<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 000-22486
CAPSTAR COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
13-3649750
(I.R.S. Employer Identification Number)
600 CONGRESS AVENUE, SUITE 1400, AUSTIN, TEXAS 78701
(Address of principal executive offices, including zip code)
(512) 340-7800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (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 each of the issuer's classes
of common stock, as of the latest practicable date: As of October 31, 1999,
1,006 shares of Common Stock, par value $.01 per share, of Capstar
Communications, Inc. were outstanding. As of such date, there was no public
market for the Common Stock.
================================================================================
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999 (unaudited)........................................................ 3
Condensed Consolidated Statements of Operations for the three
months ended September 30, 1998, the period from July 1 to July
13, 1999 and the period from July 14 to September 30, 1999
(unaudited)........................................................................... 4
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 1998, the period from January 1 to
July 13, 1999 and the period from July 14 to September 30, 1999
(unaudited)........................................................................... 5
Condensed Consolidated Statement of Stockholder's Equity for the
nine months ended September 30, 1999 (unaudited)...................................... 6
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998, the period from January 1 to
July 13, 1999 and the period from July 14 to September 30, 1999
(unaudited)........................................................................... 7
Notes to Condensed Consolidated Financial Statements (unaudited)...................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 20
Item 2. Changes in Securities and Use of Proceeds........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders.................................. 20
Item 6. Exhibits and Reports on Form 8-K..................................................... 21
Signature............................................................................ 22
</TABLE>
As used in this Quarterly Report on Form 10-Q, unless the context otherwise
requires, (i) "AMFM" refers to AMFM Inc. (formerly Chancellor Media
Corporation), the parent company of Capstar Broadcasting, (ii) "Capstar
Broadcasting" refers to Capstar Broadcasting Corporation, an indirect
wholly-owned subsidiary of AMFM and the parent company of Capstar Partners who
owns all of the outstanding common stock of Capstar Partners, (iii) "Capstar
Communications" refers to Capstar Communications, Inc., an indirect subsidiary
of Capstar Radio, (iv) "Capstar Partners" refers to Capstar Broadcasting
Partners, Inc., (v) "Capstar Radio" refers to Capstar Radio Broadcasting
Partners, Inc., a direct wholly-owned subsidiary of Capstar Partners and (vi)
the "Company" collectively refers to Capstar Communications and its
subsidiaries.
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY SFX BROADCASTING, INC. AND SUBSIDIARIES)
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
PRE-MERGER POST-MERGER
DECEMBER 31, SEPTEMBER 30,
1998 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 11,391 $ 8,626
Accounts receivable, less allowance for doubtful accounts
of $4,511 in 1998 and $5,179 in 1999 ....................... 71,314 75,160
Other current assets .......................................... 1,660 3,940
----------- -----------
Total current assets .................................. 84,365 87,726
Property and equipment, net ..................................... 118,163 119,308
Intangibles assets, net ......................................... 3,323,486 3,559,736
Other assets .................................................... 627 772
----------- -----------
$ 3,526,641 $ 3,767,542
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses ......................... $ 21,308 $ 33,210
Current portion of long-term debt ............................. 372,903 333,379
Income taxes payable .......................................... 35,140 2,204
----------- -----------
Total current liabilities ............................. 429,351 368,793
Long-term debt, net of current portion .......................... 325,686 319,464
Deferred tax liabilities ........................................ 1,008,385 860,848
----------- -----------
Total liabilities ..................................... 1,763,422 1,549,105
----------- -----------
Commitments and contingencies
Redeemable preferred stock:
Redeemable series E cumulative exchangeable preferred stock,
par value $.01 per share, 4,150,000 shares authorized,
1,266,176 and 1,430,989 shares issued and outstanding,
respectively; liquidation preference of $133,944 and
$146,863, respectively ...................................... 148,669 169,281
Stockholder's equity:
Common stock, $.01 par value. 200,000 shares authorized; 1,006
shares issued and outstanding ............................... -- --
Paid-in capital ............................................... 1,613,968 2,063,384
Retained earnings (deficit) ................................... 582 (14,228)
----------- -----------
Total stockholder's equity ............................ 1,614,550 2,049,156
----------- -----------
$ 3,526,641 $ 3,767,542
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY SFX BROADCASTING, INC. AND SUBSIDIARIES)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1999
-------------------------
PRE-MERGER PRE-MERGER POST-MERGER
THREE MONTHS PERIOD FROM PERIOD FROM
ENDED JULY 1 TO JULY 14 TO
SEPTEMBER 30, JULY 13, SEPTEMBER 30,
1998 1999 1999
------------- ------------ -------------
<S> <C> <C> <C>
Gross revenues ................................... $ 107,436 $ 15,097 $ 105,398
Less agency commissions ........................ 10,702 1,534 10,496
--------- --------- ---------
Net revenues ........................... 96,734 13,563 94,902
--------- --------- ---------
Operating expenses:
Operating expenses, excluding
depreciation and amortization ................ 47,539 6,833 45,848
Depreciation, amortization, duopoly
integration costs and acquisition-related
costs ........................................ 23,204 3,175 49,681
Corporate general and administrative ........... 1,740 462 2,789
--------- --------- ---------
Operating income (loss) ..................... 24,251 3,093 (3,416)
--------- --------- ---------
Other (income) expense:
Interest expense................................ 14,377 1,898 11,739
Other .......................................... (265) -- (45)
--------- --------- ---------
Income (loss) before income taxes ........... 10,139 1,195 (15,110)
Income tax expense (benefit) ..................... 3,867 578 (882)
--------- --------- ---------
Net income (loss) ............................ 6,272 617 (14,228)
Dividends and accretion on preferred stock ....... 3,680 590 4,256
--------- --------- ---------
Net income (loss) attributable to common stock.. $ 2,592 $ 27 $ (18,484)
========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY SFX BROADCASTING, INC. AND SUBSIDIARIES)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
--------------------------- --------------------------------
PREDECESSOR COMPANY COMPANY COMPANY
PRE-MERGER PRE-MERGER PRE-MERGER POST-MERGER
FIVE MONTHS FOUR MONTHS PERIOD FROM PERIOD FROM
ENDED ENDED JANUARY 1, 1999 JULY 14, 1999
MAY 31, SEPTEMBER 30, TO JULY 13, TO SEPTEMBER 30,
1998 1998 1999 1999
----------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Gross revenues ........................................ $ 141,369 $ 143,675 $ 228,272 $ 105,398
Less agency commissions ............................. 16,692 14,440 22,449 10,496
--------- --------- --------- ---------
Net revenues ................................ 124,677 129,235 205,823 94,902
--------- --------- --------- ---------
Operating expenses:
Operating expenses, excluding
depreciation and amortization ..................... 78,235 64,089 108,766 45,848
Depreciation, amortization, duopoly
integration costs and acquisition-related costs ... 17,668 31,439 50,772 49,681
Corporate general and administrative ................ 3,069 2,333 5,522 2,789
Settlement of options and warrants .................. 74,199 -- -- --
Non-recurring and unusual charges,
including adjustments to broadcast
rights agreement .................................. 35,318 -- -- --
--------- --------- --------- ---------
Operating income (loss) .......................... (83,812) 31,374 40,763 (3,416)
--------- --------- --------- ---------
Other (income) expense:
Interest expense .................................... 31,564 21,323 28,775 11,739
Other ............................................... (352) (286) (31) (45)
--------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes .................... (115,024) 10,337 12,019 (15,110)
Income tax expense (benefit) .......................... 210 3,928 4,710 (882)
--------- --------- --------- ---------
Income (loss) from continuing operations ............ (115,234) 6,409 7,309 (14,228)
Discontinued operations:
Loss from operations to be distributed to
shareholders, net of taxes .......................... (99,389) -- -- --
--------- --------- --------- ---------
Net income (loss) ........................... (214,623) 6,409 7,309 (14,228)
Dividends and accretion on preferred stock ............ 17,264 6,083 8,365 4,256
--------- --------- --------- ---------
Net income (loss) attributable to common stock ...... $(231,887) $ 326 $ (1,056) $ (18,484)
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY SFX BROADCASTING, INC. AND SUBSIDIARIES)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
PRE-MERGER
--------------------------------------------------------------------
COMMON STOCK RETAINED TOTAL
---------------- PAID-IN EARNINGS STOCKHOLDER'S
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
----- ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998 ................ 1,006 $ -- $ 1,613,968 $ 582 $ 1,614,550
Dividends and accretion on preferred stock.... -- -- (474) (7,891) (8,365)
Capital contributions ........................ -- -- 42,427 -- 42,427
Dividends to parent .......................... -- -- (1,419) -- (1,419)
Net income ................................... -- -- -- 7,309 7,309
----- ------ ----------- ----------- -----------
Balances at July 13, 1999 .................... 1,006 $ -- $ 1,654,502 $ -- $ 1,654,502
===== ====== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
POST-MERGER
--------------------------------------------------------------------
COMMON STOCK RETAINED TOTAL
---------------- PAID-IN EARNINGS STOCKHOLDER'S
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Initial capitalization, July 14, 1999 ........ 1,006 $ -- $ 2,067,640 $ -- $ 2,067,640
Dividends and accretion on preferred stock.... -- -- (4,256) -- (4,256)
Net loss ..................................... -- -- -- (14,228) (14,228)
----- ------ ----------- ----------- -----------
Balances at September 30, 1999 ............... 1,006 $ -- $ 2,063,384 $ (14,228) $ 2,049,156
===== ====== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY SFX BROADCASTING, INC. AND SUBSIDIARIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
--------------------------- -----------------------------
PREDECESSOR COMPANY COMPANY COMPANY
PRE-MERGER PRE-MERGER PRE-MERGER POST-MERGER
FIVE MONTHS FOUR MONTHS PERIOD FROM PERIOD FROM
ENDED ENDED JANUARY 1, JULY 14, 1999
MAY 31, SEPTEMBER 30, TO JULY 13, TO SEPTEMBER 30,
1998 1998 1999 1999
----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Cash provided by (used by) continuing operations ................. $ (22,704) $ 61,489 $ 31,816 $ 31,196
Cash from operating activities of SFX Entertainment .............. 10,988 -- -- --
--------- --------- --------- ---------
Net cash provided by (used by) operating activities ................ (11,716) 61,489 31,816 31,196
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired ............................... -- (238,360) -- (15,443)
Proceeds from sale of assets ..................................... 4,692 109,091 -- --
Payments for pending acquisitions ................................ -- (2,778) -- (66)
Purchases of property and equipment .............................. (5,138) (5,227) (3,698) (2,261)
Other ............................................................ (215) (902) (4,141) 31
--------- --------- --------- ---------
Net cash used by investing activities .................... (661) (138,176) (7,839) (17,739)
Net cash used by investing activities of SFX
Entertainment ....................................... (397,681) -- -- --
--------- --------- --------- ---------
Net cash used by investing activities .................... (398,342) (138,176) (7,839) (17,739)
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds of long-term debt ....................................... -- 522,311 67,502 35,794
Payments on long-term debt ....................................... (141) (621,495) (91,359) (52,129)
Redemption of preferred stock .................................... -- (135,207) -- --
Net proceeds from issuance of common stock ....................... 17,137 314,510 -- --
Dividends on preferred stock ..................................... (2,459) (9,507) -- (7)
--------- --------- --------- ---------
Net cash provided by (used by) financing activities ...... 14,537 70,612 (23,857) (16,342)
Net cash provided by financing activities of SFX
Entertainment ....................................... 467,874 -- -- --
--------- --------- --------- ---------
Net cash provided by (used by) financing activities ...... 482,411 70,612 (23,857) (16,342)
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents ................... 72,353 (6,075) 120 (2,885)
Cash and cash equivalents at beginning of period ................... 24,686 15,857 11,391 11,511
Net increase in cash of SFX Entertainment .......................... (81,182) -- -- --
--------- --------- --------- ---------
Cash and cash equivalents at end of period ......................... $ 15,857 $ 9,782 $ 11,511 $ 8,626
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements include the accounts
of Capstar Communications and its direct and indirect wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation and, in the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial position,
results of operations and cash flows have been recorded. Interim period results
are not necessarily indicative of results to be expected for the year.
These financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in Capstar
Communications' Annual Report on Form 10-K for the year ended December 31, 1998.
The year-end consolidated balance sheet data was derived from the audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
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.
Certain reclassifications have been made to prior period condensed
consolidated financial statements to conform to the current period presentation.
2. AMFM MERGER
On July 13, 1999, AMFM acquired Capstar Broadcasting through the merger (the
"Merger") of a wholly-owned subsidiary of AMFM into Capstar Broadcasting, with
Capstar Broadcasting surviving as a wholly-owned subsidiary of AMFM. Capstar
Communications is an indirect subsidiary of Capstar Broadcasting. As a result of
the Merger, Capstar Communications became an indirect subsidiary of AMFM.
As a result of the Merger, all of the then outstanding shares of Capstar
Broadcasting common stock were converted, in a tax-free exchange, into 0.4955 of
a share of AMFM common stock, or approximately 53.6 million shares of AMFM
common stock in the aggregate. AMFM also assumed the outstanding options,
warrants and other equity rights in Capstar Broadcasting which represented up to
an additional 3.3 million shares of AMFM common stock.
AMFM accounted for its acquisition of Capstar Broadcasting as a purchase,
and purchase accounting adjustments, including goodwill, have been pushed down
and are reflected in the financial statements of Capstar Communications and its
subsidiaries for the period subsequent to July 13, 1999. The financial
statements for Capstar Communications for the periods ended prior to July 13,
1999 were prepared using Capstar Communications' historical basis of accounting
and are designated "Pre-Merger." The comparability of the operating results for
the Pre-Merger periods and the periods reflecting push-down accounting are
affected by the purchase accounting adjustments, including the amortization of
intangibles over a period of 15 years.
3. CLEAR CHANNEL MERGER AGREEMENT
On October 2, 1999, AMFM and Clear Channel Communications, Inc. ("Clear
Channel") entered into a definitive merger agreement. Under the terms of the
merger agreement, AMFM stockholders will receive 0.94 shares of Clear Channel
common stock, on a fixed exchange basis, for each share of AMFM common stock
held on the record date of the transaction. Pursuant to the Telecommunications
Act of 1996 and other regulatory guidelines, it is expected that, collectively,
Clear Channel and AMFM will need to divest approximately 100 radio stations to
obtain antitrust and Federal Communications Commission approval for the merger,
including stations owned by
8
<PAGE> 9
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Capstar Communications. Consummation of the merger is also subject to
stockholder approval by both companies and other conditions. Although there can
be no assurance, AMFM expects that the Clear Channel merger will be consummated
during the second half of 2000.
4. CHANGE IN LEGAL STRUCTURE AND REFINANCING
Through a series of related transactions, including capital contributions of
stock and mergers of subsidiaries, AMFM intends to combine the outstanding
bonds, bank indebtedness and preferred stock of its direct and indirect
subsidiaries into fewer entities (the "Reorganization"). After completion of the
Reorganization, Capstar Partners will be a wholly-owned subsidiary of Chancellor
Mezzanine Holdings Corporation (to be renamed AMFM Holdings Inc.), a
wholly-owned subsidiary of AMFM, and Capstar Communications will assume and/or
be liable for all of its remaining outstanding bonds, as well as the bonds and
bank indebtedness of Capstar Radio and Chancellor Media Corporation of Los
Angeles ("CMCLA"), an indirect subsidiary of AMFM, which will be combined with
Capstar Communications in the fourth quarter of 1999. The Reorganization also
includes the tender offer for the 10 3/4% Capstar Communications Senior
Subordinated Notes due 2006 and the possible exchange of the 12 5/8% Capstar
Communications Series E Cumulative Exchangeable Preferred Stock for 12 5/8%
Senior Subordinated Exchange Debentures due 2006. The Reorganization is expected
to be completed during the fourth quarter of 1999.
Also as part of the Reorganization, AMFM intends to refinance CMCLA's senior
credit facility and Capstar Broadcasting's credit facility with a new credit
facility. Several banks entered into a commitment letter with CMCLA on November
3, 1999 and agreed to provide Capstar Communications with a senior credit
facility. AMFM expects that Capstar Communications' senior credit facility will
be entered into in November 1999. Capstar Communications' senior credit facility
will include commitments for a revolving loan facility of $600,000 and a term
loan facility of $2,600,000. The proceeds of such facilities may be used to
repay the existing credit facilities of CMCLA and Capstar Broadcasting, to
repay, repurchase or redeem other debt and equity securities of AMFM and its
subsidiaries and for other general corporate purposes. Both the revolving loan
facility and the term loan facility of Capstar Communications will mature two
years after the date of Capstar Communications' senior credit facility. No
scheduled amortization of principal will be required prior to maturity. Both the
revolving loan facility and the term loan facility of Capstar Communications
will bear interest at fluctuating rates based upon the prime rate or the
eurodollar rate. The margin above the applicable prime rate or the eurodollar
rate will be determined by reference to Capstar Communications' ratio of
consolidated debt to consolidated earnings before interest, taxes, depreciation
and amortization, provided that such margins will be fixed at .50% and 1.50%,
respectively, until delivery of Capstar Communications' financial statements for
the fiscal quarter ending March 31, 2000, and capped at .50% and 1.50%,
respectively, thereafter so long as the Clear Channel merger agreement has not
been terminated. Capstar Communications' senior credit facility will be
guaranteed by most of the direct and indirect subsidiaries, other than Capstar
Communications, of Chancellor Mezzanine Holdings Corporation ("Chancellor
Mezzanine"), a direct subsidiary of AMFM, and will be secured by (a) a
non-recourse pledge of the stock of Chancellor Mezzanine, (b) a recourse pledge
of the stock of Capstar Partners, (c) a recourse pledge of the stock of Capstar
Communications and most of the subsidiaries of Capstar Communications, and (d) a
pledge of the common stock of Lamar Advertising Company, an equity investment
currently held by AMFM, to be held by Capstar Communications after the
Reorganization. Capstar Communications' senior credit facility will be subject
to affirmative and negative covenants, including (i) limitations on
indebtedness, mergers, acquisitions and dispositions of assets, dividends, stock
repurchases, other restricted payments, investments and liens, and (ii)
financial maintenance covenants. The merger of AMFM and Clear Channel will be an
event of default under Capstar Communications' senior credit facility and will
require refinancing at the effective time of the merger.
5. PENDING TRANSACTIONS
On February 20, 1998, AMFM entered into an agreement to acquire, over a
period of three years, eleven radio stations from Capstar Communications for an
aggregate purchase price of $637,500. Pursuant to this agreement, the
acquisition of KODA-FM was completed on May 29, 1998 for $143,250. On February
1, 1999, AMFM began operating WKNR-AM in Cleveland, a station owned by Capstar
Communications, under a time brokerage agreement. The February 20, 1998 purchase
agreement and the WKNR-AM time brokerage agreement will be terminated upon the
completion of the Reorganization described in Note 4.
On August 30, 1999, AMFM entered into an agreement with Cox Radio, Inc.
("Cox") to acquire KOST-FM and KFI-AM in Los Angeles plus $3,000 in cash payable
by Cox in exchange for 13 of its radio stations including CMCLA stations WEDR-FM
in Miami and WFOX-FM in Atlanta, Capstar Radio stations WEFX-FM, WNLK-AM,
WKHL-FM and WSTC-AM in Stamford/Norwalk, and Capstar
9
<PAGE> 10
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Communications stations WFYV-FM, WAPE-FM, WBWL-AM, WKQL-FM, WMXQ-FM and WOKV-AM
in Jacksonville and WPLR-FM and the local sales rights of a 14th Capstar
Communications station, WYBC-FM in New Haven. AMFM began programming KOST-FM and
KFI-AM in Los Angeles and Cox began programming the 13 AMFM stations under time
brokerage agreements effective October 1, 1999. Although there can be no
assurance, AMFM expects that the Cox exchange will be consummated in the first
quarter of 2000.
On September 14, 1999, AMFM entered into an agreement to acquire radio
station KQOD-FM in Stockton, California from Carson Group, Inc. for a purchase
price of $5,150 payable in cash. KQOD-FM will become part of the Capstar
Communications station portfolio. AMFM began programming KQOD-FM under a local
marketing agreement on September 20, 1999. Although there can be no assurance,
AMFM expects to complete the acquisition in the fourth quarter of 1999.
6. CONTINGENCIES
On August 29, 1997, two lawsuits were commenced against Capstar
Communications (formerly SFX Broadcasting, Inc.) and its directors in the Court
of Chancery of the State of Delaware (New Castle County). The plaintiffs in the
lawsuits are Harbor Finance Partners (C.A. No. 15891) and Steven Lieberman (C.A.
No. 15901). The complaints are identical and allege that the consideration to be
paid as a result of the acquisition of Capstar Communications to the holders of
the class A common stock of Capstar Communications was unfair and that the
individual defendants breached their fiduciary duties. Both complaints sought to
have the actions certified as class actions and sought to enjoin the acquisition
of Capstar Communications by Capstar Broadcasting or, in the alternative,
monetary damages. The parties agreed that the lawsuits could be consolidated in
one action entitled In Re SFX Broadcasting, Inc. Shareholders Litigation (C.A.
No. 15891). On March 17, 1998, the parties entered into a Memorandum of
Understanding, pursuant to which the parties reached an agreement providing for
a settlement of the lawsuit. Pursuant to the settlement, Capstar Communications
agreed not to seek an amendment to the Capstar Communications merger agreement
with Capstar Broadcasting to reduce the consideration to be received by the
stockholders of Capstar Communications in the Capstar Communications acquisition
in order to offset the indemnity obligations of SFX Entertainment, Inc., a
former subsidiary of Capstar Communications. The settlement also provides for
Capstar Communications to pay plaintiff's counsel an aggregate of $950,
including all fees and expenses as approved by the court. The settlement is
conditioned on court approval. Pursuant to the settlement, the defendants have
denied, and continue to deny, that they have acted in bad faith or breached any
fiduciary duty. The parties expect to submit the settlement document soon to the
court for its approval. There can be no assurance that the court will approve
the settlement.
On July 13, 1998, Noddings Investment Group, Inc. and Noddings Warrant Limited
Partnership filed Civil Action No. 16538 in the Court of Chancery of the State
of Delaware in and for New Castle County against Capstar Communications.
Noddings, which allegedly holds 415,900 warrants, alleges that Capstar
Communications breached a warrant agreement that Noddings contends requires
Capstar Communications to permit Noddings, after payment of an $11.50 purchase
price, to exercise warrants in exchange for cash and shares of stock of SFX
Entertainment, Inc., a former subsidiary of Capstar Communications.
Specifically, Noddings alleges that Capstar Communications has violated the
warrant agreement by permitting Noddings to receive cash in exchange for its
warrants, but refusing to convey shares of stock of SFX Entertainment. In March
1999, the Chancery Court held that Noddings is entitled to 0.2983 shares of SFX
Entertainment, Inc. stock per warrant in addition to the $22.3725 in cash, after
Noddings' payment of the $11.50 purchase price. Capstar Communications appealed
to the Supreme Court of the State of Delaware. In September 1999, the Supreme
Court affirmed the Chancery Court's decision.
Capstar Communications is also involved in various other claims and lawsuits
which are generally incidental to its business. Capstar Communications is also
vigorously contesting all of these matters and believes that the ultimate
resolution of these matters and those mentioned above will not have a material
adverse effect on its consolidated financial position or results of operations.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of all fiscal
years beginning after
10
<PAGE> 11
CAPSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY SFX BROADCASTING, INC. AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
June 15, 2000. Management does not anticipate that this statement will have a
material impact on Capstar Communications' consolidated financial statements.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Capstar Communications is a large radio broadcaster in the United States
operating primarily in mid-sized markets. As of November 1, 1999, Capstar
Communications owned and operated, programmed or sold air time for 112 radio
stations (83 FM and 29 AM) in 27 markets, including two radio stations
programmed under time brokerage ("LMA") or joint sales agreements.
On July 13, 1999, AMFM acquired Capstar Broadcasting through the merger (the
"Merger") of a wholly-owned subsidiary of AMFM into Capstar Broadcasting, with
Capstar Broadcasting surviving as a wholly-owned subsidiary of AMFM. Capstar
Communications is an indirect subsidiary of Capstar Broadcasting. The
acquisition of Capstar Broadcasting by AMFM resulted in a change of control of
Capstar Broadcasting and Capstar Communications. As a result of the Merger,
Capstar Communications became an indirect subsidiary of AMFM.
As a result of the Merger, all of the then outstanding shares of Capstar
Broadcasting common stock were converted, in a tax-free exchange, into 0.4955 of
a share of AMFM common stock, or approximately 53.6 million shares of AMFM
common stock in the aggregate. AMFM also assumed the outstanding options,
warrants and other equity rights in Capstar Broadcasting which represented up to
an additional 3.3 million shares of AMFM common stock.
AMFM accounted for its acquisition of Capstar Broadcasting as a purchase,
and purchase accounting adjustments, including goodwill, have been pushed down
and are reflected in the financial statements of Capstar Communications and its
subsidiaries for the period subsequent to July 13, 1999. The financial
statements for Capstar Communications for the periods ended prior to July 13,
1999 were prepared using Capstar Communications' historical basis of accounting.
The comparability of the operating results for the pre-merger periods and the
periods reflecting push-down accounting are affected by the purchase accounting
adjustments, including the amortization of intangibles over a period of 15
years.
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 lower in the first
and third calendar quarters and higher 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.
CLEAR CHANNEL MERGER
On October 2, 1999, AMFM and Clear Channel Communications, Inc. ("Clear
Channel") entered into a definitive merger agreement. Under the terms of the
merger agreement, AMFM stockholders will receive 0.94 shares of Clear Channel
common stock, on a fixed exchange basis, for each share of AMFM common stock
held on the record date of the transaction. Pursuant to the Telecommunications
Act of 1996 and other regulatory guidelines, it is expected that, collectively,
Clear Channel and AMFM will need to divest approximately 100 radio stations to
obtain antitrust and Federal Communications Commission approval for the merger,
including stations owned by Capstar Communications. Consummation of the merger
is also subject to stockholder approval by both companies and other conditions.
Although there can be no assurance, AMFM expects that the Clear Channel merger
will be consummated during the second half of 2000.
12
<PAGE> 13
RESULTS OF OPERATIONS
The following table presents summary historical condensed consolidated
financial data of Capstar Communications for the three months and nine months
ended September 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.
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues .............................. $ 96,734 $ 108,465 $ 253,912 $ 300,725
Operating expenses, excluding depreciation
and amortization ........................ 47,539 52,681 142,324 154,614
Depreciation, amortization, duopoly
integration costs and acquisition-related
costs ................................... 23,204 52,856 49,107 100,453
Corporate general and administrative ...... 1,740 3,251 5,402 8,311
Settlement of options and warrants ........ -- -- 74,199 --
Non-recurring and unusual charges,
including adjustments to broadcast rights
agreement................................ -- -- 35,318 --
--------- --------- --------- ---------
Operating income (loss) ................... 24,251 (323) (52,438) 37,347
Interest expense .......................... 14,377 13,637 52,887 40,514
Net income (loss) ......................... 6,272 (13,611) (208,214) (6,919)
</TABLE>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net revenues for the three months ended September 30, 1999 increased 12.1%
to $108.5 million compared to $96.7 million for the third quarter of 1998.
Operating expenses excluding depreciation and amortization increased 10.8% to
$52.7 million for the three months ended September 30, 1999 compared to $47.5
million for the three months ended September 30, 1998. The increase in net
revenues and operating expenses was attributable to the growth in the sale of
time to local and national advertisers and overall operational improvements, as
evidenced by the increase in Capstar Communications' direct operating margin
from 50.9% for the three months ended September 30, 1998 to 51.4% for the three
months ended September 30, 1999.
Depreciation and amortization for the three months ended September 30, 1999
increased 127.8% to $52.9 million compared to $23.2 million for the same period
in 1998 due to the effects of purchase accounting adjustments, including
goodwill and related amortization, that were pushed down as a result of the
Merger and are reflected in the financial statements of Capstar Communications
and its subsidiaries for the period subsequent to July 13, 1999.
Corporate general and administrative expenses for the three months ended
September 30, 1999 increased 86.8% to $3.3 million compared to $1.7 million for
the third quarter of 1998 primarily as a result of higher salary expense for
additional staffing.
As a result of the above factors, Capstar Communications incurred an
operating loss of $0.3 million for the three months ended September 30, 1999
compared to operating income of $24.3 million for the third quarter of 1998.
Interest expense for the three months ended September 30, 1999 decreased
5.1% to $13.6 million compared to $14.4 million in the same period in 1998
primarily due to lower overall levels of indebtedness.
As a result of the above factors, Capstar Communications incurred a net loss
of $13.6 million for the three months ended September 30, 1999 compared to net
income of $6.3 million for the three months ended September 30, 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Net revenues for the nine months ended September 30, 1999 increased 18.4% to
$300.7 million compared to $253.9 million for the nine months ended September
30, 1998. Operating expenses excluding depreciation and amortization increased
8.6% to $154.6 million for the nine months ended September 30, 1999 compared to
$142.3 million for the nine months ended September 30, 1998. The increase in net
revenues and operating expenses was attributable to growth in the sale of time
to local and national advertisers and overall operational improvements, as
evidenced by the increase in Capstar Communications' direct operating margin
from 43.9% for the nine months ended September 30, 1998 to 48.6% for the nine
months ended September 30, 1999.
13
<PAGE> 14
Depreciation and amortization for the nine months ended September 30, 1999
increased 104.6% to $100.5 million compared to $49.1 million for the same period
in 1998 due to the effects of purchase accounting adjustments, including
goodwill and related amortization, that were pushed down as a result of the
Merger and are reflected in the financial statements of Capstar Communications
and its subsidiaries for the period subsequent to July 13, 1999.
Corporate general and administrative expenses for the nine months ended
September 30, 1999 increased 53.9% to $8.3 million compared to $5.4 million for
the nine months ended September 30, 1998 primarily as a result of higher salary
expense for additional staffing. The settlement of options and warrants expense
of $74.2 million for the nine months ended September 30, 1998 related to the
settlement of all outstanding options and warrants in connection with the
acquisition of Capstar Communications by Capstar Broadcasting.
Capstar Communications recorded non-recurring and unusual charges of $35.3
million during the nine months ended September 30, 1998 which consisted of (i)
$5.6 million of compensation expenses related to bonuses and options issued,
(ii) $1.4 million related to the settlement of lawsuits, (iii) $0.5 million
related to the increase in value of certain stock appreciation rights, (iv)
$16.6 million related to the consent solicitations from the holders of the
10 3/4% Capstar Communications Senior Subordinated Notes due 2006 and the
holders of the Capstar Communications Series E Cumulative Exchangeable Preferred
Stock in connection with the spin-off of the stock of SFX Entertainment, Inc.
from Capstar Communications in April 1998, (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 of the stock of SFX Entertainment, Inc. and (vi)
$5.0 million related to a brokers contract due upon a change in control.
As a result of the above factors, Capstar Communications realized
operating income of $37.3 million for the nine months ended September 30, 1999
compared to operating loss of $52.4 million for the nine months ended September
30, 1998.
Interest expense for the nine months ended September 30, 1999 decreased
23.4% to $40.5 million compared to $52.9 for the nine months ended September
30, 1998 primarily due to lower overall levels of indebtedness.
As a result of the above factors, Capstar Communications incurred a net loss
of $6.9 million for the nine months ended September 30, 1999 compared to a net
loss of $208.2 million for the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Capstar Communications historically has generated sufficient cash flow from
operations to finance its existing operational requirements and debt service
requirements, and Capstar Communications anticipates that this will continue to
be the case. Operating activities provided net cash of $49.8 million and $63.0
million for the nine months ended September 30, 1998 and 1999, respectively.
Capstar Communications has used the proceeds of bank debt and private and public
debt and equity offerings, supplemented by cash flow from operations not
required to fund operational requirements and debt service, to fund
implementation of its acquisition strategy.
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.
Outstanding Debt and Preferred Stock
The Merger resulted in a change of control with respect to the outstanding
indebtedness (other than Capstar Broadcasting's credit facility) and preferred
stock of Capstar Communications and its subsidiaries, and Capstar Communications
offered 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. Capstar Communications made offers to
purchase its outstanding notes and preferred stock and closed the acquisition of
accepted tenders in August and September 1999. Capstar
14
<PAGE> 15
Communications paid for the change of control offers out of cash from operating
activities and Capstar Broadcasting's credit facility. Capstar Communications
repurchased the following notes and preferred stock upon completion of the
change of control offers:
o $0.3 million, or 0.1%, of the aggregate outstanding principal amount
of the 10 3/4% Capstar Communications Senior Subordinated Notes due
2006;
o $0.1 million, or 17.6%, of the aggregate outstanding principal amount
of the 11 3/8% Capstar Communications Senior Subordinated Notes due
2000; and
o 73 shares, or 0.005%, of the outstanding shares of 12 5/8% Capstar
Communications Series E Cumulative Exchangeable Preferred Stock.
Remaining amounts of outstanding debt and preferred stock are detailed
below.
10 3/4% Capstar Communications Notes and 11 3/8% Capstar Communications
Notes. Capstar Communications has outstanding its 10 3/4% Senior Subordinated
Notes due 2006 and its 11 3/8% Senior Subordinated Notes due 2000. Capstar
Communications pays interest of approximately $15.8 million on its 10 3/4%
Senior Subordinated Notes due 2006 semi-annually on May 15 and November 15 of
each year and pays interest of approximately $27,000 on its 11 3/8% Senior
Subordinated Notes due 2000 semi-annually on April 1 and October 1 of each year.
As of October 31, 1999, the outstanding principal balances were approximately
$293.8 million and $0.5 million on the 10 3/4% Capstar Communications Senior
Subordinated Notes due 2006 and the 11 3/8% Capstar Communications Senior
Subordinated Notes due 2000, respectively. On November 12, 1999, Capstar
Communications completed a cash tender offer to acquire all of its outstanding
10 3/4% Senior Subordinated Notes due 2006. Approximately $293.6 million in
aggregate principal amount of the notes, representing 99.9% of the outstanding
notes, was accepted for payment for an aggregate repurchase cost of $327.8
million plus accrued interest of $15.2 million. The repurchase was funded with
borrowings under the senior credit facility of Chancellor Media Corporation of
Los Angeles ("CMCLA"), an indirect subsidiary of AMFM.
12 5/8% Capstar Communications Series E Preferred Stock. Capstar
Communications has outstanding its 12 5/8% Series E Cumulative Exchangeable
Preferred Stock. Capstar Communications is required to pay dividends on its
12 5/8% Series E Cumulative Exchangeable Preferred Stock semi-annually on
January 15 and July 15 of each year at the rate per share of $12.625 per year.
Until January 15, 2002, Capstar Communications may pay dividends either in cash
or in additional shares of its 12 5/8% Series E Cumulative Exchangeable
Preferred Stock. Since July 15, 1998, Capstar Communications has paid the
required dividend in additional shares. However, Capstar Communications intends
to pay all future dividends in cash. As of October 31, 1999, 1,430,989 shares of
the 12 5/8% Capstar Communications Series E Cumulative Exchangeable Preferred
Stock were issued and outstanding with a liquidation preference equal to $100.00
per share plus accrued and unpaid dividends. On October 12, 1999, Capstar
Communications commenced a consent solicitation to modify certain timing
restrictions on its ability to exchange all shares of its 12 5/8% Series E
Cumulative Exchangeable Preferred Stock for its 12 5/8% Senior Subordinated
Exchange Debentures due 2006. If at least a majority of the holders consent to
the proposed modifications, then consenting holders of the 12 5/8% Capstar
Communications Series E Cumulative Exchangeable Preferred Stock will be entitled
to receive consent payments of $0.25 per share of 12 5/8% Capstar Communications
Series E Cumulative Exchangeable Preferred Stock. If the requisite consents are
obtained and certain other conditions are satisfied, Capstar Communications
intends to exchange the outstanding shares of its 12 5/8% Series E Cumulative
Exchangeable Preferred Stock for its 12 5/8% Senior Subordinated Exchange
Debentures due 2006 in November 1999.
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% Capstar Communications Senior Subordinated Notes due 2006 and the
certificate of designation governing the 12 5/8% Capstar Communications Series E
Cumulative Exchangeable Preferred Stock. As of September 30, 1999, Capstar
Communications had borrowings of approximately $331.2 million outstanding under
the loan with a weighted average effective interest rate of 7.13% per annum.
During the nine months ended September 30, 1999, Capstar Communications paid
approximately $19.0 million in interest to Capstar Radio.
15
<PAGE> 16
Change in Legal Structure and Refinancing
Through a series of related transactions, including capital contributions of
stock and mergers of subsidiaries, AMFM intends to combine the outstanding
bonds, bank indebtedness and preferred stock of its direct and indirect
subsidiaries into fewer entities (the "Reorganization"). After completion of the
Reorganization, Capstar Partners will be a wholly-owned subsidiary of Chancellor
Mezzanine Holdings Corporation ("Chancellor Mezzanine", to be renamed AMFM
Holdings Inc.), a wholly-owned subsidiary of AMFM, and Capstar Communications
will assume and/or be liable for all of its remaining outstanding bonds, as well
as the bonds and bank indebtedness of Capstar Radio and CMCLA, which will be
combined with Capstar Communications in the fourth quarter of 1999. The
Reorganization also includes the tender offer for the 10 3/4% Capstar
Communications Senior Subordinated Notes due 2006 and the possible exchange of
the 12 5/8% Capstar Communications Series E Cumulative Exchangeable Preferred
Stock for 12 5/8% Capstar Communications Senior Subordinated Debentures due 2006
described above. The Reorganization is expected to be completed during the
fourth quarter of 1999.
Also as part of the Reorganization, AMFM intends to refinance CMCLA's senior
credit facility and Capstar Broadcasting's credit facility with a new credit
facility. Several banks entered into a commitment letter with CMCLA on November
3, 1999 and agreed to provide Capstar Communications with a senior credit
facility. AMFM expects that Capstar Communications' senior credit facility will
be entered into in November 1999. Capstar Communications' senior credit facility
will include commitments for a revolving loan facility of $600.0 million and a
term loan facility of $2.6 billion. The proceeds of such facilities may be used
to repay the existing credit facilities of CMCLA and Capstar Broadcasting, to
repay, repurchase or redeem other debt and equity securities of AMFM and its
subsidiaries and for other general corporate purposes. Both the revolving loan
facility and the term loan facility of Capstar Communications will mature two
years after the date of Capstar Communications' senior credit facility. No
scheduled amortization of principal will be required prior to maturity. Both the
revolving loan facility and the term loan facility of Capstar Communications
will bear interest at fluctuating rates based upon the prime rate and the
eurodollar rate. The margin above the applicable prime rate or the eurodollar
rate will be determined by reference to Capstar Communications' ratio of
consolidated debt to consolidated earnings before interest, taxes, depreciation
and amortization, provided that such margins will be fixed at .50% and 1.50%,
respectively, until delivery of Capstar Communications' financial statements for
the fiscal quarter ending March 31, 2000, and capped at .50% and 1.50%,
respectively, thereafter so long as the Clear Channel merger agreement has not
been terminated. Capstar Communications' senior credit facility will be
guaranteed by most of the direct and indirect subsidiaries, other than Capstar
Communications, of Chancellor Mezzanine, and will be secured by (a) a
non-recourse pledge of the stock of Chancellor Mezzanine, (b) a recourse pledge
of the stock of Capstar Partners, (c) a recourse pledge of the stock of Capstar
Communications and most of the subsidiaries of Capstar Communications, and (d) a
pledge of the common stock of Lamar Advertising Company, an equity investment
currently held by AMFM, to be held by Capstar Communications after the
Reorganization. Capstar Communications' senior credit facility will be subject
to affirmative and negative covenants, including (i) limitations on
indebtedness, mergers, acquisitions and dispositions of assets, dividends, stock
repurchases, other restricted payments, investments and liens, and (ii)
financial maintenance covenants. The merger of AMFM and Clear Channel will be an
event of default under Capstar Communications' senior credit facility and will
require refinancing at the effective time of the merger.
Pending Transactions
On February 20, 1998, AMFM entered into an agreement to acquire, over a
period of three years, eleven radio stations from Capstar Communications for an
aggregate purchase price of $637.5 million. Pursuant to this agreement, the
acquisition of KODA-FM was completed on May 29, 1998 for $143.3 million. AMFM
began programming the remaining ten stations under time brokerage agreements on
May 29, 1998. On February 1, 1999, AMFM began operating WKNR-AM in Cleveland, a
station owned by Capstar Communications, under a time brokerage agreement.
During the nine months ended September 30, 1999, CMCLA paid Capstar Broadcasting
approximately $37.1 million in LMA fees. The February 20, 1998 purchase
agreement and the WKNR-AM time brokerage agreement will be terminated upon the
completion of the pending Reorganization.
On August 30, 1999, AMFM entered into an agreement with Cox Radio, Inc.
("Cox") to acquire KOST-FM and KFI-AM in Los Angeles plus $3.0 million in cash
payable by Cox in exchange for 13 of its radio stations including CMCLA stations
WEDR-FM in Miami and WFOX-FM in Atlanta, Capstar Radio stations WEFX-FM,
WNLK-AM, WKHL-FM and WSTC-AM in Stamford/Norwalk, and Capstar Communications
stations WFYV-FM, WAPE-FM, WBWL-AM, WKQL-FM, WMXQ-FM and WOKV-AM in Jacksonville
and WPLR-FM and the local sales rights of a 14th Capstar Communications station,
WYBC-FM in New Haven. AMFM began programming KOST-FM and KFI-AM in Los Angeles
and Cox began programming the 13 AMFM stations under time brokerage agreements
effective October 1, 1999. Although there can be no assurance, AMFM expects that
the Cox exchange will be consummated in the first quarter of 2000.
16
<PAGE> 17
On September 14, 1999, AMFM entered into an agreement to acquire radio
station KQOD-FM in Stockton, California from Carson Group, Inc. for a purchase
price of $5.2 million payable in cash. KQOD-FM will become part of the Capstar
Communications station portfolio. AMFM began programming KQOD-FM under a local
marketing agreement on September 20, 1999. Although there can be no assurance,
AMFM expects to complete the acquisition in the fourth quarter of 1999.
Consummation of each of the transactions discussed above is subject to
various conditions, including approval from the FCC, in the case of radio
broadcast station transactions, and the expiration or early termination of any
waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976. AMFM believes that such conditions will be satisfied in the ordinary
course, but there can be no assurance that this will be the case.
The principal liquidity requirements of Capstar Communications and its
subsidiaries (in addition to debt service and tax liabilities) will be for
working capital, general corporate purposes, capital expenditures and pending
acquisitions, and as opportunities arise, to acquire additional radio stations
or complementary broadcast-related businesses. Capstar Communications believes
that disposition of certain assets and cash from operating activities, together
with available revolving credit borrowings under Capstar Broadcasting's credit
facility, 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 ongoing basis
and has had, and continues to have, preliminary discussions concerning the
purchase of additional stations and other assets. Capstar Communications expects
that in connection with the financing of future acquisitions, it may consider
disposing of stations in its current markets.
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 Capstar Communications 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 Capstar Communications, 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
Capstar Communications; the restrictions imposed on Capstar Communications and
its subsidiaries by the agreements governing its debt instruments; the
competitive nature of the radio broadcasting and new media businesses; 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; potential adverse effects of the Year 2000
issue; and the control of Capstar Communications 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. Capstar Communications 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. Management does not anticipate that this
statement will have a material impact on Capstar Communications' consolidated
financial statements.
YEAR 2000 ISSUE
17
<PAGE> 18
Background. The Year 2000 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 Year 2000 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 Year 2000
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 Year 2000 compliance.
The Company has received Year 2000 compliance certificates from these
application vendors indicating that they are Year 2000 compliant. The Company is
in the process of testing these systems to ensure their Year 2000 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 Year 2000 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 its other digital automation systems are Year 2000
compliant. The Company has tested substantially all of these systems to ensure
their Year 2000 compliance.
The list of the Company's mission critical systems may be expanded upon
completion of its 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 Year 2000
compliant systems.
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 Year 2000. 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 Year 2000
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 Year 2000
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 Year 2000 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 Year 2000 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 Year 2000 efforts
are currently expected to be approximately $1.3 million, of which $1.1 million
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 AMFM'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 Year 2000
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 Year 2000
noncompliance are the most reasonably likely worst case scenarios. Most 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 most of its stations will resolve possible material disruptions in
its business operations 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 Year 2000 issue. Management presently
believes, however, that the Company is taking
18
<PAGE> 19
appropriate steps to assess and control its Year 2000 issues. The Company cannot
guarantee that there will be no Year 2000 issues in spite of these efforts. If
the Company does not complete all phases of its Year 2000 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 Year 2000
issue could have a material adverse impact on the Company's results of
operations and financial condition.
Contingency Plans. The Company has developed 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 Year 2000
compliant. The Company is continually assessing the status of completion of its
Year 2000 compliance program and, as necessary, will update the level of
contingency plans necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Management monitors and evaluates changes in market conditions on a regular
basis. Based upon a review of information available as of Capstar
Communications' most recent interim balance sheet, management of Capstar
Communications has determined that there have been no material changes in market
risks since year end. For further information regarding market risk as of year
end, refer to Capstar Communications' Annual Report on Form 10-K for the year
ended December 31, 1998.
19
<PAGE> 20
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 29, 1997, two lawsuits were commenced against Capstar
Communications (formerly SFX Broadcasting, Inc.) and its directors in the Court
of Chancery of the State of Delaware (New Castle County). The plaintiffs in the
lawsuits are Harbor Finance Partners (C.A. No. 15891) and Steven Lieberman (C.A.
No. 15901). The complaints are identical and allege that the consideration to be
paid as a result of the acquisition of Capstar Communications to the holders of
the class A common stock of Capstar Communications was unfair and that the
individual defendants breached their fiduciary duties. Both complaints sought to
have the actions certified as class actions and sought to enjoin the acquisition
of Capstar Communications by Capstar Broadcasting or, in the alternative,
monetary damages. The parties agreed that the lawsuits could be consolidated in
one action entitled In Re SFX Broadcasting, Inc. Shareholders Litigation (C.A.
No. 15891). On March 17, 1998, the parties entered into a Memorandum of
Understanding, pursuant to which the parties reached an agreement providing for
a settlement of the lawsuit. Pursuant to the settlement, Capstar Communications
agreed not to seek an amendment to the Capstar Communications merger agreement
with Capstar Broadcasting to reduce the consideration to be received by the
stockholders of Capstar Communications in the Capstar Communications acquisition
in order to offset the indemnity obligations of SFX Entertainment, Inc., a
former subsidiary of Capstar Communications. The settlement also provides for
Capstar Communications to pay plaintiff's counsel an aggregate of approximately
$1.0 million, including all fees and expenses as approved by the court. The
settlement is conditioned on court approval. Pursuant to the settlement, the
defendants have denied, and continue to deny, that they have acted in bad faith
or breached any fiduciary duty. The parties expect to submit the settlement
document soon to the court for its approval. There can be no assurance that the
court will approve the settlement.
On July 13, 1998, Noddings Investment Group, Inc. and Noddings Warrant
Limited Partnership filed Civil Action No. 16538 in the Court of Chancery of the
State of Delaware in and for New Castle County against Capstar Communications.
Noddings, which allegedly holds 415,900 warrants, alleges that Capstar
Communications breached a warrant agreement that Noddings contends requires
Capstar Communications to permit Noddings, after payment of an $11.50 purchase
price, to exercise warrants in exchange for cash and shares of stock of SFX
Entertainment, Inc., a former subsidiary of Capstar Communications.
Specifically, Noddings alleges that Capstar Communications has violated the
warrant agreement by permitting Noddings to receive cash in exchange for its
warrants, but refusing to convey shares of stock of SFX Entertainment. In March
1999, the Chancery Court held that Noddings is entitled to 0.2983 shares of SFX
Entertainment, Inc. stock per warrant in addition to the $22.3725 in cash, after
Noddings' payment of the $11.50 purchase price. Capstar Communications appealed
to the Supreme Court of the State of Delaware. In September 1999, the Supreme
Court affirmed the Chancery Court's decision.
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 effect on its consolidated financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 12, 1999, Capstar Communications completed an offer to purchase
all of its outstanding 10 3/4% Senior Subordinated Notes due 2006. In connection
with the tender offer, holders of not less than 75 percent in aggregate
principal amount of the 10 3/4% Senior Subordinated Notes due 2006 consented to
certain amendments to the indenture governing the notes, and the material
restrictive covenants in the indenture were deleted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 12, 1999, Capstar Communications completed an offer to purchase
all of its outstanding 10 3/4% Senior Subordinated Notes due 2006. In connection
with the tender offer, holders of not less than 75 percent in aggregate
principal amount of the 10 3/4% Senior Subordinated Notes due 2006 consented to
certain amendments to the indenture governing the notes, and the material
restrictive covenants in the indenture were deleted.
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1(a) Agreement and Plan of Merger, dated October 2, 1999, by and
between Clear Channel Communications, Inc., CCU Merger Sub,
Inc. and AMFM Inc.
27.1* Financial Data Schedule.
- -------------
* Filed herewith.
(a) Incorporated by reference to the identically numbered exhibit to the Current
Report on Form 8-K of AMFM Inc., dated October 2, 1999 and filed on October 5,
1999, File No. 001-15145.
(b) Reports on Form 8-K
1. Current Report on Form 8-K (Items 1 and 7), dated July 13, 1999 and
filed July 22, 1999, announcing (i) the change in control of Capstar
Communications as a result of the acquisition by AMFM and (ii) the appointment
of R. Gerald Turner to AMFM's Board of Directors.
2. Current Report on Form 8-K (Items 5 and 7), dated August 27, 1999
and filed September 16, 1999, announcing the completion of Capstar
Communications' change of control offer to purchase for cash all of its
outstanding 10 3/4% Senior Subordinated Notes due 2006, 11 3/8% Senior
Subordinated Notes due 2000 and 12 5/8% Series E Cumulative Exchangeable
Preferred Stock due October 31, 2006.
3. Current Report on Form 8-K (Items 5 and 7), dated September 27, 1999
and filed September 27, 1999, announcing the commencement of (i) a tender offer
to purchase for cash all of its outstanding 10 3/4% Senior Subordinated Notes
due 2006 and (ii) the solicitation of consents to proposed amendments to
eliminate certain restrictive covenants and to amend certain other provisions of
the indenture to which the 10 3/4% Senior Subordinated Notes due 2006 were
issued.
21
<PAGE> 22
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/ W. SCHUYLER HANSEN
-------------------------------------
W. Schuyler Hansen
Senior Vice President and Chief
Accounting Officer
Date: November 12, 1999
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1(a) Agreement and Plan of Merger, dated October 2, 1999, by and
between Clear Channel Communications, Inc., CCU Merger Sub,
Inc. and AMFM Inc.
27.1* Financial Data Schedule.
</TABLE>
- ----------
* Filed herewith.
(a) Incorporated by reference to the identically numbered exhibit to the Current
Report on Form 8-K of AMFM Inc., dated October 2, 1999 and filed on October 5,
1999, File No. 001-15145.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,626
<SECURITIES> 0
<RECEIVABLES> 80,339
<ALLOWANCES> 5,179
<INVENTORY> 0
<CURRENT-ASSETS> 87,726
<PP&E> 121,736
<DEPRECIATION> 2,428
<TOTAL-ASSETS> 3,767,542
<CURRENT-LIABILITIES> 368,793
<BONDS> 319,464
169,281
0
<COMMON> 0
<OTHER-SE> 2,049,156
<TOTAL-LIABILITY-AND-EQUITY> 3,767,542
<SALES> 300,725
<TOTAL-REVENUES> 300,725
<CGS> 0
<TOTAL-COSTS> 154,614
<OTHER-EXPENSES> 108,764
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,514
<INCOME-PRETAX> (3,091)
<INCOME-TAX> 3,828
<INCOME-CONTINUING> (6,919)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,540)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
