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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 33-92732
---------------------
CAPSTAR RADIO BROADCASTING PARTNERS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3034720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 CONGRESS AVENUE
SUITE 1400
AUSTIN, TEXAS 78701
(Address of principal executive offices) (Zip Code)
</TABLE>
(512) 340-7800
(Registrant's telephone number, including area code)
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Indicate by check mark whether Capstar Broadcasting Corporation ("Capstar
Broadcasting") (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 Capstar Radio's
classes of common stock, as of the latest practicable date: As of May 1, 1999,
1,113,068,214 shares of Common Stock, par value $.01 per share ("Common Stock"),
of Capstar Radio were outstanding. As of such date, there was no public market
for the Common Stock.
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FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND
SUBSIDIARIES
Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999
(unaudited)........................................ 3
Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1999 (unaudited).... 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1998 and 1999
(unaudited)......................................... 5
Notes to 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 Disclosure About Market
Risk................................................ 18
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................... 19
Item 6. Exhibits and Reports on Form 8-K.................... 20
</TABLE>
As used in this Quarterly Report on Form 10-Q, unless the context otherwise
requires, (i) "Capstar Radio" refers to Capstar Radio Broadcasting Partners,
Inc., a direct wholly-owned of Capstar Broadcasting Partners, Inc., (ii) the
"Company" collectively refers to Capstar Radio and its subsidiaries, (iii)
"Capstar Partners" refers to Capstar Broadcasting Partners, Inc., (iv) "Capstar
Broadcasting" refers to Capstar Broadcasting Corporation, the parent company of
Capstar Partners, and (v) "Capstar Communications" refers to Capstar
Communications, Inc. (formerly known as SFX Broadcasting, Inc.), an indirect
subsidiary of Capstar Radio.
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 17,117 $ 12,522
Accounts receivable, net of allowance for doubtful
accounts of $8,352 and $8,085, respectively............ 112,846 91,900
Prepaid expenses and other current assets................. 20,107 23,399
---------- ----------
Total current assets.............................. 150,070 127,821
Property and equipment, net............................... 247,875 252,004
Intangibles and other, net................................ 4,233,139 4,203,825
Other non-current assets.................................. 10,277 8,664
---------- ----------
Total assets...................................... $4,641,361 $4,592,314
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current portion of long-term debt......................... $ 29,834 $ 39,891
Accounts payable.......................................... 11,615 11,247
Accrued liabilities....................................... 68,231 68,011
Income taxes payable...................................... 37,776 3,802
---------- ----------
Total current liabilities......................... 147,456 122,951
Long-term debt, net of current portion.................... 1,409,708 1,424,899
Due from parent........................................... (1,950) (1,262)
Deferred income taxes..................................... 1,191,213 1,181,686
---------- ----------
Total liabilities................................. 2,746,427 2,728,274
Commitments and contingencies
Redeemable preferred stock of subsidiary:
Capstar Communications, Inc., Series E Cumulative
Exchangeable Preferred stock, $.01 par value, 4,150
shares authorized, 1,266 and 1,346 shares issued and
outstanding, respectively, aggregate liquidation
preference of $133,944 and $138,150, respectively...... 148,669 152,511
Stockholder's equity:
Common stock, $.01 par value, 1,500,000 shares authorized;
1,113,068 shares issued and outstanding................ 11,131 11,131
Additional paid-in capital................................ 1,820,229 1,807,245
Unearned compensation..................................... (4,893) (4,397)
Accumulated deficit....................................... (80,202) (102,450)
---------- ----------
Total stockholder's equity........................ 1,746,265 1,711,529
---------- ----------
Total liabilities and stockholder's equity........ $4,641,361 $4,592,314
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Gross broadcast revenue..................................... $ 70,086 $155,721
Less: agency commissions.................................... (6,011) (13,716)
-------- --------
Net broadcast revenue....................................... 64,075 142,005
-------- --------
Operating expenses:
Programming, technical and news........................... 15,780 29,855
Sales and promotion....................................... 18,009 39,059
General and administrative................................ 13,971 23,272
Corporate expenses.......................................... 3,575 6,238
Corporate expenses -- noncash compensation.................. 15,793 2,002
LMA fees.................................................... 1,871 319
Depreciation and amortization............................... 10,968 36,316
Merger, nonrecurring and systems development expense........ -- 2,548
-------- --------
Operating income (loss)..................................... (15,892) 2,396
Other income (expense):
Interest expense.......................................... (10,463) (30,329)
Interest income........................................... 417 99
Other..................................................... (134) (145)
-------- --------
Loss before benefit for income taxes and dividends and
accretion on preferred stock of subsidiary................ (26,072) (27,979)
Benefit for income taxes.................................... 3,186 9,573
Dividends and accretion on preferred stock of subsidiary.... -- 3,842
-------- --------
Net loss.................................................... $(22,886) $(22,248)
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1998 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by (used in) operating
activities...................................... $ 127 $ (8,197)
--------- --------
Cash flows from investing activities:
Proceeds from sale of broadcasting property............... 52,335 --
Purchase of property and equipment........................ (4,076) (11,788)
Payments for acquisitions, net of cash acquired........... (83,262) (14,714)
Payments for pending acquisitions......................... (8,138) (2,036)
Other investing activities, net........................... (353) (580)
--------- --------
Net cash used in investing activities............. (43,494) (29,118)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt and credit facilities........ 105,600 61,000
Repayment of long-term debt and credit facilities......... (248,256) (34,952)
Net proceeds from issuance of common stock................ 556,630 (330)
Equity contributions by Parent............................ -- 7,002
Dividends paid on common stock............................ (224,669) --
--------- --------
Net cash provided by financing activities......... 189,305 32,720
--------- --------
Net increase (decrease) in cash and cash equivalents........ 145,938 (4,595)
Cash and cash equivalents at beginning of period............ 70,719 17,117
--------- --------
Cash and cash equivalents at end of period.................. $ 216,657 $ 12,522
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
Information with respect to the three month periods ended March 31, 1998
and 1999 is unaudited. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the unaudited interim consolidated
financial statements contain all adjustments considered necessary for a fair
presentation. Operating results for the three month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999, or for any other interim period. For further
information, refer to the consolidated financial statements and footnotes
thereto for the year ended December 31, 1998 for Capstar Radio included in the
Form 10-K of Capstar Radio (Commission File No. 33-92732).
The consolidated financial statements include the accounts of Capstar
Radio, and its direct and indirect wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
NOTE 2 -- CHANCELLOR MERGER AGREEMENT
On August 26, 1998, Capstar Broadcasting and Chancellor Media Corporation
("Chancellor Media"), an affiliate of Capstar Broadcasting, entered into a
merger agreement (the merger agreement was subsequently amended and restated
effective April 29, 1999). Under the merger agreement:
- Chancellor Media will acquire Capstar Broadcasting in a merger between a
wholly-owned subsidiary of Chancellor Media and Capstar Broadcasting,
with Capstar Broadcasting surviving the merger as a wholly-owned
subsidiary of Chancellor Media;
- each share of Class A Common Stock, par value $0.01 per share, of Capstar
Broadcasting ("Class A Common Stock"), Class B Common Stock, par value
$0.01 per share, of Capstar Broadcasting, and Class C Common Stock, par
value $0.01 per share, of Capstar Broadcasting, will represent 0.4955
shares of common stock in Chancellor Media;
- each Capstar Broadcasting stock option and warrant that is outstanding
and unexercised immediately prior to the merger will be assumed by
Chancellor Media and will thereafter be an option or warrant to acquire
0.4955 shares of common stock of Chancellor Media;
- each share of Chancellor Media common stock will remain equal to one
share of Chancellor Media common stock; and
- each share of Chancellor Media preferred stock will remain equal to one
share of Chancellor preferred stock.
The completion of the merger depends on the satisfaction of a number of
conditions. There can be no assurance that all of the conditions to the merger
will be satisfied. Either company may waive compliance with the conditions at
its discretion if permitted by law.
NOTE 3 -- RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging
6
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CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This pronouncement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management does not
believe the implementation of this accounting pronouncement will have a material
effect on its consolidated financial statements.
NOTE 4 -- ACQUISITIONS AND DISPOSITIONS OF BROADCASTING PROPERTIES
During the three months ended March 31, 1999, Capstar Radio acquired 11 FM
and 3 AM radio stations and related broadcast equipment through several
acquisitions, all of which have been accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets and
liabilities acquired based upon their fair values at the date of acquisition.
The excess purchase price over the fair value of net tangible assets acquired is
allocated to intangible assets, primarily FCC licenses. The results of
operations associated with the acquired radio stations have been included in the
accompanying consolidated financial statements from the dates of acquisition.
Acquisition activity during the three months ended March 31, 1999 was as
follows. All consideration paid for the acquisitions scheduled below consisted
solely of cash.
<TABLE>
<CAPTION>
STATIONS
ACQUIRED
---------
TRANSACTION FM AM DATE OF ACQUISITION PURCHASE OF COST
- ----------- --- --- ------------------- ----------- -------
<S> <C> <C> <C> <C> <C>
Appalachian Broadcasting Company,
Inc................................... 1 -- February 1999 Assets $ 1,056
Noalmark Broadcasting Corp.............. 1 1 March 1999 Assets 3,395
Champion Broadcasting Corporation....... 9 2 March 1999 Assets 12,539
-------
$16,990
=======
</TABLE>
The acquisitions during the three months ended March 31, 1999 are
summarized in the aggregate as follows:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED
MARCH 31,
1999
------------
<S> <C>
Consideration:
Cash................................................. $15,522
Acquisition costs.................................... 1,468
-------
Total........................................ $16,990
=======
Assets acquired:
Property and equipment............................... $ 4,639
Intangible assets.................................... 12,351
-------
Total........................................ $16,990
=======
</TABLE>
On March 18, 1999, Capstar Broadcasting contributed to Muzak Holdings LLC
("Muzak Holdings") Capstar Broadcasting's Muzak affiliate territories in
Atlanta, Albany and Macon, Georgia and Ft. Myers, Florida in exchange for voting
membership units in Muzak Holdings. On May 3, 1999, Capstar Broadcasting
contributed to Muzak Holdings its Muzak affiliate territory located in Omaha,
Nebraska that Capstar Broadcasting acquired from Triathlon Broadcasting Company
on April 30, 1999, in exchange for additional voting membership units in Muzak
Holdings. The value of the membership units in Muzak Holdings that
7
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CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Capstar Broadcasting then held was approximately $20,500, subject to a working
capital adjustment to be finalized. The investment in Muzak Holdings represents
the book value of the net assets contributed, which approximates fair value.
Upon completion of the contribution of the Omaha affiliate territory, Capstar
Broadcasting then held approximately 22.87% of the then outstanding voting power
of Muzak Holdings.
The following unaudited proforma summary presents the consolidated results
of operations for the three months ended March 31, 1998 and 1999 as if all the
acquisitions and dispositions completed through March 31, 1999 had occurred at
the beginning of 1998. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would have
occurred had the acquisitions and dispositions been made as of that date or of
results which may occur in the future.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
1998 1999
-------- --------
<S> <C> <C>
Net revenue................................................. $125,562 $139,371
======== ========
Net loss.................................................... $(45,741) $(23,406)
======== ========
</TABLE>
Subsequent to March 31, 1999, Capstar Radio acquired 22 FM and 10 AM radio
stations and related broadcast equipment through the acquisition of Triathlon
Broadcasting Company ("Triathlon") for aggregate consideration in cash of
approximately $201,000. This acquisition was funded with borrowings from Capstar
Radio's credit facility. In order to consummate the acquisition of Triathlon,
Capstar Radio was required to dispose of certain radio stations in the Colorado
Springs, Colorado, Spokane, Washington and Wichita, Kansas markets. Therefore,
concurrently with the acquisition of Triathlon, Capstar Radio sold 1 FM and 3 AM
radio stations (all of which were owned by Triathlon) in the Colorado Springs
and Spokane markets to Citadel Broadcasting Company ("Citadel") for $10,000 in
cash and exchanged radio station KSPZ-FM for KKLI-FM in the Colorado Springs
market with Citadel. In addition, Capstar Radio placed 2 FM and 3 AM radio
stations from the Wichita market (one of which was an existing Capstar Radio AM
station) into trust pending the sale of the stations. As a result of the above
transactions, Capstar Radio added 19 FM and 5 AM radio stations in six markets
to its portfolio of radio stations.
Subsequent to March 31, 1999, Capstar Radio disposed of one AM station and
related broadcast equipment for approximately $500 in cash.
Additionally, Capstar Radio has entered into the following;
- one agreement to acquire two additional stations in Harrisburg,
Pennsylvania for approximately $12,750; and
- one agreement to dispose of one AM station for approximately $500.
Upon completion of the pending transactions, Capstar Radio will own and
operate 340 stations in primarily mid-sized markets located throughout the
United States. Consummation of each of the pending transactions is subject to
numerous conditions, including governmental approvals. Accordingly, the actual
date of consummation of each of the pending transactions may vary from the
anticipated closing dates. No assurances can be given that any or all of the
pending transactions will be consummated or that, if completed, they will be
successful.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
On July 13, 1998, Noddings Investment Group, Inc. and Noddings Warrant
Limited Partnership filed Civil Action No. 16538 in the Court of Chancery of the
State of Delaware in and for New Castle County
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CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
against Capstar Communications, Noddings alleges that Capstar Communications
breached a warrant agreement that Noddings contends requires Capstar
Communications to permit Noddings to exercise warrants in exchange for cash and
shares of stock of SFX Entertainment, Inc. Specifically, Noddings alleges that
Capstar Communications has violated the warrant agreement by permitting Noddings
to receive cash in exchange for its warrants, but refusing to convey shares of
stock of SFX Entertainment. In addition to suing on its own behalf, Noddings is
seeking to prosecute the action on behalf of a putative class comprised of all
persons who owned equivalent warrants on April 21, 1998 (the date immediately
following the record date of the distribution of stock of SFX Entertainment to
holders of the stock of SFX) and their transferees and successors in interest.
Noddings has requested that the Court:
- declare that on the exercise of its warrants Capstar Communications
transmit to plaintiffs and members of the class that it seeks to
represent $22.3725 in cash per warrant and 0.2983 shares of common stock
of SFX Entertainment per warrant,
- require Capstar Communications to pay 0.2983 shares of common stock of
SFX Entertainment per warrant and, (if not previously paid) $22.3725 in
cash, to any putative class member that has exercised or exercises
warrants after April 20, 1998,
- in the alternative, award plaintiffs and members of the putative class
monetary damages in an amount to be determined at trial, and
- award costs and attorneys' fees.
In March 1999, the court issued an opinion dismissing two of Noddings'
counts and granted summary judgment in favor of Noddings on one count. The court
held that Noddings is entitled to 0.2983 shares of SFX Entertainment, Inc. stock
per warrant. Both parties have filed a notice of appeal.
On July 24, 1998 in connection with the acquisition of Triathlon
Broadcasting Company, Capstar Radio was notified of an action filed on behalf of
all holders of depository shares of Triathlon against Triathlon, its directors,
and Capstar Radio. The action was filed in the Court of Chancery of the State of
Delaware in and for New Castle County, Delaware. The complaint alleges that
Triathlon and its directors breached their fiduciary duties to the class of
depository shareholders by agreeing to a transaction with Capstar Radio that
allegedly favored the Class A common shareholders of Triathlon at the expense of
the depository shareholders. Capstar Radio is accused of knowingly aiding and
abetting the breaches of fiduciary duties allegedly committed by the other
defendants. The complaint seeks to have the action certified as a class action
and seeks to enjoin the Triathlon acquisition or, in the alternative, seeks
monitory damages in an unspecified amount. On February 12, 1999, the parties
signed a Memorandum of Understanding that provides for the settlement of the
lawsuit. The amount of the settlement will equal $0.11 additional consideration
for each depository share owned by any class member at the effective time of the
Triathlon acquisition. Capstar Radio also agreed not to oppose plaintiff's
counsel's application for attorney's fees and expenses in the aggregate amount
of $150. The proposed settlement is contingent upon a confirmatory discovery by
the plaintiff, executive of a definitive settlement agreement and court
approval.
Capstar Radio is subject to various legal proceedings and claims that arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not have a material
impact on the consolidated financial position or results of operations or cash
flows of Capstar Radio.
NOTE 6 -- SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company is engaged principally in
one line of business-ownership and manage-
9
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CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ment of radio broadcast stations ("Radio") which represents more than 95% of
consolidated net revenue. Radio is the Company's only reportable segment.
Operating segments categorized as "Other" include results of insignificant
operations and income and expense not allocated to reportable segments.
The Company evaluates the performance of its operating segments and
allocates resources to them based on their net revenue and broadcast cash flow
("BCF") which consists of operating income before merger, nonrecurring and
systems development expense; depreciation, amortization, LMA fees, non-cash
compensation expense, and corporate expenses.
The Company has developed an operating structure designed to manage a large
and growing number of radio stations throughout the United States. The Radio
segment is operationally organized into six regions.
The table below presents information about the reportable and "Other"
operating segments. The prior period's segment information has been restated to
conform with the current period's presentation. For the three months ended March
31, 1998 and 1999, segment data includes intersegment revenues.
<TABLE>
<CAPTION>
RADIO OTHER TOTAL
-------- ------ --------
<S> <C> <C> <C>
1998:
Net revenue............................................... $ 60,844 $3,231 $ 64,075
BCF....................................................... 16,099 216 16,315
1999:
Net revenue............................................... 137,266 6,332 143,598
BCF....................................................... 50,719 (508) 50,211
</TABLE>
A reconciliation of total segment net revenue to total consolidated net
revenue and of total segment BCF to total consolidated loss before benefit for
income taxes and extraordinary item, for the three months ended March 31, 1998
and 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
NET REVENUE
Total segment net revenue................................... $ 64,075 $143,598
Elimination of intersegment net revenue..................... -- (1,593)
-------- --------
Consolidated net revenue.................................. $ 64,075 $142,005
======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
BCF
Total BCF for reportable segments........................... $ 16,315 $ 50,211
Corporate Expenses.......................................... (3,575) (6,238)
Corporate expenses -- noncash compensation.................. (15,793) (2,002)
LMA fees.................................................... (1,871) (319)
Depreciation and Amortization............................... (10,968) (36,316)
Merger, nonrecurring and other expense...................... -- (2,548)
Nonoperating expenses....................................... (10,180) (30,375)
Intercompany profit......................................... -- (392)
-------- --------
Consolidated loss before income taxes and dividends and
accretion on preferred stock of subsidiaries.............. $(26,072) $(27,979)
======== ========
</TABLE>
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
In Management's Discussion and Analysis, management explains the general
financial condition and the results of operations of Capstar Radio including:
- what factors affect Capstar Radio' business;
- what Capstar Radio's earnings and costs were in 1998 and 1999;
- why those earnings and costs were different from the period before;
- where Capstar Radio's earnings come from;
- how all of this affects Capstar Radio's overall financial condition;
- what Capstar Radio's expenditures for acquisitions and other capital
needs were in the first quarter of 1999 and what management expects them
to be for the remainder of the year; and
- where cash will come from to pay for future capital expenditures and debt
service obligations.
As you read this Management's Discussion and Analysis, it may be helpful to
refer to Capstar Radio's Consolidated Financial Statements on pages 3 through 5.
In Management's Discussion and Analysis, management analyzes and explains the
changes in the specific line items in the consolidated statements of operations
and other data. You should know that these changes are not historically
comparable because of the numerous acquisitions and dispositions that Capstar
Radio has completed since its inception. Management's analysis may be important
to you in making decisions about your investments in Capstar Radio.
Capstar Broadcasting Chancellor Media have agreed to merge. The merger with
Chancellor Media may impact many of the matters discussed in this Management's
Discussion and Analysis, including earnings, results of operations, expenses,
liquidity and capital resources.
Management believes that it is important to discuss advertising revenues
and seasonal fluctuations of advertising revenues, two factors that have a
strong influence on Capstar Radio's business performance:
- Advertising Revenues. Capstar Radio's revenues are derived primarily from
the sale of time to local and national advertisers. These revenues are
affected by the advertising rates that Capstar Radio is able to charge
and the number of advertisements that can be broadcast without
jeopardizing listener levels (and resulting ratings). Advertising rates
tend to be based upon demand for a station's advertising inventory and
its ability to attract audiences in targeted demographic groups, as
measured principally by Arbitron. Capstar Radio attempts to maximize
revenues for each of its stations by adjusting rates based upon local
market conditions, controlling advertising inventory and creating demand
and audience ratings.
- Seasonality. Seasonal revenue fluctuations are common in the radio
broadcasting industry and are due primarily to fluctuations in
advertising expenditures by local and national advertisers. Advertising
expenditures are typically lowest in the first calendar quarter and
highest in the second and fourth calendar quarters of each year. Capstar
Radio's operating results in any period may be affected by the occurrence
of advertising and promotion expenses that do not produce commensurate
revenues in the period in which the expenditures are made. Because
Arbitron reports audience ratings on a quarterly basis, Capstar Radio's
ability to realize revenues as a result of increased advertising and
promotional expenses and any resulting audience ratings improvements may
be delayed for several months.
In the following analysis, management discusses broadcast cash flow and
EBITDA (before noncash compensation expense, LMA fees and merger, nonrecurring
and systems development expense) because they are measures widely used in the
broadcasting industry to evaluate a radio company's operating performance.
Broadcast cash flow consists of operating income before depreciation,
amortization, corporate expenses, LMA fees, noncash compensation expense and
merger nonrecurring and systems development expense. EBITDA
11
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(before noncash compensation expense, LMA fees and merger, nonrecurring and
systems development expense) consists of operating income before depreciation,
amortization, LMA fees, noncash compensation expense fees and merger,
nonrecurring and systems development expense. You should know that broadcast
cash flow and EBITDA (before noncash compensation expense, LMA fees and merger,
nonrecurring and systems development expense) are not measures of performance
calculated in accordance with GAAP. Accordingly, you should also review Capstar
Radio's operating income, cash flows from operating activities and other income
or cash flow statements that are prepared in accordance with GAAP.
RESULTS OF OPERATIONS
The following table presents summary supplemental historical consolidated
financial data of Capstar Radio for the three months ended March 31, 1998 and
1999 and should be read in conjunction with the consolidated financial
statements of Capstar Radio and the related notes included elsewhere in this
Quarterly Report on Form 10-Q.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1998 1999
--------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Operating Data:
Net revenue............................................... $ 64,075 $142,005
Station operating expenses................................ 47,760 92,186
Corporate expenses........................................ 3,575 6,238
Noncash compensation expense(1)........................... 15,793 2,002
LMA fees.................................................. 1,871 319
Depreciation and amortization............................. 10,968 36,316
Merger, nonrecurring and systems development expense...... -- 2,548
Operating income (loss)................................... (15,892) 2,396
Interest expense.......................................... 10,463 30,329
Net loss.................................................. (22,886) (22,248)
Other Data:
Broadcast cash flow....................................... $ 16,315 $ 49,819
Broadcast cash flow margin................................ 25.5% 35.1%
EBITDA (before noncash compensation expense, LMA fees and
merger, nonrecurring and systems development
expense)............................................... 12,740 43,581
</TABLE>
- ---------------
(1) Consists of noncash compensation charges resulting from the grant of
warrants, options and stock subscriptions.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net Revenue. Net revenue increased $77.9 million or 121.6% to $142.0
million in the three months ended March 31, 1999 from $64.1 million in the three
months ended March 31, 1998. This increase was attributable to the acquisitions
of radio stations and revenue generated from stations being operated by
Chancellor Media pursuant to an LMA. On a same store basis, for stations owned
or operated, LMA fees earned and other non-radio operations as of March 31,
1999, net revenue increased $13.8 million or 11.0% to $139.4 million from $125.6
million in the three months ended March 31, 1998. The increase was primarily
attributable to growth in the sale of time to local and national advertisers.
Station Operating Expenses. Station operating expenses increased $44.4
million or 93.0% to $92.2 million in the three months ended March 31, 1999 from
$47.8 million in the three months ended March 31, 1998. On a same store basis,
for stations owned or operated, LMA fees earned and other non-radio operations
as of March 31, 1999, operating expenses increased $8.4 million or 10.4% to
$89.8 million from $81.4 million in the three months ended March 31, 1998. As a
percent of revenue, historical operating expenses have declined
12
<PAGE> 13
from 74.5% in 1998 to 64.9% in 1999 as a result of cost savings measures
implemented by Capstar Radio in connection with its acquisitions and the
spreading of fixed costs over a larger revenue base.
Corporate Expenses. Corporate expenses increased $2.6 million or 74.5% to
$6.2 million in the three months ended March 31, 1999 from $3.6 million in the
same period during 1998 primarily as a result of higher salary expense for
additional staffing. As a percent of revenue, historical corporate expenses have
declined from 5.6% in 1998 to 4.4% in 1999 as a result of cost savings measures
implemented by Capstar Radio in connection with its acquisitions and the
spreading of fixed costs over a larger revenue base.
Other Operating Expenses. Depreciation and amortization increased $25.3
million or 231.2% to $36.3 million in the three months ended March 31, 1999 from
$11.0 million in the same period in 1998 primarily due to radio station
acquisitions consummated in 1998 and the first quarter of 1999. Noncash
compensation expense related to certain options, warrants and stockholder
non-recourse notes decreased $13.8 million or 87.3% to $2.0 million in 1999 from
$15.8 million in 1998 due a significant increase in the fair value of the Class
A Common Stock during the first quarter of 1998 compared to an insignificant
change in the fair value of the Class A Common Stock in the first quarter of
1999. In quarter ended March 31, 1999, Capstar Radio has recorded merger,
nonrecurring and systems development expense of $2.5 million which consisted of
$1.1 million of investment banking, legal and other expense related to the
pending merger with Chancellor Media, $0.7 million consisting primarily of
startup costs associated with Capstar Radio's sales training initiative and $0.7
million of business process reengineering and training expense incurred in
connection with Capstar Radio's development of the Galaxy(TM) system.
Other Income (Expense). Interest expense increased $19.8 million or 189.9%
to $30.3 million in the three months ended March 31, 1999 from $10.5 million in
the same period in 1998 primarily due to the interest expense associated with
indebtedness incurred in connection with Capstar Radio's acquisitions.
Net Loss. As a result of the factors described above, net loss decreased by
$638,000 to a $22.2 million net loss in the three months ended March 31, 1999
from a $22.8 million net loss in the three months ended March 31, 1998.
Broadcast Cash Flow. As a result of the factors described above, broadcast
cash flow increased $33.5 million or 205.4% to $49.8 million in the three months
ended March 31, 1999 from $16.3 million in the three months ended March 31,
1998. The broadcast cash flow margin was 35.1% in the three months ended March
31, 1999 as compared to 25.5% in the same period in 1998. On a same store basis,
for stations owned or operated, LMA fees earned and other non-radio operations
as of March 31, 1999, broadcast cash flow increased $5.4 million or 12.2% to
$49.5 million from $44.1 million in the three months ended March 31, 1998.
EBITDA (before noncash compensation expense, LMA fees and merger,
nonrecurring and systems development expense). As a result of the factors
described above, EBITDA (before noncash compensation expense, LMA fees and
merger, nonrecurring and systems development) increased $30.8 million or 242.1%
to $43.6 million in the three months ended March 31, 1999 from $12.7 million in
the three months ended March 31, 1998. The EBITDA (before noncash compensation
expense, LMA fees and merger, nonrecurring and systems development) margin
increased to 30.7% in 1999 from 19.9% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Capstar Radio's acquisition strategy requires a great deal of capital.
Capstar Radio has historically used the proceeds of bank debt, debt offerings,
equity offerings and cash flow from operations to fund the implementation of its
acquisition strategy. Capstar Radio's business has generated sufficient cash
flow from operations to finance its existing operations and debt service
requirements, and management anticipates that this will continue to be the case.
A brief summary of each of Capstar Radio's outstanding debt or preferred equity
instruments follows.
In June 1997, Capstar Radio issued its 9 1/4% Senior Subordinated Notes due
2007 (the "9 1/4% Capstar Radio Notes".) As of March 31, 1999, the outstanding
principal balance was $199.3 million. Capstar Radio
13
<PAGE> 14
pays interest payments of $9.25 million on the 9 1/4% Capstar Radio Notes
semi-annually on January 1 and July 1 of each year. The 9 1/4% Capstar Radio
Notes mature on July 1, 2007.
Capstar Communications has outstanding its 10 3/4% Senior Subordinated
Notes due 2006 (the "10 3/4% CCI Notes") and its 11 3/8% Senior Subordinated
Notes due 2000 (the "11 3/8% CCI Notes"). Capstar Communications pays interest
of approximately $15.8 million on the 10 3/4% CCI Notes semi-annually on May 15
and November 15 of each year. The 10 3/4% CCI Notes mature on May 15, 2006.
Capstar Communications pays interest of approximately $32,000 on the 11 3/8% CCI
Notes semi-annually on April 1 and October 1 of each year. The 11 3/8% CCI Notes
mature on October 1, 2000. As of March 31, 1999, the outstanding principal
balances were $322.6 million and $566,000 on the 10 3/4% CCI Notes and 11 3/8%
CCI Notes, respectively.
Capstar Communications has outstanding its Series E Cumulative Exchangeable
Preferred Stock ("CCI Series E Preferred Stock"). Capstar Communications is
required to pay dividends on the CCI Series E Preferred Stock semi-annually on
January 15 and July 15 of each year at the rate per share of $12.625 per year.
Until January 15, 2002, Capstar Communications may pay dividends either in cash
or in additional shares of CCI Series E Preferred Stock. Since July 15, 1998,
Capstar Communications has paid the required dividend by issuing additional
shares. Capstar Communications intends to continue to pay the dividend in
additional shares, rather than cash, through January 15, 2002. As of May 1,
1999, 1,346,091 shares of the CCI Series E Preferred Stock were issued and
outstanding with a liquidation preference equal to $100.00 per share or
approximately $134.6 million, excluding accrued dividends of $5.0 million.
The merger with Chancellor Media will result in a change of control under
Capstar Radio's and its subsidiaries indebtedness and preferred stock, and
Capstar Radio or its subsidiaries will be obligated to purchase the notes and
the preferred stock from the holders thereof at an offer price in cash equal to
101% of the aggregate principal amount or liquidation preference, as applicable,
plus accrued and unpaid interest or dividends, as applicable, if any, thereon.
Capstar Radio anticipates that it will pay for the change in control offers from
cash from operating activities.
In addition to the debt and equity described above, Capstar Radio is a
party to a credit facility under which Capstar Radio is the borrower. The credit
facility consists of a $500 million revolving loan, a $450 million A Term Loan
and a $400 million B Term Loan. Pursuant to the credit facility and subject to
bank availabilities and approvals, Capstar Radio may request additional term
loans and revolving credit loans in an aggregate amount up to $550 million. The
interest rate under the Capstar Radio credit facility is a floating rate. On May
1, 1999, Capstar Radio had borrowings of approximately $1,131.0 million
outstanding under the Capstar Radio credit facility comprised of $284.0 million
in revolving loans, $450.0 million under the A Term Loan and $397.0 million
under the B Term Loan, with a weighted average effective interest rate of 7.3%
per annum. On May 1, 1999, $205.7 million was available for borrowing, subject
to financial convenants contained in the credit facility and the indentures that
govern the indebtedness of Capstar Radio' subsidiaries. Beginning August 31,
1999, the A Term Loan will require scheduled annual principal payments, payable
quarterly, of $45 million for the first year, $67.5 million in the second and
third years, $90 million for the fourth and fifth years, and two quarterly
payments of $45 million during the final year commencing August 31, 2004. The B
Term Loan requires scheduled annual principal payments, payable quarterly, of $4
million in years 1999 through 2003, $180 million in 2004 and $200 million in
2005. In April 1999, the credit facility was amended to, among other things,
permit the merger with Chancellor Media and related transactions to be
consummated; increase the leverage ratio required to be maintained by Capstar
Radio during the period from April 1, 1999 through September 30, 2000; increase
the pricing of the credit facility beginning January 1, 2000; and permit the
proposed amendment of a $150 million note payable by Capstar Broadcasting to
Chancellor Media.
In connection with the sales of assets and the spin-off of SFX
Entertainment, Inc., Capstar Communications incurred an estimated federal income
tax liability of approximately $93.0 million. SFX Entertainment, Inc.
indemnified Capstar Communications for all of the estimated tax liability. These
estimated federal income taxes were paid prior to March 31, 1999.
14
<PAGE> 15
Chancellor Media is providing services for eleven large market stations
under separate LMAs with Capstar Broadcasting for approximately $49.4 million
per year. In addition, Chancellor Media has agreed to acquire such stations in
exchange for radio stations to be identified by Capstar Broadcasting over a
three-year period beginning in May 1998, with corresponding decreases in the
amount of the LMA fees as stations are exchanged. From January 1, 1999 to March
31, 1999, Chancellor Media has paid Capstar Broadcasting approximately $12.4
million in LMA fees. For the remainder of 1999, Capstar Broadcasting expects to
receive approximately $37.0 in LMA fees from Chancellor Media. During the
pendency of the merger with Chancellor Media, Capstar Broadcasting does not
anticipate effecting any exchanges with Chancellor Media. Chancellor Media is
currently assessing whether the terms of the letter agreement will be modified
upon the consummation of the merger with Chancellor Media.
In addition to debt service and tax liabilities, Capstar Radio's principal
liquidity requirements in 1999 will be for working capital and general corporate
purposes, including capital expenditures estimated at $42.0 million, to
consummate its pending acquisitions and, as appropriate opportunities arise, to
acquire additional radio stations or complementary broadcast-related businesses.
Capstar Radio believes that the disposition of certain assets, cash from
operating activities, LMA fees from Chancellor Media, together with available
revolving credit borrowings under the its credit facility, should be sufficient
to permit Capstar Radio to meet its obligations. No assurances can be given that
Capstar Radio will be able to find an alternative source of funds. In the
future, Capstar Radio may require additional financing, either in the form of
additional debt or equity securities. Capstar Radio evaluates potential
acquisition opportunities on an on-going basis and has had, and continues to
have, preliminary discussions concerning the purchase of additional stations.
Capstar Radio expects that in connection with the financing of future
acquisitions, it may consider disposing of stations in its current markets.
Capstar Radio is a holding company with no significant assets other than
the capital stock of its direct and indirect subsidiaries. Consequently, its
sole source of cash from which to service indebtedness is dividends distributed
or other payments made to it by its operating subsidiaries. The instruments
governing Capstar Radio's indebtedness contain certain covenants that restrict
or prohibit the ability of subsidiaries to pay dividends and make other
distributions. These restrictions are not anticipated to have an impact on
Capstar Radio's ability to meet its cash obligations.
Net cash provided by (used in) operating activities was approximately $0.1
million and $(8.2) million for the three months ended March 31, 1998 and 1999,
respectively. Changes in Capstar Radio's net cash provided by operating
activities are primarily the result of completed acquisitions and station
operating agreements entered into during the periods and their effects on income
from operations and working capital requirements.
Net cash used in investing activities was $43.5 million and $29.1 million
for the three months ended March 31, 1998 and 1999, respectively. Net cash
provided by financing activities was $189.3 million and $32.7 million for the
three months ended March 31, 1998 and 1999, respectively. These cash flows
primarily reflect borrowings, capital contributions and expenditures for
stations acquisitions and dispositions.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward looking statements. The
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "foresee," "will," "could," "may" and similar expressions are
intended to identify forward looking statements. Such statements reflect Capstar
Radio's current views with respect to future events and financial performance
and involve risks and uncertainties, including without limitation business
conditions and growth in the industry and the general economy, competitive
factors, changes in interest rates, the failure or inability to renew one or
more of Capstar Radio's broadcasting licenses, and regulatory developments
affecting Capstar Radio's operations and the acquisitions and dispositions
described elsewhere in this Quarterly Report on Form 10-Q. Should one or more of
these risks or uncertainties occur, or should underlying assumptions prove
incorrect, actual results may vary materially and adversely from those
indicated.
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<PAGE> 16
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This pronouncement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management does not believe the implementation of
this accounting pronouncement will have a material effect on its consolidated
financial statements.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue concerns the inability of computer programs and
embedded computer chips to properly recognize and process date sensitive
information when the year changes to 2000, or "00". Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail causing disruption in the operations of a company.
A company-wide inventory and assessment of Capstar Radio's systems and
operations began in December 1996, and is continuing, to identify any software
or hardware systems, equipment with embedded chips or processors, and
non-information technology systems, such as telephone, voicemail and HVAC
systems, which do not properly recognize dates after December 31, 1999.
Concurrently with its company-wide assessment, Capstar Radio is developing and
is in the process of implementing its Year 2000 compliance program. Capstar
Radio is utilizing both internal and external resources to identify its
compliance. In addition, as part of its acquisition and consolidation strategy,
Capstar Radio assesses and, as necessary, remediates or replaces the systems of
acquired companies and stations with Year 2000 compliant systems.
Initially, Capstar Radio has identified StarSystem(TM), its digital
automation systems, its advertising scheduling and billing systems and its
accounting systems as the mission critical systems to evaluate for Year 2000
compliance. The list of Capstar Radio's mission critical systems may be
expanded, however, upon completion of its company-wide inventory and assessment.
If remediations or replacements are not made, are not completed on time, or are
insufficient to prevent systems failures or other disruptions, the Year 2000
issue could have a material adverse impact on Capstar Radio's results of
operations and financial condition.
Management has determined that the software underlying StarSystem(TM) is
Year 2000 compliant. StarSystem's(TM) wide area computer network is, however,
dependent on the systems of Capstar Radio's telecommunications services
providers. Capstar Radio sent a questionnaire to each of its telecommunications
services providers asking it to update Capstar Radio on the status of its Year
2000 compliance. Based on the telecommunications services providers responses to
the questionnaire, the providers appear to be Year 2000 compliant.
Management has been assured by its vendors that Capstar Radio's digital
automation systems are Year 2000 compliant. Capstar Radio has tested over 50% of
these systems to insure their Year 2000 compliance and expects to complete
testing of all of these systems by year end.
Capstar Radio employs advertising scheduling and billing systems at each of
its stations. Capstar Radio has received Year 2000 compliance certificates from
the vendors providing the software applications underlying Capstar Radio's
existing advertising scheduling and billing systems, certifying that such
applications are Year 2000 compliant. Not all of the hardware underlying Capstar
Radio's existing advertising scheduling and billing systems are Year 2000
compliant. As part of Capstar Radio's capital improvement program, Capstar Radio
is replacing its Year 2000 noncompliant advertising scheduling and billing
systems. Management estimates that such hardware replacement will be completed
by the end of August 1999 at a total cost of approximately $90,000.
Capstar Radio utilizes purchased software programs for it financial
applications and office automation. Capstar Radio has received Year 2000
compliance certificates from the venders providing these software packages,
certifying that such packages are Year 2000 compliant. Capstar Radio is
currently testing these systems to insure their Year 2000 compliance.
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<PAGE> 17
Capstar Radio has determined that some of its telephone systems are not
Year 2000 compliant. As part of Capstar Radio' Year 2000 compliance efforts and
its capital improvement program, management intends to remediate or replace such
telephone systems by the end of September 1999 at a current estimated cost of
approximately $150,000.
In addition to identifying, assessing and remediating or replacing its
mission critical systems, Capstar Radio is assessing its exposure from external
sources to Year 2000 failures. Capstar Radio relies on third-party providers for
key services such as telecommunications and utilities. Interruption of these
services could, in management's view, have a material adverse impact on the
operations of Capstar Radio. Capstar Radio has begun sending questionnaires to
each of these and other significant third party providers asking them to update
Capstar Radio on the status of their Year 2000 compliance. Until those
questionnaires are returned and reviewed, Capstar Radio will be unable to fully
assess the potential for disruption in its programming and operations arising
from this third party risk. If Capstar Radio does not receive reasonable
assurance regarding Year 2000 compliance from any provider of these services,
Capstar Radio will then develop contingency plans, to the extent possible, to
address its exposure.
Costs specifically associated with ensuring that Capstar Radio's systems
and the systems of third parties on which Capstar Radio is dependent are Year
2000 compliant are currently expected to be approximately $1.0 million, of which
approximately $700,000 has been incurred to date. These cost estimates are
subject to change once Capstar Radio has fully assessed its systems and
responses are obtained from third party vendors and service providers. Any
change in cost may be material. Funding of these costs is anticipated to come
from cash flows generated by business operations and/or borrowings under Capstar
Radio's credit facility.
Capstar Radio is in the process of identifying the most reasonably likely
worst case scenarios that may affect its operations due to Year 2000
noncompliance of Capstar Radio's systems or the systems of third parties.
Initially, Capstar Radio believes that the failure of its advertising scheduling
and billing systems and the temporary loss of power at some of its stations due
to Year 2000 noncompliance are the most reasonably likely worst case scenarios.
Many of Capstar Radio's stations and transmitter sites currently have on-site
generators in the event of power outages. As part of Capstar Radio's capital
improvement program, management has begun installation of generators at each of
its remaining stations and transmitter sites and expects to have approximately
98% coverage of its stations and transmitter sites by year end. Capstar Radio
believes that the upgrade of the hardware on its existing advertising scheduling
and billing systems and the installation of generators at substantially all of
its stations will resolve possible disruptions in the business operations of
Capstar Radio that would result from such risks. Capstar Radio may identify
additional worst case scenarios once it has fully assessed its mission critical
systems and obtained responses from third party vendors and service providers.
Capstar Radio expects to develop other contingency plans to mitigate the
possible disruption in business operations that may result from Capstar Radio's
systems or the systems of third parties that are not Year 2000 compliant.
Based on the nature of Capstar Radio's business and dispersed geographical
locations, Capstar Radio believes that it may experience some disruption in its
business due to the impact of the Year 2000 issue. Management presently
believes, however, that Capstar Radio is taking appropriate steps to assess and
control its Year 2000 issues. If Capstar Radio does not complete all phases of
its Year 2000 compliance program and remediations or replacements are not made,
are not completed on time, or are insufficient to prevent systems failures or
other disruptions, the Year 2000 issue could have a material adverse impact on
Capstar Radio's results of operations and financial condition. Capstar Radio
does not currently have any contingency plans in the event that it does not
complete all phases of its Year 2000 compliance program. Capstar Radio is
continually assessing the status of completion of its Year 2000 compliance
program and, as necessary, will determine whether any such contingency plans are
necessary.
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<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of Capstar Radio due to adverse
changes in financial and commodity market prices and rates. Capstar Radio is
exposed to market risk in the areas of changes in the Unites States and
international borrowing rates (i.e. prime rate or LIBOR).
INTEREST RATE RISK MANAGEMENT
In January 1997, Capstar Radio entered into an interest rate swap agreement
(a derivative instrument) designated as a partial hedge of Capstar Radio's
portfolio of variable rate debt. The purpose of the swap is to reduce certain
exposures to interest rate fluctuations. At March 31, 1999, this interest rate
swap had a notional amount of $26.0 million, and a portfolio value of variable
debt outstanding in the amount of $936.0 million. Under the agreement, Capstar
Radio is receiving a weighted-average variable rate equal to LIBOR and paying a
weighted-average fixed interest rate of 6.34%. The weighted-average LIBOR rate
applicable to this agreement was 4.97% at March 31, 1999. Interest expense was
increased by $170,000 and $74,000 in the year ended December 31, 1998 and the
three months ended March 31, 1999, respectively. Notional amounts do not
quantify risk or represent assets or liabilities of Capstar Radio, but are used
in the determination of cash settlements under the agreements. The interest rate
swap agreement matures on January 31, 2000.
The fair value of the interest rate swap is estimated by obtaining
quotations from brokers. The fair value of the interest rate swap agreement as
of March 31, 1999 is approximately negative $326,000, which is the estimate of
the amount Capstar Radio would have to pay as of March 31, 1999 if the contract
was transferred to other parties or cancelled by the broker. Management believes
that potential, near-term losses in future earnings from reasonably possible
near-term changes in market rates will be immaterial.
The following table represents the notional amount and expected interest
rates that exist during the term of the interest rate swap agreement. The
notional amount is used to calculate the contractual payments to be exchanged
under the contract. The variable rates are based on implied forward rates in the
yield curve at the reporting date.
In the normal course of business, Capstar Radio also faces risks that are
either non-financial or non-quantifiable. Such risks principally include credit
risk and legal risk and are not represented in the following table.
<TABLE>
<CAPTION>
FAIR
1999 2000 VALUE
------- ------- -----
<S> <C> <C> <C>
INTEREST RATE DERIVATIVE
Variable to Fixed:
Notional amount (in thousands)............................ $26,000 $26,000 $(326)
(loss)
Average pay rate........................................ 6.34% 6.34%
Average receive rate.................................... 5.50% 5.75%
</TABLE>
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<PAGE> 19
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On August 29, 1997, two lawsuits were commenced against SFX Broadcasting
Inc. (currently Capstar Communications, Inc., an indirect subsidiary of Capstar
Radio) and its directors in the Court of Chancery of the State of Delaware (New
Castle County). The plaintiffs in the lawsuits are Harbor Finance Partners (C.A.
No. 15891) and Steven Lieberman (C.A. No. 15901). The complaints are identical
and allege that the consideration to be paid as a result of the SFX acquisition
to the holders of the CCI Class A Common Stock is unfair and that the individual
defendants have breached their fiduciary duties. Both complaints seek to have
the actions certified as class actions and seek to enjoin the SFX acquisition
or, in the alternative, monetary damages. The defendants have filed answers
denying the allegations, and discovery has commenced. The parties have agreed
that the lawsuits may be consolidated in one action entitled In Re SFX
Broadcasting, Inc. Shareholders Litigation (C.A. No. 15891). On March 17, 1998,
the parties entered into a Memorandum of Understanding, pursuant to which the
parties reached an agreement providing for a settlement of the action. Pursuant
to the settlement, SFX agreed not to seek an amendment to the SFX merger
agreement to reduce the consideration to be received by the stockholders of SFX
in the SFX acquisition in order to offset the indemnity obligations of SFX
Entertainment Inc., a former subsidiary of SFX. The settlement also provides for
SFX to pay plaintiff's counsel an aggregate of $950,000, including all fees and
expenses as approved by the court. The settlement is conditioned on the
consummation of the SFX acquisition (which has been consummated), completion of
the confirmatory discovery (which has been completed) and approval of the court.
Pursuant to the settlement, the defendants have denied, and continue to deny,
that they have acted in bad faith or breached any fiduciary duty. The parties
expect to submit the settlement documents soon to the court for its approval.
However, there can be no assurance that the court will approve the settlement.
On July 13, 1998, Noddings Investment Group, Inc. and Noddings Warrant
Limited Partnership filed Civil Action No. 16538 in the Court of Chancery of the
State of Delaware in and for New Castle County against Capstar Communications,
Noddings alleges that Capstar Communications breached a warrant agreement that
Noddings contends requires Capstar Communications to permit Noddings to exercise
warrants in exchange for cash and shares of stock of SFX Entertainment, Inc.
Specifically, Noddings alleges that Capstar Communications has violated the
warrant agreement by permitting Noddings to receive cash in exchange for its
warrants, but refusing to convey shares of stock of SFX Entertainment. In
addition to suing on its own behalf, Noddings is seeking to prosecute the action
on behalf of a putative class comprised of all persons who owned equivalent
warrants on April 21, 1998 (the date immediately following the record date of
the distribution of stock of SFX Entertainment to holders of the stock of SFX)
and their transferees and successors in interest. Noddings has requested that
the Court:
- declare that on the exercise of its warrants Capstar Communications
transmit to plaintiffs and members of the class that it seeks to
represent $22.3725 in cash per warrant and 0.2983 shares of common stock
of SFX Entertainment per warrant,
- require Capstar Communications to pay 0.2983 shares of common stock of
SFX Entertainment per warrant and, (if not previously paid) $22.3725 in
cash, to any putative class member that has exercised or exercises
warrants after April 20, 1998,
- in the alternative, award plaintiffs and members of the putative class
monetary damages in an amount to be determined at trial, and
- award costs and attorneys' fees.
In March 1999, the court issued an opinion dismissing two of Noddings' counts
and granted summary judgment in favor of Noddings on one count. The court held
that Noddings is entitled to 0.2983 shares of SFX Entertainment, Inc. stock per
warrant. Both parties have filed a notice of appeal.
On July 24, 1998 in connection with the acquisition of Triathlon
Broadcasting Company, Capstar Radio was notified of an action filed on behalf of
all holders of depository shares of Triathlon against Triathlon, its
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<PAGE> 20
directors, and Capstar Radio. The action was filed in the Court of Chancery of
the State of Delaware in and for New Castle County, Delaware. The complaint
alleges that Triathlon and its directors breached their fiduciary duties to the
class of depository shareholders by agreeing to a transaction with Capstar Radio
that allegedly favored the Class A common shareholders of Triathlon at the
expense of the depository shareholders. Capstar Radio is accused of knowingly
aiding and abetting the breaches of fiduciary duties allegedly committed by the
other defendants. The complaint seeks to have the action certified as a class
action and seeks to enjoin the Triathlon acquisition or, in the alternative,
seeks monitory damages in an unspecified amount. On February 12, 1999, the
parties signed a Memorandum of Understanding that provides for the settlement of
the lawsuit. The amount of the settlement will equal $0.11 additional
consideration for each depository share owned by any class member at the
effective time of the Triathlon acquisition. Capstar Radio also agreed not to
oppose plaintiff's counsel's application for attorney's fees and expenses in the
aggregate amount of $150,000. The proposed settlement is contingent upon a
confirmatory discovery by the plaintiff, executive of a definitive settlement
agreement and court approval.
On September 9, 1998, Capstar Radio was notified of an action filed on
behalf of all owners of securities of Chancellor Media against Chancellor Media,
Hicks, Muse, Tate & Furst, Inc. ("Hicks, Muse") and the individual directors of
Hicks, Muse in the Court of Chancery of the State of Delaware in and for New
Castle County, Delaware. While the complaint does not name Capstar Radioas a
defendant, the complaint alleges that Chancellor Media and its directors
breached their duties to the alleged class by entering into an "overly generous
offer for Capstar assets." The action is relevant to Capstar Radio because inter
alia, the plaintiff seeks an injunction prohibiting the proposed merger of
Capstar Broadcasting with Chancellor Media. As Capstar Radio is not a defendant
in this action, Capstar Radio has no obligation to appear or participate.
Capstar Radio is also involved in various other claims and lawsuits which
are generally incidental to its business. Capstar Radio is vigorously contesting
all of these matters and believes that the ultimate resolution of these matters
and those mentioned above will not have a material adverse affect on its
consolidated financial position or results of operation.
See Part I Item 1 Note 5 to the March 31, 1999 unaudited financial
statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Amended and Restated Agreement and Plan of Merger, dated
as of April 29, 1999, among Chancellor Media Corporation,
Capstar Broadcasting Corporation, CBC Acquisition
Company, Inc. and CMC Merger Sub, Inc.(1)
2.2 -- Amended and Restated Voting Agreement, dated as of April
29, 1999, among Chancellor Media Corporation, Capstar
Broadcasting Corporation, Capstar Broadcasting Partners,
L.P., Thomas O. Hicks and R. Steven Hicks.(1)
10.1 -- Second Amendment and Waiver, dated as of April 23, 1999,
among Capstar Broadcasting Corporation, Capstar
Broadcasting Partners, Inc., Capstar Radio Broadcasting
Partners, Inc. and the financial institutions party
thereto.(1)
10.2 -- Second Amendment to Employment Agreement, dated April 29,
1999, between Capstar Broadcasting Corporation and Paul
D. Stone.(1)
10.3 -- Second Amendment to Employment Agreement, dated April 29,
1999, between Capstar Broadcasting Corporation and
William S. Banowsky, Jr.(1)
10.4 -- Second Amendment to Employment Agreement, dated March 15,
1999, between Capstar Broadcasting Corporation and D.
Geoffrey Armstrong.(1)
10.5 -- Third Amendment to Employment Agreement, dated April 29,
1999, between Capstar Broadcasting Corporation and R.
Steven Hicks.(1)
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.6 -- Second Amendment to Warrant, dated April 29, 1999,
between Capstar Broadcasting Corporation and William S.
Banowsky, Jr.(1)
10.7 -- Second Amendment to Warrant, dated April 29, 1999,
between Capstar Broadcasting Corporation and Paul D.
Stone.(1)
10.8 -- Amendment to Warrants, dated April 29, 1999, between
Capstar Broadcasting Corporation and R. Steven Hicks.(1)
10.9 -- Second Amendment to Warrant, dated March 15, 1999,
between Capstar Broadcasting Corporation and D. Geoffrey
Armstrong.(1)
27.1 -- Financial Data Schedule.*
</TABLE>
- ---------------
* Filed herewith.
(1) Incorporated by reference to Capstar Broadcasting's Quarterly Report on Form
10-Q for the three months ended March 31, 1999, File No. 001-14107.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Capstar Radio during the three months
ended March 31, 1999.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Capstar Radio Broadcasting Partners, Inc. has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
CAPSTAR RADIO BROADCASTING
PARTNERS, INC.
By: /s/ PAUL D. STONE
----------------------------------
Paul D. Stone
Executive Vice President and
Chief Financial Officer
Date: May 17, 1999
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Amended and Restated Agreement and Plan of Merger, dated
as of April 29, 1999, among Chancellor Media Corporation,
Capstar Broadcasting Corporation, CBC Acquisition
Company, Inc. and CMC Merger Sub, Inc.(1)
2.2 -- Amended and Restated Voting Agreement, dated as of April
29, 1999, among Chancellor Media Corporation, Capstar
Broadcasting Corporation, Capstar Broadcasting Partners,
L.P., Thomas O. Hicks and R. Steven Hicks.(1)
10.1 -- Second Amendment and Waiver, dated as of April 23, 1999,
among Capstar Broadcasting Corporation, Capstar
Broadcasting Partners, Inc., Capstar Radio Broadcasting
Partners, Inc. and the financial institutions party
thereto.(1)
10.2 -- Second Amendment to Employment Agreement, dated April 29,
1999, between Capstar Broadcasting Corporation and Paul
D. Stone.(1)
10.3 -- Second Amendment to Employment Agreement, dated April 29,
1999, between Capstar Broadcasting Corporation and
William S. Banowsky, Jr.(1)
10.4 -- Second Amendment to Employment Agreement, dated March 15,
1999, between Capstar Broadcasting Corporation and D.
Geoffrey Armstrong.(1)
10.5 -- Third Amendment to Employment Agreement, dated April 29,
1999, between Capstar Broadcasting Corporation and R.
Steven Hicks.(1)
10.6 -- Second Amendment to Warrant, dated April 29, 1999,
between Capstar Broadcasting Corporation and William S.
Banowsky, Jr.(1)
10.7 -- Second Amendment to Warrant, dated April 29, 1999,
between Capstar Broadcasting Corporation and Paul D.
Stone.(1)
10.8 -- Amendment to Warrants, dated April 29, 1999, between
Capstar Broadcasting Corporation and R. Steven Hicks.(1)
10.9 -- Second Amendment to Warrant, dated March 15, 1999,
between Capstar Broadcasting Corporation and D. Geoffrey
Armstrong.(1)
27.1 -- Financial Data Schedule.*
</TABLE>
- ---------------
* Filed herewith.
(1) Incorporated by reference to Capstar Broadcasting's Quarterly Report on Form
10-Q for the three months ended March 31, 1999, File No. 001-14107.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 12,522
<SECURITIES> 0
<RECEIVABLES> 99,985
<ALLOWANCES> 8,085
<INVENTORY> 0
<CURRENT-ASSETS> 127,821
<PP&E> 284,643
<DEPRECIATION> 32,639
<TOTAL-ASSETS> 4,592,314
<CURRENT-LIABILITIES> 122,951
<BONDS> 1,424,899
152,511
0
<COMMON> 11,131
<OTHER-SE> 1,700,398
<TOTAL-LIABILITY-AND-EQUITY> 4,592,314
<SALES> 0
<TOTAL-REVENUES> 142,005
<CGS> 0
<TOTAL-COSTS> 90,973
<OTHER-EXPENSES> 47,423
<LOSS-PROVISION> 1,213
<INTEREST-EXPENSE> 30,329
<INCOME-PRETAX> (27,979)
<INCOME-TAX> (9,573)
<INCOME-CONTINUING> (22,248)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,248)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
