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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2003 Commission file number 000-22486
AMFM OPERATING INC.
(AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF
CLEAR CHANNEL COMMUNICATIONS, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE 13-3649750
(State of Incorporation) (I.R.S. Employer Identification No.)
200 EAST BASSE ROAD
SAN ANTONIO, TEXAS 78209
(210) 822-2828
(Address and telephone number
of principal executive offices)
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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
Indicate the number of shares outstanding of each class of the issuer's
classes of common stock, as of the latest practicable date: As of August 12,
2003, 1,040 shares of the Registrant's common stock were outstanding.
The registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this report with the
reduced disclosure format.
TABLE OF CONTENTS
Page No.
--------
Part I -- Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets at June 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations for the six and three months ended June 30, 2003 and 2002 5
Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 4. Controls and Procedures 15
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
Signatures 16
Index to Exhibits 17
PART I
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
AMFM OPERATING INC. AND SUBSIDIARIES
(an indirect, wholly-owned subsidiary of Clear Channel Communications, Inc.)
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
June 30, December 31,
2003 2002
(Unaudited) (Audited)
------------ ------------
Current Assets
Accounts receivable, less allowance of $14,883 at
June 30, 2003 and $14,911 at December 31, 2002 $ 433,925 $ 432,473
Other current assets 24,790 34,316
------------ ------------
Total Current Assets 458,715 466,789
Property, Plant and Equipment
Land, buildings and improvements 181,649 180,685
Transmitter and studio equipment 267,659 260,314
Furniture and other equipment 106,187 106,561
Construction in progress 27,322 33,058
------------ ------------
582,817 580,618
Less accumulated depreciation (125,469) (104,590)
------------ ------------
457,348 476,028
Intangible Assets
Definite-lived intangibles, net 151,080 160,038
Indefinite-lived intangibles - licenses 7,332,941 7,332,132
Goodwill 2,794,642 2,794,642
Other Assets
Other assets 48,858 49,576
Other investments 5,084 5,084
------------ ------------
Total Assets $ 11,248,668 $ 11,284,289
------------ ------------
See Notes to Consolidated Financial Statements
-3-
AMFM OPERATING INC. AND SUBSIDIARIES
(an indirect, wholly-owned subsidiary of Clear Channel Communications, Inc.)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands)
June 30, December 31,
2003 2002
(Unaudited) (Audited)
------------ ------------
Current Liabilities
Accounts payable $ 30,807 $ 26,884
Accrued interest 8,802 10,714
Accrued expenses 88,920 107,059
------------ ------------
Total Current Liabilities 128,529 144,657
Long-term debt 689,481 1,265,535
Clear Channel promissory note 593,510 300,000
Deferred income taxes 1,837,344 1,769,824
Other long-term liabilities 167,788 170,676
Shareholder's Equity
Common stock 1 1
Additional paid-in capital 17,346,238 17,346,238
Retained deficit (9,514,223) (9,712,642)
------------ ------------
Total Shareholder's Equity 7,832,016 7,633,597
------------ ------------
Total Liabilities and Shareholder's Equity $ 11,248,668 $ 11,284,289
------------ ------------
See Notes to Consolidated Financial Statements
-4-
AMFM OPERATING INC. AND SUBSIDIARIES
(an indirect, wholly-owned subsidiary of Clear Channel Communications, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands)
Six Months Ended June 30, Three Months Ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue $ 980,460 $ 969,436 $ 542,002 $ 540,254
Operating expenses:
Divisional operating expenses (excludes non-cash compensation
expenses of $1,017, $2,777, $501 and $1,317 for the six and
three months ended June 30, 2003 and 2002, respectively) 532,532 524,307 279,186 277,088
Non-cash compensation expense 1,017 2,777 501 1,317
Depreciation and amortization 37,230 33,947 19,994 17,337
Corporate expenses 28,124 25,112 13,888 7,248
----------- ----------- ----------- -----------
Operating income 381,557 383,293 228,433 237,264
Interest expense 49,227 61,775 23,242 29,664
Gain (loss) on sale of assets (3,124) 1,288 (3,124) 1,288
Gain (loss) on marketable securities -- 3,991 -- --
Other income (expense) - net 4,271 17,625 1,753 11,238
----------- ----------- ----------- -----------
Income before income taxes and cumulative effect of a change in 333,477 344,422 203,820 220,126
accounting principle
Income tax (expense) benefit (135,058) (139,491) (82,547) (89,151)
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of a change in accounting 198,419 204,931 121,273 130,975
principle
Cumulative effect of a change in accounting principle, net of tax
of $3,366,192 -- (9,379,265) -- --
----------- ----------- ----------- -----------
Net income (loss) 198,419 (9,174,334) 121,273 130,975
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during period -- 1,470 -- --
Reclassification adjustment for (gains) losses included in net
income (loss) -- (2,475) -- --
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 198,419 $(9,175,339) $ 121,273 $ 130,975
----------- ----------- ----------- -----------
See Notes to Consolidated Financial Statements
-5-
AMFM OPERATING INC. AND SUBSIDIARIES
(an indirect, wholly-owned subsidiary of Clear Channel Communications, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended June 30,
-------------------------
2003 2002
--------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 292,804 $ 341,863
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities -- 11,827
Purchases of property, plant and equipment (10,231) (16,454)
Proceeds from disposal of assets 644 --
Acquisitions of operating assets (4,193) (5,029)
Other -- (139)
--------- ---------
Net cash (used in) investing activities (13,780) (9,795)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments on) proceeds from Clear Channel promissory
note, net 293,510 (192,163)
(Payments on) long-term debt (572,534) (151,257)
--------- ---------
Net cash (used in) financing activities (279,024) (343,420)
Increase (decrease) in cash and cash equivalents -- (11,352)
Cash and cash equivalents at beginning of period -- 11,352
--------- ---------
Cash and cash equivalents at end of period $ -- $ --
--------- ---------
See Notes to Consolidated Financial Statements
-6-
AMFM OPERATING INC. AND SUBSIDIARIES
(an indirect, wholly-owned subsidiary of Clear Channel Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Preparation of Interim Financial Statements
AMFM Operating Inc. (the "Company"), together with its subsidiaries, is an
indirect, wholly-owned subsidiary of Clear Channel Communications, Inc. ("Clear
Channel"), a diversified media company with operations in radio broadcasting,
outdoor advertising and live entertainment.
The consolidated financial statements have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC")
and, in the opinion of management, include all adjustments (consisting of normal
recurring accruals and adjustments necessary for adoption of new accounting
standards) necessary to present fairly the results of the interim periods shown.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such SEC rules and regulations.
Management believes that the disclosures made are adequate to make the
information presented not misleading. Due to seasonality and other factors, the
results for the interim periods are not necessarily indicative of results for
the full year. The financial statements contained herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 2002 Annual Report on Form 10-K.
The consolidated financial statements include the accounts of the Company and
its subsidiaries, the majority of which are wholly-owned. All significant
intercompany transactions are eliminated in the consolidation process. Certain
reclassifications have been made to the 2002 consolidated financial statements
to conform to the 2003 presentation.
Stock-Based Compensation
The Company's employees are periodically awarded stock options to acquire stock
of Clear Channel. The Company accounts for these stock-based awards in
accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, under which
compensation expense is recorded to the extent that the market price on the
grant date of the underlying stock exceeds the exercise price. The required pro
forma net income as if the stock-based awards had been accounted for using the
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, are as follows:
(In thousands) Six Months Ended Three Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net Income before cumulative effect of a change in
accounting principle
Reported $ 198,419 $ 204,931 $ 121,273 $ 130,975
Pro forma stock compensation expense,
net of tax (2,087) (1,122) (1,251) (544)
--------- --------- --------- ---------
Pro Forma $ 196,332 $ 203,809 $ 120,022 $ 130,431
--------- --------- --------- ---------
The fair value for these options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following assumptions for 2003 and
2002:
2003 2002
------------- -------------
Risk-free interest rate 2.91% - 3.76% 2.85% - 5.33%
Dividend yield 0% 0%
Volatility factors 43% - 47% 36% - 49%
Expected life in years 5.0 - 7.5 3.5 - 7.5
-7-
Recent Accounting Pronouncements
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations ("Statement
143"). Statement 143 applies to legal obligations associated with the retirement
of long-lived assets that result from acquisition, construction, development
and/or the normal operation of a long-lived asset. Adoption of this statement
did not materially impact the Company's financial position or results of
operations.
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit or Disposal
Activities ("Statement 146"). Statement 146 addresses the accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Terminations Benefits and Other Costs to Exit an Activity." It
also substantially nullifies EITF Issue No. 88-10, "Costs Associated with Lease
Modification or Termination." Adoption of this statement did not materially
impact the Company's financial position or results of operations.
On January 1, 2003, the Company adopted Financial Accounting Standards Board
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45").
FIN 45 applies to contracts or indemnification agreements that contingently
require the guarantor to make payments to the guaranteed party based on changes
in an underlying that is related to an asset, liability, or an equity security
of the guaranteed party. FIN 45's disclosure requirements were effective for
financial statements of interim or annual periods ending after December 15,
2002. FIN 45's initial recognition and initial measurement provisions were
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The Company
adopted the disclosure requirements of this Interpretation for its 2002 annual
report. Adoption of the initial recognition and initial measurement requirements
of FIN 45 did not materially impact the Company's financial position or results
of operations.
On January 1, 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 46, Consolidation of Variable
Interest Entities ("FIN 46"). FIN 46 addresses consolidation of business
enterprises of variable interest entities. FIN 46 is effective immediately for
all variable interest entities created after January 31, 2003 and for the first
fiscal year or interim period beginning after June 15, 2003 for variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company has not acquired any variable
interest entities subsequent to January 31, 2003 and will therefore adopt FIN 46
for its quarterly report for the period ending September 30, 2003. The Company
does not expect adoption of this statement to materially impact the Company's
financial position or results of operations.
Note 2: INTANGIBLE ASSETS AND GOODWILL
Definite-lived Intangibles
The Company's definite-lived intangibles consist of representation contracts for
non-affiliated television and radio stations. These agreements are amortized
over their respective lives.
Total amortization expense from representation contracts for the three and six
months ended June 30, 2003 and for the year ended December 31, 2002 was $5.8
million, $11.5 million and $19.9 million, respectively. The gross carrying value
of the contracts at June 30, 2003 was $201.0 million and accumulated
amortization was $49.9 million. The gross carrying value of the contracts at
December 31, 2002 was $198.5 million and accumulated amortization was $38.5
million. The following table presents the Company's estimate of amortization
expense for each of the five succeeding fiscal years for definite-lived
intangible assets:
(In thousands)
2004 $ 23,442
2005 22,292
2006 17,500
2007 11,695
2008 10,132
-8-
Indefinite-lived Intangibles
Under the guidance in Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("Statement 142"), the Company's FCC
licenses are considered indefinite-lived intangibles. These assets are not
subject to amortization, but will be tested for impairment at least annually.
In accordance with Statement 142, the Company tested these indefinite-lived
intangible assets for impairment as of January 1, 2002 by comparing their fair
value to their carrying value at that date. The Company recognized impairment on
FCC licenses of approximately $5.5 billion, net of tax of $3.4 billion, recorded
as a component of the cumulative effect of a change in accounting principle
during the three and six months ended June 30, 2002. The Company used the income
approach to value FCC licenses, which involved estimating expected future cash
flows from the licenses, discounted to their present value using a risk-adjusted
discount rate. Terminal values were also estimated and discounted to their
present value. In estimating future cash flows at January 1, 2002, the Company
took into account the economic slowdown in the radio industry at the end of
2001, coupled with the economic impact of the events of September 11th.
Goodwill
Statement 142 requires the Company to test goodwill for impairment using a
two-step process. The first step is a screen for potential impairment, while the
second step measures the amount of impairment. The Company completed the
two-step impairment test during the first quarter of 2002. As a result of this
test, the Company recognized an impairment of approximately $3.9 billion as a
component of the cumulative effect of a change in accounting principle during
the three and six months ended June 30, 2002. Consistent with the Company's
approach to fair value FCC licenses, the income approach was used to determine
the fair value of the Company's reporting unit. Throughout 2001, unfavorable
economic conditions persisted in the industries that the Company serves, which
caused its customers to reduce the number of advertising dollars spent on the
Company's media inventory as compared to prior periods. These conditions
adversely impacted the cash flow projections used to determine the fair value of
the Company's reporting unit, resulting in a write-off of a portion of goodwill.
There was no change in the Company's goodwill balance from December 31, 2002 to
June 30, 2003.
Note 3: RESTRUCTURING
The Company has recorded a liability in purchase accounting from its merger with
Clear Channel in 2000 ("AMFM Merger"), that relates to severance for terminated
employees and lease terminations as follows:
(In thousands) Six Months Ended Year Ended December
June 30, 2003 31, 2002
---------------- -------------------
Severance and lease termination costs:
Accrual at January 1 $ 29,450 $ 36,310
Payments charged against restructuring accrual (2,042) (6,860)
------------ ------------
Remaining severance and lease termination accrual $ 27,408 $ 29,450
------------ ------------
The remaining severance and lease accrual is comprised of $20.2 million of
severance and $7.2 million of lease termination. The severance accrual will be
paid over the next several years. The lease termination accrual will be paid
over the next four years. During the six months ended June 30, 2003, $1.4
million was paid and charged to the restructuring accrual related to severance.
As the Company made adjustments to finalize the purchase price allocation
related to the AMFM Merger during 2001, any potential excess reserves will be
recorded as an adjustment to the purchase price.
-9-
Note 4: CLEAR CHANNEL PROMISSORY NOTE AND LONG-TERM DEBT
Long-term debt consists of the following:
(In millions) June 30, December 31,
2003 2002
-------- ------------
Clear Channel Promissory Note $ 593.5 $ 300.0
-------- --------
Long-Term Debt:
8% Senior Notes 689.5 690.8
8.125% Notes -- 380.2
8.75% Notes -- 194.5
-------- --------
689.5 1,265.5
Less: Current portion -- --
-------- --------
Total long-term debt (a) $ 689.5 $1,265.5
-------- --------
(a) Includes $18.2 million and $44.6 million as of June 30, 2003 and December
31, 2002, respectively, in unamortized fair value purchase accounting
adjustments related to the merger with Clear Channel. The fair value of the
Company's long-term debt was $772.0 million and $1.2 billion at June 30, 2003
and December 31, 2002, respectively.
Clear Channel Promissory Note
The promissory note bears interest at 7% per annum. Accrued interest plus the
note balance is payable on August 30, 2010 or upon demand. The Company is
entitled to borrow additional funds and to repay outstanding borrowings, subject
to the terms of the promissory note. Clear Channel currently has no intention of
demanding payment on this note prior to its maturity.
On February 10, 2003, Clear Channel called all of the Company's outstanding
8.125% senior subordinated notes due 2007 for $379.2 million plus accrued
interest. On February 18, 2003, Clear Channel called all of the Company's
outstanding 8.75% senior subordinated notes due 2007 for $193.4 million plus
accrued interest. The Company financed the redemption of the notes through
borrowings on the Clear Channel promissory note. As a result of the redemption,
a gain on the early extinguishment of debt of $1.6 million was recorded during
the six months ended June 30, 2003 in Other income (expense) - net.
8% Senior Notes
On November 17, 1998, the Company issued $750.0 million aggregate principal
amount of 8% senior notes due 2008 (the "8% senior notes"). Interest on the 8%
senior notes is payable semiannually, commencing on May 1, 1999. The 8% senior
notes mature on November 1, 2008 and are redeemable, in whole or in part, at the
option of the Company at a redemption price equal to 100% plus the applicable
premium (as defined in the indenture governing the 8% senior notes) plus accrued
and unpaid interest. Upon the occurrence of a change in control (as defined in
the indenture governing the 8% senior notes), the holders of the notes have the
right to require the Company to repurchase all or any part of the notes at a
purchase price equal to 101% plus accrued and unpaid interest.
The 8% senior notes are senior unsecured obligations of the Company and rank
equal in right of payment to the obligations of the Company and all other
indebtedness of the Company not expressly subordinated to the 8% senior notes.
The 8% senior notes are fully and unconditionally guaranteed, on a joint and
several basis, by all of the Company's direct and indirect subsidiaries.
The 8% senior 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. Under the 8% senior notes, the Company had approximately $7.1
billion available for restricted payments at June 30, 2003. The redemptions of
the 8.125% notes and 8.75% notes in February 2003 were restricted payments under
the 8% senior notes.
-10-
Other
At June 30, 2003, the Company was in compliance with all debt covenants. The
Company expects to be in compliance throughout 2003.
The Company has no scheduled maturities of long-term debt until 2008.
Note 5: COMMITMENTS, CONTINGENCIES AND GUARANTEES
The Company has guaranteed a portion of Clear Channel's bank credit facilities
including a reducing revolving line of credit facility, a $1.5 billion five-year
multi-currency revolving credit facility and a $500.0 million three-year term
loan with outstanding balances at June 30, 2003, of $75.0 million, $1.6 million,
and $500.0 million, respectively. At June 30, 2003, the contingent liability
under these guarantees was $1.0 billion.
From time to time, claims are made and lawsuits are filed against the Company,
arising out of the ordinary business of the Company. In the opinion of the
Company's management, liabilities, if any, arising from these actions are either
covered by insurance or accrued reserves, or would not have a material adverse
effect on the financial condition of the Company.
Note 6: SEGMENT DATA
The Company has one reportable operating segment - radio broadcasting. The
Company's media representation firm is reported in "other". Revenue and expenses
earned and charged between segments are recorded at fair value and eliminated in
consolidation.
(In thousands) Radio
Broadcasting Other Corporate Eliminations Consolidated
------------ ----------- ----------- ------------ ------------
Six months ended June 30, 2003
Revenue $ 899,513 $ 94,163 $ -- $ (13,216) $ 980,460
Divisional operating expenses 464,726 81,022 -- (13,216) 532,532
Non-cash compensation 1,017 -- -- -- 1,017
Depreciation and amortization 20,917 14,306 2,007 -- 37,230
Corporate expenses -- -- 28,124 -- 28,124
----------- ----------- ----------- ----------- -----------
Operating income (loss) $ 412,853 $ (1,165) $ (30,131) $ -- $ 381,557
----------- ----------- ----------- ----------- -----------
Identifiable assets $10,941,919 $ 229,359 $ 77,390 $ -- $11,248,668
Three months ended June 30, 2003
Revenue $ 498,055 $ 51,272 $ -- $ (7,325) $ 542,002
Divisional operating expenses 243,774 42,737 -- (7,325) 279,186
Non-cash compensation 501 -- -- -- 501
Depreciation and amortization 11,522 7,142 1,330 -- 19,994
Corporate expenses -- -- 13,888 -- 13,888
----------- ----------- ----------- ----------- -----------
Operating income (loss) $ 242,258 $ 1,393 $ (15,218) $ -- $ 228,433
----------- ----------- ----------- ----------- -----------
Six months ended June 30, 2002
Revenue $ 894,003 $ 90,012 $ -- $ (14,579) $ 969,436
Divisional operating expenses 459,020 79,866 -- (14,579) 524,307
Non-cash compensation 2,777 -- -- -- 2,777
Depreciation and amortization 20,545 12,052 1,350 -- 33,947
Corporate expenses -- -- 25,112 -- 25,112
----------- ----------- ----------- ----------- -----------
Operating income (loss) $ 411,661 $ (1,906) $ (26,462) $ -- $ 383,293
----------- ----------- ----------- ----------- -----------
Identifiable assets $10,909,161 $ 291,548 $ 79,971 $ -- $11,280,680
-11-
Radio
Broadcasting Other Corporate Eliminations Consolidated
------------ -------- --------- ------------ ------------
Three months ended June 30, 2002
Revenue $499,050 $ 49,560 $ -- $ (8,356) $540,254
Divisional operating expenses 244,944 40,500 -- (8,356) 277,088
Non-cash compensation 1,317 -- -- -- 1,317
Depreciation and amortization 10,434 6,361 542 -- 17,337
Corporate expenses -- -- 7,248 -- 7,248
-------- -------- -------- -------- --------
Operating income (loss) $242,355 $ 2,699 $ (7,790) $ -- $237,264
-------- -------- -------- -------- --------
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Abbreviated pursuant to General Instruction H(2)(a) of Form 10-Q)
RESULTS OF OPERATIONS
Comparison of Three and Six Months Ended June 30, 2003 to Three and six Months
Ended June 30, 2002 is as follows:
CONSOLIDATED
(In thousands) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- % ------------------------- %
2003 2002 Change 2003 2002 Change
-------- -------- ------ -------- -------- ------
Revenue $542,002 $540,254 0% $980,460 $969,436 1%
Divisional Operating Expenses 279,186 277,088 1% 532,532 524,307 2%
Revenue was flat for the three months ended June 30, 2003 as compared
to the same period of 2002. Our revenue was impacted by weakness in local spot
sales and non-traditional revenues offset by stronger national sales,
particularly in the retail, auto, telecom/utility, and entertainment categories.
Revenue increased 1% for the six months ended June 30, 2003 as compared
to the same period of 2002. The increase was driven primarily by national
advertising revenue and an increase in revenues from our representation
business. Our strongest national advertising categories during the six months
ended June 30, 2003 were retail, auto, telecom/utility, and entertainment.
Divisional operating expenses increased 1% and 2% for the three and six
months ended June 30, 2003, respectively, as compared to the same periods of
2002. The increase was driven primarily by increased commission expense in our
representation business as well as an increase in programming expenses in our
radio business.
Other Income and Expense Information
Non-cash compensation expense relates to unvested stock options
granted to our employees that have been assumed by Clear Channel and that are
now convertible into Clear Channel stock. To the extent that these employees'
options continue to vest post-merger, we recognize non-cash compensation expense
over the remaining vesting period. Vesting dates vary through April 2005. If no
employees forfeit their unvested options by leaving the company, we expect to
recognize non-cash compensation expense of approximately $1.4 million during the
remaining vesting period.
Interest expense decreased $6.4 million and $12.5 million during the
three and six months ended June 30, 2003, respectively, compared to the same
periods of 2002 due to the decrease in our total debt outstanding. In February
2003, we redeemed all of the 8.125% notes and all of the 8.75% notes.
During the three and six month periods ended June 30, 2003, we recorded
a loss on the sale of assets of $3.1 million, primarily related to the sale of a
building, land and equipment in one of our markets resulting from the
consolidation of facilities.
During the six months ended June 30, 2002, a $4.0 million gain on sale
of assets related to mergers was recorded relating to the sale of 791,000 shares
of Entravision Corporation that we acquired in the AMFM merger.
Other income (expense) - net decreased $9.5 million and $13.4 million
during the three and six months ended June 30, 2003, respectively, compared to
the same periods of 2002. The decline is primarily related to income recognized
in the first quarter of 2002 related to a $6.2 million gain on the early
extinguishment of debt and a $11.5 million gain recognized in the second quarter
of 2002 related to the sale of representation contracts.
The loss recorded as a cumulative effect of a change in accounting
principle during the first three and six months of 2002 relates to our adoption
of Statement of Financial Accounting Standards No. 142, Goodwill and
-13-
Other Intangible Assets ("Statement 142") on January 1, 2002. Statement 142
requires us to test goodwill and indefinite-lived intangibles for impairment
using a fair value approach. As a result of the goodwill test, we recorded a
non-cash impairment charge of approximately $3.9 billion. Also, as a result of
the indefinite-lived intangible test, we recorded a non-cash, net of tax
impairment charge on our FCC licenses of approximately $5.5 billion.
The non-cash impairments of our goodwill and FCC licenses were
primarily caused by unfavorable economic conditions, which persisted in the
industries we serve throughout 2001. This weakness contributed to our customers
reducing the number of advertising dollars spent on our media inventory. These
conditions adversely impacted the cash flow projections used to determine the
fair value of our licenses and reporting unit. These factors resulted in the
non-cash impairment charge of a portion of our licenses and goodwill.
Regulatory Matters
On June 2, 2003, the FCC adopted a decision modifying a number of its
rules governing the ownership of radio stations and other media outlets in local
and national markets. Among other changes, the modified rules establish a new
methodology for defining local radio markets and counting stations within those
markets, treat radio joint sales agreements as ownership interests of the
selling party in certain circumstances, allow for increased ownership of TV
stations at the local and national level, and permit additional local
cross-ownership of daily newspapers, television stations, and radio stations.
We expect some parties to petition the FCC for reconsideration of the
new regulations. In addition, we expect that certain aspects of the new rules
will be challenged in Court and Congress is also currently reviewing the new
regulations. Given these contingencies, it is unclear at this time whether the
new FCC regulations will be fully implemented in their current form.
Caution Concerning Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements made by us or on our behalf. Except for
the historical information, this report contains various forward-looking
statements which represent our expectations or beliefs concerning future events,
including the future levels of cash flow from operations. Management believes
that all statements that express expectations and projections with respect to
future matters, including the strategic fit of radio assets, expansion of market
share, and the availability of capital resources are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act. We caution
that these forward-looking statements involve a number of risks and
uncertainties and are subject to many variables which could impact our financial
performance. These statements are made on the basis of management's views and
assumptions, as of the time the statements are made, regarding future events and
business performance. There can be no assurance, however, that management's
expectations will necessarily come to pass.
A wide range of factors could materially affect future developments and
performance, including:
o the impact of general economic conditions in the U.S. and in
other countries in which we currently do business;
o the impact of the geopolitical environment;
o our ability to integrate the operations of recently acquired
companies;
o shifts in population and other demographics;
o industry conditions, including competition;
o fluctuations in operating costs;
o technological changes and innovations;
o changes in labor conditions;
o capital expenditure requirements;
o litigation settlements;
o legislative or regulatory requirements;
o interest rates;
o the effect of leverage on our financial position and earnings;
o taxes;
o access to capital markets; and
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o certain other factors set forth in our filings with the
Securities and Exchange Commission ("SEC").
This list of factors that may affect future performance and the
accuracy of forward-looking statements is illustrative, but by no means
exhaustive. Accordingly, all forward-looking statements should be evaluated with
the understanding of their inherent uncertainty.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Omitted pursuant to General Instruction H(2)(c) of Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Our principal executive and financial officers have concluded, based on
their evaluation as of the end of the period covered by this Form 10-Q, that our
disclosure controls and procedures, as defined under Rule 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, are effective to ensure that
information we are required to disclose in the reports we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and include controls and
procedures designed to ensure that information we are required to disclose in
such reports is accumulated and communicated to management, including our
principal executive and financial officers, as appropriate to allow timely
decisions regarding required disclosure.
Subsequent to our evaluation, there were no significant changes in internal
controls or other factors that could significantly affect these internal
controls.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See Exhibit Index on Page 17
(b) Reports on Form 8-K
NONE
SIGNATURES
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 thereunto duly authorized.
AMFM OPERATING INC.
August 12, 2003 /s/ RANDALL T. MAYS
-----------------------------------------
Randall T. Mays
Executive Vice President and
Chief Financial Officer
August 12, 2003 /s/ HERBERT W. HILL, JR.
-----------------------------------------
Herbert W. Hill, Jr.
Senior Vice President and
Chief Accounting Officer
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
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3.1(1) -- Amended and Restated Certificate of Incorporation of AMFM Operating Inc.
3.2(2) -- Bylaws of AMFM Operating Inc.
4.1(3) -- Certificate of Designation for 12 5/8% Series E Cumulative Exchangeable Preferred Stock of
AMFM Operating Inc.
4.2(4) -- Certificate of Amendment to Certificate of Designation for 12 5/8% Series E Cumulative
Exchangeable Preferred Stock of AMFM Operating Inc.
4.4(5) -- Indenture, dated as of June 24, 1997, governing the 8 3/4% Senior Subordinated Notes due
2007 of AMFM Operating Inc. (the "8 3/4% Notes Indenture").
4.5(6) -- First Supplemental Indenture, dated as of September 5, 1997, to the 8 3/4% Notes Indenture.
4.6(7) -- Second Supplemental Indenture, dated as of October 28, 1997, to the 8 3/4% Notes Indenture.
4.7(7) -- Third Supplemental Indenture, dated as of August 23, 1999, to the 8 3/4% Notes Indenture.
4.8(7) -- Fourth Supplemental Indenture, dated as of November 19, 1999, to the 8 3/4% Notes
Indenture.
4.9(7) -- Fifth Supplemental Indenture, dated as of January 18, 2000, to the 8 3/4% Notes Indenture.
4.10(8) -- Indenture, dated as of December 22, 1997, governing the 8 1/8% Senior Subordinated Notes
due 2007 of AMFM Operating Inc. (the "8 1/8% Notes Indenture").
4.11(7) -- First Supplemental Indenture, dated as of August 23, 1999, to the 8 1/8% Notes Indenture.
4.12(7) -- Second Supplemental Indenture, dated as of November 19, 1999, to the 8 1/8% Notes
Indenture.
4.13(7) -- Third Supplemental Indenture, dated as of January 18, 2000, to the 8 1/8% Notes Indenture.
4.14(9) -- Indenture, dated as of November 17, 1998, governing the 8% Senior Notes due 2008 of AMFM
Operating Inc. (the "8% Notes Indenture").
4.15(7) -- First Supplemental Indenture, dated as of August 23, 1999, to the 8% Notes Indenture.
4.16(7) -- Second Supplemental Indenture, dated as of November 19, 1999, to the 8% Notes Indenture.
4.17(7) -- Third Supplemental Indenture, dated as of January 18, 2000, to the 8% Notes Indenture.
4.18(10) -- Intercompany Promissory Note between AMFM Operating Inc. and Clear Channel Communications,
Inc. dated August 30, 2000.
10.1(11) -- Stock Option Grant Agreement, dated July 13, 1999, by and between AMFM Inc. and HMCo for
335,099 shares.
10.2(11) -- Stock Option Grant Agreement, dated July 13, 1999, by and between AMFM Inc. and HMCo for
634,517 shares.
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31.1 -- Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 -- Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 -- Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 -- Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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(1) Incorporated by reference to Exhibit 3.1 to the Quarterly Report on
Form 10-Q of Capstar Communications, Inc. for the quarterly period
ending June 30, 1999.
(2) Incorporated by reference to Exhibits to SFX Broadcasting, Inc.'s
Registration Statement on Form S-3, initially filed November 4, 1996,
as amended (Registration Number 333-15469).
(3) Incorporated by reference to Exhibits to the Current Report on Form 8-K
of SFX Broadcasting, Inc., filed on January 27, 1997.
(4) Incorporated by reference to Exhibits to SFX Broadcasting, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1997.
(5) Incorporated by reference to Exhibit 4.1 to the Current Report on Form
8-K of Chancellor Broadcasting Company and Chancellor Radio
Broadcasting Company filed on July 17, 1997.
(6) Incorporated by reference to Exhibits to Chancellor Media Corporation
of Los Angeles's Registration Statement on Form S-4, initially filed on
September 26, 1997, as amended (Registration Number 333-36451).
(7) Incorporated by reference to Exhibits to the Annual Report on Form 10-K
of AMFM Inc. for the year ended December 31, 1999.
(8) Incorporated by reference to Exhibits to Chancellor Media Corporation
of Los Angeles's Registration Statement on Form S-4, initially filed on
April 22, 1998, as amended (Registration Number 333-50739).
(9) Incorporated by reference to Exhibits to Chancellor Media Corporation
of Los Angeles's Registration Statement on Form S-4, initially filed on
November 9, 1998, as amended (Registration Number 333-66971).
(10) The Company has not filed long-term debt instruments where the total
amount under such instruments is less than ten percent of the total
assets of the Company and its subsidiaries on a consolidated basis.
However, the Company will furnish a copy of such instruments to the
Commission upon request.
(11) Incorporated by reference to Exhibits to Amendment No. 6 to Schedule
13D of Thomas O. Hicks, et. al., filed on October 14, 1999.
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