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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-22486
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CAPSTAR COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3649750
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 CONGRESS AVENUE 78701
SUITE 1400 (Zip Code)
AUSTIN, TEXAS
(Address of principal executive offices)
</TABLE>
(512) 340-7800
Registrant's telephone number, including area code
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Indicate by check mark whether Capstar Communications, Inc. ("CCI") (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of CCI's classes of common stock,
as of the latest practicable date: As of October 31, 1998, 1,006 shares of Class
A Common Stock, par value $.01 per share ("Common Stock"), of Capstar
Communications, Inc. were outstanding. As of such date, there was no public
market for the Common Stock.
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<PAGE> 2
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1998
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of December 31, 1997 and
September 30, 1998 (unaudited)............................ 3
Consolidated Statements of Operations for the three months
ended September 30, 1997 and 1998 (unaudited)............. 4
Consolidated Statements of Operations for the nine months
ended September 30, 1997 and the five months ended May 31,
1998 (predecessor) and the four months ended September 30,
1998 (unaudited).......................................... 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and the five months ended
May 31, 1998 (predecessor) and the four months ended
September 30, 1998 (unaudited)............................ 6
Consolidated Statement of Shareholder's Equity for the nine
months ended September 30, 1998 (unaudited)............... 7
Notes to Consolidated Financial Statements (unaudited)...... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Item Quantitative and Qualitative Disclosure About Market Risk...
3.... 26
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 27
Item 4. Submission of Matters to a Vote of Security Holders......... 28
Item 6. Exhibits and Reports on Form 8-K............................ 28
</TABLE>
As used in this Quarterly Report on Form 10-Q, unless the context otherwise
requires, (i) "CCI" refers to Capstar Communications, Inc., (formerly known as
SFX Broadcasting, Inc.), a direct wholly-owned subsidiary of Capstar Radio
Broadcasting Partners, Inc., (ii) the "Company" collectively refers to CCI and
its subsidiaries, (iii) "Capstar Radio" refers to Capstar Radio Broadcasting
Partners, Inc., a direct wholly-owned subsidiary of Capstar Broadcasting
Partners, Inc., (iv) "Capstar Partners" refers to Capstar Broadcasting Partners,
Inc., whose outstanding common stock is owned by Capstar Broadcasting
Corporation, and (v) "Capstar Broadcasting" refers to Capstar Broadcasting
Corporation.
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------ -------------
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 24,686 $ 9,782
Accounts receivable, net of allowance for doubtful
accounts of $2,264 and $4,239 at December 31, 1997 and
September 30, 1998, respectively....................... 71,241 67,057
Assets under contract for sale............................ 42,883 --
Prepaid and other current assets.......................... 3,109 10,697
Receivable from SFX Entertainment......................... 11,539 26,250
---------- ----------
Total current assets.............................. 153,458 113,786
Property and equipment, net................................. 74,829 109,808
Intangibles and other, net.................................. 1,039,394 3,336,122
Net assets to be distributed to shareholders................ 102,144 --
Other assets................................................ 5,790 3,569
---------- ----------
Total assets...................................... $1,375,615 $3,563,285
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,665 $ 3,437
Accrued expenses.......................................... 19,246 16,354
Payable to former national sales representative........... 23,025 471
Accrued interest.......................................... 6,675 21,628
Income taxes payable...................................... -- 56,421
Current portion of long-term debt......................... 610 378,499
---------- ----------
Total current liabilities......................... 58,221 476,810
Long-term debt, net of current portion...................... 764,092 326,306
Deferred income taxes....................................... 102,681 1,008,617
---------- ----------
Total liabilities................................. 924,994 1,811,733
---------- ----------
Redeemable Preferred Stock, aggregate liquidation preference
of $390,025 and $129,948, respectively.................... 375,796 144,973
---------- ----------
Commitments and contingencies
Shareholder's equity:
Class A Voting Common Stock, $.01 par value; 100,000,000
and 200,000 shares Authorized; 614 and 1,006 shares
issued; 612 and 1,006 shares outstanding at December
31, 1997 and September 30, 1998, respectively.......... 1 1
Class B Voting Convertible Common Stock, $.01 par value;
10,000,000 shares Authorized; 77 shares issued; and 68
shares outstanding at December 31, 1997................ 1 --
Additional paid-in capital................................ 185,642 1,606,252
Treasury Stock; 11 shares at December 31, 1997............ (6,523) --
Retained earnings (deficit)............................... (104,296) 326
---------- ----------
Total shareholder's equity........................ 74,825 1,606,579
---------- ----------
Total liabilities and shareholder's equity........ $1,375,615 $3,563,285
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------ ------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Gross broadcast revenue..................................... $ 90,052 $107,436
Less: agency commissions.................................... (10,592) (10,702)
-------- --------
Net broadcast revenue..................................... 79,460 96,734
-------- --------
Station operating expenses.................................. 46,719 47,539
Depreciation, amortization, duopoly integration costs and
acquisition related costs................................. 11,005 23,204
Corporate expenses, net of $259 allocated to SFX
Entertainment in 1997..................................... 2,246 1,740
Settlement of Options and Warrants.......................... 156 --
Non-recurring and unusual charges, including adjustments to
Broadcast rights agreement................................ 17,995 --
-------- --------
Total operating expenses.......................... 78,121 72,483
-------- --------
Operating income............................................ 1,339 24,251
Investment income........................................... (575) (265)
Interest expense............................................ 18,637 14,377
Other expense............................................... 1,344 --
-------- --------
Income (loss) from continuing operations before income
taxes..................................................... (18,067) 10,139
Income tax expense (benefit)................................ (2,712) 3,867
-------- --------
Income (loss) from continuing operations.................... (15,355) 6,272
-------- --------
Discontinued operations:
Income from operations to be distributed to shareholders
net of taxes........................................... 3,361 --
-------- --------
Net income (loss)........................................... (11,994) 6,272
Dividends and accretion on preferred stocks................. 9,926 3,680
-------- --------
Net income (loss) attributable to common stock.............. $(21,920) $ 2,592
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR COMPANY
------------------ ------------ ------------------
NINE MONTHS FIVE MONTHS FOUR MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, 1997 MAY 31, 1998 SEPTEMBER 30, 1998
------------------ ------------ ------------------
<S> <C> <C> <C>
Gross broadcast revenue........................ $216,030 $ 141,369 $143,675
Less: agency commissions....................... (25,702) (16,692) (14,440)
-------- --------- --------
Net broadcast revenue........................ 190,328 124,677 129,235
-------- --------- --------
Station operating expenses..................... 116,220 78,235 64,089
Depreciation, amortization, duopoly integration
costs and Acquisition related costs.......... 27,388 17,668 31,439
Corporate expenses, net of $1,307 allocated to
SFX Entertainment in 1997.................... 5,074 3,069 2,333
Settlement of Options and Warrants............. 468 74,199 --
Non-recurring and unusual charges, including
adjustments to Broadcast rights agreement.... 17,995 35,318 --
-------- --------- --------
Total operating expenses............. 167,145 208,489 97,861
-------- --------- --------
Operating income (loss)........................ 23,183 (83,812) 31,374
Investment income.............................. (2,479) (352) (286)
Interest expense............................... 45,482 31,564 21,323
Other expense.................................. 1,344 -- --
-------- --------- --------
Income (loss) from continuing operations before
income taxes................................. (21,164) (115,024) 10,337
Income tax expense (benefit)................... (2,107) 210 3,928
-------- --------- --------
Income (loss) from continuing operations....... (19,057) (115,234) 6,409
-------- --------- --------
Discontinued operations:
Income (loss) from operations to be distributed
to shareholders, net of taxes................ 3,652 (99,389) --
-------- --------- --------
Net income (loss).............................. (15,405) (214,623) 6,409
Dividends and accretion on preferred stocks.... 27,723 17,264 6,083
-------- --------- --------
Net income (loss) attributable to common
stock........................................ $(43,128) $(231,887) $ 326
======== ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR COMPANY
------------------ ------------ ------------------
NINE MONTHS FIVE MONTHS FOUR MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, 1997 MAY 31, 1998 SEPTEMBER 30, 1998
------------------ ------------ ------------------
<S> <C> <C> <C>
Cash provided by (used in) continuing operations.... $ (4,207) $ (22,704) $ 61,489
Cash from operating activities of SFX
Entertainment..................................... 789 10,988 --
--------- --------- ---------
Net cash provided by (used in) operating
activities........................................ (3,418) (11,716) 61,489
--------- --------- ---------
Investing activities:
Purchase of stations and related businesses, net
of cash acquired............................... (406,162) -- (238,360)
Proceeds from sales of stations and other
assets......................................... 1,317 4,692 109,091
Deposits and other payments for pending
acquisitions................................... (2,327) -- (2,778)
Purchase of property and equipment................ (10,331) (5,138) (5,227)
Loans and advances to related parties............. (2,800) -- --
Other investing activities........................ -- (215) (902)
--------- --------- ---------
Net cash used in investing activities............... (420,303) (661) (138,176)
Cash used in investing activities of SFX
Entertainment.................................. (71,997) (397,681) --
--------- --------- ---------
Net cash used in investing activities............... (492,300) (398,342) (138,176)
--------- --------- ---------
Financing activities:
Payments on long-term debt and credit
facilities..................................... (53,256) (141) (621,495)
Additions to debt issuance costs.................. (2,753) -- --
Proceeds from issuance of long term debt and
credit facilities.............................. 339,000 -- 522,311
Proceeds from sales of preferred stock............ 224,029 -- --
Redemption of preferred stock..................... -- -- (135,207)
Purchase of treasury stock........................ (130) -- --
Proceeds from issuance of common stock............ -- 17,137 314,510
Cash transferred to SFX Entertainment............. (78,855) -- --
Preferred stock dividends......................... (21,028) (2,459) (9,507)
--------- --------- ---------
Net cash provided by financing activities........... 407,007 14,537 70,612
Cash provided by financing activities of SFX
Entertainment..................................... 78,302 467,874 --
--------- --------- ---------
Net cash provided by financing activities........... 485,309 482,411 70,612
--------- --------- ---------
Net increase (decrease) in cash and equivalents..... (10,409) 72,353 (6,075)
Cash and cash equivalents at beginning of period.... 30,601 24,686 15,857
Net (increase) decrease in cash of SFX
Entertainment..................................... 7,904 (81,182) --
--------- --------- ---------
Cash and cash equivalents at end of period.......... $ 28,096 $ 15,857 $ 9,782
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 7
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
----------------- ----------------- RETAINED TOTAL
NUMBER PAR NUMBER PAR PAID-IN TREASURY EARNINGS SHAREHOLDER'S
OF SHARES VALUE OF SHARES VALUE CAPITAL STOCK (DEFICIT) EQUITY
--------- ----- --------- ----- ---------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998
(Predecessor)................... 614 $ 1 77 $ 1 $ 185,642 $(6,523) $(104,296) $ 74,825
Dividends and accretion on
Preferred Stock................. -- -- -- -- (17,264) -- -- (17,264)
Settlement of Options and
Warrants........................ -- -- -- -- 74,061 -- -- 74,061
Spin-off of SFX Entertainment..... -- -- -- -- 34,329 -- -- 34,329
Other, principally shares issued
pursuant to stock option plan... 23 -- -- -- 13,418 -- -- 13,418
Net loss.......................... -- -- -- -- -- -- (214,623) (214,623)
----- --- -- --- ---------- ------- --------- ----------
Balance at May 31, 1998
(Predecessor)................... 637 $ 1 77 $ 1 $ 290,186 $(6,523) $(318,919) $ (35,254)
===== === == === ========== ======= ========= ==========
Balance at June 1, 1998
(Company)....................... -- $-- -- $-- $ -- $ -- $ -- $ --
Issuance of Common Stock.......... 1,006 1 -- -- 1,597,458 -- -- 1,597,459
Capital contribution by Parent.... -- -- -- -- 8,794 -- -- 8,794
Dividends and accretion on
Preferred Stock................. -- -- -- -- -- -- (6,083) (6,083)
Net income (loss)................. -- -- -- -- -- -- 6,409 6,409
----- --- -- --- ---------- ------- --------- ----------
Balance at September 30, 1998
(Company)....................... 1,006 $ 1 -- $-- $1,606,252 $ -- $ 326 $1,606,579
===== === == === ========== ======= ========= ==========
</TABLE>
7
<PAGE> 8
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
Information with respect to the three and nine month periods ended
September 30, 1997 and 1998 is unaudited. The accompanying unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles 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 generally accepted accounting principles 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 three and nine month periods ended September 30, 1998,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998, or for any other interim period. For further
information, refer to the consolidated financial statements and footnotes
thereto for SFX Broadcasting, Inc. ("SFX" or "Predecessor") included in its Form
10-K for the year ended December 31, 1997.
On April 27, 1998, SFX distributed the net assets (the "Spin-Off") of its
live entertainment business ("SFX Entertainment") pro-rata to its stockholders
and the holders of certain warrants, options, and stock appreciation rights.
On May 29, 1998, SBI Holding Corporation, a Delaware corporation ("SFX
Parent"), acquired SFX Capstar Communications, Inc., 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, 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 a direct wholly-owned
subsidiary of Capstar Radio. The total consideration paid in the SFX Merger was
approximately $1,500,000 (the "Merger Consideration"), including the repayment
of the outstanding balance under the existing credit facility of SFX (the "SFX
Credit Facility") of approximately $313,000.
In connection with the SFX Merger and other related transactions, the
Company (i) acquired and disposed of certain assets and stock as described in
Note 4 and (ii) borrowed approximately $441,400 in cash from Capstar Radio (the
"Capstar Radio Loan") under a revolving credit note with Capstar Radio (the
"Capstar Radio Note"). The Capstar Radio Note is a $1,400,000 revolving credit
agreement with interest payable quarterly at an annual floating rate equal to
the per annum interest rate available to Capstar Radio under its credit facility
(the "Capstar Credit Facility") for revolving loans that are Eurodollar loans
with a three month interest period applicable thereto.
Pursuant to the terms of the SFX Merger, all net working capital of the
Company on May 29, 1998, as determined in accordance with the SFX merger
agreement, will be paid to SFX Entertainment by the Company or any net negative
working capital will be paid to the Company by SFX Entertainment. Working
capital on May 29, 1998 was negative in the amount of approximately $8,000.
CCI estimates that in connection with (i) the Spin-Off and (ii) certain
other intercompany transactions engaged in by SFX Entertainment prior to the
Spin-Off, SFX incurred a federal income tax liability of approximately $94.0
million. SFX Entertainment has agreed to fully indemnify CCI from and against
such tax liability (including any tax liability of CCI arising from such
indemnification payments), which full indemnity payments are presently estimated
to be approximately $105 million. On June 30 and September, 1998, respectively,
CCI received approximately $52.5 and $26.3 million in cash from SFX
Entertainment in partial payment of SFX Entertainment's indemnity obligation. It
is anticipated that CCI will receive the remaining balance of approximately
$26.3 million in cash from SFX Entertainment on December 31, 1998. In
8
<PAGE> 9
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
connection with certain asset divestiture transactions occurring immediately
after the SFX Merger, CCI incurred a federal income tax liability of
approximately $26.0 million. These federal income taxes resulting from the
Spin-Off and the divestiture transactions will be due in full by March 15, 1999.
The operations of SFX Entertainment have been presented in the financial
statements as discontinued operations pursuant to the Spin-Off. During the five
month period ended May 31, 1998, revenue and loss from operations for SFX
Entertainment were $122,700 and $99,400, respectively. Included in operating
expenses is $1,300 of allocated corporate expenses. Additionally, interest
expense relating to the debt that was distributed to the stockholders pursuant
to the Spin-Off of $6,700 has been allocated to SFX Entertainment. The Company
provided various administrative services to SFX Entertainment. It is the
Company's policy to allocate these expenses on the basis of direct usage. In the
opinion of management, this method of allocation is reasonable and allocated
expenses approximate what SFX Entertainment would have incurred on a stand-
alone basis.
The Company accounted for the SFX Merger under the purchase method of
accounting, following the accounting treatment in accordance with push-down
accounting, whereby the Company recorded the purchase price allocation in its
financial statements. For financial reporting purposes, the Company accounted
for the transaction effective June 1, 1998. As of June 1, 1998, the Company made
a preliminary allocation of the purchase price to the net assets acquired. The
purchase price was allocated to assets and liabilities based on their respective
fair values at June 1, 1998, as adjusted, as listed in the table below which
represents the components of the opening balance sheet.
<TABLE>
<S> <C>
Cash........................................................ $ 15,857
Receivables................................................. 74,952
Other current assets........................................ 4,470
Receivable from SFX Entertainment........................... 105,000
Receivable from Capstar Radio............................... 8,294
Land........................................................ 5,536
Buildings and improvements.................................. 11,944
Broadcasting equipment and other............................ 68,412
Broadcast licenses.......................................... 3,185,007
Goodwill.................................................... 1,000
Other assets................................................ 2,080
Accounts payable............................................ (11,843)
Accrued expenses............................................ (11,294)
Payable to former national sales representative............. (7,014)
Accrued interest............................................ (6,782)
Income tax payable.......................................... (107,000)
Long-term debt.............................................. (812,436)
Capital lease obligations................................... (629)
Deferred income taxes....................................... (959,000)
Preferred stock............................................. (283,605)
----------
Shareholder's net equity.................................... $1,282,949
==========
</TABLE>
In connection with the SFX Merger, the Company amended its charter to
provide for 10,210,000 shares of authorized stock consisting of 200,000 shares
of Common Stock and 10,010,000 shares of preferred stock, par value $0.01. Upon
the filing of the amendment all existing outstanding common shares were
immediately converted to .000064592 new Class A common shares. All share
information included in the accompanying
9
<PAGE> 10
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements and notes thereto (with the exception of authorized shares)
has been retroactively adjusted to reflect the reverse split.
The consolidated financial statements include the accounts of CCI and its
direct and indirect subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain amounts in 1997 have
been reclassified to conform to the 1998 presentation.
NOTE 2 -- CHANCELLOR MERGER AGREEMENT
Capstar Broadcasting has entered into an Agreement and Plan of Merger dated
August 26, 1998 (the "Chancellor Merger Agreement"), with Chancellor Media and
CBC Acquisition Company, Inc., a wholly-owned subsidiary of Capstar
Broadcasting, pursuant to which Chancellor Media will be merged (the "Chancellor
Merger") with and into CBC Acquisition Company, Inc. and will become a
wholly-owned subsidiary of Capstar Broadcasting. The Chancellor Merger Agreement
provides, among other things, that upon the consummation of the Chancellor
Merger, Capstar Broadcasting will be renamed "Chancellor Media Corporation" (as
such, the "Parent") and (i) each share of Class A Common Stock and Class C
Common Stock issued and outstanding immediately prior to the effective time of
the Chancellor Merger (the "Effective Time") (other than shares of Class A
Common Stock and Class C Common Stock held as treasury shares) will be
reclassified, changed and converted into 0.4800 of a validly issued, fully paid
and nonassessable share of the common stock, par value $.01 per share ("Parent
Voting Common Stock"), of the Parent, such exchange ratio being subject to
adjustment as described in the Chancellor Merger Agreement, (ii) each share of
Class B Common Stock issued and outstanding immediately prior to the Effective
Time (other than shares of Class B Common Stock held as treasury shares) will be
reclassified, changed and converted into 0.4800 of a validly issued, fully paid
and nonassessable share of nonvoting common stock, par value $.01 per share
("Parent Nonvoting Common Stock"), of the Parent, such exchange ratio being
subject to adjustment as described in the Chancellor Merger Agreement, (iii)
each share of common stock, par value $.01 per share ("Chancellor Common
Stock"), of Chancellor Media issued and outstanding immediately prior to the
Effective Time (other than shares of Chancellor Common Stock held as treasury
shares) will be converted into the right to receive one share of Parent Voting
Common Stock, and (iv) each share of 7% Convertible Preferred Stock, par value
$.01 per share, and $3.00 Convertible Exchangeable Preferred Stock, par value
$.01 per share, in each case of Chancellor Media, will be converted into the
right to receive one share of 7% Convertible Preferred Stock, par value $.01 per
share ("Parent 7% Convertible Preferred Stock"), and $3.00 Convertible
Exchangeable Preferred Stock, par value $.01 per share (collectively with the
Parent 7% Convertible Preferred Stock, the "Parent Convertible Preferred
Stock"), in each case of the Parent.
Affiliates of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse") own
approximately 65% of the equity of Capstar Broadcasting on a fully-diluted basis
and, after the Chancellor Merger, will own approximately 26% of the equity of
the Parent on a fully-diluted basis after giving effect to the consummation of
Chancellor Media's pending acquisition of Ranger Equity Holdings Corporation,
the parent company of LIN Television Corporation.
Consummation of the Chancellor Merger is subject to various conditions
fully set forth in the Chancellor Merger Agreement, including, without
limitation, the approval of the Chancellor Merger by a majority of the shares of
Class A Common Stock that are present and entitled to vote on the Chancellor
Merger at a stockholders meeting to be called by Capstar Broadcasting and which
are beneficially owned by a holder other than Thomas O. Hicks, Capstar
Broadcasting's Chairman of the Board, R. Steven Hicks, Capstar Broadcasting's
Chief Executive Officer, or any of their respective affiliates, the expiration
or termination of any applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the receipt of regulatory
approval from the Federal Communications Commission.
10
<PAGE> 11
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Thomas O. Hicks, R. Steven Hicks and Capstar Broadcasting Partners, L.P.,
an affiliate of Hicks Muse (collectively, the "Stockholders"), entered into a
Voting Agreement dated August 26, 1998 (the "Voting Agreement"), with Chancellor
Media, pursuant to which each of the Stockholders has agreed, among other
things, to vote in favor of the Chancellor Merger, the Chancellor Merger
Agreement and any other transactions contemplated by the Chancellor Merger
Agreement.
The foregoing description of the Chancellor Merger Agreement and the Voting
Agreement does not purport to be complete and is qualified in its entirety by
the copies of the Chancellor Merger Agreement and Voting Agreement incorporated
herein by reference as exhibits to this Quarterly Report on Form 10-Q.
NOTE 3 -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Restated Information," which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This pronouncement is effective for financial statements beginning after
December 15, 1997.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which significantly changes
current financial statement disclosure requirements from those that were
required under SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132 does
not change the existing measurement or recognition provision of SFAS Nos. 87, 88
or 106. This pronouncement is effective for financial statements beginning after
December 15, 1997.
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 these accounting
pronouncements will have a material effect on its consolidated financial
statements.
NOTE 4 -- ACQUISITION AND DISPOSITION OF BROADCASTING PROPERTIES
On February 20, 1998, Capstar Broadcasting and Chancellor Media Corporation
of Los Angeles ("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
11
<PAGE> 12
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 a like-kind exchange 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. As of
September 30, 1998, the Company earned LMA fees of approximately $16,500 from
the Chancellor Exchange Stations. The LMA fees earned by the Company will
decrease as Chancellor Exchange Stations are exchanged. During the pendency of
the Chancellor Merger (as defined), 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.
On May 29, 1998, the Company 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, 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.
On May 29, 1998, due to governmental restrictions on multiple station
ownership, the Company completed the sale (the "Daytona Disposition") 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, the Company completed the sale (the "Long Island Disposition") 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, the Company, completed the sale (the "Houston KKPN Disposition") 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, the Company paid 50% of the sale proceeds in
excess of $50,000, approximately $1,700, to Chancellor Media.
For financial statement purposes, all of the acquisitions described above
were accounted for using the purchase method of accounting, with the purchase
price allocated to the assets acquired (principally intangible assets) and the
liabilities assumed based on their estimated fair values at the dates of
acquisition. Certain of the recent transactions are based on preliminary
estimates of the fair value of the net assets acquired and subject to final
adjustment. The excess purchase price over the estimated fair value of the net
assets acquired has been recorded as FCC licenses and goodwill. The assets and
liabilities of these acquisitions and the results of their operations and cash
flows for the period from the date of acquisition are included in the
accompanying consolidated financial statements.
On May 29, 1998, Capstar Radio sold all of the outstanding capital stock of
Patterson Broadcasting, Inc. (which then owned and operated or programmed 22 FM
and 12 AM stations) to the Company for approximately $223,500 in cash and
approximately $8,000 due under the Capstar Radio Note. In addition, Pacific Star
Communications, Inc., a wholly-owned subsidiary of Capstar Radio, sold radio
stations
12
<PAGE> 13
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
KJSN-FM, KFIV-FM, KJAX-AM and KFRY-FM in the Modesto/Stockton, California market
to the Company for approximately $6,500 in cash. The Company funded the
acquisition of Patterson Broadcasting, Inc. and certain stations of Pacific Star
Communications, Inc. with proceeds from a loan by Bankers Trust Company, which
loan was refinanced with borrowings under the Capstar Radio Note.
For financial reporting purposes, the transaction in the preceding
paragraph has been treated as a transaction between entities under common
control. Accordingly, the assets and liabilities so acquired have been recorded
by the Company at historical cost in a manner similar to that in
pooling-of-interests accounting. The operating results of these businesses have
been included in the Company's financial statements from the date of
acquisition, the earliest date for which common control of both entities
existed.
Unaudited proforma results of the Company for the aforementioned
acquisitions and dispositions which were completed during the nine months ended
September 30, 1998, including the SFX Merger, as if they were purchased or sold
on January 1, 1997, including adjustments for amortization of asset value
changes based on fair value adjustments, amortization of the excess cost over
fair value of assets acquired and interest expense related to acquisition
indebtedness and the elimination of non-recurring expenses related to the SFX
Merger, are as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
1997 1998
-------- --------
<S> <C> <C>
Net revenue........................................ $247,891 $269,116
======== ========
Net loss from continuing operations................ (3,159) (876)
======== ========
</TABLE>
On August 10, 1998, the Company exchanged one AM station in Pittsburgh,
Pennsylvania for another AM station in Cleveland, Ohio. On September 30, 1998,
the Company exchanged one FM station in Jackson, Mississippi for another FM
station in Jackson, Mississippi. The $5.0 million and $11.75 million,
respectively, carrying value of the station's net assets exchanged approximate
the fair value of the net assets received.
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DEPRECIABLE
DEPRECIATION LIFE DECEMBER 31, SEPTEMBER 30,
METHOD (YEARS) 1997 1998
------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Buildings and improvements......... Straight-line 5-20 $ 18,295 $ 17,273
Broadcasting and other Equipment... Straight-line 3-20 67,821 88,785
-------- --------
86,116 106,058
Accumulated depreciation and
Amortization..................... (17,456) (3,125)
-------- --------
68,660 102,933
Land............................... 6,169 6,875
-------- --------
$ 74,829 $109,808
======== ========
</TABLE>
13
<PAGE> 14
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Capstar Radio Note................................. $ -- $378,299
Senior subordinated notes.......................... 450,556 324,801
SFX Credit Facility................................ 313,000 --
Other.............................................. 1,146 1,705
-------- --------
764,702 704,805
Less: current portion.............................. (610) (378,499)
-------- --------
$764,092 $326,306
======== ========
</TABLE>
On July 3, 1998, (i) pursuant to the terms of the indenture governing CCI's
10 3/4% Senior Subordinated Notes due 2006 (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 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.) and (ii) 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 1,196,011 shares of the CCI Series E
Preferred Stock for an aggregate purchase price of $141,800, including a $15,100
redemption premium and $7,000 of accrued dividends (The carrying value of the
CCI Series E Preferred Stock approximated its fair value on the date of the SFX
Merger.).
To fund these purchases, Capstar Radio contributed $314,510 in cash in
exchange for stock of CCI.
The SFX Merger resulted in a change of control under the indentures
governing the 10 3/4% CCI Notes and CCI's 11 3/8% Senior Subordinated Notes due
2000 (the "11 3/8% CCI Notes") and under the CCI Certificate of Designation.
Pursuant to change of control offers to acquire all of the outstanding 10 3/4%
CCI Notes, 11 3/8% CCI Notes and CCI Series E Preferred Stock, each of which
commenced on June 8, 1998, CCI purchased on July 10, 1998 (i) $1,866 aggregate
principal amount of the 10 3/4% CCI Notes for an aggregate purchase price of
$1,915 including a $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.) and (ii) $500 aggregate liquidation preferences, or
5,004 shares, of the CCI Series E Preferred Stock for aggregate purchase price
of $536, including a $5 purchase premium and $31 of accrued dividends (The
carrying value of the CCI Series E Preferred Stock approximated its fair value
on the date of the SFX Merger.) No 11 3/8% CCI Notes were tendered for
repurchase.
To facilitate the Spin-Off, SFX Entertainment's 1998 acquisitions and its
financing thereof, the Predecessor sought and obtained consents from the holders
of its the 10 3/4% CCI Notes and the holders of the CCI Series E Preferred
Stock. In connection with these consents, the Company modified certain
covenants. Management anticipates that the Company will be in compliance with
these covenants in the foreseeable future. Fees and expenses of approximately
$18,000 were incurred by the Company in connection with the consent
solicitations and were reimbursed by SFX Entertainment with the proceeds of the
Notes. Such charges are included in non-recurring and unusual charges.
NOTE 7 -- NON-RECURRING AND UNUSUAL CHARGES
In the first quarter of 1998, the Predecessor recorded non-recurring and
unusual charges of $24,974 which consisted primarily of (i) $4,196 of
compensation expense related to stock options issued, (ii) $550 relating to
14
<PAGE> 15
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the settlement of a lawsuit, (iii) $489 relating to the increase in value of
certain SAR's, (iv) $16,600 relating to the consent solicitations from the
holders of 10 3/4% CCI Notes and the holders of the CCI Series E Preferred Stock
in connection with the Spin-off and (v) $3,139 of expenses, primarily legal,
accounting and regulatory fees associated with the merger and the consent
solicitations.
In the second quarter of 1998, the Predecessor recorded non-recurring and
unusual charges of $10,344 which consisted primarily of (i) $1,358 compensation
expense related to bonuses and stock options issued, (ii) $870 related to
lawsuits, (iii) $3,116 of expenses, primarily legal, accounting and regulatory
fees associated with the merger and consent solicitations, and (iv) $5,000
related to a brokers contract due upon a change in control.
NOTE 8 -- SETTLEMENT OF OPTIONS AND WARRANTS
Capstar Radio purchased and settled all outstanding options and warrants of
SFX resulting in SFX recording approximately $74,000 in expense and a
corresponding credit to paid-in capital.
NOTE 9 -- INTERCOMPANY MATTERS
The Company is charged by its Parent for corporate services through a
monthly corporate overhead allocation charge. Such charge is based on factors of
direct usage and in the opinion of management, is reasonable and approximates
what the Company would have incurred on a stand-alone basis.
Subsequent to the SFX Merger, the Company's operating results are included
in the consolidated federal income tax return of its parent. Tax provisions in
the accompanying financial statements have been prepared on a stand-alone basis
with any net current tax liability due to federal taxing authorities resulting
from inclusion of the Company's activities in its parents consolidated tax
return being reflected as due to its parent under the Capstar Radio Note.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
In October 1996, Cardinal Communications Partners, L.P. ("Cardinal") filed
a complaint in the United States District Court, Northern District of Texas,
Dallas Division, against SFX, its Executive Chairman and other defendants. The
complaint concerns Cardinal's sale of radio station KTCK-AM to SFX in 1995. The
claims asserted in the complaint include breach of contract, fraud, negligent
misrepresentation, quantum meruit and unjust enrichment. The complaint seeks
declaratory relief, actual and punitive damages and attorneys' fees all in
unspecified amount. SFX reached an agreement with Cardinal effective August 1,
1997, that settled and resolved the claims asserted in the lawsuit. As a result
of the settlement agreement, all of the claims have been dismissed against all
of the defendants, with prejudice, except for one claim. This one claim,
alleging breach of contract related to deferred payments which SFX may be
required to pay to Cardinal, was dismissed without prejudice, subject to renewal
by Cardinal through an agreed arbitration procedure. In October 1998, the
parties completed an arbitration regarding the deferred payment. In November
1998, the parties settled the claim for approximately $3.1 million, excluding
legal fees of approximately $0.2 million.
On August 29, 1997, two lawsuits were commenced against SFX 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 SFX Merger to the holders of
SFX's Class A common stock is unfair and that the individual defendants have
breached their fiduciary duties. Both complaints seek to have the actions
certified as class actions and seek to enjoin the SFX Merger or, in the
alternative, monetary damages. The defendants have filed answers denying the
allegations, and discovery has commenced. The
15
<PAGE> 16
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
parties have agreed that the lawsuits may 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 have reached an agreement providing for a
settlement of the action (the "Settlement"). Pursuant to the Settlement, SFX has
agreed not to seek an amendment to the merger agreement to reduce the
consideration to be received by the stockholders of SFX in the SFX Merger in
order to offset SFX Entertainment's indemnity obligations. The Settlement also
provides for SFX to pay plaintiff's counsel an aggregate of $950,000, including
all fees and expenses as approved by the court. The Settlement is conditioned on
the (a) consummation of the SFX Merger, (b) completion of the confirmatory
discovery and (c) approval of the court. Pursuant to the Settlement, the
defendants have denied, and continue to deny, that they have acted in bad faith
or breached any fiduciary duty. There can be no assurance that the court will
approve the Settlement on the terms and conditions provided for therein, or at
all. The parties currently are engaging in confirmatory discovery.
On July 13, 1998, Noddings Investment Group, Inc. and Noddings Warrant
Limited Partnership ("Noddings") filed Civil Action No. 16538 in the Court of
Chancery of the State of Delaware in and for New Castle County against CCI.
Noddings alleges that CCI breached a March 23, 1994, Warrant Agreement that
Noddings contends requires CCI to permit Noddings to exercise warrants in
exchange for cash and shares of stock of SFX Entertainment, Inc. ("SFX
Entertainment"), a former subsidiary of SFX which was spun-off prior to the SFX
Merger. Specifically, Noddings alleges that CCI 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 (i) declare that on the exercise of its warrants CCI transmit to
plaintiffs and members of the class that it seeks to represent $22.3725 in cash
per warrant and .2983 shares of common stock of SFX Entertainment per warrant,
(ii) require CCI to pay .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, (iii) in
the alternative, award plaintiffs and members of the putative class monetary
damages in an amount to be determined at trial, and (iv) award costs and
attorneys' fees. CCI has filed a motion to dismiss this lawsuit. A response from
the plaintiffs is due November 1998.
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.
NOTE 11 -- IMPACT OF YEAR 2000 ISSUE
The Year 2000 Issue concerns the inability of computer programs and
embedded computer chips to properly recognize and process date sensitive
information when the year changes to 2000, or "00." Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail causing a disruption in the operations of a company.
A Company-wide assessment of systems and operations is underway to identify
any computer systems, including equipment with embedded chips, which do not
properly recognize dates after December 31, 1999. The Company uses purchased
software programs for a variety of financial applications, including general
ledger, accounts payable and accounts receivable accounting packages. The
companies providing these software programs are Year 2000 compliant, and the
Company has received Year 2000 compliance certificates
16
<PAGE> 17
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from these software vendors. Substantially all of the Company's advertising
scheduling and billing systems are Year 2000 compliant. Unrelated to the Year
2000 Issue, the Company expects to begin implementation of a new integrated
software package called "Galaxy" in November 1998, which will bring the
remainder of the advertising scheduling and billing systems into Year 2000
compliance by the end of 1999. The Company believes that its other financial
applications are Year 2000 compliant.
The Company's Year 2000 implementation plan also includes the actual
remediation and replacement of computer systems and other equipment with
embedded chips or processors (i.e. individual work stations, phone systems,
etc.) that are not Year 2000 compliant.
In addition, the Company is assessing its exposure from external sources to
Year 2000 failures. These efforts are partially complete. The Company does rely
on third-party providers for key services such as telecommunications and
utilities. Interruption of these services could, in management's view, have a
material impact on the operations of the Company. The Company is in the process
of developing contingency plans intended to mitigate the possible disruption in
business operations that may result from certain of the Company's or
third-parties' critical or necessary systems that are not Year 2000 compliant,
and is developing cost estimates for such plans. Through September 30, 1998, the
Company has incurred minimal costs specifically related to the Year 2000 Issue
and estimates spending an aggregate cost of less than $1.0 million. Funding of
these costs is anticipated to come from cash generated in business operations.
Based on the nature of the Company's business and dispersed geographical
locations, the Company believes that it may experience some disruption in its
business due to the impact of Year 2000 Issue. However, the Company's management
presently believes the Company is taking appropriate steps to assess and control
its Year 2000 issues. Due to the general uncertainty inherent in the Year 2000
Issue, due in part from the uncertainty of the Year 2000 readiness of third
parties, the Company is unable to determine at this time whether Year 2000
issues will have a material adverse effect on the Company's results of
operations or financial condition.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the consolidated financial condition and
results of operations of the Company should be read in conjunction with the
consolidated financial statements and related notes thereto of the Company
included elsewhere in this Quarterly Report on Form 10-Q.
A radio broadcast company's revenues are derived primarily from the sale of
time to local and national advertisers. Those revenues are affected by the
advertising rates that a radio station is able to charge and the number of
advertisements that can be broadcast without jeopardizing listener levels (and
resulting ratings). Advertising rates tend to be based upon demand for a
station's advertising inventory and its ability to attract audiences in targeted
demographic groups, as measured principally by Arbitron. Radio stations attempt
to maximize revenues by adjusting rates based upon local market conditions,
controlling advertising inventory and creating demand and audience ratings.
Seasonal revenue fluctuations are common in the radio broadcasting industry
and are due primarily to fluctuations in advertising expenditures by local and
national advertisers, with revenues typically being lowest in the first calendar
quarter and highest in the second and fourth calendar quarters of each year. A
radio station's operating results in any period may be affected by the
occurrence of advertising and promotion expenses that do not produce
commensurate revenues in the period in which the expenditures are made. Because
Arbitron reports audience ratings on a quarterly basis, a radio station's
ability to realize revenues as a result of increased advertising and promotional
expenses and any resulting audience ratings improvements may be delayed for
several months.
The Company's results of operations from period to period have not
historically been comparable because of the impact of the various acquisitions
and dispositions that the Company has completed.
On May 29, 1998, SFX Parent acquired SFX in a transaction effected through
the merger of SBI Radio Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of SFX Parent, 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 a direct
wholly-owned subsidiary of Capstar Radio. For financial reporting purposes, the
Company accounted for the transaction effective June 1, 1998. The description of
results of operations for the 9 months ended September 30, 1998, includes
operations of the Predecessor for the five months ended May 31, 1998 and the
results of the Company for four months ended September 30, 1998.
As of September 30, 1998, the Company currently owns and operates, provides
programming to or sells advertising on behalf of 115 radio stations located in
29 markets.
In the following analysis, management discusses broadcast cash flow and
EBITDA (before settlement of options and warrants expense and non-recurring and
unusual charges). Broadcast cash flow consists of operating income before
depreciation, amortization, corporate expenses, and settlement of options and
warrants expense. EBITDA (before settlement of options and warrants expense and
non-recurring and unusual charges) consists of operating income before
depreciation, amortization and settlement of options and warrants expense.
Although broadcast cash flow and EBITDA (before settlement of options and
warrants expense and non-recurring and unusual charges) are not measures of
performance calculated in accordance with generally accepted accounting
principles ("GAAP"), management believes that they are useful to an investor in
evaluating the Company because it is a measure widely used in the broadcasting
industry to evaluate a radio company's operating performance. However, broadcast
cash flow and EBITDA (before settlement of options and warrants expense and
non-recurring and unusual charges) should not be considered in isolation or as a
substitute for operating income, cash flows from operating activities or any
other measure for determining the Company's operating performance or liquidity
that is calculated in accordance with GAAP or as a measure of liquidity or
profitability.
18
<PAGE> 19
RESULTS OF OPERATIONS
The following table presents summary supplemental historical consolidated
financial data of the Company for the three months ended September 30, 1997 and
1998 and should be read in conjunction with the consolidated financial
statements of the Company and the related notes included elsewhere in this
Quarterly Report on Form 10-Q.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
-----------------------
1997 1998
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING DATA:
Net revenue............................................... $ 79,460 $96,734
Station operating expenses................................ 46,719 47,539
Depreciation and amortization............................. 11,005 23,204
Corporate expenses........................................ 2,246 1,740
Settlement of options and warrants........................ 156 --
Non-recurring and unusual charges......................... 17,995 --
Operating income (loss)................................... 1,339 24,251
Interest expense.......................................... 18,637 14,377
Income (loss) from continuing operations.................. (15,355) 6,272
Net Income (loss) attributable to common stock............ $(21,920) $ 2,592
OTHER DATA:
Broadcast cash flow(1).................................... $ 32,741 $49,195
Broadcast cash flow margin................................ 41.2% 50.9%
EBITDA from continuing operations (before settlement of
options and warrants expense)(2)....................... 30,495 47,455
</TABLE>
- ---------------
(1) Broadcast cash flow consists of operating income before depreciation,
amortization, corporate expenses and settlement of options and warrants
expense. Although broadcast cash flow is not a measure of performance
calculated in accordance with GAAP, management believes that it is useful to
an investor in evaluating the Company because it is a measure widely used in
the broadcasting industry to evaluate a radio company's operating
performance. Nevertheless, it should not be considered in isolation or as a
substitute for operating income, cash flows from operating activities or any
other measure for determining the Company's operating performance or
liquidity that is calculated in accordance with GAAP. As broadcast cash flow
is not a measure calculated in accordance with GAAP, this may not be
compared to similarly titled measures employed by other companies.
(2) EBITDA from continuing operations (before settlement of options and warrants
expense and non-recurring and unusual charges) consists of operating income
before depreciation, amortization and settlement of options and warrants
expense. Although EBITDA (before settlement of options and warrants expense
and non-recurring and unusual charges) is not a measure of performance
calculated in accordance with GAAP, management believes that it is useful to
an investor in evaluating the Company because it is a measure widely used in
the broadcasting industry to evaluate a radio company's operating
performance. Nevertheless, it should not be considered in isolation or as a
substitute for operating income, cash flows from operating activities or any
other measure for determining the Company's operating performance or
liquidity that is calculated in accordance with GAAP. As EBITDA (before
settlement of options and warrants expense and non-recurring and unusual
charges) is not a measure calculated in accordance with GAAP, this measure
may not be compared to similarly titled measures employed by other
companies.
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1998
Net Revenue. Due to the impact of synergies realized through association
with Capstar Broadcasting Corporation, net revenue increased $17.2 million or
21.6% to $96.7 million for the three months ended
19
<PAGE> 20
September 30, 1998 from $79.5 million for the three months ended September 30,
1997. On a same station basis, for stations owned and operated as of September
30, 1998, net revenue increased $7.9 million or 9.0% to $95.7 million from $87.8
million in the three months ended September 30, 1997. The increase is primarily
attributable to growth in the sale of time to local and national advertisers.
Station Operating Expenses. Due to the impact of the various acquisitions
and dispositions that the Company has completed, station operating expenses
increased $0.8 million or 1.7% to $47.5 million for the three months ended
September 30, 1998 from $46.7 million for the three months ended September 30,
1997. The increase was attributable to the station operating expenses of the
radio acquisitions and the LMAs entered into during 1998. On a same station
basis, for stations owned or operated as of September 30, 1998, operating
expenses decreased $0.4 million or 0.8% to $46.4 million from $46.8 million in
the period ended September 30, 1997, and as a percentage of revenue, on a same
station basis, operating expenses declined from 53.3% in 1997 to 48.5% in 1998
as a result of (i) cost saving measures implemented by the Company in connection
with its acquisitions and (ii) the spreading of fixed costs over a larger
revenue base.
Corporate Expenses. Due to the impact of synergies realized through
association with Capstar Broadcasting Corporation, corporate expenses decreased
$0.5 million or 22.7% to $1.7 million for the three months ended September 30,
1998 from approximately $2.2 million for the three months ended September 30,
1997.
Other Operating Expenses. Depreciation and amortization increased $12.2
million or 110.9% to $23.2 million for the three months ended September 30, 1998
from $11.0 million for the three months ended September 30, 1997 primarily due
to the various acquisitions consummated during 1997 and 1998.
Other Expenses (Income). Interest expense decreased $4.2 million or 22.6%
to $14.4 million in the three months ended September 30, 1998 from $18.6 million
during the same period in 1997 primarily due to lower levels of indebtedness and
lower effective interest rates.
Income (Loss) From Continuing Operations. Income (loss) from continuing
operations changed by $21.7 million to a $6.3 million income for the three
months ended September 30, 1998 from a $15.4 million loss for the three months
ended September 30, 1997.
Broadcast Cash Flow. Due to the impact of the various acquisitions and
dispositions that the Company has completed, broadcast cash flow increased $16.5
million or 50.5% to $49.2 million for the three months ended September 30, 1998
from $32.7 million for the three months ended September 30, 1997. The broadcast
cash flow margin was 50.9% for the three months ended September 30, 1998
compared to 41.2% for the three months ended September 30, 1997.
EBITDA (before settlement of options and warrants expense and non-recurring
and unusual charges). Due to the impact of the various acquisitions and
dispositions that the Company has completed, EBITDA (before settlement of
options and warrants expense and non-recurring and unusual charges) increased
$17 million or 55.7% to $47.5 million for the three months ended September 30,
1998 from $30.5 million for the three months ended September 30, 1997. The
EBITDA (before settlement of options and warrants expense and non-recurring and
unusual charges) margin for the three months ended September 30, 1998 was 49.1%
compared to 38.4% for the three months ended September 30, 1997.
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<PAGE> 21
The following table presents summary supplemental historical consolidated
financial data of the Company for the Nine months ended September 30, 1997 and
1998 and should be read in conjunction with the consolidated financial
statements of the Company and the related notes included elsewhere in this
Quarterly Report on Form 10-Q.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
1997 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING DATA:
Net revenue............................................... $ 190,328 $ 253,912
Station operating expenses................................ 116,220 142,324
Depreciation and amortization............................. 27,388 49,107
Corporate expenses........................................ 5,074 5,402
Settlement of options and warrants........................ 468 74,199
Non-recurring and unusual charges......................... 17,995 35,318
Operating income (loss)................................... 23,183 (52,438)
Interest expense.......................................... 45,482 52,887
Loss from continuing operations........................... (19,057) (108,825)
Net loss attributable to common stock..................... $ (43,128) $(231,561)
OTHER DATA:
Broadcast cash flow(1).................................... $ 74,108 $ 111,588
Broadcast cash flow margin................................ 38.9% 43.9%
EBITDA from continuing operations (before settlement of
options and warrants expense)(2)....................... 69,034 106,186
Cash flows from continuing operations related to:
Operating activities...................................... (4,207) 38,785
Investing activities...................................... (420,303) (138,837)
Financing activities...................................... 407,007 85,149
Capital expenditures...................................... (10,331) (10,365)
</TABLE>
- ---------------
(1) Broadcast cash flow consists of operating income before depreciation,
amortization, corporate expenses and settlement of options and warrants
expense. Although broadcast cash flow is not a measure of performance
calculated in accordance with GAAP, management believes that it is useful to
an investor in evaluating the Company because it is a measure widely used in
the broadcasting industry to evaluate a radio company's operating
performance. Nevertheless, it should not be considered in isolation or as a
substitute for operating income, cash flows from operating activities or any
other measure for determining the Company's operating performance or
liquidity that is calculated in accordance with GAAP. As broadcast cash flow
is not a measure calculated in accordance with GAAP, this may not be
compared to similarly titled measures employed by other companies.
(2) EBITDA from continuing operations (before settlement of options and warrants
expense and non-recurring unusual charges) consists of operating income
before depreciation, amortization and settlement of options and warrants
expense. Although EBITDA (before settlement of options and warrants expense
and non-recurring and unusual charges) is not a measure of performance
calculated in accordance with GAAP, management believes that it is useful to
an investor in evaluating the Company because it is a measure widely used in
the broadcasting industry to evaluate a radio company's operating
performance. Nevertheless, it should not be considered in isolation or as a
substitute for operating income, cash flows from operating activities or any
other measure for determining the Company's operating performance or
liquidity that is calculated in accordance with GAAP. As EBITDA (before
settlement of options and warrants expense and non-recurring and unusual
charges) is not a measure calculated in accordance with GAAP, this measure
may not be compared to similarly titled measures employed by other
companies.
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<PAGE> 22
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1998
Net Revenue. Due to the impact of the various acquisitions and dispositions
that the Company has completed, net revenue increased $63.6 million or 33.4% to
$253.9 million for the nine months ended September 30, 1998 from $190.3 million
for the nine months ended September 30, 1997. On a same station basis, for
stations owned or operated as of September 30, 1998, net revenue increased $21.2
million or 8.6% to $269.1 million from $247.9 million in the nine months ended
September 30, 1997. This increase was primarily attributable to growth in the
sale of time to local and national advertisers.
Station Operating Expenses. Due to the impact of the various acquisitions
and dispositions that the Company has completed, station operating expenses
increased $26.1 million or 22.5% to $142.3 million for the nine months ended
September 30, 1998 from $116.2 million for the nine months ended September 30,
1997. On a same station basis, for stations owned or operated as of September
30, 1998, operating expenses increased $3.8 million or 2.8% to $140.3 million
from $136.5 million in the period ended September 30, 1997, and as a percentage
of revenue, on a same station basis, operating expenses declined from 55.0% in
1997 to 52.1% in 1998 as a result of (i) cost saving measures implemented by the
Company in connection with its acquisitions and (ii) the spreading of fixed cost
over a larger revenue base.
Corporate Expenses. Due to the impact of synergies realized through
association with Capstar Broadcasting Corporation, corporate expenses decreased
$0.3 million or 5.9% to $5.4 million for the nine months ended September 30,
1998 from approximately $5.1 million for the nine months ended September 30,
1997.
Other Operating Expenses. Depreciation and amortization increased $21.7
million or 79.2% to $49.1 million for the nine months ended September 30, 1998
from $27.4 million for the nine months ended September 30, 1997 primarily due to
the various acquisitions consummated during 1997 and 1998. Settlement of options
and warrants expense increased $73.7 million or 14,740% to $74.2 million in the
nine months ended September 30, 1998 from $0.5 million in the nine months ended
September 30, 1997 primarily due to the purchase and settlement of all
outstanding options and warrants on May 29, 1998 by Capstar Radio.
Other Expenses (Income). Interest expense increased $7.4 million or 16.3%
to $52.9 million in the nine months ended September 30, 1998 from $45.5 million
during the same period in 1997 primarily due to lower overall levels of
indebtedness during 1997.
Loss From Continuing Operations. Loss from continuing operations increased
$89.7 million to $108.8 million for the nine months ended September 30, 1998
from $19.1 million for the nine months ended September 30, 1997.
Broadcast Cash Flow. Due to the impact of the various acquisitions and
dispositions that the Company has completed, broadcast cash flow increased $37.5
million or 50.6% to $111.6 million for the nine months ended September 30, 1998
from $74.1 million for the nine months ended September 30, 1997. The broadcast
cash flow margin was 43.9% for the nine months ended September 30, 1998 compared
to 38.9% for the nine months ended September 30, 1997.
EBITDA (before settlement of options and warrants expense and non-recurring
and unusual charges). Due to the impact of the various acquisitions and
dispositions that the Company has completed, EBITDA (before settlement of
options and warrants expense and non-recurring and unusual charges) increased
$37.2 million or 53.9% to $106.2 million for the nine months ended September 30,
1998 from $69.0 million for the nine months ended September 30, 1997. The EBITDA
(before settlement of options and warrants expense and non-recurring and unusual
charges) margin for the nine months ended September 30, 1998 was 41.8% compared
to 36.3% for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for funds has historically been to fund the
acquisition of radio stations and live entertainment businesses, including
related working capital needs, and, to a lesser extent, capital expenditures and
the redemption of outstanding securities and debt service. The Company's
principal sources
22
<PAGE> 23
of funds for these requirements have historically been the proceeds from
offerings of equity and debt securities, borrowings under credit agreements and,
to a significantly lesser extent, cash flows from operations.
CCI estimates that in connection with (i) the Spin-Off and (ii) certain
other intercompany transactions engaged in by SFX Entertainment prior to the
Spin-Off, SFX incurred a federal income tax liability of approximately $94.0
million. SFX Entertainment has agreed to fully indemnify CCI from and against
such tax liability (including any tax liability of CCI arising from such
indemnification payments), which full indemnity payments are presently estimated
to be approximately $105.0 million. On June 30 and September 30, 1998,
respectively, CCI received approximately $52.5 and $26.2 million in cash from
SFX Entertainment in partial payment of SFX Entertainment's indemnity
obligation. It is anticipated that CCI will receive the remaining balance of
approximately $26.3 million in cash from SFX Entertainment on December 31, 1998.
In connection with certain asset divestiture transactions occurring immediately
after the Merger, CCI incurred a federal income tax liability of approximately
$26.0 million. These federal income taxes resulting from the Spin-Off and the
divestiture transactions will be due in full by March 15, 1999.
Pursuant to the terms of the SFX Merger, all net working capital of the
Company as of May 29, 1998, as determined in accordance with the merger
agreement, will be paid to SFX Entertainment by the Company or any negative
working capital will be paid to the Company by SFX Entertainment. Working
capital on May 29, 1998 was negative in the amount of approximately $8 million.
On May 29, 1998, the Company borrowed approximately $438.2 million (the "BT
Loan") from Bankers Trust Company and used such proceeds to repay the
approximately $317.7 million outstanding balance (including principal and
interest) of the SFX Credit Facility and purchased Patterson Broadcasting, Inc.
and certain radio stations from Pacific Star Communications, Inc. from Capstar
Radio.
On May 29, 1998, the Company received proceeds of approximately $109.1
million in cash from the Houston-KKPN Disposition, the Long Island Disposition
and the Daytona Disposition, the proceeds of which were used to fund in part the
acquisition of Patterson Broadcasting, Inc. and certain radio stations from
Pacific Star Communications, Inc.
On May 29, 1998, the Company also entered into the Capstar Radio Note,
which is payable on the earlier of demand or May 31, 2005. On such date, the
Company borrowed approximately $441.4 million, which was used in part to repay
the BT Loan. The Capstar Radio Note consists of a $1.4 billion revolver.
Borrowings under the Capstar Radio Note bear interest at the per annum interest
rate available to Capstar Radio under the Capstar Credit Facility for revolving
loans that are Eurodollar loans with a three month interest period applicable
thereto. Interest is payable quarterly commencing on August 31, 1998, and
thereafter on the last day of each November, February, May and August during the
term of the Capstar Radio Note and at maturity. Advances under the Capstar Radio
Note may be made only if, among other things, at the time such advance is made
(both before and after giving effect thereto) such additional indebtedness is
permitted pursuant to the terms of the indenture governing the 10 3/4% CCI Notes
and the CCI Certificate of Designation. The Company as of October 31, 1998 had
borrowings of approximately $362 million outstanding under the Capstar Radio
Note with a weighted average effective interest rate of 7.7% per annum.
On May 29, 1998, Chancellor Media began to provide services for ten large
market stations under separate LMAs with the Company for approximately $49.4
million per year for up to three years after the consummation of the SFX Merger.
In addition, Chancellor Media agreed to acquire such stations in exchange for
radio stations to be identified by Capstar Broadcasting over a three-year
period, with corresponding decreases in the amount of the LMA fees received by
the Company as stations are exchanged. No assurances can be given that stations
acquired by the Company will generate cash flows comparable to the LMA fees to
be received from Chancellor Media in connection therewith, either initially when
such stations are acquired or at all. As of September 30, 1998, Chancellor had
paid the Company approximately $16.5 million pursuant to such LMAs. During the
pendency of the Chancellor Merger, the Company does not anticipate effecting any
exchanges with Chancellor Media. Chancellor Media is currently assessing whether
the terms of the letter agreement will be modified upon the consummation of the
Chancellor Merger.
23
<PAGE> 24
On July 3, 1998, (i) pursuant to the terms of the indenture governing the
10 3/4% CCI Notes, CCI redeemed $154.0 million aggregate principal amount of the
10 3/4% CCI Notes for an aggregate purchase price of $172.8 million, including a
$16.6 million redemption premium and $2.2 million of accrued interest. The
Merger resulted in a change of control under the indentures governing the
10 3/4% CCI Notes and the 11 3/8% CCI Notes. Pursuant to change of control
offers 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,
$1.9 million aggregate principal amount of the 10 3/4% CCI Notes for an
aggregate purchase price of $1.9 million, including a $18,000 purchase premium
and $31,000 of accrued interest. No 11 3/8% CCI Notes were tendered for
repurchase. To fund these purchases, Capstar Radio contributed $314.5 million to
the Company in exchange for stock of CCI. Upon completion of the change of
control offers, the outstanding principal balances of the 10 3/4% CCI Notes and
the 11 3/8% CCI Notes were approximately $294.1 million and $0.6 million,
respectively. Interest payments of approximately $15.8 million are payable on
the 10 3/4% CCI Notes semi-annually on May 15 and November 15 of each year until
maturity on May 15, 2006. Interest payments of approximately $32,000 are payable
on the 11 3/8% CCI Notes semi-annually on April 1 and October 1 of each year
until maturity on October 1, 2000.
All 2,392,022 shares of CCI Series E Preferred Stock outstanding
immediately prior to the SFX Merger remained outstanding after completion 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. CCI paid
the required dividend on July 15, 1998 by issuing an additional 75,169 shares of
CCI Series E Preferred Stock, and CCI intends to pay in kind dividends, rather
than cash dividends, through January 15, 2002. On July 3, 1998, pursuant to the
terms of the CCI Certificate of Designation, CCI redeemed $119.6 million
aggregate liquidation preference, or 1,196,011 shares, of the CCI Series E
Preferred Stock for an aggregate purchase price of $141.8 million, including a
$15.1 million redemption premium and $7.0 million of accrued dividends. The SFX
Merger resulted in a change of control under the CCI Certificate of Designation.
Pursuant to a change of control offer to acquire all of the outstanding CCI
Series E Preferred Stock, which commenced on June 8, 1998, CCI purchased on July
10, 1998, $500,400 aggregate liquidation preference, or 5,004 shares, of the CCI
Series E Preferred Stock for an aggregate purchase price of $536,000, including
a $5,000 purchase premium and $31,000 of accrued dividends. The partial
redemptions and the change of control offers were funded with a capital
contribution by Capstar Radio. As of October 31, 1998, 1,266,176 shares of the
CCI Series E Preferred Stock were issued and outstanding.
In addition to debt service, the Company's principal liquidity requirements
will be for working capital and general corporate purposes, including capital
expenditures estimated at $18.0 million for fiscal year 1998 and payment of the
federal income tax liabilities resulting from the Spin-Off, which is
indemnified, and the asset divestiture transactions occurring immediately after
the SFX Merger, to consummate its pending acquisitions and, as appropriate
opportunities arise, to acquire additional radio stations or complementary
broadcast-related businesses. Management believes that the disposition of
certain assets of the Company, cash from operating activities, LMA fees from
Chancellor Media and SFX Entertainment's satisfaction of its indemnity
obligation to pay CCI for CCI's tax liability resulting from the Spin-Off,
together with available revolving credit borrowings under the Capstar Radio
Note, should be sufficient to permit the Company to meet its obligations under
the agreements governing its existing indebtedness, to fund its operations, and
to consummate its pending acquisitions. The Company may require financing,
either in the form of additional debt or equity securities, for additional
future acquisitions, if any, and there can be no assurance that it will be able
to obtain such financing on terms considered to be favorable by management.
Management evaluates potential acquisition opportunities on an on-going basis
and has had, and continues to have, preliminary discussions concerning the
purchase of additional stations. The Company expects that in connection with the
financing of future acquisitions, it may consider disposing of stations in its
markets.
Upon completion of the SFX Merger, the Company became subject to the
restrictive covenants found in the instruments governing the outstanding
indebtedness of Capstar Broadcasting, Capstar Partners and
24
<PAGE> 25
Capstar Radio, including Capstar Broadcasting's outstanding note payable to
Chancellor Media, Capstar Partner's 12 3/4% Senior Discount Notes due 2009 and
its 12% Senior Exchangeable Preferred Stock, par value $.01 per share, Capstar
Radio's 9 1/4% Senior Subordinated Notes due 2007 and the Capstar Credit
Facility.
Net cash (used in) provided by continuing operating activities was
approximately $38.8 million and $(4.2) million for the nine month periods ended
September 30, 1998 and 1997, respectively. Net cash (used in) continuing
investing activities was $(138.8) million and $(420.3) million for the nine
month periods ended September 30, 1998 and 1997, respectively. Net cash provided
by continuing financing activities was $85.2 million and $407.0 million for the
nine month periods ended September 30, 1998 and 1997, respectively. These cash
flows primarily reflect the borrowings, capital contribution and expenditures
for stations acquisitions and dispositions.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward looking statements. The
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "foresee," "will," "could," "may" and similar expressions are
intended to identify forward looking statements. Such statements reflect the
Company's current views with respect to future events and financial performance
and involve risks and uncertainties, including without limitation business
conditions and growth in the industry and the general economy, competitive
factors, changes in interest rates, the failure or inability to renew one or
more of the Company's broadcasting licenses, and regulatory developments
affecting the Company's operations and the acquisitions and dispositions
described elsewhere in this Quarterly Report on Form 10-Q. Should one or more of
these risks or uncertainties occur, or should underlying assumptions prove
incorrect, actual results may vary materially and adversely from those
indicated.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Restated Information," which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This pronouncement is effective for financial statements beginning after
December 15, 1997.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which significantly changes
current financial statement disclosure requirements from those that were
required under SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132 does
not change the existing measurement or recognition provision of SFAS Nos. 87, 88
or 106. This pronouncement is effective for financial statements beginning after
December 15, 1997.
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 these accounting
pronouncements will have a material effect on its consolidated financial
statements.
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<PAGE> 26
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue concerns the inability of computer programs and
embedded computer chips to properly recognize and process date sensitive
information when the year changes to 2000, or "00." Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail causing a disruption in the operations of a company.
A Company-wide assessment of systems and operations is underway to identify
any computer systems, including equipment with embedded chips, which do not
properly recognize dates after December 31, 1999. The Company uses purchased
software programs for a variety of financial applications, including general
ledger, accounts payable and accounts receivable accounting packages. The
companies providing these software programs are Year 2000 compliant, and the
Company has received Year 2000 compliance certificates from these software
vendors. Substantially all of the Company's advertising scheduling and billing
systems are Year 2000 compliant. Unrelated to the Year 2000 Issue, the Company
expects to begin implementation of a new integrated software package called
"Galaxy" in November 1998, which will bring the remainder of the advertising
scheduling and billing systems into Year 2000 compliance by the end of 1999. The
Company believes that its other financial applications are Year 2000 compliant.
The Company's Year 2000 implementation plan also includes the actual
remediation and replacement of computer systems and other equipment with
embedded chips or processors (i.e. individual work stations, phone systems,
etc.) that are not Year 2000 compliant.
In addition, the Company is assessing its exposure from external sources to
Year 2000 failures. These efforts are partially complete. The Company does rely
on third-party providers for key services such as telecommunications and
utilities. Interruption of these services could, in management's view, have a
material impact on the operations of the Company. The Company is in the process
of developing contingency plans intended to mitigate the possible disruption in
business operations that may result from certain of the Company's or
third-parties' critical or necessary systems that are not Year 2000 compliant,
and is developing cost estimates for such plans. Through September 30, 1998, the
Company has incurred minimal costs specifically related to the Year 2000 Issue
and estimates spending an aggregate cost of less than $1.0 million. Funding of
these costs is anticipated to come from cash generated in business operations.
Based on the nature of the Company's business and dispersed geographical
locations, the Company believes that it may experience some disruption in its
business due to the impact of Year 2000 Issue. However, the Company's management
presently believes the Company is taking appropriate steps to assess and control
its Year 2000 issues. Due to the general uncertainty inherent in the Year 2000
Issue, due in part from the uncertainty of the Year 2000 readiness of third
parties, the Company is unable to determine at this time whether Year 2000
issues will have a material adverse effect on the Company's results of
operations or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
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<PAGE> 27
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In October 1996, Cardinal Communications Partners, L.P. ("Cardinal") filed
a complaint in the United States District Court, Northern District of Texas,
Dallas Division, against SFX, its Executive Chairman and other defendants. The
complaint concerns Cardinal's sale of radio station KTCK-AM to SFX in 1995. The
claims asserted in the complaint include breach of contract, fraud, negligent
misrepresentation, quantum meruit and unjust enrichment. The complaint seeks
declaratory relief, actual and punitive damages and attorneys' fees all in
unspecified amount. SFX reached an agreement with Cardinal effective August 1,
1997, that settled and resolved the claims asserted in the lawsuit. As a result
of the settlement agreement, all of the claims have been dismissed against all
of the defendants, with prejudice, except for one claim. This one claim,
alleging breach of contract related to deferred payments which SFX may be
required to pay to Cardinal, was dismissed without prejudice, subject to renewal
by Cardinal through an agreed arbitration procedure. In October 1998, the
parties completed an arbitration regarding the deferred payment. In November
1998, the parties settled the claim for approximately $3.1 million, excluding
legal fees of approximately $0.2 million.
On August 29, 1997, two lawsuits were commenced against SFX 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 SFX Merger to the holders of
SFX's Class A common stock is unfair and that the individual defendants have
breached their fiduciary duties. Both complaints seek to have the actions
certified as class actions and seek to enjoin the SFX Merger or, in the
alternative, monetary damages. The defendants have filed answers denying the
allegations, and discovery has commenced. The parties have agreed that the
lawsuits may 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 have reached an agreement providing for a
settlement of the action (the "Settlement"). Pursuant to the Settlement, SFX has
agreed not to seek an amendment to the merger agreement to reduce the
consideration to be received by the stockholders of SFX in the SFX Merger in
order to offset SFX Entertainment's indemnity obligations. The Settlement also
provides for SFX to pay plaintiff's counsel an aggregate of $950,000, including
all fees and expenses as approved by the court. The Settlement is conditioned on
the (a) consummation of the SFX Merger, (b) completion of the confirmatory
discovery and (c) approval of the court. Pursuant to the Settlement, the
defendants have denied, and continue to deny, that they have acted in bad faith
or breached any fiduciary duty. There can be no assurance that the court will
approve the Settlement on the terms and conditions provided for therein, or at
all. The parties currently are engaging in confirmatory discovery.
On July 13, 1998, Noddings Investment Group, Inc. and Noddings Warrant
Limited Partnership ("Noddings") filed Civil Action No. 16538 in the Court of
Chancery of the State of Delaware in and for New Castle County against CCI.
Noddings alleges that CCI breached a March 23, 1994, Warrant Agreement that
Noddings contends requires CCI to permit Noddings to exercise warrants in
exchange for cash and shares of stock of SFX Entertainment, Inc. ("SFX
Entertainment"), a former subsidiary of SFX which was spun-off prior to the SFX
Merger. Specifically, Noddings alleges that CCI 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 (i) declare that on the exercise of its warrants CCI transmit to
plaintiffs and members of the class that it seeks to represent $22.3725 in cash
per warrant and .2983 shares of common stock of SFX Entertainment per
27
<PAGE> 28
warrant, (ii) require CCI to pay .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, (iii) in the alternative, award plaintiffs and members of the putative
class monetary damages in an amount to be determined at trial, and (iv) award
costs and attorneys' fees. CCI has filed a motion to dismiss this lawsuit. A
response from the plaintiffs is due November 1998.
See Part 1 Item 1 Note 9 to the September 30, 1998 Unaudited Financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to the written consent in lieu of a meeting dated August 25, 1998,
of SBI Holding Corporation, the sole stockholder of CCI, SBI Holding Corporation
elected R. Steven Hicks as a director of CCI and accepted the resignation of
Eric C. Neuman as director of CCI.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated August 26, 1998,
among Chancellor Media Corporation, Capstar Broadcasting
and CBC Acquisition Company, Inc.(1)
2.2 -- Voting Agreement, dated August 26, 1998, among Chancellor
Media Corporation, Capstar Broadcasting Partners, L.P.,
Thomas O. Hicks and Steven R. Hicks.(1)
27.1 -- Financial Data Schedule.*
</TABLE>
- ---------------
* Filed herewith.
(1) Incorporated by reference to Schedule 13D/A filed by Thomas O. Hicks, et al.
on September 3, 1998, File No. 000-54151.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by CCI during the three months
ended September 30, 1998:
Amendment No. 1 to Current Report on Form 8-K, filed August 14, 1998,
relating to the acquisition of CCI. Item 7(b) was reported.
Current Report on Form 8-K, filed September 10, 1998, relating to the
execution of the Chancellor Merger Agreement with Chancellor Media. Item 1 was
reported.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Capstar Communications, Inc. has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CAPSTAR COMMUNICATIONS, INC.
By: /s/ PAUL D. STONE
----------------------------------
Paul D. Stone
Executive Vice President and
Chief Financial Officer
Date: November 16, 1998
29
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated August 26, 1998,
among Chancellor Media Corporation, Capstar Broadcasting
and CBC Acquisition Company, Inc.(1)
2.2 -- Voting Agreement, dated August 26, 1998, among Chancellor
Media Corporation, Capstar Broadcasting Partners, L.P.,
Thomas O. Hicks and Steven R. Hicks.(1)
27.1 -- Financial Data Schedule.*
</TABLE>
- ---------------
* Filed herewith.
(1) Incorporated by reference to Schedule 13D/A filed by Thomas O. Hicks, et al.
on September 3, 1998, File No. 000-54151.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,782
<SECURITIES> 0
<RECEIVABLES> 71,296
<ALLOWANCES> 4,239
<INVENTORY> 0
<CURRENT-ASSETS> 113,786
<PP&E> 112,933
<DEPRECIATION> 3,125
<TOTAL-ASSETS> 3,563,285
<CURRENT-LIABILITIES> 476,810
<BONDS> 326,306
144,973
0
<COMMON> 1
<OTHER-SE> 1,606,578
<TOTAL-LIABILITY-AND-EQUITY> 3,563,285
<SALES> 0
<TOTAL-REVENUES> 253,912
<CGS> 0
<TOTAL-COSTS> 304,500
<OTHER-EXPENSES> (638)
<LOSS-PROVISION> 1,850
<INTEREST-EXPENSE> 52,887
<INCOME-PRETAX> (104,687)
<INCOME-TAX> 4,138
<INCOME-CONTINUING> (108,825)
<DISCONTINUED> (99,389)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (208,214)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
