10-Q 1 d08313e10vq.txt FORM 10-Q 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

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)

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)

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)

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)

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:

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:

-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:

-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:

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:

(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.

-11-

-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

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 -14- 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. -15- 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 -16- INDEX TO EXHIBITS

-17- 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.

---------- (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. -18-

AMFM OPERATING INC 10-Q