<PAGE> 1
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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 MARCH 31, 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 May 11, 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..................................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 17
Item 6. Exhibits and Reports on Form 8-K.................................................. 18
Signature......................................................................... 20
</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>
ASSETS
DECEMBER 31, MARCH 31,
1999 2000
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................................... $ 14,634 $ 28,494
Accounts receivable, less allowance for doubtful accounts of $21,428 in 1999
and $27,385 in 2000 .................................................................... 531,818 455,380
Other current assets .................................................................... 95,358 62,174
------------- ------------
Total current assets ............................................................. 641,810 546,048
Property and equipment, net ............................................................... 471,051 459,221
Intangible assets, net .................................................................... 10,352,530 10,086,069
Investments in non-consolidated affiliates ................................................ 1,103,442 1,081,115
Other assets, net ......................................................................... 251,036 248,894
------------- ------------
$ 12,819,869 $ 12,421,347
============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses ................................................... $ 290,577 $ 306,712
Long-term debt ............................................................................ 5,644,517 5,394,941
Deferred tax liabilities .................................................................. 1,716,441 1,677,118
Other liabilities ......................................................................... 60,154 52,023
------------- ------------
Total liabilities ................................................................ 7,711,689 7,430,794
------------- ------------
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 5,592,257
Accumulated deficit ..................................................................... (447,747) (601,705)
------------- ------------
Total stockholder's equity ....................................................... 5,108,180 4,990,553
------------- ------------
$ 12,819,869 $ 12,421,347
============= ============
</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
----------------------
MARCH 31, MARCH 31,
1999 2000
--------- ---------
<S> <C> <C>
Gross revenues ........................................................... $ 394,123 $ 588,884
Less agency commissions ................................................ 43,858 67,614
--------- ---------
Net revenues ........................................................ 350,265 521,270
Operating expenses ...................................................... 208,510 308,088
Depreciation and amortization ........................................... 147,744 209,568
Corporate general and administrative .................................... 17,814 15,302
Non-cash compensation ................................................... -- 34,878
Merger and non-recurring costs .......................................... 16,344 11,115
--------- ---------
Operating loss ...................................................... (40,147) (57,681)
Interest expense, net ................................................... 84,392 113,888
Loss (gain) on disposition of assets .................................... 82 (22,819)
Gain on disposition of representation contracts ......................... (3,685) (16,217)
--------- ---------
Loss before income taxes ............................................ (120,936) (132,533)
Income tax benefit ....................................................... 26,967 6,311
--------- ---------
Loss before equity in net loss of affiliates and extraordinary item .... (93,969) (126,222)
Equity in net loss of affiliates ......................................... -- 24,631
--------- ---------
Loss before extraordinary item ......................................... (93,969) (150,853)
Extraordinary loss, net of income tax benefit ............................ -- 6,094
--------- ---------
Net loss attributable to common stock .................................. $ (93,969) $(156,947)
========= =========
</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>
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
1999 2000
---------- ----------
<S> <C> <C>
Net cash provided by operating activities ........................ $ 91,236 $ 190,720
---------- ----------
Cash flows from investing activities:
Acquisitions, net of cash acquired ............................. (346,790) (5,255)
Proceeds from sale of assets ................................... -- 93,711
Purchases of property and equipment ............................ (9,771) (9,451)
Construction of advertising structures ......................... (5,157) --
Payments made for purchases of representation contracts ........ (8,676) (8,277)
Payments received from sales of representation contracts ....... 6,187 5,624
Other .......................................................... (2,677) (1,235)
---------- ----------
Net cash provided by (used by) investing activities .... (366,884) 75,117
---------- ----------
Cash flows from financing activities:
Proceeds of long-term debt ..................................... 329,000 212,500
Payments on long-term debt ..................................... (47,000) (470,793)
Contributions from parent ...................................... 3,336 20,303
Dividends to parent ............................................ (6,417) (9,453)
Distributions to parent ........................................ (8,458) (4,534)
---------- ----------
Net cash provided by (used by) financing activities .... 270,461 (251,977)
---------- ----------
Increase (decrease) in cash and cash equivalents ................. (5,187) 13,860
Cash and cash equivalents at beginning of period ................. 12,256 14,634
---------- ----------
Cash and cash equivalents at end of period ....................... $ 7,069 $ 28,494
========== ==========
</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 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's common stock
held on the closing date of the transaction and AMFM will become a wholly-owned
subsidiary of Clear Channel. Pursuant to the Telecommunications Act of 1996, the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other regulatory
guidelines, it is expected that, collectively, Clear Channel and the Company
will need to divest between 110 and 115 radio stations in the aggregate in
approximately 37 markets or geographical areas to obtain antitrust and Federal
Communications Commission (the "FCC") approval for the merger. At March 31,
2000, AMFM and Clear Channel have signed definitive agreements to sell 110 of
these stations for an aggregate cash sales price of approximately $4.3 billion.
Of these stations, 66 are owned and operated by the Company. Completion of these
sales is subject to the completion of the Clear Channel merger, obtaining
regulatory approvals and other closing conditions. In addition, the Company may
need to make further divestitures of radio stations or other assets or interests
in order to gain the approval of the federal and state antitrust authorities
6
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AMFM OPERATING INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
for the merger. On April 26, 2000 and April 27, 2000, stockholders of both
companies approved the merger. Although there can be no assurance, the Company
expects that the Clear Channel merger will be consummated by September 30, 2000.
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.
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 three-month period ended March
31, 2000 follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
2000
-------------
<S> <C>
Property and equipment.................................... $ 566
Intangible assets......................................... 4,689
-------------
Total net assets acquired....................... $ 5,255
=============
</TABLE>
The unaudited pro forma condensed consolidated results of operations data
for the three months ended March 31, 1999 and 2000, as if the acquisitions and
dispositions through March 31, 2000 occurred at January 1, 1999, follow:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
1999 2000
----------- -----------
<S> <C> <C>
Net revenues............................................. $ 427,293 $ 520,796
Loss before extraordinary item........................... (154,543) (150,247)
Net loss................................................. (154,543) (156,341)
</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.
(b) Pending Transactions
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 in the second quarter
of 2000.
On January 19, 2000, the Company entered into an agreement to exchange radio
station KSKY-AM in Dallas for radio station KPRZ-FM in Colorado Springs owned by
Bison Media, Inc., plus $7,500 in cash payable by Bison Media. Although there
can be no
7
<PAGE> 8
AMFM OPERATING INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
assurance, the Company expects to complete the asset exchange in the
second quarter of 2000.
4. REDEMPTION 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.
5. CONTINGENCIES
On July 24, 1998, in connection with Capstar Broadcasting's then pending
acquisition of Triathlon Broadcasting Company, Capstar Broadcasting was notified
of an action filed on behalf of all holders of depository shares of Triathlon
against Triathlon, Triathlon's directors, and Capstar Broadcasting. The action
was filed in the Court of Chancery of the State of Delaware (Civil Action No.
16560) in and for New Castle County, Delaware by Herbert Behrens. The complaint
alleges that Triathlon and its directors breached their fiduciary duties to the
class of depository stockholders by agreeing to a transaction with Capstar
Broadcasting that allegedly favored the class A common stockholders at the
expense of the depository stockholders. Capstar Broadcasting is accused of
knowingly aiding and abetting the breaches of fiduciary duties allegedly
committed by the other defendants. The complaint sought to have the action
certified as a class action and sought to enjoin the Triathlon acquisition, or
in the alternative, sought monetary damages in an unspecified amount. On
February 12, 1999, the parties signed a memorandum of understanding that
provided for the settlement of the lawsuit. The amount of the settlement will
equal $0.11 in additional consideration for each depositary share owned by any
class member at the effective time of the Triathlon acquisition. 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. The proposed settlement is contingent upon confirmatory discovery by the
plaintiff, execution of a definitive settlement agreement, and court approval.
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 $47,118 in damages
from Clear Channel Communications, Inc. Also named as a defendant is Katz
Communications, Inc., 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.
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.
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AMFM OPERATING INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. NON-CASH COMPENSATION
The Company recorded non-cash compensation of $34,878 during the three
months ended March 31, 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 for the three months
ended March 31, 1999 and 2000:
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Severance(a)..................................... $ 12,196 $ 8,399
Merger and other(b).............................. 4,148 2,716
-------- --------
$ 16,344 $ 11,115
======== ========
</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.
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 ended
March 31, 2000, the Company incurred costs of $3,059, of which $2,637
related to personnel costs. At March 31, 2000, $8,978 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
----
The Company incurred costs of $1,663 for the three months ended March
31, 2000 related to the Clear Channel merger and developmental costs of
$1,053 related to the Galaxy(TM) system, the Company's proprietary
traffic system.
8. SEGMENT DATA
During the three months ended March 31, 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 Advertising Company 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:
9
<PAGE> 10
AMFM OPERATING INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
1999 2000
--------- ---------
<S> <C> <C>
AMFM Radio Group -- radio broadcasting:
Net revenues ...................................... $ 261,779 $ 480,706
Operating expenses ................................ 154,121 279,662
Depreciation and amortization ..................... 104,682 192,327
Merger and non-recurring costs .................... -- 8,387
Operating loss .................................... (298) (2,742)
AMFM New Media Group -- media representation:
Net revenues ...................................... 39,695 49,784
Operating expenses ................................ 30,748 37,646
Depreciation and amortization ..................... 7,783 11,071
Merger and non-recurring costs .................... -- 1,053
Operating loss .................................... (344) (2,814)
Chancellor Outdoor Group -- outdoor advertising:
Net revenues ...................................... 53,601 --
Operating expenses ................................ 28,451 --
Depreciation and amortization ..................... 31,396 --
Merger and non-recurring costs .................... -- --
Operating loss .................................... (9,071) --
</TABLE>
The segment financial data includes intersegment revenues and expenses which
must be excluded to reconcile to the Company's consolidated financial
statements. In addition, certain depreciation and amortization expenses,
corporate general and administrative expenses, non-cash compensation 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
------------------------
MARCH 31, MARCH 31,
1999 2000
----------- -----------
<S> <C> <C>
Intersegment net revenues..................................... $ 4,810 $ 9,220
Intersegment operating expenses............................... 4,810 9,220
Unallocated depreciation and amortization..................... 3,883 6,170
Unallocated corporate general and administrative expenses..... 10,207 9,402
Unallocated non-cash compensation............................. -- 34,878
Unallocated merger and non-recurring costs.................... 16,344 1,675
</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 will be effective July 1, 2000.
If the Clear Channel merger is completed prior to July 1, 2000, the effective
date of the Interpretation, the Company would be required to record a
significant non-cash charge related to certain amendments to AMFM's stock option
plans that are expected to be implemented prior to the consummation of the
merger. Due to the terms of certain options previously granted, the Company will
record a non-cash charge upon consummation of the 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.
10
<PAGE> 11
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. As of March
31, 2000, the Company owned and operated, programmed or sold air time for 442
radio stations (318 FM and 124 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 March 31, 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 ended March 31,
2000 are not comparable to the results of operations for the three months ended
March 31, 1999 due to the impact of the Corporate Reorganization and the
Company's various acquisitions and dispositions. In addition to the Capstar
merger and the Corporate Reorganization, the Company completed the following
transactions from April 1, 1999 through March 31, 2000:
o the sale 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; and
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o the disposition of 14 radio stations (ten FM and four AM) for
approximately $116.1 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.
Completion of the Clear Channel merger is subject to the satisfaction or
waiver of numerous conditions including regulatory approval by the Federal
Communications Commission and the U.S. Department of Justice. Pursuant to the
Telecommunications Act of 1996, the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 and other regulatory guidelines, it is expected that, collectively,
Clear Channel and the Company will need to divest between 110 and 115 radio
stations in the aggregate in approximately 37 markets or geographical areas to
obtain antitrust and Federal Communications Commission (the "FCC") approval for
the merger. At March 31, 2000, AMFM and Clear Channel have signed definitive
agreements to sell 110 of these stations for an aggregate cash sales price of
approximately $4.3 billion. Of these stations, 66 are owned and operated by the
Company. Completion of these sales is subject to the completion of the Clear
Channel merger, obtaining regulatory approvals and other closing conditions. In
addition, the Company may need to make further divestitures of radio stations or
other assets or interests in order to gain the approval of the federal and state
antitrust authorities for the merger. The Company expects that the Clear Channel
merger will be completed by September 30, 2000 if all conditions to the merger
are satisfied. 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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 Compared To Three Months Ended March 31, 1999
AMFM Radio Group net revenues for the three months ended March 31, 2000
increased 83.6% to $480.7 million compared to $261.8 million for the three
months ended March 31, 1999. AMFM Radio Group operating expenses for the three
months ended March 31, 2000 increased 81.5% to $279.7 million compared to $154.1
million for the first 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 and overall net
operational improvements, as evidenced by the increase in AMFM Radio Group's
direct operating margin from 41.1% for the three months ended March 31, 1999 to
41.8% for the first quarter of 2000. Additional factors contributing to the
increase included higher revenues from dot-com clients, the positive effects of
the market strategy implemented in many major markets at the end of the third
quarter of 1999 and improved results for stations which were re-programmed with
Jammin' Oldies. On a pro forma basis for all stations owned and operated as of
March 31, 2000, net revenues increased 23.0% during the three months ended March
31, 2000 compared to the three months ended March 31, 1999 and pro forma net
operating expenses increased 13.6%.
AMFM New Media Group net revenues for the three months ended March 31, 2000
increased 25.4% to $49.8 million compared to $39.7 million for the three months
ended March 31, 1999. AMFM New Media Group operating expenses for the three
months ended March 31, 2000 increased 22.4% to $37.6 million compared to $30.7
million for the first quarter of 1999. This increase in primarily attributable
to Katz, which experienced an increase in net revenues for the three months
ended March 31, 2000 of 17.7% to $46.7 million compared to $39.7 million for the
first 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 merger and provides
the hardware necessary for the utilization of StarSystem(TM), generated $3.1
million in revenues during the first quarter of 2000 from the sale of hardware
to third parties.
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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 $53.6 million and operating
expenses of $28.5 million for the three months ended March 31, 1999.
Depreciation and amortization for the three months ended March 31, 2000
increased 41.8% to $209.6 million compared to $147.7 million for the first
quarter of 1999. The increase is due to the impact of the acquisitions completed
during 1999 and through March 31, 2000.
Corporate general and administrative expenses for the three months ended
March 31, 2000 decreased 14.1% to $15.3 million compared to $17.8 million for
the first quarter of 1999 primarily due to a reduction in personnel.
The non-cash compensation expense of $34.9 million for the three months
ended March 31, 2000 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 three months ended March 31, 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, $3.1 million related to the costs to
terminate employees and close certain facilities in connection with the
implementation of the Company's market strategy, $1.7 million related to the
Clear Channel merger, and other costs of $1.1 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 first
quarter of 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 incurred an operating loss of
$57.7 million for the three months ended March 31, 2000 compared to an operating
loss of $40.1 million for the first quarter of 1999.
Net interest expense for the three months ended March 31, 2000 increased
35.0% to $113.9 million compared to $84.4 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 $22.8 million for the three months
ended March 31, 2000 primarily related to the January 14, 2000 sale of the
capital stock of the Company's Puerto Rico subsidiaries to Spanish Broadcasting
System of Puerto Rico, Inc.
The Company recorded a gain on disposition of representation contracts of
$16.2 million for the three months ended March 31, 2000 and $3.7 million for the
first 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 $6.3 million for the three
months ended March 31, 2000 compared with an income tax benefit of $27.0 million
for the three months ended March 31, 1999 primarily due to an increase in
non-deductible amortization for the first quarter of 2000.
During the first quarter of 2000, the Company recorded equity in net loss of
affiliates of $24.6 million related to the Company's investments accounted for
using the equity method.
During the first quarter of 2000, the Company recorded an extraordinary
charge of $6.1 million, net of a tax benefit of $3.3 million, consisting of the
premiums paid in connection with the redemption of AMFM Operating's 9 3/8%
Subordinated Exchange Debentures due 2004.
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As a result of the above factors, the Company incurred a net loss
attributable to common stock of $156.9 million for the three months ended March
31, 2000 compared to a $94.0 million net loss attributable to common stock for
the first quarter of 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 $190.7 million and $91.2 million for the three
months ended March 31, 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.
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 April 28, 2000, the Company commenced a tender offer to purchase 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. The principal balance as of April 30, 2000 was $100.0 million. Prior
to the initiation of the offer, The Company received the irrevocable consent of
the holder of the majority in aggregate principal amount of the notes to certain
amendments which will eliminate most of the restrictive covenants and certain
other provisions of the indenture pursuant to which the notes were issued.
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 fixed at .50% and 1.50%, respectively, until delivery of AMFM
Operating's 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. The merger of AMFM and Clear
Channel would 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 April 30, 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.
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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 April 30, 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 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 April 30, 2000, the total outstanding principal
balance on the Subordinated Notes was approximately $1.8 billion. Interest
payment requirements on the Subordinated Notes are approximately $165.7 million
per year, payable in semi-annual payments.
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
April 30, 2000, the Company remains in compliance with these covenants.
Pending Transactions
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. The Company 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
second quarter of 2000.
On January 19, 2000, the Company entered into an agreement to exchange radio
station KSKY-AM in Dallas for radio station KPRZ-FM in Colorado Springs owned by
Bison Media, Inc., plus $7.5 million in cash payable by Bison Media. Although
there can be no assurance, the Company expects to complete the asset exchange in
the second quarter of 2000.
Consummation of each of the transactions 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 April 30, 2000, the Company had $397.4 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
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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.
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 will be effective July 1, 2000.
If the Clear Channel merger is completed prior to July 1, 2000, the effective
date of the Interpretation, the Company would be required to record a
significant non-cash charge related to certain amendments to AMFM's stock option
plans that are expected to be implemented prior to the consummation of the
merger. Due to the terms of certain options previously granted, the Company will
record a non-cash charge upon consummation of the 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.
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 March 31, 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.
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<TABLE>
<CAPTION>
NINE 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. $) ................. $ -- $ 2,802,500 $ -- $ -- $ --
Average interest rate .... -- 8.48% -- -- --
Interest rate swaps
(variable to fixed):
Notional amount .......... $ 300,000 $ 400,000 $ -- $ -- $ --
Unrecorded gain -- -- -- -- -- --
fair value .............
Average pay rate ......... 5.89% 5.17% -- -- --
Average receive rate ..... 6.30% 6.99% -- -- --
<CAPTION>
THEREAFTER TOTAL FAIR VALUE
------------ ----------- -----------
Fixed rate debt
(U.S. $) ................. $ 2,592,441 $ 2,592,441 $ 2,588,610
Average interest rate .... 8.60% 8.60%
Variable rate debt
(U.S. $) ................. $ -- $ 2,802,500 $ 2,802,500
Average interest rate .... -- 8.48%
Interest rate swaps
(variable to fixed):
Notional amount .......... $ -- $ 700,000
Unrecorded gain -- -- --
fair value ............. $ 9,734
Average pay rate ......... -- 5.48%
Average receive rate ..... -- 6.70%
</TABLE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 24, 1998, in connection with Capstar Broadcasting's then pending
acquisition of Triathlon Broadcasting Company, Capstar Broadcasting was notified
of an action filed on behalf of all holders of depository shares of Triathlon
against Triathlon, Triathlon's directors, and Capstar Broadcasting. The action
was filed in the Court of Chancery of the State of Delaware (Civil Action No.
16560) in and for New Castle County, Delaware by Herbert Behrens. The complaint
alleges that Triathlon and its directors breached their fiduciary duties to the
class of depository stockholders by agreeing to a transaction with Capstar
Broadcasting that allegedly favored the class A common stockholders at the
expense of the depository stockholders. Capstar Broadcasting is accused of
knowingly aiding and abetting the breaches of fiduciary duties allegedly
committed by the other defendants. The complaint sought to have the action
certified as a class action and sought to enjoin the Triathlon acquisition, or
in the alternative, sought monetary damages in an unspecified amount. On
February 12, 1999, the parties signed a memorandum of understanding that
provided for the settlement of the lawsuit. The amount of the settlement will
equal $0.11 in additional consideration for each depositary share owned by any
class member at the effective time of the Triathlon acquisition. 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
approximately $0.2 million. The proposed settlement is contingent upon
confirmatory discovery by the plaintiff, execution of a definitive settlement
agreement, and court approval. 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 from Clear Channel Communications, Inc. Also named as a defendant is
Katz Communications, Inc., 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
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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.
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
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
-------- ----------------------
<S> <C> <C>
4.7.8(1) -- Seventh Supplemental Indenture, dated as of January
18, 2000, to the Indenture, dated as of February 14,
1996, governing the 9 3/8% Senior Subordinated Notes
due 2004 of AMFM Operating Inc.
4.8.6(1) -- Fifth Supplemental Indenture, dated as of January 18,
2000, to the Indenture, dated as of June 24, 1997,
governing the 8 3/4% Senior Subordinated Notes due
2007 of AMFM Operating Inc.
4.9.5 (1) -- Fifth Supplemental Indenture, dated as of January 18,
2000, to the Indenture, dated as of October 28, 1997,
governing the 10 1/2% Senior Subordinated Notes due
2007 of AMFM Operating Inc.
4.10.4 (1) -- Third Supplemental Indenture, dated as of January 18,
2000, to the Indenture, dated as of December 22, 1997,
governing the 8 1/8% Senior Subordinated Notes due
2007 of AMFM Operating Inc.
4.11.4 (1) -- Third Supplemental Indenture, dated as of January 18,
2000, to the Indenture, dated as of September 30,
1998, governing the 9% Senior Subordinated Notes due
2008 of AMFM Operating Inc.
4.12.4 (1) -- Third Supplemental Indenture, dated as of January 18,
2000, to the Indenture, dated as of November 17, 1998,
governing the 8% Senior Subordinated Notes due 2008 of
AMFM Operating Inc.
10.4.2(2) -- First Amendment to Chancellor Holdings Corp. 1994
Director Stock Option Plan.
10.5.2(2) -- First Amendment to 1995 Stock Option Plan for
executive officers and key employees of Evergreen
Media Corporation.
10.6.2(2) -- First Amendment to Chancellor Broadcasting Company
1996 Stock Award Plan.
10.7.2(2) -- First Amendment to Amended and Restated Chancellor
Media Corporation Stock Option Plan for Non-Employee
Directors.
10.7.3(2) -- Second Amendment to Amended and Restated Chancellor
Media Corporation Stock Option Plan for Non-Employee
Directors.
10.8.3(2) -- Second Amendment to Capstar Broadcasting Corporation
1998 Stock Option Plan.
10.9.2(2) -- First Amendment to Chancellor Media Corporation 1998
Stock Option Plan.
10.9.3(2) -- Second Amendment to Chancellor Media Corporation 1998
Stock Option Plan.
10.10.3(2) -- Second Amendment to AMFM Inc. 1999 Stock Option Plan.
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C>
10.12.3(1) -- Separation Agreement, dated as of February 16, 2000,
among AMFM Inc., AMFM Operating Inc. and James E. de
Castro.
27.1* -- Financial Data Schedule of AMFM Operating Inc.
</TABLE>
- ------------
* Filed herewith.
(1) Incorporated by reference to Exhibits to AMFM Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1999.
(2) Incorporated by reference to Exhibits to AMFM Inc.'s Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000.
(b) Reports on Form 8-K
1. Current Report on Form 8-K (Items 5 and 7), dated January 6, 2000 and
filed January 11, 2000, announcing the completion of the change of control offer
to purchase for cash all of the outstanding 12 5/8% Senior Subordinated Exchange
Debentures due 2006.
19
<PAGE> 20
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: May 11, 2000
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
-------- ----------------------
<S> <C> <C>
4.7.8(1) -- Seventh Supplemental Indenture, dated as of January
18, 2000, to the Indenture, dated as of February 14,
1996, governing the 9 3/8% Senior Subordinated Notes
due 2004 of AMFM Operating Inc.
4.8.6(1) -- Fifth Supplemental Indenture, dated as of January 18,
2000, to the Indenture, dated as of June 24, 1997,
governing the 8 3/4% Senior Subordinated Notes due
2007 of AMFM Operating Inc.
4.9.5(1) -- Fifth Supplemental Indenture, dated as of January 18,
2000, to the Indenture, dated as of October 28, 1997,
governing the 10 1/2% Senior Subordinated Notes due
2007 of AMFM Operating Inc.
4.10.4(1) -- Third Supplemental Indenture, dated as of January 18,
2000, to the Indenture, dated as of December 22, 1997,
governing the 8 1/8% Senior Subordinated Notes due
2007 of AMFM Operating Inc.
4.11.4(1) -- Third Supplemental Indenture, dated as of January 18,
2000, to the Indenture, dated as of September 30,
1998, governing the 9% Senior Subordinated Notes due
2008 of AMFM Operating Inc.
4.12.4(1) -- Third Supplemental Indenture, dated as of January 18,
2000, to the Indenture, dated as of November 17, 1998,
governing the 8% Senior Subordinated Notes due 2008 of
AMFM Operating Inc.
10.4.2(2) -- First Amendment to Chancellor Holdings Corp. 1994
Director Stock Option Plan.
10.5.2(2) -- First Amendment to 1995 Stock Option Plan for
executive officers and key employees of Evergreen
Media Corporation.
10.6.2(2) -- First Amendment to Chancellor Broadcasting Company
1996 Stock Award Plan.
10.7.2(2) -- First Amendment to Amended and Restated Chancellor
Media Corporation Stock Option Plan for Non-Employee
Directors.
10.7.3(2) -- Second Amendment to Amended and Restated Chancellor
Media Corporation Stock Option Plan for Non-Employee
Directors.
10.8.3(2) -- Second Amendment to Capstar Broadcasting Corporation
1998 Stock Option Plan.
10.9.2(2) -- First Amendment to Chancellor Media Corporation 1998
Stock Option Plan.
10.9.3(2) -- Second Amendment to Chancellor Media Corporation 1998
Stock Option Plan.
10.10.3(2) -- Second Amendment to AMFM Inc. 1999 Stock Option Plan.
10.12.3(1) -- Separation Agreement, dated as of February 16, 2000,
among AMFM Inc., AMFM Operating Inc. and James E. de
Castro.
27.1* -- Financial Data Schedule of AMFM Operating Inc.
</TABLE>
- ------------
* Filed herewith.
(1) Incorporated by reference to Exhibits to AMFM Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1999.
(2) Incorporated by reference to Exhibits to AMFM Inc.'s Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 3/31/00
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000908612
<NAME> AMFM OPERATING INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 28,494
<SECURITIES> 0
<RECEIVABLES> 482,765
<ALLOWANCES> 27,385
<INVENTORY> 0
<CURRENT-ASSETS> 546,048
<PP&E> 562,372
<DEPRECIATION> 103,151
<TOTAL-ASSETS> 12,421,347
<CURRENT-LIABILITIES> 306,712
<BONDS> 5,394,941
0
0
<COMMON> 1
<OTHER-SE> 4,990,552
<TOTAL-LIABILITY-AND-EQUITY> 12,421,347
<SALES> 521,270
<TOTAL-REVENUES> 521,270
<CGS> 0
<TOTAL-COSTS> 308,088
<OTHER-EXPENSES> 270,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,888
<INCOME-PRETAX> (132,533)
<INCOME-TAX> (6,311)
<INCOME-CONTINUING> (126,222)
<DISCONTINUED> 0
<EXTRAORDINARY> 6,094
<CHANGES> 0
<NET-INCOME> (156,947)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
