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 Commission file number
September 30, 2002 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 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 class of the issuer's
classes of common stock, as of the latest practicable date: As of November 14,
2002, 1,040 shares of common stock 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.
AMFM OPERATING INC.
INDEX
Page No.
--------
Part I -- Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets at September 30, 2002 and
December 31, 2001 3
Consolidated Statements of Operations for the nine and
three months ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 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
Certification 17
Index to Exhibits 19
PART I
Item 1. UNAUDITED FINANCIAL STATEMENTS
AMFM OPERATING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
September 30, December 31,
2002 2001
(Unaudited) (Audited)
----------------- -----------------
Current Assets
Cash and cash equivalents $ -- $ 11,352
Accounts receivable, less allowance of $15,710 at
September 30, 2002 and $12,883 at December 31, 2001 426,844 404,778
Prepaid expense 16,876 15,124
Other current assets 19,391 28,017
----------------- -----------------
Total Current Assets 463,111 459,271
Property, Plant and Equipment
Land, buildings and improvements 179,955 175,814
Transmitter and studio equipment 252,973 240,525
Furniture and other equipment 103,137 97,510
Construction in progress 19,360 19,109
----------------- -----------------
555,425 532,958
Less accumulated depreciation (91,736) (54,636)
----------------- -----------------
463,689 478,322
Intangible Assets
Definite-lived intangibles, net 161,098 166,662
Indefinite-lived intangibles - licenses 7,285,007 16,146,201
Goodwill 2,794,642 6,744,779
Other Assets
Other assets 43,039 50,712
Other investments 39,884 49,256
----------------- -----------------
Total Assets $ 11,250,470 $ 24,095,203
----------------- -----------------
See Notes to Consolidated Financial Statements
-3-
AMFM OPERATING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands)
September 30, December 31,
2002 2001
(Unaudited) (Audited)
----------------- -----------------
Current Liabilities
Accounts payable $ 31,299 $ 34,569
Accrued interest 35,593 18,890
Accrued expenses 96,517 178,540
Accrued income taxes payable to Clear Channel 229,197 94,615
Deferred income 1,670 --
Current portion of long-term debt -- 157,595
----------------- -----------------
Total Current Liabilities 394,276 484,209
Long-term debt 1,267,230 1,272,133
Clear Channel promissory note 60,719 487,190
Deferred income taxes 1,728,518 4,994,595
Other long-term liabilities 135,335 133,255
Shareholder's Equity
Common stock 1 1
Additional paid-in capital 17,346,238 17,346,238
Retained deficit (9,681,847) (623,423)
Accumulated other comprehensive income -- 1,005
----------------- -----------------
Total shareholder's equity 7,664,392 16,723,821
----------------- -----------------
Total Liabilities and Shareholder's Equity $ 11,250,470 $ 24,095,203
----------------- -----------------
See Notes to Consolidated Financial Statements
-4-
AMFM OPERATING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands)
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------ -----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenue $ 1,490,231 $ 1,435,446 $ 520,795 $ 483,156
Operating expenses:
Divisional operating expenses (excludes non-cash compensation
expenses of $3,681, $10,623, $904 and $2,359 for the
nine months ended and three months ended September 30, 2002
and 2001, respectively) 790,288 793,573 265,981 267,795
Non-cash compensation expense 3,681 10,623 904 2,359
Depreciation and amortization 53,709 775,443 19,762 255,467
Corporate expenses 39,772 34,729 14,660 11,665
-------------- ------------- -------------- -------------
Operating income (loss) 602,781 (178,922) 219,488 (54,130)
Interest expense 88,113 139,439 26,338 42,950
Gain (loss) on sale of assets -- -- -- 1,491
Gain (loss) on marketable securities 3,991 (86,359) -- --
Other income (expense) - net 20,571 5,424 1,658 4,624
-------------- ------------- -------------- -------------
Income (loss) before income taxes and cumulative effect of a
change in accounting principle 539,230 (399,296) 194,808 (90,965)
Income tax (expense) benefit (218,389) 68,399 (78,898) 7,081
-------------- ------------- -------------- -------------
Income (loss) before cumulative effect of a change in accounting 320,841 (330,897) 115,910 (83,884)
principle
Cumulative effect of a change in accounting principle (9,379,265) -- -- --
-------------- ------------- -------------- -------------
Net income (loss) (9,058,424) (330,897) 115,910 (83,884)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during period 1,470 (37,139) -- (89,752)
Reclassification adjustment for (gains) losses included in net
income (loss) (2,475) 54,579 -- --
-------------- ------------- -------------- -------------
Comprehensive income (loss) $ (9,059,429) $ (313,457) $ 115,910 $ (173,636)
-------------- ------------- -------------- -------------
See Notes to Consolidated Financial Statements
-5-
AMFM OPERATING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF cash flows
(UNAUDITED)
(In thousands)
Nine Months Ended September 30,
------------------------------------
2002 2001
---- ----
Net cash provided by (used in) operating activities $ 589,012 $ (50,328)
Cash flows from investing activities:
(Investment in) liquidation of restricted cash -- 320,485
(Increase) decrease in notes receivable, net -- 4,575
Proceeds from divestitures placed in restricted cash -- 3,000
Proceeds from sale of marketable securities 11,827 595,634
Purchases of property and equipment (26,893) (41,557)
Proceeds from disposal of assets -- 14,242
Acquisitions of operating assets (7,432) (5,541)
Acquisition of radio stations with restricted cash -- (191,929)
Other (137) (299)
-------------- --------------
Net cash (used in) provided by investing activities (22,635) 698,610
Cash flows from financing activities:
Payments on Clear Channel promissory note (426,471) (650,221)
Payments on long-term debt (151,258) (175)
-------------- --------------
Net cash used in financing activities (577,729) (650,396)
Decrease in cash and cash equivalents (11,352) (2,114)
Cash and cash equivalents at beginning of period 11,352 18,502
-------------- --------------
Cash and cash equivalents at end of period $ -- $ 16,388
-------------- --------------
See Notes to Consolidated Financial Statements
-6-
AMFM OPERATING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: 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 2001 Annual Report on Form 10-K.
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. All significant intercompany
transactions are eliminated in the consolidation process. Certain
reclassifications have been made to the 2001 consolidated financial statements
to conform to the 2002 presentation.
Note 2: RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("Statement
144"). Statement 144 supersedes Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. Statement
144 also amends ARB No. 51, Consolidated Financial Statements, to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. Adoption of Statement 144 had no impact on the financial position of
the Company or its results of operations.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("Statement 145"). Statement 145 rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. Statement 145 also rescinds FASB Statement No. 44, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. Statement 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. Early adoption of
Statement 145 is encouraged and may be as of the beginning of the fiscal year or
as of the beginning of the interim period in which the statement issued. The
Company has elected to early adopt this statement effective January 1, 2002.
Management does not believe adoption of this statement materially impacted the
Company's financial position or results of operations.
-7-
Note 3: INTANGIBLE ASSETS AND GOODWILL
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("Statement 142").
Statement 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, Intangible
Assets. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized but are subject to annual impairment
tests in accordance with the statement. Other intangible assets will continue to
be amortized over their useful lives.
The following table presents the impact of Statement 142 on earnings net (loss)
as if the standard had been in effect for the nine and three months ended
September 30, 2001:
(In thousands)
Nine months ended Three months ended
September 30, 2001 September 30, 2001
------------------ -------------------
Adjusted Net Income (Loss):
Reported Net Loss $ (330,897) $ (83,884)
Add Back: Goodwill Amortization 212,922 71,162
Add Back: License Amortization 511,506 171,303
Tax Impact (194,372) (65,095)
------------------ -------------------
Adjusted Net Income $ 199,159 $ 93,486
------------------ -------------------
Definite-lived Intangibles
The Company has representation contracts for non-affiliated television and radio
stations, which continue to be amortized in accordance with Statement 142. These
agreements are amortized over their respective lives. In accordance with the
transitional requirements of Statement 142, the Company reassessed the useful
lives of these intangibles and made no material changes to their useful lives.
Total amortization expense from representation contracts for the three and nine
months ended September 30, 2002 and for the year ended December 31, 2001 was
$4.9 million, $14.2 million and $15.4 million, respectively. The gross carrying
value of the contracts at September 30, 2002 was $190.8 million and accumulated
amortization was $29.7 million. The gross carrying value of the contracts at
December 31, 2001 was $185.7 million and accumulated amortization was $19.0
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)
2003 $ 24,437
2004 22,863
2005 19,547
2006 17,226
2007 11,631
Indefinite-lived Intangibles
Under the guidance in 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 deferred tax of $3.4 billion,
recorded as a component of the cumulative effect of a change in accounting
principle during the three months ended March 31, 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, the Company took into
account the economic slow down in the radio industry at the end of 2001, coupled
with the economic impact of the events of September 11th.
-8-
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 months ended March 31, 2002. Consistent with the Company's approach to
fair valuing 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. The
following table presents the changes in the carrying amount of goodwill for the
nine-month period ended September 30, 2002:
(In thousands)
Balance as of December 31, 2001 $ 6,744,779
Adjustments (63,216)
Impairment loss related to the
adoption of FAS 142 (3,886,921)
------------
Balance as of September 30, 2002 $ 2,794,642
------------
Other
Statement 142 does not change the requirements of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, for recognition of
deferred taxes related to FCC licenses and tax-deductible goodwill. As a result
of adopting Statement 142, a deferred tax benefit for the difference between
book and tax amortization on the Company's FCC licenses and tax-deductible
goodwill will no longer be recognized as these assets are no longer amortized
for book purposes. As the majority of the Company's deferred tax liability
recorded on the balance sheet relates to the difference between book and tax
basis on FCC licenses, the deferred tax liability will not reverse over time
unless future impairment charges are recognized on FCC licenses or the FCC
licenses are sold.
Prior to adopting Statement 142, the Company recorded large amounts of
non-deductible goodwill amortization, which resulted in a corresponding large
permanent tax item, which adversely impacted the Company's effective tax rate.
However, as a result of the Company's adoption of Statement 142, it no longer
amortizes goodwill for book or tax purposes, thus its effective tax rate more
closely approximates statutory tax rates.
Note 4: RESTRUCTURING
The combined company restructured the former AMFM operations primarily during
2001. The Company communicated to all affected employees the last date of their
employment. The AMFM corporate offices in Dallas and Austin, Texas were closed
on March 31, 2001 and other operations of AMFM have either been discontinued or
integrated into existing similar operations of Clear Channel. As of September
30, 2002, the restructuring has resulted in the termination of 430 employees.
The Company has recorded a liability in purchase accounting primarily related to
severance for terminated employees and lease terminations as follows:
(In thousands)
Severance and lease termination costs:
Accrual at January 1, 2002 $ 36,310
Payments charged against restructuring accrual (5,409)
-------------------
Remaining severance and lease termination accrual at September 30, 2002 $ 30,901
-------------------
The remaining severance and lease accrual is comprised of $22.9 million of
severance and $8.0 million of lease termination obligations. The severance
accrual will be paid over the next several years. The lease termination
accrual will be paid over the next five years. During the nine months ended
September 30, 2002, $4.3 million was paid and charged to the restructuring
reserve 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 5: CLEAR CHANNEL PROMISSORY NOTE AND LONG-TERM DEBT
The Clear Channel promissory note and long-term debt consists of the
following:
(In millions)
September 30, December 31,
2002 2001
---- ----
Clear Channel Promissory Note $ 60.7 $ 487.2
--------------- ----------------
Long-Term Debt:
8% Senior Notes 691.5 693.4
8.125% Notes 380.8 382.7
8.75% Notes 194.9 196.0
12.625% Notes -- 157.1
Other -- .5
--------------- ----------------
1,267.2 1,429.7
Less: Current portion -- 157.6
--------------- ----------------
Total long-term debt (a) $ 1,267.2 $ 1,272.1
--------------- ----------------
(a) Includes $46.3 million and $66.5 million as of September 30, 2002 and
December 31, 2001, respectively, in unamortized fair value purchase accounting
adjustments related to the merger with Clear Channel.
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.
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"). 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.
8.125% Notes
On December 22, 1997, the Company issued $500.0 million aggregate principal
amount of 8.125% Senior Subordinated Notes due 2007 (the "8.125% Notes"). The
8.125% Notes mature on December 15, 2007 and are redeemable, in whole or in
part, at the option of the Company on or after December 15, 2002, at redemption
prices ranging from 104.063% at December 15, 2002 and declining to 100% on or
after December 15, 2005, plus in each case accrued and unpaid interest.
8.75% Notes
Upon consummation of the merger with Chancellor Broadcasting Company on
September 5, 1997, the Company assumed Chancellor Radio Broadcasting Company's
$200.0 million aggregate principal amount of 8.75% Senior Subordinated Notes due
2007 (the "8.75% Notes"). The 8.75% Notes mature on June 15, 2007 and are
redeemable, in whole or in part, at the option of the Company on or after June
15, 2002, at redemption prices ranging from 104.375% at June 15, 2002 and
declining to 100% on or after June 15, 2005, plus in each case accrued and
unpaid interest.
-10-
12.625% Notes
On January 15, 2002, the Company redeemed all of the outstanding 12.625%
Debentures originally issued under the Company's prior name, SFX Broadcasting,
Inc. At December 31, 2001 the face value of these notes was $141.8 million and
the unamortized fair value purchase accounting adjustment premium was $15.3
million. The 12.625% debentures were redeemed for $150.8 million plus accrued
interest. The redemption resulted in a gain of $6.3 million recorded in other
income (expense) - net.
Other
Upon the occurrence of a change in control (as defined in the indenture
governing the 8.0%, 8.125% and 8.75% Notes (the "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.
Although the Clear Channel merger resulted in a change of control with respect
to the Notes, the repurchase option has expired.
AMFM Operating's 8.75% Notes and 8.125% Notes (collectively, the "Subordinated
Notes") are unsecured obligations of AMFM Operating. The Subordinated Notes are
subordinated in right of payment to all existing and any future senior
indebtedness of AMFM Operating. The Subordinated Notes are fully and
unconditionally guaranteed, on a joint and several basis, by all of AMFM
Operating's direct and indirect subsidiaries (the "Subsidiary Guarantors"). In
addition, AMFM Operating's independent assets and operations are insignificant,
as the majority of the assets and all of the operations are at the level of the
Subsidiary Guarantors. Additionally, all of the Subsidiary Guarantors are 100%
owned by the Company.
The 8% Senior Notes are senior unsecured obligations of AMFM Operating and rank
equal in right of payment to the obligations of AMFM Operating and all other
indebtedness of AMFM Operating not expressly subordinated to the 8% Senior
Notes. The 8% Senior Notes are fully and unconditionally guaranteed, on a joint
and several basis, by the Subsidiary Guarantors.
AMFM Operating's 8% Senior Notes and the Subordinated Notes contain customary
restrictive covenants, which, among other things and with certain exceptions,
limit the ability of the Company to incur additional indebtedness and liens in
connection therewith, enter into certain transactions with affiliates, pay
dividends, consolidate, merge or effect certain asset sales, issue additional
stock, effect an asset swap and make acquisitions.
We have guaranteed certain Clear Channel debt obligations, including a reducing
revolving long-term line of credit facility, a $1.5 billion five-year
multi-currency revolving credit facility and a $1.5 billion three-year term loan
with outstanding balances at September 30, 2002 of $127.0 million, $19.5 million
and $1.5 billion, respectively. At September 30, 2002, the contingent liability
under these guarantees was limited to $1.2 billion.
At September 30, 2002, the Company was in compliance with all debt covenants.
The Company expects to remain in compliance throughout 2002. The Company has no
scheduled maturities of long-term debt until 2007.
Note 6: COMMITMENTS AND CONTINGENCIES
There are various lawsuits and claims pending against the Company. The Company
believes that any ultimate liability resulting from those actions or claims will
not have a material adverse effect on the results of operations, financial
position or liquidity of the Company.
-11-
Note 7: 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
-------------- -------------- -------------- -------------- ---------------
Nine months ended September 30, 2002
- ------------------------------------
Revenue $ 1,370,156 $ 142,500 $ -- $ (22,425) $ 1,490,231
Divisional operating expenses 690,505 122,208 -- (22,425) 790,288
Non-cash compensation 3,681 -- -- -- 3,681
Depreciation and amortization 33,410 18,273 2,026 -- 53,709
Corporate expenses -- -- 39,772 -- 39,772
-------------- -------------- -------------- -------------- ---------------
Operating income (loss) $ 642,560 $ 2,019 $ (41,798) $ -- $ 602,781
-------------- -------------- -------------- -------------- ---------------
Identifiable assets $ 10,888,326 $ 283,843 $ 78,301 $ -- $ 11,250,470
Three months ended September 30, 2002
- -------------------------------------
Revenue $ 476,154 $ 52,487 $ -- $ (7,846) $ 520,795
Divisional operating expenses 231,485 42,342 -- (7,846) 265,981
Non-cash compensation 904 -- -- -- 904
Depreciation and amortization 12,865 6,221 676 -- 19,762
Corporate expenses -- -- 14,660 -- 14,660
-------------- -------------- -------------- -------------- ---------------
Operating income (loss) $ 230,900 $ 3,924 $ (15,336) $ -- $ 219,488
-------------- -------------- -------------- -------------- ---------------
Nine months ended September 30, 2001
- ------------------------------------
Revenue $ 1,305,079 $ 146,779 $ -- $ (16,412) $ 1,435,446
Divisional operating expenses 685,917 124,068 -- (16,412) 793,573
Non-cash compensation 10,623 -- -- -- 10,623
Depreciation and amortization 546,357 14,103 214,983 -- 775,443
Corporate expenses -- -- 34,729 -- 34,729
-------------- -------------- -------------- -------------- ---------------
Operating income (loss) $ 62,182 $ 8,608 $ (249,712) $ -- $ (178,922)
-------------- -------------- -------------- -------------- ---------------
Identifiable assets $ 23,964,283 $ 303,881 $ 341,978 $ -- $ 24,610,142
Three months ended September 30, 2001
- -------------------------------------
Revenue $ 437,535 $ 50,003 $ -- $ (4,382) $ 483,156
Divisional operating expenses 229,836 42,341 -- (4,382) 267,795
Non-cash compensation 2,359 -- -- -- 2,359
Depreciation and amortization 106,904 6,209 142,354 -- 255,467
Corporate expenses -- -- 11,665 -- 11,665
-------------- -------------- -------------- -------------- ---------------
Operating income (loss) $ 98,436 $ 1,453 $ (154,019) $ -- $ (54,130)
-------------- -------------- -------------- -------------- ---------------
-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 Nine Months Ended September 30, 2002 to Three and Nine
Months Ended September 30, 2001 is as follows:
Consolidated
(In thousands) Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- % ------------------------------- %
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Revenue $ 520,795 $ 483,156 8% $ 1,490,231 $ 1,435,446 4%
Divisional Operating Expenses 265,981 267,795 (1%) 790,288 793,573 (0%)
Revenue increased $37.6 million and $54.8 million for the three and
nine months ended September 30, 2002 as compared to the same periods of 2001,
respectively. We experienced broad based revenue increases for the third
quarter. Growth occurred across our large and small market clusters and in
national and local sales. This growth was spurred by growth in our auto, retail,
telecom/utility, consumer products and entertainment advertising categories. As
we have progressed through the year, we have seen more of our advertising
categories contribute to the revenue gains, which have fueled the growth across
our markets. Our national and local revenues grew 15% and 9% respectively, for
the three months ended September 30, 2002 and 7% and 4%, respectively, for the
nine months ended September 30, 2002 as compared to the same periods of 2001.
Divisional operating expenses decreased $1.8 million and $3.3 million
for the three and nine months ended September 30, 2002, respectively, as
compared to the same periods of 2001. These decreases are primarily attributable
to decreases in operating expenses associated with our digital audio software
supply business. However, this decrease was partially offset by increases in
radio commission and sports rights expenses as well as various operating
expenses from our syndicated radio business.
Other Income and Expense Information
Non-cash compensation expense relates to unvested stock options granted
to AMFM 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 $4.0 million during the
remaining vesting period.
Depreciation and amortization expense decreased $235.7 million and
$721.7 million for the three and nine months ended September 30, 2002 as
compared to the same periods of 2001, respectively. Upon our adoption of FAS 142
on January 1, 2002, we no longer amortize goodwill and FCC licenses. For the
three and nine months ended September 30, 2001, goodwill and FCC license
amortization was approximately $242.5 million and $724.4 million, respectively.
Corporate expenses increased $5.0 million for the nine months ended
September 30, 2002 from the same period of 2001, primarily resulting from
additional sales force hired in late 2001. Clear Channel's methodology of
allocating corporate expense is based on head count, thus increasing the
corporate allocation.
Interest expense was $26.3 million and $43.0 million for the three
months ended September 30, 2002 and 2001 respectively, a decrease of $16.7
million, or 39%. The decrease is due to the January 15, 2002 redemption of all
of the outstanding 12.625% Debentures as well as a decrease in the balance of
the Clear Channel Promissory Note.
The gain on sale of marketable securities for the nine months ended
September 30, 2002 of $4.0 million is related to the sale of 791,000 shares of
Entravision Corporation. The loss on marketable securities for the nine
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months ended September 30, 2001 of $86.4 million is comprised of a loss of $78.7
million related to the sale of 14.5 million shares of Lamar Advertising Company
and a loss of $7.7 million related to a write-down of an investment.
Income tax expense was $78.9 million and $218.4 million for the three
and nine months ended September 30, 2002, respectively, compared to a benefit of
$7.1 million and $68.4 million for the three and nine months ended September 30,
2001, respectively. Income taxes for the nine months ended September 30, 2002
and 2001 were provided at the federal and state statutory rates adjusted for the
effects of permanent tax items. During the nine months ended September 30, 2001,
as a result of our large amounts of non-deductible goodwill amortization, our
effective tax rate was adversely impacted. As we no longer amortize goodwill,
our effective rate for the nine months ended September 30, 2002, more closely
approximates our statutory tax rates.
Income (loss) before cumulative effect of a change in accounting
principle for the three and nine months ended September 30, 2002 was income of
$115.9 million and $320.8 million, respectively, as compared to loss of $83.9
million and $330.9 million for the same periods of 2001, respectively. Income
(loss) before cumulative effect of a change in accounting principle for the
three and nine months ended September 30, 2001, if we had adopted Statement 142
as of January 1, 2001, would have been income of $93.5 million and $199.2
million, respectively.
The loss recorded as a cumulative effect of a change in accounting
principle during the first nine months of 2002 relates to our adoption of
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.
Risks Regarding Forward Looking Statements
Except for the historical information, this report contains various
forward-looking statements that 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 expansion of market share,
availability of capital resources, and expected changes in radio industry
advertising revenues, 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 that could have an adverse effect upon 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 and political developments in the
U.S. and in other countries in which we currently do business;
o competition and general conditions in the radio broadcasting industry;
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;
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o legislative or regulatory requirements;
o legislative proposals;
o interest rates;
o the effect of leverage on our financial position and earnings;
o taxes; and
o certain other factors set forth in our SEC filings, including our Annual
Report on Form 10-K for the year ended December 31, 2001.
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 a date within 90 days before the filing of this Form
10-Q, that our disclosure controls and procedures under Rule 13a-14 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 19
(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.
November 13, 2002 /s/ RANDALL T. MAYS
----------------------------
Randall T. Mays
Executive Vice President and
Chief Financial Officer
November 13, 2002 /s/ HERBERT W. HILL, JR.
----------------------------
Herbert W. Hill, Jr.
Senior Vice President and
Chief Accounting Officer
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Certification
I, L. Lowry Mays, Chairman and Chief Executive Officer of AMFM Operating Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of AMFM Operating Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ L. LOWRY MAYS
- --------------------------------------
L. Lowry Mays
Chairman and Chief Executive Officer
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Certification
I, Randall T. Mays, Executive Vice President and Chief Financial Officer of AMFM
Operating Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of AMFM Operating Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ RANDALL T. MAYS
- --------------------------------------
Randall T. Mays
Executive Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- -------------- ----------------------
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.
4.3(5) -- Indenture, dated as of November 19, 1999, governing the
12 5/8% Senior Subordinated Exchange Debentures due 2006, of
AMFM Operating Inc.
4.4(6) -- 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(7) -- First Supplemental Indenture, dated as of September 5, 1997,
to the 8 3/4% Notes Indenture.
4.6(8) -- Second Supplemental Indenture, dated as of October 28, 1997,
to the 8 3/4% Notes Indenture.
4.7(8) -- Third Supplemental Indenture, dated as of August 23, 1999,
to the 8 3/4% Notes Indenture.
4.8(8) -- Fourth Supplemental Indenture, dated as of November 19, 1999,
to the 8 3/4% Notes Indenture.
4.9(8) -- Fifth Supplemental Indenture, dated as of January 18, 2000,
to the 8 3/4% Notes Indenture.
4.10(9) -- 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(8) -- First Supplemental Indenture, dated as of August 23, 1999, to
the 8 1/8% Notes Indenture.
4.12(8) -- Second Supplemental Indenture, dated as of November 19, 1999,
to the 8 1/8% Notes Indenture.
4.13(8) -- Third Supplemental Indenture, dated as of January 18, 2000,
to the 8 1/8% Notes Indenture.
4.14(10) -- Indenture, dated as of November 17, 1998, governing the 8%
Senior Notes due 2008 of AMFM Operating Inc.(the "8% Notes
Indenture").
4.15(8) -- First Supplemental Indenture, dated as of August 23, 1999, to
the 8% Notes Indenture.
4.16(8) -- Second Supplemental Indenture, dated as of November 19, 1999,
to the 8% Notes Indenture.
4.17(8) -- Third Supplemental Indenture, dated as of January 18, 2000,
to the 8% Notes Indenture.
4.18(11) -- Intercompany Promissory Note between AMFM Operating Inc. and
Clear Channel Communications, Inc. dated August 30, 2000.
99.1 -- Certification of Chief Executive Officer of AMFM Operating
Inc.
99.2 -- Certification of Chief Financial Officer of AMFM Operating
Inc.
- ------------
(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 Exhibit 3.2 to the Annual Report on Form
10-K of Capstar Communications, Inc. for the year ended December 31,
1998.
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(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 AMFM Operating Inc. filed on November 19, 1999.
(6) 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.
(7) Incorporated by reference to Exhibits to CMCLA's Registration Statement
on Form S-4, initially filed on September 26, 1997, as amended
(Registration Number 333-36451).
(8) Incorporated by reference to Exhibits to the Annual Report on Form
10-K of AMFM Inc. for the year ended December 31, 1999.
(9) Incorporated by reference to Exhibits to CMCLA's Registration Statement
on Form S-4, initially filed on April 22, 1998, as amended
(Registration Number 333-50739).
(10) Incorporated by reference to Exhibits to CMCLA's Registration Statement
on Form S-4, initially filed on November 9, 1998, as amended
(Registration Number 333-66971).
(11) 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.
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