<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 JUNE 30, 2000
COMMISSION FILE NUMBER 000-22486
AMFM OPERATING 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)
1845 WOODALL RODGERS FREEWAY, SUITE 1300, DALLAS, TEXAS 75201
(Address of principal executive offices, including zip code)
(214) 922-8700
(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 August 14, 2000, 1,040
shares of common stock of the Registrant's common stock were outstanding.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................................................. 3
Condensed Consolidated Balance Sheets (unaudited)................................. 3
Condensed Consolidated Statements of Operations (unaudited)....................... 4
Condensed Consolidated Statements of Cash Flows (unaudited)....................... 5
Notes to Condensed Consolidated Financial Statements (unaudited).................. 6
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 6. Exhibits and Reports on Form 8-K.................................................. 21
Signature......................................................................... 22
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMFM OPERATING INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 14,634 $ 40,577
Accounts receivable, less allowance for doubtful accounts of $21,428 in 1999
and $27,000 in 2000 ...................................................... 531,818 547,935
Other current assets ....................................................... 95,358 61,789
------------ ------------
Total current assets ................................................ 641,810 650,301
Property and equipment, net .................................................. 471,051 442,661
Intangible assets, net ....................................................... 10,352,530 9,902,702
Investments in non-consolidated affiliates ................................... 1,103,442 1,058,154
Other assets, net ............................................................ 251,036 239,028
------------ ------------
$ 12,819,869 $ 12,292,846
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses ...................................... $ 290,577 $ 267,187
Long-term debt ............................................................... 5,644,517 5,347,310
Deferred tax liabilities ..................................................... 1,716,441 1,646,968
Other liabilities ............................................................ 60,154 49,052
------------ ------------
Total liabilities ................................................... 7,711,689 7,310,517
------------ ------------
Commitments and contingencies
Stockholder's equity:
Common stock, $.01 par value. 200,000 shares authorized; 1,040 shares issued
and outstanding ........................................................... 1 1
Paid-in capital ............................................................ 5,555,926 5,631,532
Accumulated deficit ........................................................ (447,747) (649,204)
------------ ------------
Total stockholder's equity .......................................... 5,108,180 4,982,329
------------ ------------
$ 12,819,869 $ 12,292,846
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
AMFM OPERATING INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gross revenues ........................................ $ 490,720 $ 722,825 $ 884,843 $ 1,311,709
Less agency commissions ............................. 56,574 84,924 100,432 152,538
----------- ----------- ----------- -----------
Net revenues ..................................... 434,146 637,901 784,411 1,159,171
Operating expenses .................................... 219,258 318,485 427,768 626,573
Depreciation and amortization ......................... 145,139 220,260 292,883 429,827
Corporate general and administrative .................. 12,798 14,010 30,612 29,312
Non-cash compensation ................................. -- 957 -- 35,835
Merger and non-recurring costs ........................ -- 7,831 16,344 18,946
----------- ----------- ----------- -----------
Operating income .................................. 56,951 76,358 16,804 18,678
Interest expense, net ................................. 87,719 108,998 172,111 222,886
Gain on disposition of assets ......................... (12,488) (8,285) (12,406) (31,104)
Gain on disposition of representation contracts ....... (5,168) (772) (8,853) (16,989)
----------- ----------- ----------- -----------
Loss before income taxes .......................... (13,112) (23,583) (134,048) (156,115)
Income tax expense (benefit) .......................... 2,777 (5,298) (24,190) (11,609)
----------- ----------- ----------- -----------
Loss before equity in net loss of affiliates
and extraordinary item ............................. (15,889) (18,285) (109,858) (144,506)
Equity in net loss of affiliates ...................... 200 22,960 200 47,591
----------- ----------- ----------- -----------
Loss before extraordinary item ...................... (16,089) (41,245) (110,058) (192,097)
Extraordinary loss, net of income tax benefit ......... -- 6,255 -- 12,349
----------- ----------- ----------- -----------
Net loss attributable to common stock ............... $ (16,089) $ (47,500) $ (110,058) $ (204,446)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
AMFM OPERATING INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
JUNE 30, JUNE 30,
1999 2000
--------- ---------
<S> <C> <C>
Net cash provided by operating activities ....................... $ 71,886 $ 247,074
--------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired ............................ (364,608) (5,255)
Proceeds from sale of assets .................................. 44,085 101,076
Purchases of property and equipment ........................... (17,685) (20,968)
Construction of advertising structures ........................ (16,687) --
Payments made for purchases of representation contracts ....... (16,249) (13,704)
Payments received from sales of representation contracts ...... 10,914 9,323
Other ......................................................... (20,007) (2,151)
--------- ---------
Net cash provided by (used by) investing activities ... (380,237) 68,321
--------- ---------
Cash flows from financing activities:
Proceeds of long-term debt .................................... 427,000 362,500
Payments on long-term debt .................................... (103,000) (677,378)
Contributions from parent ..................................... 20,466 39,413
Dividends to parent ........................................... (12,835) (9,453)
Distributions to parent ....................................... (13,151) (4,534)
--------- ---------
Net cash provided by (used by) financing activities ... 318,480 (289,452)
--------- ---------
Increase in cash and cash equivalents ........................... 10,129 25,943
Cash and cash equivalents at beginning of period ................ 12,256 14,634
--------- ---------
Cash and cash equivalents at end of period ...................... $ 22,385 $ 40,577
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
AMFM OPERATING 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 AMFM Operating Inc. and its subsidiaries (collectively, the
"Company" or "AMFM Operating"). AMFM Operating is an indirect wholly-owned
subsidiary of AMFM Inc. (together with its subsidiaries, "AMFM"). All
significant intercompany balances and transactions have been eliminated in
consolidation and, in the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial position,
results of operations and cash flows have been recorded. Investments in which
the Company owns 20 percent to 50 percent of the voting common stock or
otherwise exercises significant influence over operating and financial policies
of the investee are accounted for using the equity method. Interim period
results are not necessarily indicative of results to be expected for the year.
These financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999. 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.
Certain reclassifications have been made to prior period condensed
consolidated financial statements to conform to the current period presentation.
On November 19, 1999, AMFM completed the combination of the outstanding
bonds, bank indebtedness and preferred stock of its direct and indirect
subsidiaries into two entities, Capstar Broadcasting Partners, Inc. ("Capstar
Partners") and AMFM Operating, through a series of related transactions,
including contributions of stock and mergers of its direct and indirect
subsidiaries (the "Corporate Reorganization"). As part of the combination,
Capstar Broadcasting Corporation ("Capstar Broadcasting") was merged into AMFM's
direct subsidiary Chancellor Mezzanine Holdings Corporation. In addition,
Capstar Radio Broadcasting Partners, Inc. ("Capstar Radio") and Chancellor Media
Corporation of Los Angeles ("CMCLA") merged into Capstar Communications, Inc.
("Capstar Communications"), which assumed all of the outstanding bonds and bank
indebtedness of Capstar Radio and CMCLA. The combined entity was renamed AMFM
Operating Inc. and became a wholly-owned subsidiary of Capstar Partners, which
is a wholly-owned subsidiary of AMFM. All of the operating subsidiaries of AMFM,
except for the subsidiaries engaged in AMFM's Internet initiatives, became
directly or indirectly owned by AMFM Operating.
As CMCLA, Capstar Radio and Capstar Communications, a wholly-owned indirect
subsidiary of Capstar Radio, were under the common control of AMFM, the
Corporate Reorganization was accounted for by the Company in a manner similar to
a pooling of interests. The accounts of CMCLA and its subsidiaries are included
in the Company's financial statements as of and for all periods presented
herein. Subsequent to July 13, 1999, the date of AMFM's acquisition of Capstar
Broadcasting, which included Capstar Radio, the Company's financial statements
also include the accounts of Capstar Radio and its subsidiaries.
2. 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's common stock
held on the closing date of the transaction and AMFM will become a wholly-owned
subsidiary of Clear Channel. On April 26, 2000 and April 27, 2000, stockholders
of both companies approved the merger. On July 20, 2000, the U.S. Department of
Justice preliminarily cleared the merger after AMFM and Clear Channel agreed to
divest approximately 100 stations in 27 markets and also to dispose of the
Company's approximate 30% equity interest in Lamar Advertising Company
("Lamar"). AMFM and Clear Channel are currently negotiating a consent decree
with the U.S. Department of Justice documenting the agreement reached. To date,
the Company and Clear Channel have signed
6
<PAGE> 7
AMFM OPERATING INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
definitive agreements to sell approximately 100 radio stations for aggregate
proceeds of approximately $4.2 billion. Of these stations, 58 are owned and
operated by the Company. As the transaction is currently structured, a further
seven stations currently owned by the Company will be put into trust until the
eventual sale of these stations can be approved by the various regulatory
agencies. Completion of these sales is subject to the completion of the Clear
Channel merger, obtaining final regulatory approvals and other closing
conditions. It is expected that the merger will be consummated during the third
quarter of 2000. The accompanying financial statements do not include any
adjustments related to the merger and divestitures.
3. ACQUISITIONS AND DISPOSITIONS
(a) Completed Transactions
On January 14, 2000, the Company sold the capital stock of its Puerto Rico
subsidiaries to Spanish Broadcasting System of Puerto Rico, Inc. for $90,860 in
cash and recognized a pre-tax gain of approximately $22,800. The Company owned
and operated eight radio stations in Puerto Rico.
On January 31, 2000, the Company sold radio stations KIOK-FM, KALE-AM and
KEGX-FM in Richland, Washington and KTCR-AM in Kennewick, Washington to New
Northwest Broadcasters II, Inc. for $3,781 in cash.
On January 31, 2000, the Company acquired radio station KQOD-FM in
Stockton, California from Carson Group, Inc. for a purchase price of $5,255 in
cash, including direct acquisition costs. The Company had previously been
operating KQOD-FM under a local marketing agreement effective September 20,
1999.
On June 30, 2000, the Company sold radio station KSKY-AM in Dallas in
exchange for radio station KPRZ-FM (now known as KMOM-FM) in Colorado Springs
plus $7,500 in cash from Bison Media, Inc. and recorded a preliminary pre-tax
gain of approximately $8,300.
The foregoing acquisitions were accounted for as purchases. Accordingly,
the accompanying consolidated financial statements include the results of
operations of the acquired entities from their respective dates of acquisition.
A summary of the net assets acquired in the six-month period ended June 30,
2000 follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
2000
----------
<S> <C>
Property and equipment ................. $ 808
Intangible assets ...................... 9,947
-------
Total net assets acquired .... 10,755
Less:
Assets transferred in exchange ...... 5,500
-------
Cash paid for acquisitions ... $ 5,255
=======
</TABLE>
The unaudited pro forma condensed consolidated results of operations data
for the six months ended June 30, 1999 and 2000, as if the acquisitions and
dispositions through June 30, 2000 occurred at January 1, 1999, follow:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
1999 2000
----------- -----------
<S> <C> <C>
Net revenues ........................... $ 966,174 $ 1,158,631
Loss before extraordinary item ......... (247,805) (191,108)
Net loss ............................... (247,805) (203,457)
</TABLE>
The pro forma results are not necessarily indicative of the financial
results which would have occurred if the transactions had been in effect for the
entire periods presented.
7
<PAGE> 8
AMFM OPERATING INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(b) Pending Transaction
On August 30, 1999, the Company entered into an agreement with Cox Radio,
Inc. ("Cox") to acquire KOST-FM and KFI-AM in Los Angeles plus $3,000 in cash
payable by Cox in exchange for 13 of its radio stations including WEDR-FM in
Miami, WFOX-FM in Atlanta, WEFX-FM, WNLK-AM, WKHL-FM and WSTC-AM in
Stamford/Norwalk, WFYV-FM, WAPE-FM, WBWL-AM, WKQL-FM, WMXQ-FM and WOKV-AM in
Jacksonville and WPLR-FM and the local sales rights of a 14th station, WYBC-FM,
in New Haven. The Company began programming KOST-FM and KFI-AM in Los Angeles
and Cox began programming the 13 Company stations under time brokerage
agreements effective October 1, 1999. Although there can be no assurance, the
Company expects that the Cox exchange will be consummated during the third
quarter of 2000.
4. REDEMPTIONS OF DEBT
On February 1, 2000, the Company completed the redemption of all of its
outstanding 9 3/8% Senior Subordinated Notes due 2004 for an aggregate
repurchase cost of $216,355, which included the principal amount of the notes of
$200,000, premiums on the repurchase of the notes of $9,376 and accrued and
unpaid interest on the notes from October 1, 1999 through February 14, 2000 of
$6,979. An extraordinary charge of $6,094 (net of a tax benefit of $3,282) was
recorded in connection with the redemption.
On June 2, 2000, the Company completed a cash tender offer to acquire its
outstanding 10 1/2% Senior Subordinated Notes due 2007. Prior to the initiation
of the tender offer, the Company received the irrevocable consent of the holder
of the majority of the notes to certain amendments, which eliminated most of the
restrictive covenants and certain other provisions of the indenture pursuant to
which the notes were issued. Approximately $99,400 in aggregate principal amount
of the notes, representing 99.4% of the outstanding notes, was accepted for
payment for an aggregate repurchase cost of approximately $112,995, which
included the principal amount of the notes of $99,400, premiums on the
repurchase of the notes of $9,592, accrued and unpaid interest on the notes from
January 16, 2000 through June 1, 2000 of $3,972 and other transaction costs of
$31. An extraordinary change of $6,255 (net of a tax benefit of $3,368) was
recorded in connection with the redemption. On June 29, 2000, the Company
purchased an additional $100 principal amount of the 10 1/2% Senior Subordinated
Notes due 2007 for an aggregate purchase price of approximately $114.
5. CONTINGENCIES
On July 24, 1998, in connection with Capstar Broadcasting Corporation's
then pending acquisition of Triathlon Broadcasting Company, Capstar Broadcasting
was notified of an action filed on behalf of all holders of depositary shares of
Triathlon against Triathlon, Triathlon's directors, and Capstar Broadcasting.
The action was filed in the Court of Chancery of the State of Delaware (Civil
Action No. 16560) in and for New Castle County, Delaware by Herbert Behrens. The
complaint alleges that Triathlon and its directors breached their fiduciary
duties to the class of depositary stockholders. Capstar Broadcasting is accused
of knowingly aiding and abetting the breaches of fiduciary duties allegedly
committed by the other defendants. The complaint sought to have the action
certified as a class action and sought to enjoin the Triathlon acquisition, or
in the alternative, sought monetary damages in an unspecified amount. On April
30, 1999, the acquisition of Triathlon closed. On May 26, 2000, the parties
signed a Stipulation Settlement that provided for a proposed settlement of the
lawsuit. That proposed settlement is subject to court approval. The amount of
the settlement will equal $0.11 in additional consideration for each depositary
share owned by any class member at the effective time of the Triathlon
acquisition. At the time of the acquisition, there were approximately 5.8
million depositary shares outstanding. Capstar Broadcasting also agreed not to
oppose plaintiff's counsel's application for attorney fees and expenses in the
aggregate amount of $150. On July 11, 2000, the court preliminarily approved the
proposed settlement. The court has set a fairness hearing for the proposed
settlement for August 29, 2000. On November 19, 1999, Capstar Broadcasting
merged into Chancellor Mezzanine Holdings Corporation and the surviving
corporation was renamed AMFM Holdings Inc.
In September 1998, a stockholder class action complaint was filed in the
Delaware Court of Chancery by a stockholder purporting to act individually and
on behalf of all other persons, other than defendants, who own securities of
AMFM and are similarly situated. The defendants named in the case are AMFM,
Hicks Muse, Thomas O. Hicks, Jeffrey A. Marcus, James E. de Castro, Eric C.
Neuman, Lawrence D. Stuart, Jr., Steven Dinetz, Thomas J. Hodson, Perry Lewis,
John H. Massey and Vernon E. Jordan, Jr. The plaintiff alleges breach of
fiduciary duties, gross mismanagement, gross negligence or recklessness, and
other matters relating to the defendants' actions in connection with the Capstar
merger. The plaintiff sought to certify the complaint as a class action, enjoin
consummation of the Capstar merger, order defendants to account to plaintiff and
other alleged class members for damages, and award attorneys' fees and other
costs. The Company believes that the lawsuit is without merit and intends to
vigorously defend the action.
8
<PAGE> 9
AMFM OPERATING INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On April 11, 2000, an action was commenced in New York Supreme Court, New
York County, by Interep National Radio Sales, Inc. seeking $47,118 in damages,
plus interest, from Clear Channel Communications, Inc. and $19,691 in damages,
plus interest, from Katz Communications, Inc., a co-defendant and an indirect
wholly-owned subsidiary of the Company. The complaint alleges, among other
things, that Clear Channel wrongfully terminated a February 3, 1996 agreement
between Clear Channel and Interep under which Interep agreed to act as Clear
Channel's exclusive advertising representative by procuring advertising time on
Clear Channel's radio stations and also under which Interep, Clear Channel and
Katz executed certain "triparty agreements" in which Interep agreed to buy out
the existing representation agreement of Clear Channel's then current
representative, Katz, for $23,000. The complaint also alleges that Interep's
representation agreement, by its terms, could not be terminated by Clear Channel
until February 1, 2005 and that Clear Channel's November 30, 1999 termination of
Interep constituted a breach of the representation agreement. The complaint
alleges further that Clear Channel and Katz continue to demand that Interep make
all buy out payments to Katz as set forth in the various triparty agreements.
$5,188 of the requested damages correspond to buyouts in excess of the pro rata
amount attributable to the time Interep had the right to represent the bought
out stations and $280 of the requested damages correspond to a refund of a
portion of a "signing bonus" paid by Interep to Clear Channel upon the execution
of Interep's representation agreement. The complaint does not specify the basis
for the remaining damages sought by Interep. Although this matter is in the
early stages of litigation, Katz has pending before the Court a motion to
dismiss entirely all the claims asserted by Interep against it.
On July 13, 2000, a lawsuit was filed in the Supreme Court of the State of
New York, County of Westchester by plaintiff Charles E. Armstrong against AMFM
Inc. and AMFM Interactive, Inc. The complaint alleges that AMFM Inc. and AMFM
Interactive, Inc. breached an alleged employment agreement and also an alleged
agreement to issue stock options to the plaintiff. The plaintiff seeks a
declaration regarding his rights and obligations under the alleged employment
agreement and compensatory and punitive damages in excess of $50,000. AMFM Inc.
and AMFM Interactive, Inc. deny the existence of any employment agreement, and
also deny that they have breached any agreement to issue stock options to Mr.
Armstrong. AMFM Inc. and AMFM Interactive, Inc. are vigorously defending the
action.
The Company is also involved in various other claims and lawsuits which are
generally incidental to its business. The Company is also vigorously contesting
all of these matters and believes that the ultimate resolution of these matters
and those mentioned above will not have a material adverse effect on its
consolidated financial position, results of operations or cash flows.
6. NON-CASH COMPENSATION
The Company recorded non-cash compensation of $35,835 during the six months
ended June 30, 2000 primarily related to amendments made to the stock option
agreements of certain operating personnel terminated upon implementation of the
Company's market strategy.
7. MERGER AND NON-RECURRING COSTS
Merger and non-recurring costs consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Severance(a) ............ $ -- $ 914 $12,196 $ 9,313
Merger and other(b) ..... -- 6,917 4,148 9,633
------- ------- ------- -------
$ -- $ 7,831 $16,344 $18,946
------- ======= ======= =======
</TABLE>
----------
(a) 1999
On March 15, 1999, the Company announced an executive realignment and
recorded a charge of $12,196 for executive severance and other costs.
9
<PAGE> 10
AMFM OPERATING INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2000
On February 16, 2000, the Company announced the retirement of James E. de
Castro as Vice-Chairman of AMFM Inc., President and Chief Executive Officer
of AMFM Radio Group and Chairman and Chief Executive Officer of AMFM
Interactive, Inc., effective February 18, 2000. In connection with Mr. de
Castro's retirement, the Company recorded a charge of $5,340 for severance
costs.
In 1999, the Company announced its market strategy, whereby each cluster of
stations in a market will be managed as a single business unit. In
connection with this strategy, certain personnel, consisting primarily of
operating personnel, have been terminated and other personnel-related costs
have been incurred to align formats within a market to target certain
demographics. During the three months and six months ended June 30, 2000,
the Company incurred costs of $914 and $3,973, respectively, of which $603
and $3,240 related to personnel costs. At June 30, 2000, $7,294 of the
total costs incurred to date were accrued and are expected to be paid
during the remainder of 2000.
(b) 1999
The Company assigned its contract to acquire Petry Media Corporation
("Petry") to LIN Television Corporation and recorded a charge of $4,148 to
write off transaction costs incurred in connection with the Petry
transaction.
2000
During the three months and six months ended June 30, 2000, the Company
incurred costs of $5,141 and $6,804, respectively, related to the Clear
Channel merger, developmental costs of $1,044 and $2,097, respectively,
related to the Galaxy(TM) system, AMFM's proprietary traffic system, and
other non-recurring charges of $732.
8. SEGMENT DATA
During the six months ended June 30, 1999, the Company conducted business
in three distinct operating segments consisting of radio broadcasting, new media
and outdoor advertising. Following the sale of the Company's outdoor advertising
business to Lamar on September 15, 1999, the Company operates in only the radio
broadcasting and new media segments. Separate financial data for each of the
Company's operating segments is provided below. The Company evaluates the
performance of its segments based on the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AMFM Radio Group -- radio broadcasting:
Net revenues ................................. $ 334,406 $ 589,105 $ 596,185 $1,069,811
Operating expenses ........................... 162,861 290,865 316,982 570,527
Depreciation and amortization ................ 101,419 202,837 206,101 395,164
Merger and non-recurring costs ............... -- 794 -- 9,181
Operating income ............................. 66,031 92,167 65,733 89,425
AMFM New Media Group -- media representation:
Net revenues ................................. 48,841 59,976 88,536 109,760
Operating expenses ........................... 32,503 38,800 63,251 76,446
Depreciation and amortization ................ 7,685 11,153 15,468 22,224
Merger and non-recurring costs ............... -- 1,044 -- 2,097
Operating income ............................. 7,135 6,267 6,791 3,453
Chancellor Outdoor Group -- outdoor advertising:
Net revenues ................................. 57,288 -- 110,889 --
Operating expenses ........................... 30,283 -- 58,734 --
Depreciation and amortization ................ 32,131 -- 63,527 --
Merger and non-recurring costs ............... -- -- -- --
Operating loss ............................... (8,185) -- (17,256) --
</TABLE>
10
<PAGE> 11
AMFM OPERATING INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The segment financial data includes intersegment revenues and expenses
which must be excluded to reconcile to the Company's consolidated financial
statements. In addition, certain depreciation and amortization expenses,
corporate general and administrative expenses, non-cash compensation and merger
and non-recurring costs were not allocated to operating segments and must be
included to reconcile to the Company's consolidated financial statements.
Reconciling financial data is provided below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Intersegment net revenues ....................................... $ 6,389 $11,180 $11,199 $20,400
Intersegment operating expenses ................................. 6,389 11,180 11,199 20,400
Unallocated depreciation and amortization ....................... 3,904 6,270 7,787 12,439
Unallocated corporate general and administrative expenses ....... 4,126 8,856 14,333 18,258
Unallocated non-cash compensation ............................... -- 957 -- 35,835
Unallocated merger and non-recurring costs ...................... -- 5,993 16,344 7,668
</TABLE>
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000.
Management does not anticipate that this statement will have a material impact
on the Company's consolidated financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB No. 25, Accounting for Stock Issued to
Employees. The provisions of this Interpretation became effective July 1, 2000.
Due to the terms of certain options previously granted, the Company will record
a non-cash charge upon consummation of the Clear Channel merger regardless of
the new Interpretation. The size of such charge is not presently determinable
since it will be based on, among other things, the fair value of AMFM's common
stock on the day of the merger. On July 5, 2000, AMFM amended its stock option
plans to provide that all unvested options will accelerate and vest for
employees terminated as a result of the pending AMFM/Clear Channel merger.
Further, those employees will have the remainder of the term of the option to
exercise. As a result of the Interpretation, the amendments have no accounting
impact until an event of termination occurs.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
AMFM Operating Inc. together with its subsidiaries ("AMFM Operating" or the
"Company") is an indirect wholly-owned subsidiary of AMFM Inc. (together with
its subsidiaries, "AMFM"), a large national pure-play radio broadcasting and
related media company with operations in radio broadcasting and media
representation and growing Internet operations, which focus on developing AMFM's
Internet web sites, streaming online broadcasts of the Company's on-air
programming and other media, and promoting emerging Internet and new media
concerns. In addition, the Company owns an approximate 30% equity (11% voting)
interest in Lamar Advertising Company ("Lamar"), one of the largest owners and
operators of outdoor advertising structures in the United States, which AMFM has
agreed with the U.S. Department of Justice to dispose of after the merger with
Clear Channel. As of June 30, 2000, the Company owned and operated, programmed
or sold air time for 442 radio stations (319 FM and 123 AM) in 100 markets in
the United States, including nine radio stations programmed under time brokerage
or joint sales agreements. The Company also operates a national radio network,
The AMFM Radio Networks, which broadcasts advertising and syndicated programming
shows to a national audience of approximately 68 million listeners in the United
States (including approximately 59 million listeners from the Company's
portfolio of stations) and the Chancellor Marketing Group, a full-service sales
promotion firm developing integrated marketing programs for Fortune 1000
companies. The media representation business consists of Katz Media Group, Inc.
("Katz"), a full-service media representation firm that sells national spot
advertising time for its clients in the radio and television industries
throughout the United States and for the Company's portfolio of stations.
See Note 8 to the Condensed Consolidated Financial Statements included
elsewhere in the Form 10-Q for additional information on the Company's operating
segments as of June 30, 2000.
On July 13, 1999, AMFM acquired Capstar Broadcasting Corporation ("Capstar
Broadcasting") and its subsidiaries through a merger of a wholly-owned
subsidiary of AMFM into Capstar Broadcasting, with Capstar Broadcasting
surviving as a wholly-owned direct subsidiary of AMFM. As a result of the
Capstar merger, all of the then outstanding shares of Capstar Broadcasting
common stock were converted into 0.4955 of a share of AMFM common stock, or
approximately 53.6 million shares of AMFM common stock in the aggregate.
Immediately prior to the Capstar merger, the portfolio of Chancellor Media
Corporation of Los Angeles ("CMCLA"), an indirect subsidiary of AMFM, included
124 radio stations (92 FM and 32 AM). As a result of the Capstar merger, CMCLA
added 338 radio stations (239 FM and 99 AM) to its portfolio and assumed the
outstanding options, warrants and other equity rights in Capstar Broadcasting
representing up to an additional 3.2 million shares of AMFM common stock.
On November 19, 1999, AMFM completed the combination of the outstanding
bonds, bank indebtedness and preferred stock of its direct and indirect
subsidiaries into two entities, Capstar Broadcasting Partners, Inc. ("Capstar
Partners") and AMFM Operating, through a series of related transactions,
including contributions of stock and mergers of its direct and indirect
subsidiaries (the "Corporate Reorganization"). As part of the combination,
Capstar Broadcasting was merged into AMFM's direct subsidiary Chancellor
Mezzanine Holdings Corporation. In addition, Capstar Radio Broadcasting
Partners, Inc. ("Capstar Radio") and CMCLA merged into Capstar Communications,
Inc. ("Capstar Communications"), which assumed all of the outstanding bonds and
bank indebtedness of Capstar Radio and CMCLA. The combined entity was renamed
AMFM Operating Inc. and became a wholly-owned subsidiary of Capstar Partners.
All of the operating subsidiaries of AMFM, except for the subsidiaries engaged
in AMFM's Internet initiatives, became directly or indirectly owned by AMFM
Operating.
As CMCLA, Capstar Radio and Capstar Communications, a wholly-owned indirect
subsidiary of Capstar Radio, were under the common control of AMFM, the
Corporate Reorganization was accounted for by the Company in a manner similar to
a pooling of interests. The accounts of CMCLA and its subsidiaries are included
in the Company's financial statements for all periods and dates presented
herein. Subsequent to July 13, 1999, the date of AMFM's acquisition of Capstar
Broadcasting, which included Capstar Radio, the Company's financial statements
also include the accounts of Capstar Radio and its subsidiaries.
The Company's results of operations for the three months and six months
ended June 30, 2000 are not comparable to the results of operations for the
three months and six months ended June 30, 1999 due to the impact of the
Corporate Reorganization and the
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<PAGE> 13
Company's various acquisitions and dispositions. In addition to the Capstar
merger and the Corporate Reorganization, the Company completed the following
transactions from July 1, 1999 through June 30, 2000:
o the disposition of the Company's entire outdoor advertising business
to Lamar on September 15, 1999;
o the acquisition of eight radio stations (seven FM and one AM) for
approximately $115.5 million in cash;
o the disposition of 13 radio stations (ten FM and three AM) for
approximately $95.1 million in cash; and
o the disposition of one AM radio station in exchange for one FM radio
station and approximately $7.5 million in cash.
Seasonal revenue fluctuations are common in the radio broadcasting and
outdoor advertising industries 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. The Company's
operating results in any period may be affected by the occurrence of advertising
and promotion expenses that do not produce commensurate revenues in the period
in which the expenditures are made.
CLEAR CHANNEL MERGER
On October 2, 1999, AMFM and Clear Channel agreed to a merger that will
create one of the largest out-of-home media companies reaching local, national
and international consumers through a complementary portfolio of radio stations,
radio broadcast networks, outdoor advertising displays and television stations
and a growing presence in the Internet and media representation business. If the
merger is completed, 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 and AMFM will become a wholly-owned
subsidiary of Clear Channel. On April 26, 2000 and April 27, 2000, stockholders
of AMFM and Clear Channel approved the merger. On July 20, 2000, the U.S.
Department of Justice preliminarily cleared the merger after AMFM and Clear
Channel agreed to divest approximately 100 stations in 27 markets and also to
dispose of the Company's approximate 30% equity interest in Lamar. AMFM and
Clear Channel are currently negotiating a consent decree with the U.S.
Department of Justice documenting the agreement reached. To date, the Company
and Clear Channel have signed definitive agreements to sell approximately 100
radio stations for aggregate proceeds of approximately $4.2 billion. Of these
stations, 58 are owned and operated by the Company. As the transaction is
currently structured, a further seven stations currently owned by the Company
will be put into trust until the eventual sale of these stations can be approved
by the various regulatory agencies. Completion of these sales is subject to the
completion of the Clear Channel merger, obtaining final regulatory approvals and
other closing conditions. It is expected that the merger will be consummated
during the third quarter of 2000. The Company cannot give any assurance that the
merger will be completed on the terms agreed to on October 2, 1999 or at all
because there are many conditions to the merger that are not within the
Company's control. The accompanying financial statements do not include any
adjustments related to the merger and divestitures.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared To Three Months Ended June 30, 1999
AMFM Radio Group net revenues for the three months ended June 30, 2000
increased 76.2% to $589.1 million compared to $334.4 million for the three
months ended June 30, 1999. AMFM Radio Group operating expenses for the three
months ended June 30, 2000 increased 78.6% to $290.9 million compared to $162.9
million for the second quarter of 1999. The increase in net revenues and
operating expenses was primarily attributable to the net impact of the various
acquisitions and dispositions discussed elsewhere herein. Additional factors
contributing to the increase included higher revenues from dot-com clients and
the positive effects of the market strategy implemented in many major markets at
the end of the third quarter of 1999. On a pro forma basis for all stations
owned and operated as of June 30, 2000, net revenues increased 18.2% during the
three months ended June 30, 2000 compared to the three months ended June 30,
1999 and pro forma net operating expenses increased 10.5%.
AMFM New Media Group net revenues for the three months ended June 30, 2000
increased 22.8% to $60.0 million compared to $48.8 million for the three months
ended June 30, 1999. AMFM New Media Group operating expenses for the three
months ended June 30, 2000 increased 19.4% to $38.8 million compared to $32.5
million for the second quarter of 1999. This increase is primarily attributable
to Katz, which experienced an increase in net revenues for the three months
ended June 30, 2000 of 17.3% to $57.3 million compared to $48.8 million for the
second quarter of 1999 due to a growth in new business and an overall growth in
both radio and television advertising spending. Additionally, Prophet Systems,
which was acquired in 1999 in conjunction with the Capstar
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<PAGE> 14
merger and provides the hardware necessary for the utilization of
StarSystem(TM), generated $2.7 million in revenues during the second quarter of
2000 from the sale of hardware to third parties.
The Company's outdoor advertising business was formed on July 31, 1998 with
the acquisition of Martin Media and Martin & MacFarlane, Inc. and also included
the assets of the outdoor advertising division of Whiteco Industries, Inc.,
which was acquired on December 1, 1998. On September 15, 1999, the Company
completed the sale of its outdoor advertising business to Lamar. The Company's
outdoor advertising business had net revenues of $57.3 million and operating
expenses of $30.3 million for the three months ended June 30, 1999.
Depreciation and amortization for the three months ended June 30, 2000
increased 51.8% to $220.3 million compared to $145.1 million for the second
quarter of 1999. The increase is due to the impact of the acquisitions completed
during 1999 and through June 30, 2000.
Corporate general and administrative expenses for the three months ended
June 30, 2000 increased 9.5% to $14.0 million compared to $12.8 million for the
second quarter of 1999 primarily due to increases in properties and staff
related to acquisitions.
During the three months ended June 30, 2000, the Company recorded merger
and non-recurring costs of $0.9 million related to the costs to terminate
employees and close certain facilities in connection with the implementation of
the Company's market strategy, $5.1 million related to the Clear Channel merger,
and other costs of $1.8 million including developmental costs associated with
the Galaxy(TM) system, the Company's proprietary traffic system.
As a result of the above factors, the Company realized operating income of
$76.4 million for the three months ended June 30, 2000 compared to operating
income of $57.0 million for the second quarter of 1999.
Net interest expense for the three months ended June 30, 2000 increased
24.3% to $109.0 million compared to $87.7 million for the same period in 1999.
The net increase was primarily due to (i) additional bank borrowings under the
senior credit facility required to finance the various acquisitions discussed
elsewhere herein offset by cash proceeds of approximately $720.0 million
received upon the sale of the Company's outdoor advertising business to Lamar on
September 15, 1999 and cash proceeds from other various dispositions discussed
elsewhere herein; (ii) additional debt recorded in connection with the Capstar
merger on July 13, 1999; and (iii) the exchange of the 12 5/8% Series E
cumulative exchangeable preferred stock of AMFM Operating for 12 5/8% Senior
Subordinated Exchange Debentures due 2006 on November 23, 1999.
The gain on disposition of assets of $8.3 million for the three months
ended June 30, 2000 related primarily to the exchange of KSKY-AM in Dallas for
KPRZ-FM (now known as KMOM-FM) in Colorado Springs plus $7.5 million in cash
from Bison Media, Inc. on June 30, 2000. The gain on disposition of assets of
$12.5 million for the three months ended June 30, 1999 related primarily to the
sale of WMVP-AM in Chicago to ABC, Inc. on April 16, 1999.
The Company recorded a gain on disposition of representation contracts of
$0.8 million for the three months ended June 30, 2000 and $5.2 million for the
second quarter of 1999 related to its media representation operations. The gain
represents the sales proceeds received from successor representation firms for
the buyout of existing media representation contracts, net of any remaining
deferred costs associated with obtaining the original representation contract.
While the consolidation of the radio broadcasting industry has resulted in an
increase in buyout activity, the impact on future periods cannot be predicted.
The Company recorded an income tax benefit of $5.3 million for the three
months ended June 30, 2000 compared with income tax expense of $2.8 million for
the three months ended June 30, 1999 primarily due to an increase in the
Company's pre-tax loss for the second quarter of 2000.
The Company recorded equity in net loss of affiliates of $23.0 million for
the three months ended June 30, 2000 and $0.2 million for the three months ended
June 30, 1999 related to the Company's investments accounted for using the
equity method.
During the second quarter of 2000, the Company recorded an extraordinary
charge of $6.3 million, net of a tax benefit of $3.4 million, consisting of the
premiums paid in connection with the redemption of AMFM Operating's 10 1/2%
Senior Subordinated Notes due 2007.
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<PAGE> 15
As a result of the above factors, the Company incurred a net loss
attributable to common stock of $47.5 million for the three months ended June
30, 2000 compared to a $16.1 million net loss attributable to common stock for
the three months ended June 30, 1999.
Six Months Ended June 30, 2000 Compared To Six Months Ended June 30, 1999
AMFM Radio Group net revenues for the six months ended June 30, 2000
increased 79.4% to $1.1 billion compared to $0.6 billion for the six months
ended June 30, 1999. AMFM Radio Group operating expenses for the six months
ended June 30, 2000 increased 80.0% to $570.5 million compared to $317.0 million
for the six months ended June 30, 1999. The increase in net revenues and
operating expenses was primarily attributable to the net impact of the various
acquisitions and dispositions discussed elsewhere herein. Additional factors
contributing to the increase included higher revenues from dot-com clients and
the positive effects of the market strategy implemented in many major markets at
the end of the third quarter of 1999. On a pro forma basis for all stations
owned and operated as of June 30, 2000, net revenues increased 20.2% during the
six months ended June 30, 2000 compared to the six months ended June 30, 1999
and pro forma net operating expenses increased 11.9%.
AMFM New Media Group net revenues for the six months ended June 30, 2000
increased 24.0% to $109.8 million compared to $88.5 million for the six months
ended June 30, 1999. AMFM New Media Group operating expenses for the six months
ended June 30, 2000 increased 20.9% to $76.4 million compared to $63.3 million
for the first six months of 1999. This increase is primarily attributable to
Katz, which experienced an increase in net revenues for the six months ended
June 30, 2000 of 17.5% to $104.0 million compared to $88.5 million for the six
months ended June 30, 1999 due to a growth in new business and an overall growth
in both radio and television advertising spending. Additionally, Prophet
Systems, which was acquired in 1999 in conjunction with the Capstar merger and
provides the hardware necessary for the utilization of StarSystem(TM), generated
$5.8 million in revenues during the six months ended June 30, 2000 from the sale
of hardware to third parties.
The Company's outdoor advertising business was formed on July 31, 1998 with
the acquisition of Martin Media and Martin & MacFarlane, Inc. and also included
the assets of the outdoor advertising division of Whiteco Industries, Inc.,
which was acquired on December 1, 1998. On September 15, 1999, the Company
completed the sale of its outdoor advertising business to Lamar. The Company's
outdoor advertising business had net revenues of $110.9 million and operating
expenses of $58.7 million for the six months ended June 30, 1999.
Depreciation and amortization for the six months ended June 30, 2000
increased 46.8% to $429.8 million compared to $292.9 million for the six months
ended June 30, 1999. The increase is due to the impact of the acquisitions
completed during 1999 and through June 30, 2000.
Corporate general and administrative expenses for the six months ended June
30, 2000 decreased 4.2% to $29.3 million compared to $30.6 million for the six
months ended June 30, 1999 primarily due to a reduction in personnel.
The non-cash compensation expense of $35.8 million for the six months ended
June 30, 2000 is primarily related to amendments made to the stock option
agreements of certain operating personnel terminated upon implementation of the
Company's market strategy.
During the six months ended June 30, 2000, the Company recorded merger and
non-recurring costs of $5.3 million related to severance costs in connection
with the retirement of James E. de Castro, $4.0 million related to the costs to
terminate employees and close certain facilities in connection with the
implementation of the Company's market strategy, $6.8 million related to the
Clear Channel merger, and other costs of $2.8 million including developmental
costs associated with the Galaxy(TM) system, the Company's proprietary traffic
system. The merger and non-recurring costs of $16.3 million for the six months
ended June 30, 1999 million related to the write-off of Petry Media Corporation
transaction costs and executive severance and other costs related to the
executive management realignment.
As a result of the above factors, the Company realized operating income of
$18.7 million for the six months ended June 30, 2000 compared to operating
income of $16.8 million for the six months ended June 30, 1999.
Net interest expense for the six months ended June 30, 2000 increased 29.5%
to $222.9 million compared to $172.1 million for the same period in 1999. The
net increase was primarily due to (i) additional bank borrowings under the
senior credit facility required to finance the various acquisitions discussed
elsewhere herein offset by cash proceeds of approximately $720.0 million
received upon the sale of the Company's outdoor advertising business to Lamar on
September 15, 1999 and cash proceeds from other various
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dispositions discussed elsewhere herein; (ii) additional debt recorded in
connection with the Capstar merger on July 13, 1999; and (iii) the exchange of
the 12 5/8% Series E cumulative exchangeable preferred stock of AMFM Operating
for 12 5/8% Senior Subordinated Exchange Debentures due 2006 on November 23,
1999.
The gain on disposition of assets of $31.1 million for the six months ended
June 30, 2000 primarily related to the January 14, 2000 sale of the capital
stock of AMFM's Puerto Rico subsidiaries to Spanish Broadcasting System of
Puerto Rico, Inc. and the June 30, 2000 exchange of KSKY-AM in Dallas for
KPRZ-FM (now known as KMOM-FM) in Colorado Springs plus $7.5 million in cash
from Bison Media, Inc. The gain on disposition of assets of $12.4 million for
the six months ended June 30, 1999 related primarily to the sale of WMVP-AM in
Chicago to ABC, Inc. on April 16, 1999.
The Company recorded a gain on disposition of representation contracts of
$17.0 million for the six months ended June 30, 2000 and $8.9 million for the
six months ended June 30, 1999 related to its media representation operations.
The gain represents the sales proceeds received from successor representation
firms for the buyout of existing media representation contracts, net of any
remaining deferred costs associated with obtaining the original representation
contract. While the consolidation of the radio broadcasting industry has
resulted in an increase in buyout activity, the impact on future periods cannot
be predicted.
The Company recorded an income tax benefit of $11.6 million for the six
months ended June 30, 2000 compared with income tax benefit of $24.2 million for
the six months ended June 30, 1999 primarily due to a higher proportion of
non-deductible amortization in 2000 relative to the Company's taxable loss.
The Company recorded equity in net loss of affiliates of $47.6 million for
the six months ended June 30, 2000 and $0.2 million for the six months ended
June 30, 1999 related to the Company's investments accounted for using the
equity method.
During the six months ended June 30, 2000, the Company recorded an
extraordinary charge of $12.3 million, net of a tax benefit of $6.6 million,
consisting of the premiums paid in connection with the redemption of AMFM
Operating's 9 3/8% Subordinated Exchange Debentures due 2004 and 10 1/2% Senior
Subordinated Notes due 2007.
As a result of the above factors, the Company incurred a net loss
attributable to common stock of $204.4 million for the six months ended June 30,
2000 compared to a $110.1 million net loss attributable to common stock for the
six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company historically has generated sufficient cash flow from operations
to finance its existing operational requirements and debt service requirements,
and the Company anticipates that this will continue to be the case. Operating
activities provided net cash of $247.1 million and $71.9 million for the six
months ended June 30, 2000 and 1999, respectively. The Company historically has
used the proceeds of bank debt and private and public debt and AMFM equity
offerings, supplemented by cash flow from operations not required to fund
operational requirements and debt service, to fund implementation of the
Company's acquisition strategy.
The instruments governing the Company's indebtedness contain certain
covenants that restrict or, in some cases, prohibit the ability of the Company
to pay dividends and make other distributions. These restrictions are not
anticipated to have an impact on the Company's ability to meet its cash
obligations.
Financing Transactions
On January 11, 2000, the Company completed a change of control offer to
purchase all of its outstanding 12 5/8% Senior Subordinated Exchange Debentures
due 2006 at an offer price in cash equal to 101% of the aggregate principal
amount, plus accrued and unpaid interest. AMFM Operating repurchased $1.2
million, or 0.9%, of the aggregate outstanding principal amount of the
debentures for an aggregate repurchase cost of $1.3 million.
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On February 15, 2000, the Company completed the redemption of all of its
outstanding 9 3/8% Senior Subordinated Notes due 2004 for an aggregate
repurchase cost of $216.4 million, which included:
o the principal amount of the notes of $200.0 million;
o premiums on the repurchase of the notes of $9.4 million; and
o accrued and unpaid interest on the notes from October 1, 1999 through
February 14, 2000 of $7.0 million.
On June 2, 2000, the Company completed a cash tender offer to acquire all
of its outstanding 10 1/2% Senior Subordinated Notes due 2007 at a purchase
price equal to $1,096.50 per $1,000 principal amount tendered, plus accrued and
unpaid interest. Prior to the initiation of the tender offer, the Company
received the irrevocable consent of the holder of the majority of the notes to
certain amendments, which eliminated most of the restrictive covenants and
certain other provisions of the indenture pursuant to which the notes were
issued. Approximately $99.4 million in aggregate principal amount of the notes,
representing 99.4% of the outstanding notes, was accepted for payment for an
aggregate repurchase cost of approximately $113.0 million which included:
o the principal amount of the notes of $99.4 million;
o premiums on the repurchase of the notes of $9.6 million; and
o accrued and unpaid interest on the notes from January 16, 2000 through
June 1, 2000 of $4.0 million.
Outstanding Debt
Senior Credit Facility. AMFM Operating's senior credit facility includes
commitments for a revolving loan facility of $600.0 million and a term loan
facility of $2.6 billion. The proceeds of such facilities were used to repay the
Company's previously existing senior credit facilities, to repay, repurchase or
redeem other debt and equity securities of the Company and its subsidiaries and
for other general corporate purposes. Both the revolving loan facility and the
term loan facility of AMFM Operating will mature on November 19, 2001. No
scheduled amortization of principal is required prior to maturity. Both the
revolving loan facility and the term loan facility of AMFM Operating 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 is determined
by reference to AMFM Operating's ratio of consolidated debt to consolidated
earnings before interest, taxes, depreciation and amortization, provided that
such margins are capped at .50% and 1.50%, respectively, so long as the Clear
Channel merger agreement has not been terminated. The merger of AMFM and Clear
Channel will constitute an event of default under AMFM Operating's senior credit
facility and will require refinancing at the effective time of the merger. As of
July 31, 2000, the total outstanding principal balance on the senior credit
facility was $2.8 billion, including $0.2 billion under the revolving loan
facility and $2.6 billion under the term loan facility.
AMFM Operating 8% Senior Notes. AMFM Operating's 8% Senior Notes due 2008
are senior unsecured obligations of AMFM Operating and rank equal in right of
payment to the obligations of AMFM Operating under AMFM Operating's senior
credit facility and existing and all other indebtedness of AMFM Operating not
expressly subordinated to the 8% Senior Notes due 2008. However, because the 8%
Senior Notes due 2008 are unsecured, the 8% Senior Notes due 2008 are
effectively subordinated in right of payment to AMFM Operating's senior credit
facility. The 8% Senior Notes due 2008 are fully and unconditionally guaranteed,
on a joint and several basis, by all of AMFM Operating's direct and indirect
wholly owned subsidiaries other than certain inconsequential subsidiaries (the
"Subsidiary Guarantors"). As of July 31, 2000, the outstanding principal balance
was $750.0 million. Interest payment requirements on the 8% Senior Notes due
2008 are approximately $60.0 million per year.
AMFM Operating Senior Subordinated Notes. AMFM Operating's 8 3/4% Senior
Subordinated Notes due 2007, 10 1/2% Senior Subordinated Notes due 2007, 8 1/8%
Senior Subordinated Notes due 2007, 9 1/4% Senior Subordinated Notes due 2007,
9% Senior Subordinated Notes due 2008, 10 3/4% Senior Subordinated Notes due
2006 and 12 5/8% Senior Subordinated Exchange Debentures due 2006 (collectively,
the "Subordinated Notes") are unsecured obligations of AMFM Operating. The
Subordinated Notes are subordinated in right of payment to all existing and any
future senior indebtedness of AMFM Operating. Except for the 9 1/4% Senior
Subordinated Notes due 2007, the Subordinated Notes are fully and
unconditionally guaranteed, on a joint and several basis, by the Subsidiary
Guarantors. As of July 31, 2000, the total outstanding principal balance on the
Subordinated Notes was approximately $1.7 billion. Interest payment requirements
on the Subordinated Notes are approximately $155.2 million per year, payable in
semi-annual payments.
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AMFM Operating's senior credit facility and the indentures governing AMFM
Operating's 8% Senior Notes due 2008 and the Subordinated Notes contain
customary restrictive covenants, which, among other things and with certain
exceptions, limit the ability of the Company to incur additional indebtedness
and liens in connection therewith, enter into certain transactions with
affiliates, pay dividends, consolidate, merge or effect certain asset sales,
issue additional stock, effect an asset swap and make acquisitions. The Company
is required under its senior credit facility to maintain specified financial
ratios, including leverage, cash flow and debt service coverage ratios. As of
July 31, 2000, the Company remains in compliance with these covenants.
Pending Transaction
On August 30, 1999, the Company entered into an agreement with Cox Radio,
Inc. to acquire KOST-FM and KFI-AM in Los Angeles plus $3.0 million in cash
payable by Cox Radio, Inc. in exchange for 13 of its radio stations, including
WEDR-FM in Miami, WFOX-FM in Atlanta, WEFX-FM, WNLK-AM, WKHL-FM and WSTC-AM in
Stamford/Norwalk, WFYV-FM, WAPE-FM, WBWL-AM, WKQL-FM, WMXQ-FM and WOKV-AM in
Jacksonville and WPLR-FM and the local sales rights of a 14th station, WYBC-FM,
in New Haven. AMFM began programming KOST-FM and KFI-AM in Los Angeles and Cox
Radio, Inc. began programming the 13 Company stations under time brokerage
agreements effective October 1, 1999. Although there can be no assurance, the
Company expects that the exchange will be consummated in the third quarter of
2000.
Consummation of the transaction discussed above is subject to various
conditions, including approval from the Federal Communications Commission, in
the case of radio broadcast station transactions, and the expiration or early
termination of any waiting period required under the HSR Act or any approval
required by the DOJ pursuant to a consent decree. The Company believes that such
conditions will be satisfied in the ordinary course, but there can be no
assurance that this will be the case.
Principal Liquidity Requirements
The principal liquidity requirements of the Company (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 and subject to the terms of the Clear Channel merger agreement, to acquire
additional radio stations or complementary broadcast-related businesses. The
Company believes that disposition of certain assets and cash from operating
activities, together with available revolving credit borrowings under its senior
credit facility, should be sufficient to permit the Company to meet its
obligations. As of July 31, 2000, the Company had $369.9 million available under
its senior credit facility, subject to financial covenants contained in the
senior credit facility and the indentures that govern the indebtedness of the
Company.
In the future, the Company may require additional financing, either in the
form of additional debt or equity securities. The Company 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. The Company 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 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 numerous
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
forecasted or anticipated in such forward-looking statements.
These risks, uncertainties and other factors include, but are not limited
to: the restrictions imposed on the Company by Clear Channel pending completion
of the Clear Channel merger; the potential negative consequences of the
substantial indebtedness of the Company; the restrictions imposed on the Company
by the agreements governing its debt instruments; the competitive nature of the
radio broadcasting and new media businesses; the potential adverse effects of
the recent volatility of internet related stocks; the potential adverse effects
on station 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.
18
<PAGE> 19
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. Management does not anticipate that this
statement will have a material impact on the Company's consolidated financial
statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB No. 25, Accounting for Stock Issued to
Employees. The provisions of this Interpretation became effective July 1, 2000.
Due to the terms of certain options previously granted, the Company will record
a non-cash charge upon consummation of the Clear Channel merger regardless of
the new Interpretation. The size of such charge is not presently determinable
since it will be based on, among other things, the fair value of AMFM's common
stock on the day of the merger. On July 5, 2000, AMFM amended its stock option
plans to provide that all unvested options will accelerate and vest for
employees terminated as a result of the pending AMFM/Clear Channel merger.
Further, those employees will have the remainder of the term of the option to
exercise. As a result of the Interpretation, the amendments have no accounting
impact until an event of termination occurs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK MANAGEMENT
The Company's exposure to market risk associated with changes in interest
rates relates primarily to its debt obligations. The Company manages its
interest rate risk through a combination of fixed and floating rate debt and
swap agreements.
The following table presents descriptions of the financial instruments and
derivative instruments that were held by the Company at June 30, 2000, which are
sensitive to interest rate fluctuation. For the outstanding debt, the table
presents required principal cash flows by maturity date and the related average
interest rate. For the interest rate swaps, the table presents the notional
amounts and expected interest rates that exist by contractual dates, and the
notional amount is used to calculate the contractual payments to be exchanged
under the contract. The variable rates are estimated based on implied forward
rates in the yield curve at the reporting date.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002 2003 2004
------------ ------------ ----------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fixed rate debt
(U.S. $) ................... $ -- $ -- $ -- $ -- $ --
Average interest rate ..... -- -- -- -- --
Variable rate debt
(U.S. $) ................... $ -- $ 2,855,000 $ -- $ -- $ --
Average interest rate ..... -- 8.42% -- -- --
Interest rate swaps
(variable to fixed):
Notional amount ............ $ 100,000 $ 400,000 $ -- $ -- $ --
Unrecorded gain --
fair value ................. -- -- -- -- --
Average pay rate ........... 5.83% 5.17% -- -- --
Average receive rate ....... 6.92% 7.14% -- -- --
</TABLE>
<TABLE>
<CAPTION>
THEREAFTER TOTAL FAIR VALUE
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed rate debt
(U.S. $) ................... $ 2,492,310 $ 2,492,310 $ 2,539,074
Average interest rate ..... 8.53% 8.53%
Variable rate debt
(U.S. $) ................... $ -- $ 2,855,000 $ 2,855,000
Average interest rate ..... -- 8.42%
Interest rate swaps
(variable to fixed):
Notional amount ............ $ -- $ 500,000
Unrecorded gain --
fair value ................. -- -- $ 8,793
Average pay rate ........... -- 5.30%
Average receive rate ....... -- 7.09%
</TABLE>
19
<PAGE> 20
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 24, 1998, in connection with Capstar Broadcasting Corporation's
then pending acquisition of Triathlon Broadcasting Company, Capstar Broadcasting
was notified of an action filed on behalf of all holders of depositary shares of
Triathlon against Triathlon, Triathlon's directors, and Capstar Broadcasting.
The action was filed in the Court of Chancery of the State of Delaware (Civil
Action No. 16560) in and for New Castle County, Delaware by Herbert Behrens. The
complaint alleges that Triathlon and its directors breached their fiduciary
duties to the class of depositary stockholders. Capstar Broadcasting is accused
of knowingly aiding and abetting the breaches of fiduciary duties allegedly
committed by the other defendants. The complaint sought to have the action
certified as a class action and sought to enjoin the Triathlon acquisition, or
in the alternative, sought monetary damages in an unspecified amount. On April
30, 1999, the acquisition of Triathlon closed. On May 26, 2000, the parties
signed a Stipulation Settlement that provided for a proposed settlement of the
lawsuit. That proposed settlement is subject to court approval. The amount of
the settlement will equal $0.11 in additional consideration for each depositary
share owned by any class member at the effective time of the Triathlon
acquisition. At the time of the acquisition, there were approximately 5.8
million depositary shares outstanding. Capstar Broadcasting also agreed not to
oppose plaintiff's counsel's application for attorney fees and expenses in the
aggregate amount of $0.2 million. On July 11, 2000, the court preliminarily
approved the proposed settlement. The court has set a fairness hearing for the
proposed settlement for August 29, 2000. On November 19, 1999, Capstar
Broadcasting merged into Chancellor Mezzanine Holdings Corporation and the
surviving corporation was renamed AMFM Holdings Inc.
In September 1998, a stockholder class action complaint was filed in the
Delaware Court of Chancery by a stockholder purporting to act individually and
on behalf of all other persons, other than defendants, who own securities of
AMFM and are similarly situated. The defendants named in the case are AMFM,
Hicks Muse, Thomas O. Hicks, Jeffrey A. Marcus, James E. de Castro, Eric C.
Neuman, Lawrence D. Stuart, Jr., Steven Dinetz, Thomas J. Hodson, Perry Lewis,
John H. Massey and Vernon E. Jordan, Jr. The plaintiff alleges breach of
fiduciary duties, gross mismanagement, gross negligence or recklessness, and
other matters relating to the defendants' actions in connection with the Capstar
merger. The plaintiff sought to certify the complaint as a class action, enjoin
consummation of the Capstar merger, order defendants to account to plaintiff and
other alleged class members for damages, and award attorneys' fees and other
costs. The Company believes that the lawsuit is without merit and intends to
vigorously defend the action.
On April 11, 2000 an action was commenced in New York Supreme Court, New
York County, by Interep National Radio Sales, Inc. seeking $47.1 million in
damages, plus interest, from Clear Channel Communications, Inc. and $19.7
million in damages, plus interest, from Katz Communications, Inc., a
co-defendant and an indirect wholly-owned subsidiary of the Company. The
complaint alleges, among other things, that Clear Channel wrongfully terminated
a February 3, 1996 agreement between Clear Channel and Interep under which
Interep agreed to act as Clear Channel's exclusive advertising representative by
procuring advertising time on Clear Channel's radio stations and also under
which Interep, Clear Channel and Katz executed certain "triparty agreements" in
which Interep agreed to buy out the existing representation agreement of Clear
Channel's then current representative, Katz, for $23.0 million. The complaint
also alleges that Interep's representation agreement, by its terms, could not be
terminated by Clear Channel until February 1, 2005 and that Clear Channel's
November 30, 1999 termination of Interep constituted a breach of the
representation agreement. The complaint alleges further that Clear Channel and
Katz continue to demand that Interep make all buy out payments to Katz as set
forth in the various triparty agreements. $5.2 million of the requested damages
correspond to buyouts in excess of the pro rata amount attributable to the time
Interep had the right to represent the bought out stations and $0.3 million of
the requested damages correspond to a refund of a portion of a "signing bonus"
paid by Interep to Clear Channel upon the execution of Interep's representation
agreement. The complaint does not specify the basis for the remaining damages
sought by Interep. Although this matter is in the early stages of litigation,
Katz has pending before the Court a motion to dismiss entirely all the claims
asserted by Interep against it.
On July 13, 2000, a lawsuit was filed in the Supreme Court of the State of
New York, County of Westchester by plaintiff Charles E. Armstrong against AMFM
Inc. and AMFM Interactive, Inc. The complaint alleges that AMFM Inc. and AMFM
Interactive, Inc. breached an alleged employment agreement and also an alleged
agreement to issue stock options to the plaintiff. The plaintiff seeks a
declaration regarding his rights and obligations under the alleged employment
agreement and compensatory and punitive damages in excess of $50.0 million. AMFM
Inc. and AMFM Interactive, Inc. deny the existence of any employment agreement,
and also deny that they have breached any agreement to issue stock options to
Mr. Armstrong. AMFM and AMFM Interactive, Inc. are vigorously defending the
action.
20
<PAGE> 21
The Company is also involved in various other claims and lawsuits which are
generally incidental to its business. The Company is also vigorously contesting
all of these matters and believes that the ultimate resolution of these matters
and those mentioned above will not have a material adverse effect on its
consolidated financial position, results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
4.9.6(1) -- Sixth Supplemental Indenture, dated June 2, 2000, to
the Indenture, dated as of October 28, 1997, governing
the 101/2% Senior Subordinated Notes due 2007 of AMFM
Operating Inc.
10.4.3(1) -- Second Amendment to Chancellor Holdings Corp. 1994
Director Stock Option Plan.
10.5.3(1) -- Second Amendment to the 1995 Stock Option Plan for
Executive Officers and Key Employees of Evergreen Media
Corporation.
10.6.3(1) -- Second Amendment to Chancellor Broadcasting Company
1996 Stock Award Plan.
10.7.4(1) -- Third Amendment to Amended and Restated AMFM Inc. Stock
Option Plan for Non-Employee Directors.
10.8.4(1) -- Third Amendment to the Capstar Broadcasting Corporation
1998 Stock Option Plan.
10.9.4(1) -- Third Amendment to the AMFM Inc. 1998 Stock Option
Plan.
10.10.4(1) -- Third Amendment to the AMFM Inc. 1999 Stock Option
Plan.
27.1* -- Financial Data Schedule of AMFM Operating Inc.
----------
* Filed herewith.
(1) Incorporated by reference to Exhibits to AMFM Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.
(b) Reports on Form 8-K
1. Current Report on Form 8-K (Items 5 and 7), dated May 5, 2000 and filed
May 8, 2000, announcing (i) the commencement of a tender offer to purchase for
cash all of AMFM Operating's outstanding 10 1/2% Senior Subordinated Notes due
2007 and (ii) the receipt by AMFM Operating of the consent of the holder of the
majority in aggregate principal amount of the 10 1/2% Senior Subordinated Notes
due 2007 to proposed amendments to eliminate certain restrictive covenants and
to amend certain other provisions of the indenture to which the 10 1/2% Senior
Subordinated Notes due 2007 were issued.
21
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMFM OPERATING INC.
By: /s/ W. SCHUYLER HANSEN
----------------------------
W. Schuyler Hansen
Senior Vice President and
Chief Accounting Officer
Date: August 14, 2000
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C> <C>
4.9.6(1) -- Sixth Supplemental Indenture, dated June 2, 2000, to the Indenture, dated as of October 28, 1997,
governing the 101/2% Senior Subordinated Notes due 2007 of AMFM Operating Inc.
10.4.3(1) -- Second Amendment to Chancellor Holdings Corp. 1994 Director Stock Option Plan.
10.5.3(1) -- Second Amendment to the 1995 Stock Option Plan for Executive Officers and Key Employees of
Evergreen Media Corporation.
10.6.3(1) -- Second Amendment to Chancellor Broadcasting Company 1996 Stock Award Plan.
10.7.4(1) -- Third Amendment to Amended and Restated AMFM Inc. Stock Option Plan for Non-Employee Directors.
10.8.4(1) -- Third Amendment to the Capstar Broadcasting Corporation 1998 Stock Option Plan.
10.9.4(1) -- Third Amendment to the AMFM Inc. 1998 Stock Option Plan.
10.10.4(1) -- Third Amendment to the AMFM Inc. 1999 Stock Option Plan.
27.1* -- Financial Data Schedule of AMFM Operating Inc.
</TABLE>
----------
* Filed herewith.
(1) Incorporated by reference to Exhibits to AMFM Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.
