,246 (49,629) 150,842
Interest expense.............................. 132,932 39,731 927 173,590
Gain on disposition of assets................. 136,925 130,385 (267,310) --
Other income (expense) -- net................. 15,874 (163) -- 15,711
---------- -------- --------- ----------
Income (loss) before income taxes............. 195,092 115,737 (317,866) (7,037)
Income tax (expense) benefit.................. (106,546) (52,300) 119,295 (39,551)
---------- -------- --------- ----------
Income (loss) before equity in earnings of
non-consolidated affiliates................. 88,546 63,437 (198,571) (46,588)
Equity in earnings of non-consolidated
affiliates.................................. 6,742 -- -- 6,742
---------- -------- --------- ----------
Net income (loss)............................. $ 95,288 $ 63,437 $(198,571) $ (39,846)
========== ======== ========= ==========
Net income (loss) per common share:
Basic....................................... $ 0.31 $ (0.12)
========== ==========
Diluted..................................... $ 0.31 $ (0.12)
========== ==========
</TABLE>
114
<PAGE> 116
CLEAR CHANNEL
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
UNIVERSAL MERGER
(1) The pro forma merger adjustments for the year ended December 31, 1998
are as follows:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
IN INCOME
----------
<S> <C> <C>
(a) Increase in amortization expense resulting from the
additional goodwill created by the merger................... $ (7,720)
(b) Decrease in noncash compensation to reverse the effect of
Financial Accounting Standards Board Statement No. 123 ("FAS
123") from the statement of operations as the Company
elected to follow Accounting Principles Board Opinion Number
25("APB 25") for earnings presentation and implemented FAS
123 for footnote disclosure only............................ 106
</TABLE>
MORE ACQUISITION
(2) More is headquartered in London. Accordingly, More's financial
statements are reported in British Pounds. The statement of operations was
translated into US Dollars using the average exchange rate for the period and
the balance sheet was translated into US Dollars using the exchange rate at the
end of the period. The pro forma adjustments for the year ended December 31,
1998 are as follows:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
IN INCOME
----------
<S> <C> <C>
(c) Increase in amortization expense resulting from the
additional goodwill created by the acquisition.............. $(11,565)
(d) Decrease in noncash compensation to reverse the effect of
FAS 123 from the statement of operations as Clear Channel
elected to follow APB 25 for earnings presentation and
implemented FAS 123 for footnote disclosure only............ 3,476
(e) Increase in interest expense due to financing the
acquisition price of More at Clear Channel's average
interest rate of 5.78% for 1998............................. (22,352)
(f) The tax effect of adjustment (d) at the 1998 UK statutory
rate of 31.5% offset by the tax benefit of adjustment (e) at
Clear Channel's federal U.S. tax rate in 1998 of 35%........ 6,728
</TABLE>
JACOR MERGER
The Jacor acquisition pro forma adjustments exclude the effect of any
divestiture of stations, which were required for regulatory approval, as Clear
Channel intends the funds received from any divestiture to be reinvested in
acquisitions of similar stations in other markets.
(3) The pro forma acquisition adjustments for the year ended December 31,
1998 are as follows:
(g) The adjustments for the six months ended June 30, 1998 represent
the elimination of time brokerage agreement fees and additional
depreciation and amortization expenses resulting from the
allocation of Nationwide's purchase price of KXGL in San Diego.
(h) The adjustment reflects the additional depreciation and
amortization expense resulting from the allocation of Jacor's
purchase price to the assets acquired including an increase in
property and equipment and identifiable intangible assets to
their estimated fair market values.
(i) The adjustment reflects additional interest expense related to
additional borrowings under Jacor's credit facility, its 8% Notes
and its 4 3/4% Liquid Yield Option Notes offering completed
during February of 1998 to finance, in part, the acquisition of
Nationwide.
115
<PAGE> 117
CLEAR CHANNEL
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(j) To provide for the tax effect of pro forma adjustments using an assumed
rate of 40%.
(k) Additional revenues and expenses related to Nationwide Stations from July
1, 1998 to the date of acquisition consummation, net of elimination of the
results for the divestiture of two San Diego stations.
(l) Jacor experienced and Clear Channel anticipates continuing to experience
significant expense savings, which are not reflected in the pro forma
statements of operations, resulting from the elimination of redundant
broadcast operating expenses arising from the operation of multiple
stations in broadcast areas, changes in benefit plan and compensation
structures to conform with Jacor's and the elimination of Nationwide's
corporate office function.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
ESTIMATED EXPENSE SAVINGS
Corporate general and administrative........... $1,406
Benefit plan expenses.......................... 1,741
Commissions.................................... 413
Promotion and programming...................... 1,527
Personnel reductions........................... 1,955
Other.......................................... 732
------
Total.................................. 7,774
Income taxes................................... 3,110
------
Total, net of taxes.................... $4,664
======
</TABLE>
(4) The pro forma merger adjustment for the nine months ended September 30,
1999 and the year ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
TO INCOME
----------------------------
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C> <C>
(m) Increase in amortization expense resulting
from the additional goodwill created by the
merger and a change in the life of goodwill
amortization from 40 years (Jacor's policy)
to 25 years (Clear Channel's policy). This
amortization expense results in a permanent
difference and will not be deductible for
federal income tax purposes.................. $(157,639) $ (49,629)
(n) Increase in interest expense associated with
the increased long-term debt resulting from
the estimated merger expenses of $50,000..... (2,930) (927)
(o) Decrease in gain on disposition of assets as
this gain is associated directly with the
merger of Jacor and is a non-recurring
item......................................... -- (267,310)
(p) Decrease in income tax expense associated
with the tax effect of adjustments (n), (o),
and (p) at Clear Channel's assumed tax rate
of 40%....................................... 37,172 119,295
</TABLE>
116
<PAGE> 118
AMFM INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AT SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
AMFM
HISTORICAL PRO FORMA AMFM
AT 9/30/99 ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 86,512 $ -- $ 86,512
Accounts receivable, net............................ 486,651 -- 486,651
Other current assets................................ 106,742 -- 106,742
----------- --------- -----------
Total current assets........................ 679,905 -- 679,905
Property and equipment, net........................... 467,736 -- 467,736
Intangible assets:
Licenses and goodwill............................... 11,023,112 -- 11,023,112
Other intangible assets............................. 542,028 -- 542,028
----------- --------- -----------
11,565,140 -- 11,565,140
Less accumulated amortization....................... (1,037,700) -- (1,037,700)
----------- --------- -----------
10,527,440 -- 10,527,440
Other assets:
Investment in nonconsolidated affiliates............ 1,129,389 -- 1,129,389
Other assets........................................ 242,340 -- 242,340
----------- --------- -----------
TOTAL ASSETS................................ $13,046,810 $ -- $13,046,810
=========== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................. $ 389,252 $ -- $ 389,252
Current portion of long-term debt..................... 54,625 -- 54,625
----------- --------- -----------
Total current liabilities................... 443,877 -- 443,877
Long-term debt, excluding current portion............. 5,645,670 169,281(1) 5,825,502
10,551(2)
Deferred tax liabilities.............................. 1,740,476 (3,693)(2) 1,734,967
(1,816)(3)
Other liabilities..................................... 51,176 -- 51,176
Minority interest..................................... 3,704 -- 3,704
Redeemable preferred stock............................ 317,823 (169,281)(1) 148,542
Stockholders' equity:
Preferred stock..................................... 110,000 (110,000)(4) --
Common stock........................................ 2,096 61(4) 2,157
Additional paid-in capital.......................... 5,094,432 5,188(3) 5,209,559
109,939(4)
Accumulated deficit................................. (362,444) (6,858)(2) (372,674)
(3,372)(3)
----------- --------- -----------
Total stockholders' equity.................. 4,844,084 (5,042) 4,839,042
----------- --------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................... $13,046,810 $ -- $13,046,810
=========== ========= ===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Financial Information
117
<PAGE> 119
AMFM INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CAPSTAR AS PRO FORMA
PRO FORMA ADJUSTED FOR ADJUSTMENTS
LAMAR ADJUSTMENTS FOR THE COMPLETED FOR THE
AMFM TRANSACTION THE LAMAR CAPSTAR CAPSTAR
HISTORICAL(5) HISTORICAL(6) TRANSACTION TRANSACTIONS(11) MERGER
------------- ------------- --------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues..................... $1,273,856 $(47,605) $ -- $ 626,620 $ (56,261)(12)
Operating expenses excluding
depreciation and
amortization................... 682,061 (23,505) -- 359,014 (4,400)(12)
Depreciation and amortization.... 446,338 (25,990) -- 133,223 (49,425)(12)
281,630(13)
Corporate general and
administrative................. 36,722 (1,981) -- 26,918 --
Noncash compensation expense..... -- -- -- 21,260 --
Merger and non-recurring costs... 63,661 -- -- 20,433 (8,000)(14)
---------- -------- --------- --------- ---------
Operating income (loss).......... 45,074 3,871 -- 65,772 (276,066)
Interest expense................. 217,136 (105) 45,819(7) 180,342 (10,600)(12)
4,018(15)
Interest income.................. (15,650) -- -- (3,775) 10,600(12)
Gain on disposition of assets.... (123,845) -- -- -- --
Gain on disposition of
representation contracts....... (32,198) -- -- -- --
Loss on investment in limited
liability companies............ -- -- -- 28,565 --
Other (income) expense........... (3,221) 156 -- 328 --
---------- -------- --------- --------- ---------
Income (loss) before income
taxes.......................... 2,852 3,820 (45,819) (139,688) (280,084)
Income tax expense (benefit)..... 33,751 (345) (16,037)(9) (41,083) (98,029)(16)
Dividends and accretion on
preferred stock of
subsidiaries................... 17,601 -- -- 25,586 --
---------- -------- --------- --------- ---------
Income (loss) before equity in
net loss of nonconsolidated
affiliates..................... (48,500) 4,165 (29,782) (124,191) (182,055)
Equity in net loss of
nonconsolidated affiliates..... -- -- (82,674)(10) -- --
---------- -------- --------- --------- ---------
Net income (loss)................ (48,500) 4,165 (112,456) (124,191) (182,055)
Preferred stock dividends........ 25,670 -- -- -- --
---------- -------- --------- --------- ---------
Income (loss) attributable to
common stockholders............ $ (74,170) $ 4,165 $(112,456) $(124,191) $(182,055)
========== ======== ========= ========= =========
Basic and diluted loss per common
share.......................... $ (0.54)
==========
Weighted average common shares
outstanding(22)................ 137,979 53,554
========== =========
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE OTHER 1998
OTHER COMPLETED PRO FORMA AMFM
TRANSACTIONS(17) ADJUSTMENTS PRO FORMA
----------------- ----------- ----------
<S> <C> <C> <C>
Net revenues..................... $ 414 $ -- $1,797,024
Operating expenses excluding
depreciation and
amortization................... (7,122) -- 1,006,048
Depreciation and amortization.... 5,170 -- 790,946
Corporate general and
administrative................. -- -- 61,659
Noncash compensation expense..... -- -- 21,260
Merger and non-recurring costs... -- -- 76,094
------- -------- ----------
Operating income (loss).......... 2,366 -- (158,983)
Interest expense................. 4,830 (30,222)(18) 411,218
Interest income.................. -- -- (8,825)
Gain on disposition of assets.... -- -- (123,845)
Gain on disposition of
representation contracts....... -- -- (32,198)
Loss on investment in limited
liability companies............ -- -- 28,565
Other (income) expense........... -- -- (2,737)
------- -------- ----------
Income (loss) before income
taxes.......................... (2,464) 30,222 (431,161)
Income tax expense (benefit)..... (862) 10,578(19) (112,027)
Dividends and accretion on
preferred stock of
subsidiaries................... -- (13,378)(20) 29,809
------- -------- ----------
Income (loss) before equity in
net loss of nonconsolidated
affiliates..................... (1,602) 33,022 (348,943)
Equity in net loss of
nonconsolidated affiliates..... -- -- (82,674)
------- -------- ----------
Net income (loss)................ (1,602) 33,022 (431,617)
Preferred stock dividends........ -- (25,670)(21) --
------- -------- ----------
Income (loss) attributable to
common stockholders............ $(1,602) $ 58,692 $ (431,617)
======= ======== ==========
Basic and diluted loss per common
share.......................... $ (2.06)
==========
Weighted average common shares
outstanding(22)................ 18,059 209,592
======== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Financial Information
118
<PAGE> 120
AMFM INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA CAPSTAR AS PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTED FOR ADJUSTMENTS ADJUSTMENTS
LAMAR FOR THE THE COMPLETED FOR THE FOR THE
AMFM TRANSACTION LAMAR CAPSTAR CAPSTAR OTHER COMPLETED
HISTORICAL(5) HISTORICAL(6) TRANSACTION TRANSACTIONS(11) MERGER TRANSACTIONS(17)
------------- ------------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues................. $1,376,848 $(156,627) $ -- $ 347,290 $ (31,397)(12) $ (705)
Operating expenses excluding
depreciation and
amortization............... 731,260 (84,583) -- 207,001 (4,221)(12) (116)
Depreciation and
amortization............... 529,725 (94,062) -- 78,338 (26,832)(12) 2,839
147,000(13)
Corporate general and
administrative............. 44,103 (6,835) -- 14,026 -- --
Noncash compensation
expense.................... 6,148 -- -- 20,284 -- --
Merger and non-recurring
costs...................... 59,956 (2,154) -- 51,288 (47,510)(14) --
---------- --------- --------- --------- --------- -------
Operating income (loss)...... 5,656 31,007 -- (23,647) (99,834) (3,428)
Interest expense............. 306,695 (171) (35,874)(7) 90,075 (9,650)(12) 2,717
1,464(15)
Interest income.............. (10,490) -- -- (302) 9,650(12) --
Gain on disposition of
assets..................... (221,356) (947) 209,970(8) -- -- --
Gain on disposition of
representation contracts... (18,284) -- -- -- -- --
Other (income) expense....... -- -- -- 46 -- --
---------- --------- --------- --------- --------- -------
Income (loss) before income
taxes...................... (50,909) 32,125 (174,096) (113,466) (101,298) (6,145)
Income tax expense
(benefit).................. 8,818 8,867 (60,934)(9) (26,759) (35,454)(16) (2,151)
Dividends and accretion on
preferred stock of
subsidiaries............... 7,940 -- -- 17,390 -- --
---------- --------- --------- --------- --------- -------
Income (loss) before equity
in net loss of
nonconsolidated
affiliates................. (67,667) 23,258 (113,162) (104,097) (65,844) (3,994)
Equity in net loss of
nonconsolidated
affiliates................. (2,085) -- (59,736)(10) (2,444) -- --
---------- --------- --------- --------- --------- -------
Net income (loss)............ (69,752) 23,258 (172,898) (106,541) (65,844) (3,994)
Preferred stock dividends.... 14,011 -- -- -- -- --
---------- --------- --------- --------- --------- -------
Income (loss) attributable to
common stockholders........ $ (83,763) $ 23,258 $(172,898) $(106,541) $ (65,844) $(3,994)
========== ========= ========= ========= ========= =======
Basic and diluted loss per
common share............... $ (0.52)
==========
Weighted average common
shares outstanding(22)..... 160,511 38,057
========== =========
<CAPTION>
OTHER 1999
PRO FORMA AMFM
ADJUSTMENTS PRO FORMA
----------- ----------
<S> <C> <C>
Net revenues................. $ -- $1,535,409
Operating expenses excluding
depreciation and
amortization............... -- 849,341
Depreciation and
amortization............... -- 637,008
Corporate general and
administrative............. -- 51,294
Noncash compensation
expense.................... -- 26,432
Merger and non-recurring
costs...................... -- 61,580
-------- ----------
Operating income (loss)...... -- (90,246)
Interest expense............. (9,975)(18) 345,281
Interest income.............. -- (1,142)
Gain on disposition of
assets..................... -- (12,333)
Gain on disposition of
representation contracts... -- (18,284)
Other (income) expense....... -- 46
-------- ----------
Income (loss) before income
taxes...................... 9,975 (403,814)
Income tax expense
(benefit).................. 3,491(19) (104,122)
Dividends and accretion on
preferred stock of
subsidiaries............... (12,621)(20) 12,709
-------- ----------
Income (loss) before equity
in net loss of
nonconsolidated
affiliates................. 19,105 (312,401)
Equity in net loss of
nonconsolidated
affiliates................. -- (64,265)
-------- ----------
Net income (loss)............ 19,105 (376,666)
Preferred stock dividends.... (14,011)(21) --
-------- ----------
Income (loss) attributable to
common stockholders........ $ 33,116 $ (376,666)
======== ==========
Basic and diluted loss per
common share............... $ (1.75)
==========
Weighted average common
shares outstanding(22)..... 16,435 215,003
======== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Financial Information
119
<PAGE> 121
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION
(IN THOUSANDS OF DOLLARS)
ADJUSTMENTS TO THE UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(1) Reflects the exchange of Capstar Communications' 12 5/8% Series E
Cumulative Exchangeable Preferred Stock for 12 5/8% Senior Subordinated
Exchange Debentures due 2006 expected to be completed on November 23,
1999.
(2) Reflects the purchase of $293,641 of aggregate principal amount of
Capstar Communications' 10 3/4% Senior Subordinated Notes due 2006 and
estimated fees and expenses pursuant to a tender offer which was
completed on November 12, 1999, funded with borrowings under the credit
agreement. The adjustment to accumulated deficit represents the related
extraordinary loss on the early extinguishment of debt of $10,551, net
of a tax benefit of $3,693.
(3) Reflects the adjustment to record estimated stock option compensation
expense relating to certain executive stock options of $5,188, net of a
tax benefit of $1,816, recognized ratably using the five-year vesting
period from the date of grant through September 30, 1999. These options
will become exercisable upon the Clear Channel merger, subject to the
vesting terms.
(4) Reflects the conversion of AMFM's 7% Convertible Preferred Stock to
AMFM common stock expected to be completed during the first quarter of
2000.
ADJUSTMENTS TO THE UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF
OPERATIONS
(5) AMFM began operating KKFR-FM and KFYI-AM in Phoenix under a time
brokerage agreement effective November 5, 1998. Therefore, the results
of operations of KKFR-FM and KFYI-AM are included in AMFM's historical
operations subsequent to this date during 1998 and for the nine months
ended September 30, 1999.
AMFM entered into a time brokerage agreement to sell substantially all
of the broadcast time of WMVP-AM in Chicago effective September 10,
1998. Therefore, substantially all of the results of operations of
WMVP-AM are excluded from AMFM's historical operations subsequent to
this date during 1998 and for the nine months ended September 30, 1999.
(6) On September 15, 1999, AMFM consummated the sale of its outdoor
advertising business to Lamar in exchange for net proceeds of $680,000
in cash, subject to a working capital adjustment, and 26,227,273 shares
of Lamar's class A common stock. This adjustment removes the historical
results of operations of AMFM's outdoor advertising business.
(7) Reflects the increase in interest expense of $45,819 for the year ended
December 31, 1998 and the net decrease in interest expense of $35,874
for the nine months ended September 30, 1999 in connection with the
additional bank borrowings related to the outdoor advertising
acquisitions completed during 1998 and 1999 and the paydown of debt
resulting from the net proceeds of $680,000 received from Lamar.
(8) Reflects the elimination of the nonrecurring gain of $209,970 incurred
in connection with AMFM's sale of its outdoor advertising business.
(9) Reflects the tax effect of the pro forma adjustments.
120
<PAGE> 122
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
(10) The adjustment to reflect AMFM's 30% equity interest in Lamar and
amortization of the investment basis in excess of underlying equity in
the net assets of Lamar over an estimated life of 15 years is as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
Lamar historical net loss applicable to common
stock............................................... $ (12,255) $(19,533)
Pro forma adjustments for significant acquisitions
completed by Lamar during 1998.................... (19,640) --
Pro forma adjustments to reflect the acquisition by
Lamar of AMFM's outdoor business.................. (69,104) (49,383)
--------- --------
Lamar pro forma net loss applicable to common
stockholders...................................... (100,999) (68,916)
AMFM equity interest................................ 30% 30%
--------- --------
Equity in pro forma net loss of Lamar............... (30,300) (20,675)
Less historical equity in net loss of Lamar......... -- (219)
--------- --------
Pro forma adjustment for equity in net loss of
Lamar............................................. (30,300) (20,456)
Amortization of investment basis in excess of
underlying equity in the net assets of Lamar...... (52,374) (39,280)
--------- --------
Total equity in net loss of affiliate..... $ (82,674) $(59,736)
========= ========
</TABLE>
The Lamar pro forma net loss applicable to common stockholders was
estimated by AMFM based on information obtained from publicly filed
financial statements. These estimates, including the allocation of
purchase price, are preliminary and subject to change.
121
<PAGE> 123
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
ADJUSTMENTS TO CAPSTAR'S HISTORICAL CONDENSED STATEMENT OF OPERATIONS RELATED TO
THE COMPLETED CAPSTAR TRANSACTIONS
(11) Capstar's historical condensed statement of operations for the year
ended December 31, 1998 and the period from January 1 to July 13, 1999
and pro forma adjustments related to the completed Capstar
transactions is summarized below:
<TABLE>
<CAPTION>
PRO FORMA CAPSTAR
ADJUSTMENTS AS ADJUSTED
COMPLETED FOR THE FOR THE
CAPSTAR COMPLETED COMPLETED
YEAR ENDED CAPSTAR TRANSACTIONS CAPSTAR CAPSTAR
DECEMBER 31, 1998 HISTORICAL HISTORICAL(A) TRANSACTIONS TRANSACTIONS
----------------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net revenues........................ $517,467 $ 109,153 $ -- $ 626,620
Operating expenses excluding
depreciation and amortization..... 304,565 54,449 -- 359,014
Depreciation and amortization....... 96,207 13,290 23,726(B) 133,223
Corporate general and
administrative.................... 23,678 3,240 -- 26,918
Noncash compensation expense........ 21,260 74,199 (74,199)(C) 21,260
LMA fees............................ 4,103 697 (4,800)(D) --
Merger and non-recurring costs...... 12,970 35,318 (11,255)(E) 20,433
(16,600)(F)
-------- --------- -------- ---------
Operating income (loss)............. 54,684 (72,040) 83,128 65,772
Interest expense.................... 121,145 31,508 27,689(G) 180,342
Interest income..................... (3,423) (352) -- (3,775)
Loss on investment in limited
liability companies............... 28,565 -- -- 28,565
Other (income) expense.............. 183 3,308 (3,163)(H) 328
-------- --------- -------- ---------
Income (loss) before income taxes... (91,786) (106,504) 58,602 (139,688)
Income tax expense (benefit)........ (24,317) 210 (16,976)(I) (41,083)
Dividends and accretion on preferred
stock of subsidiary............... 21,987 -- 17,264(J) 25,586
(13,665)(K)
-------- --------- -------- ---------
Net income (loss)................... (89,456) (106,714) 71,979 (124,191)
Preferred stock dividends........... -- 17,264 (17,264)(J) --
-------- --------- -------- ---------
Income (loss) attributable to common
stockholders...................... $(89,456) $(123,978) $ 89,243 $(124,191)
======== ========= ======== =========
</TABLE>
122
<PAGE> 124
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA CAPSTAR
ADJUSTMENTS AS ADJUSTED
FOR THE FOR THE
COMPLETED COMPLETED
PERIOD FROM JANUARY 1 CAPSTAR CAPSTAR CAPSTAR
TO JULY 13, 1999 HISTORICAL TRANSACTIONS TRANSACTIONS
--------------------- ---------- ------------ ------------
<S> <C> <C> <C>
Net revenues..................................... $ 347,290 $ -- $ 347,290
Operating expenses excluding depreciation and
amortization................................... 207,001 -- 207,001
Depreciation and amortization.................... 78,338 -- 78,338
Corporate general and administrative............. 14,026 -- 14,026
Noncash compensation expense..................... 20,284 -- 20,284
LMA fees......................................... 387 (387)(D) --
Merger and non-recurring costs................... 51,288 -- 51,288
--------- ----- ---------
Operating income................................. (24,034) 387 (23,647)
Interest expense................................. 90,075 -- 90,075
Interest income.................................. (302) -- (302)
Other (income) expense........................... 46 -- 46
--------- ----- ---------
Income (loss) before income taxes................ (113,853) 387 (113,466)
Income tax expense (benefit)..................... (26,894) 135(I) (26,759)
Dividends and accretion on preferred stock of
subsidiary..................................... 17,390 -- 17,390
--------- ----- ---------
Income (loss) before equity in net loss of
nonconsolidated affiliates..................... (104,349) 252 (104,097)
Equity in net loss of nonconsolidated
affiliates..................................... (2,444) -- (2,444)
--------- ----- ---------
Income (loss) attributable to common
stockholders................................... $(106,793) $ 252 $(106,541)
========= ===== =========
</TABLE>
123
<PAGE> 125
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
- ---------------
(A) The detail of the historical financial data of significant stations
acquired or disposed of in the completed transactions by Capstar for the
year ended December 31, 1998 has been obtained from the historical
financial statements of the respective stations and is summarized below:
<TABLE>
<CAPTION>
PATTERSON SFX OTHER SFX COMPLETED
ACQUISITION ACQUISITION TRANSACTIONS CAPSTAR
YEAR ENDED HISTORICAL HISTORICAL HISTORICAL TRANSACTIONS
DECEMBER 31, 1998 1/1-1/29(I) 1/1-5/29(II) 1/1-5/29(III) HISTORICAL
----------------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net revenues.................................. $ 3,503 $ 124,677 $(19,027) $ 109,153
Operating expenses excluding depreciation and
amortization................................ 2,523 78,235 (26,309) 54,449
Depreciation and amortization................. 497 17,668 (4,875) 13,290
Corporate general and administrative.......... 171 3,069 -- 3,240
Noncash compensation expense.................. -- 74,199 -- 74,199
LMA fees...................................... -- 697 -- 697
Merger and non-recurring costs................ -- 35,318 -- 35,318
------- --------- -------- ---------
Operating income (loss)....................... 312 (84,509) 12,157 (72,040)
Interest expense.............................. 645 30,867 (4) 31,508
Interest income............................... -- (352) -- (352)
Other expense................................. 3,163 -- 145 3,308
------- --------- -------- ---------
Income (loss) before income taxes............. (3,496) (115,024) 12,016 (106,504)
Income tax expense............................ -- 210 -- 210
------- --------- -------- ---------
Net income (loss)............................. (3,496) (115,234) 12,016 (106,714)
Preferred stock dividends..................... -- 17,264 -- 17,264
------- --------- -------- ---------
Income (loss) attributable to common
stockholders................................ $(3,496) $(132,498) $ 12,016 $(123,978)
======= ========= ======== =========
</TABLE>
- ---------------
(i) In January 1998, Capstar acquired 39 radio stations (25 FM and 14 AM) from
Patterson Broadcasting, Inc. for approximately $227,186 in cash.
(ii) On May 29, 1998, Capstar acquired SFX Broadcasting, Inc. a radio
broadcasting company which owned 81 radio stations (60 FM and 21 AM) and
operated two additional radio stations (1 FM and 1 AM) under time
brokerage or joint sales agreements. The acquisition was effected through
the merger of a wholly owned subsidiary of Capstar with and into SFX, with
SFX surviving the merger as a wholly owned subsidiary of Capstar, renamed
Capstar Communications, Inc. The total consideration paid for all of the
outstanding common equity interest of SFX was approximately $1,279,656,
including direct costs of the acquisition.
(iii) Other SFX transactions include the following transactions related to
stations acquired by Capstar from SFX on May 29, 1998:
(a) On February 20, 1998, AMFM entered into an agreement to acquire from
Capstar KTXQ-FM and KBFB-FM in Dallas/Ft. Worth, KODA-FM, KKRW-FM and
KQUE-AM in Houston, KPLN-FM and KYXY-FM in San Diego and WPHH-FM,
WJJJ-FM, WXDX-FM and WDVE-FM in Pittsburgh (collectively, the
"Capstar/SFX Stations") for an aggregate purchase price of
approximately $637,500 in a series of purchases and exchanges over a
period of three years. In connection with this transaction, which is
expected to be terminated on November 19, 1999, Capstar entered into a
time brokerage agreement with AMFM to sell substantially all of the
broadcasting time of ten of the Capstar/SFX Stations (9 FM and 1 AM)
effective May 29, 1998. Reflects the adjustment to eliminate the
results of operations of the Capstar/SFX Stations
124
<PAGE> 126
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
operated by AMFM under time brokerage agreements and to record the
related time brokerage (LMA) fee revenue of $20,594 for the period
January 1, 1998 to May 29, 1998.
(b) In connection with the acquisition of SFX, Capstar was required to
dispose of certain stations acquired from SFX due to governmental
restrictions on multiple station ownership. On May 29, 1998, Capstar
completed the following disposition and exchange transactions to
comply with multiple ownership rules:
- the sale of one FM station in Houston, Texas to HBC Houston, Inc.
for approximately $54,000;
- the sale of four radio stations (3 FM and 1 AM) in Long Island, New
York to Cox Radio, Inc. for approximately $46,000;
- the sale of four radio stations (3 FM and 1 AM) in Greenville,
South Carolina to Clear Channel Radio, Inc. for approximately
$35,000;
- the sale of one FM station in Daytona Beach, Florida to Clear
Channel Metroplex, Inc. for approximately $11,500;
- the assignment of four radio stations (2 FM and 2 AM) in Fairfield,
Connecticut with an aggregate fair market value of $15,000 to a
trust pending the sale to a third party; and
- the exchange of KODA-FM in Houston, Texas to AMFM for two FM
stations in Jacksonville, Florida (valued at $53,000) and $90,250
in cash, which was used by Capstar to acquire three stations (2 FM
and 1 AM) in Austin, Texas through a qualified intermediary.
Reflects the adjustment to eliminate the results of operations of the SFX
stations disposed by Capstar and to record the results of operations for
the stations received in the exchange transaction for the period January
1, 1998 to May 29, 1998.
(B) Reflects incremental amortization related to the completed transactions and
is based on the following allocation to intangible assets:
<TABLE>
<CAPTION>
INCREMENTAL HISTORICAL ADJUSTMENT
COMPLETED TRANSACTIONS AMORTIZATION INTANGIBLE AMORTIZATION AMORTIZATION FOR NET
YEAR ENDED DECEMBER 31, 1998 PERIOD(i) ASSETS, NET EXPENSE EXPENSE INCREASE
- ---------------------------- ------------ ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Patterson acquisition............. 1/1-1/29 $ 268,219 $ 540 $ 356 $ 184
SFX acquisition................... 1/1-5/29 3,194,742 33,057 9,515 23,542
---------- ------- ------ -------
$3,462,961 $33,597 $9,871 $23,726
========== ======= ====== =======
</TABLE>
- ---------------
(i) The incremental amortization period represents the period of the year
that the acquisition was not completed. Intangible assets consist of
broadcast licenses which are amortized on a straight-line basis over
estimated average lives of 40 years. Actual amortization may differ
based upon final purchase price allocations.
(C) Reflects the elimination of non-recurring transaction-related compensation
expense of $74,199 attributable to the voluntary settlement of the
outstanding options, SARs and unit purchase options by SFX in connection
with Capstar's acquisition of SFX.
(D) Reflects the elimination of $4,800 of time brokerage (LMA) fees for the
year ended December 31, 1998, of which $4,103 were paid by Capstar and $697
by SFX, and $387 of time brokerage (LMA) fees paid by Capstar for the
period from January 1 to July 13, 1999 related to acquired radio stations
that were previously operated under time brokerage agreements.
(E) Reflects the elimination of non-recurring transaction-related charges of
$11,255 recorded by SFX in connection with Capstar's acquisition of SFX and
the spin-off of SFX Entertainment, Inc. These charges consist primarily of
legal, accounting and regulatory fees.
(F) Reflects the elimination of the consent solicitation payments to the
holders of the 10 3/4% Senior Subordinated Notes due 2006 and 12 5/8%
Series E Cumulative Exchangeable Preferred Stock of SFX
125
<PAGE> 127
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
incurred in connection with the spin-off of SFX Entertainment of $16,600.
The spin-off of SFX Entertainment was consummated in April 1998.
(G) Reflects the adjustment to interest expense in connection with the
consummation of the completed Capstar transactions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Additional bank borrowings related to completed
acquisitions................................................ $1,362,072
Interest expense at 8.00%................................... 108,966
Less: historical interest expense recognized subsequent to
completed acquisition..................................... (69,925)
----------
Incremental interest expense................................ 39,041
Less: historical interest expense recognized by the acquired
company................................................... (11,352)
----------
Net increase in interest expense............................ $ 27,689
==========
</TABLE>
(H) Adjustment represents the elimination of $3,163 of transaction expenses
recorded by Patterson in connection with Capstar's acquisition of
Patterson.
(I) Reflects the tax effect of the pro forma adjustments.
(J) Reclassification of SFX's historical preferred stock dividends of $17,264
to Capstar's dividends on preferred stock of subsidiaries.
(K) Reflects the elimination of a portion of the redeemable preferred stock
dividends related to the SFX acquisition and the subsequent redemption of
$119,600 and $500 liquidation preference on July 3, 1998 and July 10, 1998,
respectively, of the 12 5/8% Series E Cumulative Preferred Stock of SFX as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
Dividends on 6% Series C Redeemable Preferred Stock redeemed
as part of the acquisition of SFX on May 29, 1998........... $ (112)
Dividends on 6 1/2% Series D Cumulative Convertible
Exchangeable Preferred Stock redeemed as part of the
acquisition of SFX on May 29, 1998........................ (5,841)
Dividends on 12 5/8% Series E Cumulative Exchangeable
Preferred Stock of $119,500 and $500 for the period
January 1, 1998 to the redemption dates of July 3, 1998
and July 10, 1998, respectively........................... (7,712)
--------
Total adjustment for net decrease in dividends and
accretion................................................. $(13,665)
========
</TABLE>
ADJUSTMENTS TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
RELATED TO THE CAPSTAR MERGER
(12) Reflects the elimination of intercompany transactions between AMFM and
Capstar for AMFM's media representation services provided to Capstar,
Capstar's participation in The AMFM Radio Networks, fees paid by AMFM
to Capstar under time brokerage (LMA) agreements and interest on
Capstar's note payable to AMFM of $150,000 for the year ended December
31, 1998 and the period from January 1 to July 13, 1999.
126
<PAGE> 128
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
(13) Reflects incremental amortization related to the Capstar merger and is
based on the allocation of the total consideration as follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1 TO
DECEMBER 31, 1998 JULY 13, 1999
----------------- -------------
<S> <C> <C>
Amortization expense on $5,893,129 of intangible
assets.......................................... $ 392,875 $210,625
Less: historical amortization expense........... (111,245) (63,625)
--------- --------
Adjustment for net increase in amortization
expense....................................... $ 281,630 $147,000
========= ========
</TABLE>
Historical depreciation expense of Capstar as adjusted for the completed
Capstar transactions is assumed to approximate depreciation expense on a
pro forma basis. Actual depreciation and amortization may differ based
upon final purchase price allocations.
(14) Reflects the elimination of financial advisory and other expenses of
Capstar in connection with the Capstar merger of $8,000 for the year
ended December 31, 1998 and $47,510 for the period from January 1 to
July 13, 1999.
(15) Reflects the adjustment to record interest expense of $4,018 for the
year ended December 31, 1998 and $1,464 for the nine months ended
September 30, 1999 on additional bank borrowings related to estimated
financial advisors, legal, accounting and other professional fees
incurred by AMFM and Capstar.
(16) Reflects the tax effect of the pro forma adjustments.
ADJUSTMENTS TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
RELATED TO THE OTHER COMPLETED TRANSACTIONS
(17) The combined condensed statement of operations for the other completed
transactions for the year ended December 31, 1998 and for the nine
months ended September 30, 1999 are summarized below:
<TABLE>
<CAPTION>
THE
CHICAGO BROADCAST PRO FORMA
DISPOSITION GROUP, INC. ADJUSTMENTS FOR OTHER
YEAR ENDED HISTORICAL HISTORICAL THE OTHER COMPLETED COMPLETED
DECEMBER 31, 1998 1/1-12/31(A) 1/1-12/31(B) TRANSACTIONS TRANSACTIONS
----------------- ------------ ------------- ------------------- ------------
<S> <C> <C> <C> <C>
Net revenues.................... $(10,309) $11,772 $ (1,049)(c) $ 414
Operating expenses excluding
depreciation and
amortization.................. (13,271) 6,149 -- (7,122)
Depreciation and amortization... (592) 188 5,574(d) 5,170
-------- ------- ---------- -------
Operating income (loss)......... 3,554 5,435 (6,623) 2,366
Interest expense................ -- 332 4,498(e) 4,830
-------- ------- ---------- -------
Income (loss) before income
taxes......................... 3,554 5,103 (11,121) (2,464)
Income tax expense (benefit).... -- 1,850 (2,712)(f) (862)
-------- ------- ---------- -------
Income (loss)................... $ 3,554 $ 3,253 $ (8,409) $(1,602)
======== ======= ========== =======
</TABLE>
127
<PAGE> 129
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
CHICAGO PRO FORMA
DISPOSITION ADJUSTMENTS FOR OTHER
NINE MONTHS ENDED HISTORICAL THE OTHER COMPLETED COMPLETED
SEPTEMBER 30, 1999 1/1-4/16(A) TRANSACTIONS TRANSACTIONS
------------------ ----------- ------------------- ------------
<S> <C> <C> <C>
Net revenues................................ $(705) $ -- $ (705)
Operating expenses excluding depreciation
and amortization.......................... (116) -- (116)
Depreciation and amortization............... -- 2,839(d) 2,839
----- ------- -------
Operating income (loss)..................... (589) (2,839) (3,428)
Interest expense............................ -- 2,717(e) 2,717
----- ------- -------
Income (loss) before income taxes........... (589) (5,556) (6,145)
Income tax expense (benefit)................ -- (2,151)(f) (2,151)
----- ------- -------
Income (loss)............................... $(589) $(3,405) $(3,994)
===== ======= =======
</TABLE>
- ---------------
(a) On April 16, 1999, AMFM sold WMVP-AM in Chicago to ABC, Inc. for $21,000
in cash. AMFM entered into a time brokerage agreement to sell
substantially all of the broadcast time of WMVP-AM effective September 10,
1998.
(b) On July 1, 1999, AMFM acquired KKFR-FM and KFYI-AM in Phoenix from The
Broadcast Group, Inc. for $90,000 in cash. AMFM began operating KKFR-FM
and KFYI-AM under a time brokerage agreement effective November 5, 1998.
(c) Reflects the elimination of revenue related to the time brokerage
agreement between The Broadcast Group Inc. and AMFM. AMFM began operating
KKFR-FM and KFYI-AM in Phoenix under the time brokerage agreement
effective November 5, 1998.
(d) Reflects incremental amortization related to the assets acquired in the
Phoenix acquisition and is based on the allocation of the total
consideration as follows:
<TABLE>
<CAPTION>
INCREMENTAL INTANGIBLE HISTORICAL ADJUSTMENT
YEAR ENDED AMORTIZATION ASSETS, AMORTIZATION AMORTIZATION FOR NET
DECEMBER 31, 1998 PERIOD(I) NET EXPENSE(I) EXPENSE INCREASE
----------------- ------------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Phoenix acquisition......... 1/1-12/31 $85,160 $5,677 $103 $5,574
======= ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
INCREMENTAL INTANGIBLE HISTORICAL ADJUSTMENT
NINE MONTHS ENDED AMORTIZATION ASSETS, AMORTIZATION AMORTIZATION FOR NET
SEPTEMBER 30, 1999 PERIOD(I) NET EXPENSE(I) EXPENSE INCREASE
------------------ ------------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Phoenix acquisition......... 1/1-7/1 $85,160 $2,839 $ -- $2,839
======= ====== ==== ======
</TABLE>
- ---------------
(i) Intangible assets are amortized on a straight-line basis over an
estimated average 15 year life. The incremental amortization period
represents the period of the year that the acquisition was not
completed.
Historical depreciation expense for the Phoenix acquisition is
assumed to approximate depreciation expense on a pro forma basis.
Actual depreciation and amortization may differ based upon final
purchase price allocations.
128
<PAGE> 130
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
(e) Reflects the adjustment to interest expense as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
Additional bank borrowings related to other
completed transactions...................... $69,000 $69,000
------- -------
Interest expense at 7.0%.................... 4,830 2,415
Less: historical interest expense recognized
subsequent to the completed transaction... -- 302
------- -------
Incremental interest expense................ 4,830 2,717
Less: historical interest expense recognized
by the acquired company................... (332) --
------- -------
Net increase in interest expense............ $ 4,498 $ 2,717
======= =======
</TABLE>
(f) Reflects the tax effect of the pro forma adjustments.
(18) Reflects (i) the net decrease in interest expense resulting from the
refinancing to occur on November 19, 1999 of the existing credit
agreements of two of AMFM's subsidiaries into a single new credit
agreement with an estimated average interest rate of 6.75%, (ii) the
net decrease in interest expense related to the purchase of $293,641
of aggregate principal amount of Capstar Communications' 10 3/4%
Senior Subordinated Notes due 2006 and estimated fees and expenses
pursuant to a tender offer which was completed on November 12, 1999,
funded with borrowings under the credit agreement and (iii) the net
increase in interest expense related to the exchange of the 12 5/8%
Series E Cumulative Exchangeable Preferred Stock of Capstar
Communications for 12 5/8% Senior Subordinated Exchange Debentures due
2006 expected to be completed on November 23, 1999.
(19) Reflects the tax effect of the pro forma adjustments.
(20) Reflects the elimination of dividends related to the exchange of the
12 5/8% Series E Cumulative Exchangeable Preferred Stock of Capstar
Communications for 12 5/8% Senior Subordinated Exchange Debentures due
2006 expected to be completed on November 23, 1999.
(21) Reflects the elimination of preferred stock dividends related to (i)
the conversion of AMFM's $3.00 Convertible Exchangeable Preferred
Stock to AMFM common stock on August 24, 1999, pursuant to a notice of
redemption issued to holders and (ii) the conversion of AMFM's 7%
Convertible Preferred Stock to AMFM common stock expected to be
completed during the first quarter of 2000.
(22) The pro forma combined loss per common share data is computed by
dividing pro forma loss attributable to common stockholders by the
weighted average common shares assumed to be
129
<PAGE> 131
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
outstanding. A summary of shares used in the pro forma combined loss
per common share calculation follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Historical weighted average shares
outstanding................................. 137,979 160,511
Incremental weighted average shares relating
to:
53,553,966 shares of common stock issued
in connection with the Capstar merger
on July 13, 1999....................... 53,554 38,057
11,979,800 shares of common stock issued
upon the conversion of AMFM's $3.00
Convertible Exchangeable Preferred
Stock on August 24, 1999............... 11,980 10,356
6,079,088 shares of common stock to be
issued upon the conversion of AMFM's 7%
Convertible Preferred Stock............ 6,079 6,079
------- -------
Shares used in the pro forma combined
earnings per share calculation............ 209,592 215,003
======= =======
</TABLE>
130
<PAGE> 132
(c) Exhibits.
<TABLE>
<S> <C>
2.1 Agreement and Plan of Merger dated October 2, 1999, among
Clear Channel Communications, Inc., AMFM, Inc., and CCU
Merger Sub, Inc. (Previously filed on the Company's Current
Report on Form 8-K dated October 5, 1999.)
23.1 Consent of Pricewaterhouse LLP
23.2 Consent of KPMG LLP
23.3 Consent of Pricewaterhouse LLP
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CLEAR CHANNEL COMMUNICATIONS, INC.
By: /s/ HERBERT W. HILL, JR.
-------------------------------------
Herbert W. Hill, Jr.
Senior Vice President and
Chief Accounting Officer
Date: November 18, 1999
131
<PAGE> 133
INDEX TO EXHIBITS
<TABLE>
<C> <S>
2.2 -- Agreement and Plan of Merger dated October 2, 1999, among
Clear Channel Communications, Inc., AMFM, Inc., and CCU
Merger Sub, Inc. (Previously filed on the Company's
Current Report on Form 8-K dated October 5, 1999.)
23.1 -- Consent of Pricewaterhouse LLP
23.2 -- Consent of KPMG LLP
23.3 -- Consent of Pricewaterhouse LLP
</TABLE>
<PAGE> 1
EXHIBIT 23.1
We hereby consent to the incorporation by reference in the two Registration
Statements on Form S-3 (File Nos. 333-76105 and 333-72839), Registration
Statement on Form S-4 (File No. 333-57987), and five Registration Statements on
Form S-8 (File Nos. 333-59772, 33-64463, 333-29717, 333-61883, and 333-72839) of
Clear Channel Communications, Inc. of our report dated February 10, 1999, except
as to Note 16, which is as of March 15, 1999, relating to the financial
statements of AMFM Inc. (formerly Chancellor Media Corporation) and
subsidiaries, which appears in the Current Report on Form 8-K of Clear Channel
Communications, Inc. dated November 18, 1999.
PricewaterhouseCoopers LLP
Dallas, Texas
November 18, 1999
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
AMFM Inc. (formerly Chancellor Media Corporation):
We consent to incorporation by reference in the Registration Statements on Form
S-3 (No. 333-76105), on Form S-4 (No. 333-57987), and on Form S-8 (Nos.
33-59772, 33-64463, 333-29717, 333-61883 and 333-72839) of Clear Channel
Communications, Inc. of our report dated January 31, 1997, related to the
consolidated statements of operations, stockholders' equity and cash flows of
Chancellor Media Corporation (currently AMFM Inc.) and subsidiaries for the year
ended December 31, 1996, which report appears in this Current Report on Form 8-K
of Clear Channel Communications, Inc.
KPMG LLP
Dallas, Texas
November 18, 1999
<PAGE> 1
EXHIBIT 23.3
We hereby consent to the incorporation by reference in the two Registration
Statements on Form S-3 (File Nos. 333-76105 and 333-72839), Registration
Statement on Form S-4 (No. 333-57987), and five Registration Statements on Form
S-8 (File Nos. 33-59772, 33-64463, 333-29717, 333-61883, and 333-72839) of Clear
Channel Communications, Inc. of our report dated February 26, 1999, except as to
Note 3, which is as of March 15, 1999, relating to the consolidated financial
statements of Capstar Broadcasting Corporation and Subsidiaries which is
included in the Current Report on Form 8-K of Clear Channel Communications, Inc.
dated November 18, 1999.
PricewaterhouseCoopers LLP
Austin, Texas
November 18, 1999
