<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
--------------
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---- ----
COMMISSION FILE NUMBER 0-22486
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CAPSTAR COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
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)
(512) 340-7800
(Registrant's telephone number, including area code)
-------------------
Indicate by check mark whether Capstar Communications, Inc. ("Capstar
Communications" or the "Company") (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 August 10, 1999, 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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1
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CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
INDEX TO QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1999
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
PART I -- FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements:
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated
Balance Sheets as of December 31, 1998 and June 30, 1999
(unaudited)...................................................... 3
Consolidated Statements of Operations for the two months ended
May 31, 1998 (predecessor) and one month ended June 30, 1998 and
the three months ended June 30, 1999 (unaudited)................. 4
Consolidated Statements of Operations for the five months ended
May 31, 1998 (predecessor) and one month ended June 30, 1998 and
the six months ended June 30, 1999 (unaudited)................... 5
Condensed Consolidated Statements of Cash Flows for the five
months ended May 31, 1998 (predecessor) and one month ended June
30, 1998 and the six months ended June 30, 1999 (unaudited)...... 6
Consolidated Statement of Shareholder's Equity for the six months
ended June 30, 1999 (unaudited).................................. 7
Notes to Consolidated Financial Statements (unaudited)........... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 17
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................................ 18
Item 6. Exhibits and Reports on Form 8-K................................. 19
</TABLE>
As used in this Quarterly Report on Form 10-Q, unless the context otherwise
requires, (i) " Capstar Communications " refers to Capstar Communications, Inc.,
(formerly known as SFX Broadcasting, Inc.), an indirect subsidiary of Capstar
Radio Broadcasting Partners, Inc., (ii) the "Company" collectively refers to
Capstar Communications 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
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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)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
----------- ----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................................... $ 11,391 $ 5,093
Accounts receivable, net of allowance for doubtful accounts of $4,511 and
$4,198, respectively ........................................................... 71,314 74,598
Prepaid and other current assets .................................................. 1,660 4,718
---------- ----------
Total current assets ...................................................... 84,365 84,409
Property and equipment, net ....................................................... 118,163 117,530
Intangibles and other, net ........................................................ 3,323,486 3,323,465
Other assets ...................................................................... 627 817
---------- ----------
Total assets .............................................................. $3,526,641 $3,526,221
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable .................................................................. $ 3,303 $ 3,015
Accrued expenses .................................................................. 13,869 12,381
Accrued interest .................................................................. 4,136 3,991
Income taxes payable .............................................................. 35,140 2,204
Current portion of long-term debt ................................................. 372,903 357,992
---------- ----------
Total current liabilities ................................................. 429,351 379,583
Long-term debt, net of current portion ............................................ 325,686 323,218
Deferred income taxes ............................................................. 1,008,385 1,012,501
---------- ----------
Total liabilities ......................................................... 1,763,422 1,715,302
---------- ----------
Series E Cumulative Exchangeable Preferred Stock, $.01 par value, 4,150 shares
authorized, 1,266 and 1,346 shares issued and outstanding, respectively,
aggregate liquidation preference of $133,944 and $142,398, respectively ......... 148,669 156,444
---------- ----------
Commitments and contingencies
Shareholder's equity:
Class A Voting Common Stock, $.01 par value; 200,000
shares authorized; 1,006 shares issued and outstanding ..................... 1 1
Additional paid-in capital ..................................................... 1,613,967 1,654,474
Retained earnings (deficit) .................................................... 58 --
---------- ----------
Total shareholder's equity ................................................ 1,614,550 1,654,475
---------- ----------
Total liabilities and shareholder's equity ................................ $3,526,641 $3,526,221
========== ==========
</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 COMPANY
---------------- --------------- ------------------
TWO MONTHS ENDED ONE MONTH ENDED THREE MONTHS ENDED
MAY 31, 1998 JUNE 30, 1998 JUNE 30, 1999
---------------- --------------- ------------------
<S> <C> <C> <C>
Gross broadcast revenue ......................................... $ 66,964 $ 36,239 $ 119,045
Less: agency commissions ........................................ (8,038) (3,738) (12,006)
---------------- --------------- ------------------
Net broadcast revenue ......................................... 58,926 32,501 107,039
---------------- --------------- ------------------
Station operating expenses ...................................... 33,599 16,550 52,655
Depreciation, amortization, duopoly integration costs
and acquisition related costs ................................. 7,015 8,236 24,387
Corporate expenses .............................................. 1,500 593 3,379
Settlement of Options and Warrants .............................. 74,061 -- --
LMA fees ........................................................ -- -- 75
Non-recurring and unusual charges, including adjustments to
broadcast rights agreement .................................... 10,344 -- --
---------------- --------------- ------------------
Total operating expenses .................................. 126,519 25,379 80,496
---------------- --------------- ------------------
Operating income (loss) ......................................... (67,593) 7,122 26,543
Investment income ............................................... 151 21 --
Interest expense ................................................ (12,375) (6,946) (13,576)
---------------- --------------- ------------------
Income (loss) from continuing operations before income taxes .... (79,817) 197 12,967
Income tax expense .............................................. -- 61 4,651
---------------- --------------- ------------------
Income (loss) from continuing operations ........................ (79,817) 136 8,316
---------------- --------------- ------------------
Discontinued operations:
Loss from operations to be distributed to
shareholders, net of taxes .................................... (1,813) -- --
---------------- --------------- ------------------
Net income (loss) ............................................... (81,630) 136 8,316
Dividends and accretion on preferred stocks ..................... 6,914 2,402 3,933
---------------- --------------- ------------------
Net income (loss) attributable to common stock .................. $ (88,544) $ (2,266) $ 4,383
================ =============== ==================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
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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 COMPANY
----------------- --------------- ----------------
FIVE MONTHS ENDED ONE MONTH ENDED SIX MONTHS ENDED
MAY 31, 1998 JUNE 30, 1998 JUNE 30, 1999
----------------- --------------- ----------------
<S> <C> <C> <C>
Gross broadcast revenue ......................................... $ 141,369 $ 36,239 $ 213,175
Less: agency commissions ........................................ (16,692) (3,738) (20,915)
----------------- --------------- ----------------
Net broadcast revenue ......................................... 124,677 32,501 192,260
----------------- --------------- ----------------
Station operating expenses ...................................... 78,235 16,550 101,936
Depreciation, amortization, duopoly integration costs
and acquisition related costs ................................. 17,668 8,236 47,447
Corporate expenses .............................................. 3,069 593 5,060
Settlement of Options and Warrants .............................. 74,199 -- --
LMA fees ........................................................ -- -- 150
Non-recurring and unusual charges, including adjustments to
broadcast rights agreement .................................... 35,318 --
----------------- --------------- ----------------
Total operating expenses .................................. 208,489 25,379 154,593
----------------- --------------- ----------------
Operating income (loss) ......................................... (83,812) 7,122 37,667
Investment income ............................................... 352 21 31
Interest expense ................................................ (31,564) (6,946) (26,877)
----------------- --------------- ----------------
Income (loss) from continuing operations before income taxes .... (115,024) 197 10,821
Income tax expense .............................................. 210 61 4,129
----------------- --------------- ----------------
Income (loss) from continuing operations ........................ (115,234) 136 6,692
----------------- --------------- ----------------
Discontinued operations:
Loss from operations to be distributed to
shareholders, net of taxes .................................... (99,389) -- --
----------------- --------------- ----------------
Net income (loss) ............................................... (214,623) 136 6,692
Dividends and accretion on preferred stocks ..................... 17,264 2,402 7,775
----------------- --------------- ----------------
Net loss attributable to common stock ........................... $ (231,887) $ (2,266) $ (1,083)
================= =============== ================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE> 6
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 COMPANY COMPANY
----------------- --------------- ----------------
FIVE MONTHS ENDED ONE MONTH ENDED SIX MONTHS ENDED
MAY 31, 1998 JUNE 30, 1998 JUNE 30, 1999
----------------- --------------- ----------------
<S> <C> <C> <C>
Cash provided by (used in) continuing operations ................... $ (22,704) $ (1,681) $ 16,545
Cash from operating activities of SFX Entertainment ................ 10,988 -- --
----------------- --------------- ----------------
Net cash provided by (used in) operating activities .................. (11,716) (1,681) 16,545
----------------- --------------- ----------------
Investing activities:
Purchase of stations and related businesses, net of cash
acquired ...................................................... -- (238,361) --
Proceeds from sales of stations and other assets ................. 4,692 109,091 --
Deposits and other payments for pending acquisitions ............. -- (117) --
Purchase of property and equipment ............................... (5,138) (1,065) (3,456)
Other investing activities ....................................... (215) (26) (4,141)
----------------- --------------- ----------------
Net cash used in investing activities ................................ (661) (130,478) (7,597)
Cash used in investing activities of SFX Entertainment ........... (397,681) -- --
----------------- --------------- ----------------
Net cash used in investing activities ................................ (398,342) (130,478) (7,597)
----------------- --------------- ----------------
Financing activities:
Payments on long-term debt and credit facilities ................. (141) (382,301) (82,748)
Proceeds from issuance of long-term debt and credit facilities ... -- 522,314 67,502
Proceeds from issuance of common stock ........................... 17,177 -- --
Preferred stock dividends ........................................ (2,459) (2,430) --
----------------- --------------- ----------------
Net cash provided by (used in) financing activities .................. 14,577 137,583 (15,246)
Cash provided by financing activities of SFX Entertainment ........... 467,874 -- --
----------------- --------------- ----------------
Net cash provided by (used in) financing activities .................. 482,451 137,583 (15,246)
----------------- --------------- ----------------
Net increase (decrease) in cash and equivalents ...................... 72,393 5,424 (6,298)
Cash and cash equivalents at beginning of period ..................... 24,686 15,897 11,391
Net increase in cash of SFX Entertainment ............................ (81,182) -- --
----------------- --------------- ----------------
Cash and cash equivalents at end of period ........................... $ 15,897 $ 21,321 $ 5,093
================= =============== ================
</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 SIX MONTHS ENDED JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK
---------------------
RETAINED TOTAL
NUMBER OF PAR PAID-IN EARNINGS SHAREHOLDER'S
SHARES VALUE CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 ............. 1,006 $ 1 $1,613,967 $ 582 $1,614,550
Dividends and accretion on Preferred
Stock ............................. -- -- (501) (7,274) (7,775)
Capital contributions .................. -- -- 42,427 -- 42,427
Dividends to parent .................... -- -- (1,419) -- (1,419)
Net income ............................. -- -- -- 6,692 6,692
--------- ------ ---------- ------- ----------
Balance at June 30, 1999 ............... 1,006 $ 1 $1,654,474 -- $1,654,475
========= ====== ========== ======= ==========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
7
<PAGE> 8
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
Information with respect to the three and six month periods ended June 30,
1998 and 1999 is unaudited. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the unaudited interim consolidated
financial statements contain all adjustments considered necessary for a fair
presentation. Operating results for the three and six month periods ended June
30, 1999, are not necessarily indicative of the results that may be expected for
the year ended December 31, 1999, or for any other interim period. For further
information, refer to the consolidated financial statements and footnotes
thereto for Capstar Communications included in its Form 10-K for the year ended
December 31, 1998.
On May 29, 1998, SBI Holding Corporation, a Delaware corporation ("SFX
Parent"), acquired SFX Broadcasting, Inc., which has been renamed Capstar
Communications, Inc. 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 an indirect
wholly-owned subsidiary of Capstar Radio.
NOTE 2 -- AMFM MERGER
On July 13, 1999, AMFM Inc. (previously known as Chancellor Media
Corporation), a Delaware corporation ("AMFM"), acquired Capstar Broadcasting.
The acquisition was effected through the merger (the "Merger") of CMC Merger
Sub, Inc., a Delaware corporation and wholly-owned subsidiary of AMFM ("Sub"),
with and into Capstar Broadcasting, with Capstar Broadcasting as the surviving
corporation. Capstar Communications, Inc. is an indirect subsidiary of Capstar
Broadcasting. As a result of the Merger, the Company became an indirect
subsidiary of Parent.
As a result of the Merger, all of the then outstanding shares of Class A
common stock, par value $0.01 per share, of Capstar Broadcasting ("Class A
common Stock"), Class B common stock, par value $0.01 per share, of Capstar
Broadcasting ("Class B Common Stock"), and Class C common stock, par value
$0.01 per share, of Capstar Broadcasting ("Class C Common Stock," and
collectively with the Class A Common Stock and the Class B Common Stock, the
"Common Stock"), were converted to the right to receive 0.4955 of a validly
issued, fully paid and nonassessable share of common stock, par value $0.01 per
share, of AMFM ("AMFM Common Stock"). Based upon the number of shares
outstanding May 19, 1999, the total consideration paid by AMFM in the Merger
was approximately 53.5 million shares of AMFM Common Stock. AMFM also assumed
options, warrants and other equity rights of Capstar Broadcasting which
represent up to an additional 3.3 million shares of AMFM Common Stock. Since
the acquisition occurred subsequent to June 30, 1999, no adjustments have been
recorded to the financial statements herein to reflect the acquisition.
NOTE 3 -- RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. 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, as amended by SFAS No. 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Management does not
believe the implementation of this accounting pronouncement will have a material
effect on its consolidated financial statements.
8
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CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
On August 29, 1997, two lawsuits were commenced against SFX Broadcasting,
Inc. and its directors in the Court of Chancery of the State of Delaware (New
Castle County). The plaintiffs in the lawsuits are Harbor Finance Partners (C.A.
No. 15891) and Steven Lieberman (C.A. No. 15901). The complaints are identical
and allege that the consideration to be paid as a result of the SFX acquisition
by Capstar Broadcasting 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 acquisition by Capstar Broadcasting 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. 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 acquisition
by Capstar Broadcasting 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 consummation of the SFX acquisition by
Capstar Broadcasting (which has been consummated), completion of the
confirmatory discovery (which has been completed) and 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. The parties
expect to submit the settlement documents soon to the court for its approval.
However, there can be no assurance that the court will approve the settlement.
On July 13, 1998, Noddings Investment Group, Inc. and Noddings Warrant
Limited Partnership filed Civil Action No. 16538 in the Court of Chancery of the
State of Delaware in and for New Castle County against Capstar Communications.
Noddings alleges that Capstar Communications breached a March 23, 1994, Warrant
Agreement that Noddings contends requires Capstar Communications to permit
Noddings to exercise warrants in exchange for cash and shares of stock of SFX
Entertainment, Inc. Specifically, Noddings alleges that Capstar Communications
has violated the Warrant Agreement by permitting Noddings to receive cash in
exchange for its warrants, but refusing to convey shares of stock of SFX
Entertainment. In addition to suing on its own behalf, Noddings is seeking to
prosecute the action on behalf of a putative class comprised of all persons who
owned equivalent warrants on April 21, 1998 (the date immediately following the
record date of the distribution of stock of SFX Entertainment to holders of the
stock of SFX) and their transferees and successors in interest. Noddings has
requested that the Court:
o declare that on the exercise of its warrants Capstar Communications
transmit to plaintiffs and members of the class that it seeks to
represent $22.3725 in cash per warrant and 0.2983 shares of common
stock of SFX Entertainment per warrant,
o require Capstar Communications to pay 0.2983 shares of common stock of
SFX Entertainment per warrant and, (if not previously paid) $22.3725
in cash, to any putative class member that has exercised or exercises
warrants after April 20, 1998,
o in the alternative, award plaintiffs and members of the putative class
monetary damages in an amount to be determined at trial, and
o award costs and attorneys' fees.
In March 1999, the court issued an opinion dismissing two of Noddings'
counts and granted summary judgment in favor of Noddings on one count. The court
held that Noddings is entitled to 0.2983 shares of SFX Entertainment, Inc. stock
per warrant. Both parties have filed appellate briefs with the Supreme Court of
the State of Delaware.
Capstar Communications is subject to various legal proceedings and claims
that arise in the ordinary course of its business. In the opinion of management,
the amount of ultimate liability with respect to these actions will not have a
material impact on the consolidated financial position or results of operations
or cash flows of Capstar Communications.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
In Management's Discussion and Analysis, management explains the
general financial condition and the results of operations of Capstar
Communications including:
o what factors affect Capstar Communications' business;
o what Capstar Communications' earnings and costs were in 1998 and 1999;
o why those earnings and costs were different from the period before;
o where Capstar Communications' earnings come from;
o how all of this affects Capstar Communications' overall financial
condition;
o what Capstar Communications' expenditures for acquisitions and other
capital needs were in the first quarter of 1999 and what management
expects them to be for the remainder of the year; and
o where cash will come from to pay for future capital expenditures and
debt service obligations.
As you read this Management's Discussion and Analysis, it may be
helpful to refer to Capstar Communications' Consolidated Financial Statements on
pages 3 through 9. In Management's Discussion and Analysis, management analyzes
and explains the changes in the specific line items in the consolidated
statements of operations and other data. You should know that these changes are
not historically comparable because of the numerous acquisitions and
dispositions that Capstar Communications completed in 1998. Management's
analysis may be important to you in making decisions about your investments in
Capstar Communications.
On July 13, 1999, AMFM acquired Capstar Broadcasting. The
acquisition was effected through the Merger. Capstar Communications is an
indirect subsidiary of Capstar Broadcasting. As a result of the Merger, Capstar
Communications became an indirect subsidiary of AMFM. The acquisition of
Capstar Broadcasting by AMFM may impact many of the matters discussed in this
Management's Discussion and Analysis, including earnings, results of
operations, expenses, liquidity and capital resources.
Management believes that it is important to discuss advertising
revenues and seasonal fluctuations of advertising revenues, two factors that
have a strong influence on Capstar Communications' business performance:
o Advertising Revenues. Capstar Communications' revenues are derived
primarily from the sale of time to local and national advertisers.
These revenues are affected by the advertising rates that Capstar
Communications 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.
Capstar Communications attempts to maximize revenues for each of its
stations by adjusting rates based upon local market conditions,
controlling advertising inventory and creating demand and audience
ratings.
o Seasonality. Seasonal revenue fluctuations are common in the radio
broadcasting industry and are due primarily to fluctuations in
advertising expenditures by local and national advertisers. Advertising
expenditures are typically lowest in the first calendar quarter and
highest in the second and fourth calendar quarters of each year.
Capstar Communications' 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, Capstar Communications' 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.
10
<PAGE> 11
In the following analysis, management discusses broadcast cash flow and
EBITDA (before settlement of options and warrants, LMA fees, nonrecurring and
unusual charges and loss from operations to be distributed to shareholders)
because they are measures widely used in the broadcasting industry to evaluate a
radio company's operating performance. Broadcast cash flow consists of operating
income before depreciation, amortization, duopoly integration costs and
acquisition related costs, corporate expenses, LMA fees, settlement of options
and warrants and nonrecurring and unusual charges. EBITDA (before settlement of
options and warrants, LMA fees, nonrecurring and unusual charges and loss from
operations to be distributed to shareholders) consists of operating income
before depreciation, amortization, duopoly integration costs and acquisition
related costs, LMA fees, settlement of options and warrants and nonrecurring and
unusual charges. You should know that broadcast cash flow and EBITDA (before
settlement of options and warrants, LMA fees, nonrecurring and unusual charges
and loss from operations to be distributed to shareholders) are not measures of
performance calculated in accordance with GAAP. Accordingly, you should also
review Capstar Communications' operating income, cash flows from operating
activities and other income or cash flow statements that are prepared in
accordance with GAAP.
RESULTS OF OPERATIONS
The following table presents summary supplemental historical consolidated
financial data of Capstar Communications for the three months ended June 30,
1998 and 1999 and should be read in conjunction with the consolidated financial
statements of Capstar Communications and the related notes included elsewhere in
this Quarterly Report on Form 10-Q.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
-----------------------
1998 1999
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
OPERATING DATA:
Net revenue .................................................................. $ 91,427 $107,039
Station operating expenses ................................................... 50,149 52,655
Corporate expenses ........................................................... 2,093 3,379
Depreciation, amortization, duopoly integration costs and
acquisition related costs .................................................. 15,251 24,387
Nonrecurring and unusual charges, including adjustments to
broadcast rights agreements ................................................ 10,344 --
Operating income (loss) ...................................................... (60,471) 26,543
Interest expense ............................................................. 19,321 13,576
Income (loss) from continuing operations ..................................... (79,681) 12,967
Net income (loss) attributable to common stock ............................... $(90,810) $ 4,383
OTHER DATA:
Broadcast cash flow .......................................................... $ 41,278 $ 54,389
Broadcast cash flow margin ................................................... 45.1% 50.8%
EBITDA from continuing operations (before settlement of
options and warrants, LMA fees, nonrecurring and unusual charges and
loss from operations to be distributed to shareholders) .................... 39,185 51,010
</TABLE>
- -------------
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1999
Net Revenue. Net revenue increased $15.6 million or 17.1% to $107.0 million
for the three months ended June 30, 1999 from $91.4 million for the three months
ended June 30, 1998. This increase was attributable to the acquisitions of radio
stations and revenue generated from JSAs and LMAs entered into during 1998. On a
same station basis, for stations owned and operated as of June 30, 1999, net
revenue increased $7.6 million or 7.6% to $107.5 million from $99.9 million for
the three months ended June 30, 1999. The increase was primarily attributable to
growth in the sale of time to local and national advertisers.
Station Operating Expenses. Station operating expenses increased $2.5
million or 5.0% to $52.7 million for the three months ended June 30, 1999 from
$50.1 million for the three months ended June 30, 1998. The increase was
primarily attributable to the station operating expenses of the radio station
acquisitions and the JSAs and LMAs entered into during 1998. As a percent of
revenue, historical operating expenses have
11
<PAGE> 12
declined from 54.9% in 1998 to 49.2% in 1999 as a result of cost saving measures
implemented by the Capstar Communications in connection with its acquisitions,
the spreading of fixed costs over a larger revenue base and significant LMA fees
earned during the period.
Corporate Expenses. Corporate expenses increased $1.3 million or 61.5% to
$3.4 million for the three months ended June 30, 1999 from $2.1 million in the
same period during 1998 primarily as a result of higher salary expense for
additional staffing.
Other Operating Expenses. Depreciation, amortization, duopoly integration
costs and acquisition related costs increased $9.1 million or 59.9% to $24.4
million for the three months ended June 30, 1999 from $15.3 million in the same
period in 1998 primarily due to radio station acquisitions consummated in 1998
and basis differences between the company and its predecessor. Settlement of
options and warrants expense related to certain options and warrants decreased
$74.1 million to $0.0 million in 1999 from $74.1 million in 1998 due to
settlement of all outstanding options and warrants in connection with the
acquisition of Capstar Communications by Capstar Broadcasting.
In 1998, Capstar Communications recorded non-recurring and unusual charges
of $10.3 million which consisted primarily of (i) $1.3 million of compensation
expense related to bonuses and options issued, (ii) $0.9 million relating to the
settlement of lawsuits, (iii) $3.1 million of expenses, primarily legal,
accounting an regulatory fees associated with the acquisition of Capstar
Communications by Capstar Broadcasting and the consent solicitations in
connection with the Spin-Off and (iv) $5.0 million related to a brokers contract
due upon a change in control.
Other Income (Expense). Interest expense, net, decreased $5.7 million or
29.8% to $13.6 million for the three months ended June 30, 1999 from $19.3
million during the same period in 1998 primarily due to lower overall levels of
indebtedness.
In 1998, net income (loss) of the live entertainment business of SFX
Entertainment, Inc., the company spun-off from Capstar Communications, was
included in the results of Capstar Communications as income (loss) from
operations to be distributed to shareholders.
Net Income (Loss). Capstar Communications' net income was $8.3 million in
1999 compared to a loss of $81.5 million in 1998 due to the factors discussed
above.
Net Income (Loss) Attributable to Common Stock. Net income (loss)
attributable to common stock increased to income of $4.4 million in 1999 from a
loss of $90.8 million in 1998 due to the factors mentioned above offset by a
decrease in preferred stock dividends due to various redemptions done
coincidental to the acquisition of Capstar Communications by Capstar
Broadcasting.
Broadcast Cash Flow. As a result of the factors described above, broadcast
cash flow increased $13.1 million or 31.8% to $54.4 million for the three months
ended June 30, 1999 from $41.3 million for the three months ended June 30, 1998.
The broadcast cash flow margin was 50.8% for the three months ended June 30,
1999 compared to 45.1% in the same period in 1998 due primarily to cost saving
measures implemented by Capstar Communications in connection with its
acquisitions, the spreading of fixed costs over a larger revenue base and
significant LMA fees earned during the period. On a same station basis, for
stations owned or operated as of June 30, 1999, broadcast cash flow increased
12.3% from 1998.
EBITDA (before settlement of options and warrants, LMA fees, nonrecurring
and unusual charges and income (loss) from operations to be distributed to
shareholders). As a result of the factors described above, EBITDA (before
settlement of options and warrants, LMA fees, nonrecurring and unusual charges
and income (loss) from operations to be distributed to shareholders) increased
$11.8 million or 30.2% to $51.0 million for the three months ended June 30, 1999
from $39.2 million for the three months ended June 30, 1998.
The following table presents summary supplemental historical consolidated
financial data of Capstar Communications for the six months ended June 30, 1998
and 1999 and should be read in conjunction with the consolidated financial
statements of Capstar Communications and the related notes included elsewhere in
this Quarterly Report on Form 10-Q.
12
<PAGE> 13
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------------
1998 1999
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
OPERATING DATA:
Net revenue ............................................................. $ 157,178 $ 192,260
Station operating expenses .............................................. 94,785 101,936
Corporate expenses ...................................................... 3,662 5,060
Depreciation, amortization, duopoly integration costs and ............... 47,447
acquisition related costs ............................................. 25,904
Nonrecurring and unusual charges, including adjustments to
broadcast rights agreements ........................................... 35,318 --
Operating income (loss) ................................................. (76,690) 37,667
Interest expense ........................................................ 38,510 26,877
Income from continuing operations ....................................... 115,098 6,692
Net loss attributable to common stock ................................... $(234,153) $ (1,083)
OTHER DATA:
Broadcast cash flow ..................................................... $ 62,393 $ 90,324
Broadcast cash flow margin .............................................. 39.7% 47.0%
EBITDA from continuing operations (before settlement of options and
warrants, LMA fees, nonrecurring and unusual charges and loss
from operations to be distributed to shareholders) .................... 58,731 85,264
</TABLE>
- -----------
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1999
Net Revenue. Net revenue increased $35.1 million or 22.3% to $192.3 million
for the six months ended June 30, 1999 from $157.2 million for the six months
ended June 30, 1998. This increase was attributable to the acquisitions of radio
stations and revenue generated from JSAs and LMAs entered into during 1998. On a
same station basis, for stations owned and operated as of June 30, 1999, net
revenue increased $15.5 million or 8.7% to $194.1 million from $178.6 million in
the six months ended June 30, 1999. The increase is primarily attributable to
growth in the sale of time to local and national advertisers.
Station Operating Expenses. Station operating expenses increased $7.2
million or 7.6% to $101.9 million for the six months ended June 30, 1999 from
$94.8 million for the six months ended June 30, 1998. The increase was primarily
attributable to the station operating expenses of the radio station acquisitions
and the JSAs and LMAs entered into during 1998. As a percent of revenue,
historical operating expenses have declined from 60.3% in 1998 to 53.0% in 1999
as a result of cost saving measures implemented by the Capstar Communications in
connection with its acquisitions, the spreading of fixed costs over a larger
revenue base and significant LMA fees earned during the period.
Corporate Expenses. Corporate expenses increased $1.4 million or 38.2% to
$5.1 million for the six months ended June 30, 1999 from $3.7 million in the
same period during 1998 primarily as a result of higher salary expense for
additional staffing.
Other Operating Expenses. Depreciation, amortization, duopoly integration
costs and acquisition related costs increased $21.5 million or 83.2% to $47.4
million for the six months ended June 30, 1999 from $25.9 million in the same
period in 1998 primarily due to radio station acquisitions consummated in 1998
and basis differences between the company and its predecessor. Settlement of
options and warrants expense related to certain options and warrants decreased
$74.2 million to $0.0 million in 1999 from $74.2 million in 1998 due to
settlement of all outstanding options and warrants in connection with the
acquisition of Capstar Communications by Capstar Broadcasting.
In 1998, Capstar Communications recorded non-recurring and unusual charges
of $35.3 million which consisted primarily of (i) $5.6 million of compensation
expense related to bonuses and options issued, (ii) $1.4 million relating to the
settlement of lawsuits, (iii) $0.5 million relating to the increase in value of
certain stock appreciation rights, (iv) $16.6 million relating to the consent
solicitations from the holders of its 10 3/4% Senior Subordinated Notes due 2006
(the "10 3/4% CCI Notes") and the holders of its Series E Cumulative
Exchangeable Preferred Stock (the "CCI Series E Preferred Stock") in connection
with the spin-off of the stock of SFX Entertainment, Inc. from Capstar
Communications in April 1998 (the "Spin-Off"), (v) $6.2 million of expenses,
primarily legal, accounting and regulatory fees associated with the acquisition
of Capstar Communications by Capstar Broadcasting and the consent solicitations
in connection with the Spin-Off and (vi) $5.0 million related to a brokers
contract due upon a change in control.
Other Income (Expense). Interest expense, net, decreased $11.6 million or
30.2% to $26.9 million for the six months ended June 30, 1999 from $38.5 million
during the same period in 1998 primarily due to lower overall levels of
indebtedness.
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<PAGE> 14
In 1998, net income (loss) of the live entertainment business of SFX
Entertainment, Inc., the company spun-off from Capstar Communications, was
included in the results of Capstar Communications as income (loss) from
operations to be distributed to shareholders. SFX Entertainment's operating
results consisted of $122.7 million of concert revenue, $(5.3) million of
operating income (loss) and $(10.7) million of income before income taxes in
1998. The significant loss in 1998 was due, in addition to the factors mentioned
above, to income tax expense of $75.7 million related to the tax consequences to
Capstar Communications of the Spin-Off.
Net Income (Loss). Capstar Communications' net income was $6.7 million in
1999 compared to a loss of $214.5 million in 1998 due to the factors discussed
above.
Net Loss Attributable to Common Stock. Net loss attributable to common stock
decreased to $1.1 million in 1999 from $234.2 million in 1998 due to the factors
mentioned above offset by a decrease in preferred stock dividends due to various
redemptions done coincidental to the acquisition of Capstar Communications by
Capstar Broadcasting.
Broadcast Cash Flow. As a result of the factors described above, broadcast
cash flow increased $27.9 million or 44.8% to $90.3 million for the six months
ended June 30, 1999 from $62.4 million for the six months ended June 30, 1998.
The broadcast cash flow margin was 47.0% for the six months ended June 30, 1999
compared to 39.7% in the same period in 1998 due primarily to cost saving
measures implemented by Capstar Communications in connection with its
acquisitions, the spreading of fixed costs over a larger revenue base and
significant LMA fees earned during the period. On a same station basis, for
stations owned or operated as of June 30, 1999, broadcast cash flow increased
11.9% from 1998.
EBITDA (before settlement of options and warrants, LMA fees, nonrecurring
and unusual charges and income (loss) from operations to be distributed to
shareholders). As a result of the factors described above, EBITDA (before
settlement of options and warrants, LMA fees, nonrecurring and unusual charges
and income (loss) from operations to be distributed to shareholders) increased
$26.5 million or 45.2% to $85.3 million for the six months ended June 30, 1999
from $58.7 million for the six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Capstar Communications' acquisition strategy requires a great deal of
capital. Capstar Communications has historically used the proceeds of bank debt,
debt offerings, and cash flow from operations to fund the implementation of its
acquisition strategy. Capstar Communications' business has generated sufficient
cash flow from operations to finance its existing operations and debt service
requirements, and management anticipates that this will continue to be the case.
A brief summary of each of Capstar Communications' outstanding debt or preferred
equity instruments follows.
Capstar Communications has outstanding its 10 3/4% CCI Notes and its 11 3/8%
CCI Notes. Capstar Communications pays interest of approximately $15.8 million
on the 10 3/4% CCI Notes semi-annually on May 15 and November 15 of each year.
The 10 3/4% CCI Notes mature on May 15, 2006. Capstar Communications pays
interest of approximately $32,000 on the 11 3/8% CCI Notes semi-annually on
April 1 and October 1 of each year. The 11 3/8% CCI Notes mature on October 1,
2000. As of June 30, 1999, the outstanding principal balances were $321.8
million and $566,000 on the 10 3/4% CCI Notes and 11 3/8% CCI Notes,
respectively.
Capstar Communications has outstanding its Series E Cumulative Exchangeable
Preferred Stock ("CCI Series E Preferred Stock"). Capstar Communications is
required to pay dividends on the CCI Series E Preferred Stock semi-annually on
January 15 and July 15 of each year at the rate per share of $12.625 per year.
Until January 15, 2002, Capstar Communications may pay dividends either in cash
or in additional shares of CCI Series E Preferred Stock. Since July 15, 1998,
Capstar Communications has paid the required dividend by issuing additional
shares. Capstar Communications intends to continue to pay the dividend in
additional shares, rather than cash, through January 15, 2002. As of August 1,
1999, 1,431,062 shares of the CCI Series E Preferred Stock were issued and
outstanding with a liquidation preference equal to $100.00 per share or
approximately $143.1 million, excluding accrued dividends of $800,000.
The Merger with AMFM resulted in a change of control under Capstar
Communications' indebtedness and preferred stock, and Capstar Communications is
obligated to purchase the notes and the preferred stock from the holders thereof
at an offer price in cash equal to 101% of the aggregate principal amount
accreted value or liquidation preference, as applicable, plus accrued and unpaid
interest or dividends, as applicable, if any, thereon. Capstar Communications
has sent change of control offers to offer to purchase the outstanding notes and
preferred stock and will close the acquisition of accepted tenders in August and
September 1999. Capstar Communications anticipates that it will pay for the
change in control offers from cash from operating activities.
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<PAGE> 15
Chancellor Media Corporation of Los Angeles ("CMCLA"), a subsidiary of
AMFM, is providing services for eleven large market stations owned by Capstar
Communications under separate LMAs with Capstar Broadcasting for approximately
$49.4 million per year. In addition, CMCLA has agreed to acquire such stations
in exchange for radio stations to be identified by Capstar Broadcasting over a
three-year period beginning in May 1998, with corresponding decreases in the
amount of the LMA fees as stations are exchanged. From January 1 to June 30,
1999, CMCLA paid Capstar Broadcasting approximately $24.7 million in LMA fees.
For the remainder of 1999, Capstar Broadcasting expects to receive approximately
$24.7 in LMA fees from CMCLA. CMLA is assessing, in light of the Merger,
whether any changes will be made to the exchange agreement between Capstar
Communications and CMCLA.
In May 1998, Capstar Communications entered into a loan for approximately
$441.4 million with Capstar Radio, which is payable on the earlier of demand or
May 31, 2005. The loan consists of a $1.4 billion revolver. Borrowings under the
loan bear interest at the per annum interest rate available to Capstar Radio
under its 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 loan and at maturity. Advances
under the loan 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 certificate of designation governing the CCI Series E
Preferred Stock. As of June 30, 1999, Capstar Communications had borrowings of
approximately $327.6 million outstanding under the loan with a weighted average
effective interest rate of 7.28% per annum. During the six months ended June
30, 1999, Capstar Communications paid approximately $12.6 million in interest to
Capstar Radio.
In addition to debt service and tax liabilities, Capstar Communications'
principal liquidity requirements in 1999 will be for working capital and general
corporate purposes, including capital expenditures estimated at $15.2 million,
to consummate its pending acquisitions and, as appropriate opportunities arise,
to acquire additional radio stations or complementary broadcast-related
businesses. Capstar Communications believes that cash from operating activities
and LMA fees from CMCLA, should be sufficient to permit Capstar Communications
to meet its obligations. In the future, Capstar Communications may require
additional financing, either in the form of additional debt or equity
securities. Capstar Communications evaluates potential acquisition opportunities
on an on-going basis and has had, and continues to have, preliminary discussions
concerning the purchase of additional stations. Capstar Communications expects
that in connection with the financing of future acquisitions, it may consider
disposing of stations in its current markets. Capstar Communications is a
holding company with no significant assets other than the capital stock of its
direct and indirect subsidiaries. Consequently, its sole source of cash from
which to service indebtedness is dividends distributed or other payments made to
it by its operating subsidiaries. The instruments governing Capstar
Communications' indebtedness contain certain covenants that restrict or prohibit
the ability of subsidiaries to pay dividends and make other distributions. These
restrictions are not anticipated to have an impact on Capstar Communications'
ability to meet its cash obligations.
Upon completion of the SFX merger, Capstar Communications became subject to
the restrictive covenants found in the instruments governing the outstanding
indebtedness of Capstar Broadcasting, Capstar Partners and 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 Capstar Broadcasting's credit facility.
Net cash provided by (used in) operating activities was approximately
$(13.4) million and $16.6 million for the six months ended June 30, 1998 and
1999, respectively. Changes in Capstar Communications' net cash provided by
operating activities are primarily the result of completed acquisitions and
station operating agreements entered into during the periods and their effects
on income from operations and working capital requirements.
Net cash used in investing activities was $528.8 million and $7.6 million
and for the six months ended June 30, 1998 and 1999, respectively. Net cash
provided by (used in) financing activities was $620.0 million and $(15.2)
million for the six months ended June 30, 1998 and 1999, respectively. These
cash flows primarily reflect borrowings, capital contributions and expenditures
for stations acquisitions and dispositions.
FORWARD LOOKING STATEMENTS
Certain statements used in the preceding and following discussion and
elsewhere in this Quarterly Report on Form 10-Q are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward
looking statements about the financial condition, prospects, operations and
business of
15
<PAGE> 16
the Company are generally accompanied by words such as "believes," "expects,"
"plans," "anticipates," "intends," "likely," "estimates," or similar
expressions. These forward-looking statements are subject to risks,
uncertainties and other factors, some of which are beyond the control of the
Company, that could cause actual results to differ materially from those
forecast or anticipated in such forward-looking statements.
These risks, uncertainties and other factors include, but are not limited
to: the potential negative consequences of the substantial indebtedness of the
Company; the restrictions imposed on the Company and its subsidiaries by the
agreements governing its debt instruments; the competitive nature of the radio
broadcasting; the potential adverse effects on licenses and ownership of
regulation of the radio broadcasting industry; the difficulty of integrating
substantial acquisitions and entering new lines of business; and the control
of the Company by affiliates of Hicks, Muse, Tate & Furst Incorporated and
potential conflicts of interest relating thereto.
Because such forward-looking statements are subject to risks and
uncertainties, readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's view only as of the date
of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to
update such statements or publicly release the result of any revisions to these
forward-looking statements which it may make to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated or
unforeseen events.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. 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, as amended by SFAS No. 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Management does not
believe the implementation of this accounting pronouncement will have a material
effect on its consolidated financial statements.
IMPACT OF THE YEAR 2000 ISSUE
BACKGROUND: The Year 2000 ("Y2K") issue is whether the Company's
computer systems will properly recognize 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.
STATE OF READINESS: The Company has substantially completed an
inventory and assessment of its systems and operations to identify any software
or hardware systems, equipment with embedded chips or processors, and
non-information technology systems, such as telephone, voicemail and HVAC
systems, which do not properly recognize dates after December 31, 1999.
Concurrent with its company-wide assessment, the Company has developed and is in
the process of implementing its Y2K compliance program. The Company is utilizing
both internal and external resources to identify its mission critical systems
and, upon identification, to remediate or replace and test systems for Y2K
compliance.
The Company has identified its corporate financial reporting and radio
broadcasting operations (including advertising scheduling and billing systems)
systems as its mission critical systems to evaluate for Y2K compliance. The
Company has received Y2K compliance certificates from these application vendors
indicating that they are Y2K compliant. The Company is in the process of testing
these systems to ensure their Y2K compliance. In addition, the Company had
identified StarSystem(TM), its digital automation systems, as one of its
critical systems. Management of Capstar Broadcasting had determined that the
software underlying StarSystem(TM) is Y2K compliant, but is dependent on the
systems of the Company's telecommunications service providers, over which the
Company has no control. The Company has been assured by its vendors that the
Company's other digital automation systems are Y2K compliant. The Company has
tested substantially all of these systems to ensure their Y2K compliance.
The list of the Company's mission critical systems may be expanded upon
completion of the Company's inventory and assessment. As part of its acquisition
and consolidation strategy, the Company also assesses and, as necessary,
remediates or replaces the systems of acquired companies and stations with Y2K
compliant systems.
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<PAGE> 17
THIRD PARTY RELATIONSHIPS: In addition to identifying, assessing and
remediating or replacing its mission critical systems, the Company continues to
assess its exposure from external sources to Y2K. The Company relies on third
party providers for key services such as telecommunications and utilities.
Interruption of these services could, in management's view, have a material
adverse impact on the operations of the Company. The ability of third parties
with which the Company does business to adequately address their Y2K issues is
outside of the Company's control. Therefore, there can be no assurance that the
failure of such third parties to adequately address their Y2K issues will not
have a material adverse effect on the Company's business, financial condition,
cash flows and results of operations. The Company has sent questionnaires to
many of its third party providers, and continues to do so, asking them to update
the Company on the status of their Y2K compliance. Until all questionnaires are
returned and reviewed, the Company will be unable to fully assess the potential
for disruption in its programming and operations arising from this third party
risk. If the Company does not receive reasonable assurance regarding Y2K
compliance from any provider of these services, the Company will then develop
contingency plans, to the extent possible, to address its exposure.
COSTS: Costs specifically associated with the Company's Y2K efforts are
currently expected to be approximately $1.3 million, of which $850 thousand has
been incurred to date. These cost estimates are subject to change once the
Company has fully assessed its systems and as responses are obtained from third
party vendors and service providers. Any change in cost may be material. Funding
of these costs is anticipated to come from cash flows generated by business
operations and/or borrowings under the Company's credit facilities.
RISKS: The Company is in the process of identifying the most reasonably
likely worst case scenarios that may affect its operations due to Y2K
noncompliance of the Company's systems or the systems of third parties.
Initially, the Company believes that the failure of its radio broadcast systems
and the temporary loss of power at some of its stations due to Y2K noncompliance
are the most reasonably likely worst case scenarios. Many of the Company's
stations and transmitter sites currently have on-site generators in the event of
power outages. As part of the Company's capital improvement program, management
has begun installation of generators at many of its remaining stations and
transmitter sites. The Company believes that the upgrade of the hardware on its
existing radio broadcast systems and the installation of generators at many of
its stations will resolve possible material disruptions in the business
operations of the Company that would result from such risks. The Company may
identify additional worst case scenarios once it has fully assessed its mission
critical systems and obtained responses from the remaining third party vendors
and service providers.
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 the Y2K issue. Management
presently believes, however, that the Company is taking appropriate steps to
assess and control its Y2K issues. The Company cannot guarantee that there will
be no Y2K issues in spite of these efforts. If the Company does not complete all
phases of its Y2K compliance program and remediations or replacements are not
made, are not completed on time, or are insufficient to prevent systems failures
or other disruptions, the Y2K issue could have a material adverse impact on the
Company's results of operations and financial condition.
CONTINGENCY PLANS: The Company has begun to develop contingency plans
to mitigate the possible disruption in business operations that may result from
the Company's systems or the systems of third parties that are not Y2K
compliant. The Company has not finished the contingency planning phase. The
Company is continually assessing the status of completion of its Year 2000
compliance program and, as necessary, will determine the level of contingency
plans necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Capstar Communications has not entered into derivative financial
instruments, derivative commodity instruments or other similar instruments.
17
<PAGE> 18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On August 29, 1997, two lawsuits were commenced against SFX Broadcasting,
Inc. and its directors in the Court of Chancery of the State of Delaware (New
Castle County). The plaintiffs in the lawsuits are Harbor Finance Partners (C.A.
No. 15891) and Steven Lieberman (C.A. No. 15901). The complaints are identical
and allege that the consideration to be paid as a result of the SFX acquisition
by Capstar Broadcasting 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 acquisition by Capstar Broadcasting 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. 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 acquisition
by Capstar Broadcasting 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 consummation of the SFX acquisition by
Capstar Broadcasting (which has been consummated), completion of the
confirmatory discovery (which has been completed) and 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. The parties
have completed confirmatory discovery in connection with the settlement. The
parties expect to submit the settlement documents soon to the court for its
approval. However, there can be no assurance that the court will approve the
settlement.
On July 13, 1998, Noddings Investment Group, Inc. and Noddings Warrant
Limited Partnership filed Civil Action No. 16538 in the Court of Chancery of the
State of Delaware in and for New Castle County against Capstar Communications.
Noddings alleges that Capstar Communications breached a March 23, 1994, Warrant
Agreement that Noddings contends requires Capstar Communications to permit
Noddings to exercise warrants in exchange for cash and shares of stock of SFX
Entertainment, Inc. Specifically, Noddings alleges that Capstar Communications
has violated the Warrant Agreement by permitting Noddings to receive cash in
exchange for its warrants, but refusing to convey shares of stock of SFX
Entertainment. In addition to suing on its own behalf, Noddings is seeking to
prosecute the action on behalf of a putative class comprised of all persons who
owned equivalent warrants on April 21, 1998 (the date immediately following the
record date of the distribution of stock of SFX Entertainment to holders of the
stock of SFX) and their transferees and successors in interest. Noddings has
requested that the Court:
o declare that on the exercise of its warrants Capstar Communications
transmit to plaintiffs and members of the class that it seeks to
represent $22.3725 in cash per warrant and 0.2983 shares of common
stock of SFX Entertainment per warrant,
o require Capstar Communications to pay 0.2983 shares of common stock of
SFX Entertainment per warrant and, (if not previously paid) $22.3725
in cash, to any putative class member that has exercised or exercises
warrants after April 20, 1998,
o in the alternative, award plaintiffs and members of the putative class
monetary damages in an amount to be determined at trial, and
o award costs and attorneys' fees
In March 1999, the court issued an opinion dismissing two of Noddings' counts
and granted summary judgment in favor of Noddings on one count. The court held
that Noddings is entitled to 0.2983 shares of SFX Entertainment, Inc. stock per
warrant. Both parties have filed appellate briefs with the Supreme Court of the
State of Delaware.
Capstar Communications is also involved in various other claims and lawsuits
which are generally incidental to its business. Capstar Communications is
vigorously contesting all of these matters and believes that the ultimate
resolution of these matters and those mentioned above will not have a material
adverse affect on its consolidated financial position or results of operation.
See Part 1 Item 1 Note 4 to the June 30, 1999 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 March 31, 1999,
of SBI Holding Corporation, the sole stockholder of Capstar Communications, SBI
Holding Corporation approved an amendment and restatement of Capstar
Communication's certificate of incorporation.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Certificate of Amended and Restated
Incorporation of Capstar Communications.*
27.1 Financial Data Schedule.*
</TABLE>
- ---------------
* Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Capstar Communications during the three
months ended June 30, 1999.
19
<PAGE> 20
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: August 13, 1999
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of
Capstar Communications.*
27.1 Financial Data Schedule.*
</TABLE>
- ------------------
* Filed herewith.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CAPSTAR COMMUNICATIONS, INC.
CAPSTAR COMMUNICATIONS, INC., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. This Amended and Restated Certificate of Incorporation amends and
restates the Corporation's original Certificate of Incorporation filed with the
Secretary of State on February 26, 1993 in the name of Capstar Media, Inc., and
thereafter amended.
2. This Amended and Restated Certificate of Incorporation was duly
adopted by the stockholders in accordance with the provisions of Sections 228,
242 and 245 of the General Corporation Law of the State of Delaware.
3. The text of the Certificate of Incorporation is hereby restated and
amended to read as herein set forth in full:
ARTICLE 1
NAME
The name of the Corporation is Capstar Communications, Inc. (the
"Corporation").
ARTICLE 2
REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware is 32 Loockerman Square, Suite L-100, Dover, County of Kent, Delaware
19904, and the name of the registered agent at such address is The Prentice-Hall
Corporation System, Inc.
ARTICLE 3
PURPOSES
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware, and by such
statement all lawful acts and activities shall be within the purposes of the
Corporation, except for express limitations, if any. The Corporation shall
possess and exercise all the powers and privileges granted by the General
Corporation Law of the State of Delaware, by any other law or by this Amended
and Restated Certificate of Incorporation, together
<PAGE> 2
with any powers incidental thereto as far as such powers and privileges are
necessary or convenient to the conduct, promotion, or attainment of the purposes
of the Corporation.
ARTICLE 4
CAPITAL STRUCTURE
The total number of shares of stock which the Corporation shall have
authority to issue is 10,210,000 shares, consisting of the following:
(a) 200,000 shares of Class A Common Stock, par value $.01 per
share (the "Class A Shares"); and
(b) 10,010,000 shares of Preferred Stock, par value $.01 per share
(the "Preferred Shares").
The designations, preferences, powers, qualifications, and special or
relative rights, or privileges of the capital stock of the Corporation shall be
as set forth in Article 5 and Article 6 below. In addition to the designations,
preferences, powers, qualifications and special or relative rights, or
privileges in Article 5 and Article 6 below, the Corporation has authorized and
outstanding its 125/8% Series E Cumulative Exchangeable Preferred Stock due
October 31, 2006 whose Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions Thereof is attached hereto as
Exhibit A.
ARTICLE 5
COMMON SHARES
Except as herein otherwise expressly provided in this Amended and
Restated Certificate of Incorporation, all Class A Shares shall be identical and
shall entitle the holders thereof to the same rights and privileges.
ARTICLE 6
PREFERRED SHARES
The Preferred Shares may be issued from time to time in one or more
series as may be determined by the Board of Directors. Subject to the provisions
of this Amended and Restated Certificate of Incorporation and this Article 6,
the Board of Directors is authorized to determine or alter the rights,
preferences, privileges, and restrictions granted to or imposed upon any wholly
unissued series of Preferred Shares and, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting any such additional series, to increase
or decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such additional series subsequent to the issue of
shares of that series. Authorized and unissued Preferred Shares may be issued
with such designations, voting
2
<PAGE> 3
powers, preferences, and relative, participating, optional or other special
rights, and qualifications, limitations and restrictions on such rights, as the
Board of Directors may authorize by resolutions duly adopted prior to the
issuance of any shares of a series of Preferred Shares. The number of authorized
Preferred Shares may be increased or decreased (but not below the number of
shares thereof then outstanding) by the affirmative vote of the holders of a
majority of the combined voting power of the outstanding Class A Common Shares,
without a vote of the holders of the Preferred Shares, or of any series thereof,
unless a vote of any such holders is required pursuant to the certificate or
certificates establishing the series of Preferred Shares. Any and all Preferred
Shares issued and for which full consideration has been paid or delivered shall
be deemed fully paid stock, and the holder thereof shall not be liable for any
further payment thereon.
ARTICLE 7
LIMITATION OF LIABILITY OF DIRECTORS
No director of the Corporation shall be personally liable to the
Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, that nothing contained in this Article 7
shall eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware or (iv) for any transaction from which the director
derived an improper personal benefit.
If the General Corporation Law of the State of Delaware is hereafter
amended to authorize the further elimination or limitation of the liability of a
director, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the General Corporation
Law of the State of Delaware, as so amended.
This Article 7 may not be amended or modified to increase the liability
of a director, or repealed, except upon the affirmative vote of the holders of
at least 75% of the combined voting power of the outstanding Class A Common
Shares. No such amendment, modification, or repeal shall apply to or have any
effect on the liability or alleged liability of any director of the Corporation
for or with respect to any acts or omissions of such director occurring prior to
such amendment, modification, or repeal.
ARTICLE 8
PARTICIPATION OF NON-CITIZENS
The following provisions are included for the purpose of ensuring that
control and management of the Corporation remains with citizens of the United
States and/or corporations formed under the laws of the United States or any of
the states of the United States, as required by the Communications Act of 1934,
as the same may be amended from time to time:
3
<PAGE> 4
(a) The Corporation shall not issue to (i) a person who is a
citizen of a country other than the United States; (ii) any entity organized
under the laws of a government other than the government of the United States or
any state, territory, or possession of the United States; (iii) a government
other than the government of the United States or of any state, territory, or
possession of the United States; or (iv) a representative of, or an individual
or entity controlled by, any of the foregoing (individually, an "Alien";
collectively, "Aliens") any shares of capital stock of the Corporation if such
issuance would result in the total number of shares of such capital stock held
or voted by Aliens exceeding 25% of (A) the total number of all shares of such
capital stock outstanding at any time and from time to time or (B) the total
voting power of all shares of such capital stock outstanding and entitled to
vote at any time and from time to time and shall not permit the transfer on the
books of the Corporation of any capital stock to any Alien that would result in
the total number of shares of such capital stock held or voted by Aliens
exceeding such 25% limits.
(b) No Alien or Aliens, individually or collectively, shall be
entitled to vote or direct or control the vote of more than 25% of (i) the total
number of all shares of capital stock of the Corporation outstanding at any time
and from time to time, or (ii) the total voting power of all shares of capital
stock of the Corporation outstanding and entitled to vote at any time and from
time to time.
(c) No Alien shall be qualified to act as an officer of the
Corporation and no more than one-fourth of the total number of directors of the
Corporation at any time may be Aliens.
(d) The Board of Directors shall have all powers necessary to
implement the provisions of this Article 8 and to ensure compliance with the
alien ownership restrictions (the "Alien Ownership Restrictions") of the
Communications Act of 1934, as amended, and the rules and regulations
promulgated thereunder, as the same may be amended from time to time
(collectively, the "Communications Act"), including, without limitation, the
power to prohibit the transfer of any shares of capital stock of the Corporation
to any Alien and to take or cause to be taken such action as it deems
appropriate to implement such prohibition.
(e) Without limiting the generality of the foregoing and
notwithstanding any other provision of this Amended and Restated Certificate of
Incorporation to the contrary, any shares of capital stock of the Corporation
determined by the Board of Directors to be owned beneficially by an Alien or
Aliens shall always be subject to redemption by the Corporation by action of the
Board of Directors, pursuant to Section 151 of the General Corporation Law of
the State of Delaware, or any other applicable provision of law, to the extent
necessary in the judgment of the Board of Directors to comply with the Alien
Ownership Restrictions. The terms and conditions of such redemption shall be as
follows:
(i) the redemption price of the shares to be redeemed
pursuant to this Article 8 shall be equal to the lower of (A) the fair
market value of the shares to be redeemed, as determined by the Board
of Directors in good faith, and (B) such Alien's purchase price for
such shares;
4
<PAGE> 5
(ii) the redemption price of such shares may be paid
in cash, securities or any combination thereof;
(iii) if less than all the shares held by Aliens are
to be redeemed, the shares to be redeemed shall be selected in any
manner determined by the Board of Directors to be fair and equitable;
(iv) at least 10 days' written notice of the
redemption date shall be given to the record holders of the shares
selected to be redeemed (unless waived in writing by any such holder),
provided that the redemption date may be the date on which written
notice shall be given to record holders if the cash or securities
necessary to effect the redemption shall have been deposited in trust
for the benefit of such record holders and subject to immediate
withdrawal by them upon surrender of the stock certificates for their
shares to be redeemed;
(v) from and after the redemption date, the shares to
be redeemed shall cease to be regarded as outstanding and any and all
rights of the holders in respect of the shares to be redeemed or
attaching to such shares of whatever nature (including without
limitation any rights to vote or participate in dividends declared on
stock of the same class or series as such shares) shall cease and
terminate, and the holders thereof thenceforth shall be entitled only
to receive the cash or securities payable upon redemption; and
(vi) such other terms and conditions as the Board of
Directors shall determine.
For purposes of this Article 8, the determination of beneficial ownership of
shares of capital stock of the Corporation shall be made pursuant to Rule 13d-3,
17 C.F.R. Section 240.13d-3, as amended from time to time, promulgated under the
Securities Exchange Act of 1934, as amended.
ARTICLE 9
MANAGEMENT OF THE CORPORATION
The following provisions relate to the management of the business and
the conduct of the affairs of the Corporation and are inserted for the purpose
of creating, defining, limiting, and regulating the powers of the Corporation
and its directors and stockholders:
(a) The business and affairs of the Corporation shall be
managed by and under the direction of the Board of Directors.
(b) The number of directors which shall constitute the whole
Board of Directors shall be fixed in accordance with the Bylaws.
(c) The Board of Directors shall have the power to make,
alter, amend, or repeal the Bylaws of the Corporation, except to the extent that
the Bylaws otherwise provide.
5
<PAGE> 6
(d) All corporate powers and authority of the Corporation
(except as at the time otherwise provided by statute, by this Amended and
Restated Certificate of Incorporation, or by the Bylaws) shall be vested in and
exercised by the Board of Directors.
(e) The stockholders and directors shall have the power, if
the Bylaws so provide, to hold their respective meetings within or without the
State of Delaware and may (except as otherwise required by statute) keep the
Corporation's books outside the State of Delaware, at such places as from time
to time may be designated by the Bylaws or the Board of Directors.
ARTICLE 10
AMENDMENTS
The Corporation reserves the right to amend or repeal any provisions
contained in this Amended and Restated Certificate of Incorporation at any time
in the manner now or hereafter prescribed in this Amended and Restated
Certificate of Incorporation and by the laws of the State of Delaware, and all
rights herein conferred upon stockholders are granted subject to such
reservation.
ARTICLE 11
REGULATORY COMPLIANCE
The Corporation shall not have the power or be authorized to do, nor
shall it have the power or be authorized to cause any act to be done, that would
cause it to be in violation of the Communications Act.
[Remainder of page intentionally left blank.]
6
<PAGE> 7
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be signed on this 31st day of March,
1999.
CAPSTAR COMMUNICATIONS, INC.
By: /s/ Kathy Archer
-----------------------------
Name: Kathy Archer
Title: Vice President
7
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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156,444
0
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