10-Q 1 d92004e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 AND 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2001 Commission file number 1-9645 CLEAR CHANNEL COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) TEXAS 74-1787539 (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. Class Outstanding at November 13, 2001 ---------------------------- -------------------------------- Common Stock, $.10 par value 597,639,787 Page 1 of 27 CLEAR CHANNEL COMMUNICATIONS, INC. AND SUBSIDIARIES INDEX
Page No. -------- Part I -- Financial Information Item 1. Unaudited Financial Statements Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 3 Consolidated Statements of Operations for the nine and three months ended September 30, 2001 and 2000 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 Part II -- Other Information Item 6. Exhibits and reports on Form 8-K 25 (a) Exhibits (b) Reports on Form 8-K Signatures 25 Index to Exhibits 26
Page 2 of 27 PART I ITEM 1. UNAUDITED FINANCIAL STATEMENTS CLEAR CHANNEL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (IN THOUSANDS)
September 30, December 31, 2001 2000 (Unaudited) (Audited) -------------- -------------- CURRENT ASSETS Cash and cash equivalents $ 266,399 $ 196,838 Restricted cash -- 308,691 Accounts receivable, less allowance of $60,696 at September 30, 2001 and $60,631 at December 31, 2000 1,577,463 1,557,048 Prepaid expenses 200,853 146,767 Other current assets 147,113 133,873 -------------- -------------- Total Current Assets 2,191,828 2,343,217 PROPERTY, PLANT AND EQUIPMENT Land, buildings and improvements 1,320,350 1,197,951 Structures and site leases 2,233,549 2,395,934 Transmitter and studio equipment 680,360 744,571 Furniture and other equipment 522,302 479,532 Construction in progress 341,260 222,286 -------------- -------------- 5,097,821 5,040,274 Less accumulated depreciation (1,146,476) (785,040) -------------- -------------- 3,951,345 4,255,234 INTANGIBLE ASSETS Contracts 1,087,718 1,075,472 Licenses and goodwill 42,444,771 40,973,198 Other intangible assets 125,943 175,451 -------------- -------------- 43,658,432 42,224,121 Less accumulated amortization (3,116,098) (1,731,557) -------------- -------------- 40,542,334 40,492,564 OTHER ASSETS Restricted cash -- 319,450 Notes receivable 37,933 99,818 Investments in, and advances to, nonconsolidated affiliates 491,473 427,303 Other assets 580,891 513,773 Other investments 594,607 1,605,102 -------------- -------------- TOTAL ASSETS $ 48,390,411 $ 50,056,461 -------------- --------------
See Notes to Consolidated Financial Statements Page 3 of 27 CLEAR CHANNEL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY (IN THOUSANDS)
September 30, December 31, 2001 2000 (Unaudited) (Audited) -------------- -------------- CURRENT LIABILITIES Accounts payable $ 333,423 $ 383,588 Accrued interest 103,677 105,581 Accrued expenses 842,415 884,941 Accrued income taxes 92,710 445,499 Current portion of long-term debt 336,858 69,699 Deferred income 225,316 218,670 Other current liabilities 20,526 20,572 -------------- -------------- Total Current Liabilities 1,954,925 2,128,550 Long-term debt 9,685,701 10,610,452 Deferred income taxes 6,437,181 6,771,198 Other long-term liabilities 312,075 137,343 Minority interest 79,645 61,745 SHAREHOLDERS' EQUITY Common stock 59,785 58,577 Additional paid-in capital 30,303,912 29,558,908 Common stock warrants 13,626 249,312 Retained earnings (deficit) (233,487) 544,940 Accumulated other comprehensive income (loss) (197,074) (32,433) Other (10,631) (26,298) Cost of shares held in treasury (15,247) (5,833) -------------- -------------- Total shareholders' equity 29,920,884 30,347,173 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 48,390,411 $ 50,056,461 -------------- --------------
See Notes to Consolidated Financial Statements Page 4 of 27 CLEAR CHANNEL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months Ended Three Months Ended September 30, September 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Gross revenue $ 6,550,857 $ 3,634,804 $ 2,448,065 $ 1,684,787 Less: agency commissions 443,000 309,671 147,832 108,068 ------------ ------------ ------------ ------------ Net revenue 6,107,857 3,325,133 2,300,233 1,576,719 Operating expenses 4,395,864 2,144,974 1,696,581 1,062,284 Non-cash compensation expense 14,931 3,151 2,581 3,151 Depreciation and amortization 1,911,372 820,800 652,771 372,059 Corporate expenses 140,832 91,862 48,150 39,417 ------------ ------------ ------------ ------------ Operating income (loss) (355,142) 264,346 (99,850) 99,808 Interest expense 428,683 230,795 134,744 105,335 Gain (loss) on sale of assets related to mergers (57,390) 805,183 -- 805,183 Gain on marketable securities 29,512 -- 5,707 -- Equity in earnings of nonconsolidated affiliates 11,619 18,036 7,011 8,433 Other income (expense) - net (19,049) (7,340) (1,651) (8,964) ------------ ------------ ------------ ------------ Income (loss) before income taxes (819,133) 849,430 (223,527) 799,125 Income tax (expense) benefit 40,706 (408,670) (8,671) (350,198) ------------ ------------ ------------ ------------ Net income (loss) (778,427) 440,760 (232,198) 448,927 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 14,292 (114,667) 63,551 (54,123) Unrealized gain (loss) on securities: Unrealized holding gain (loss) arising during period (207,180) (64,077) (178,190) (137,193) Reclassification adjustment for gains on securities transferred to trading (45,315) -- -- -- Reclassification adjustment for unrealized gains on SFX shares held prior to merger -- (36,526) -- (36,526) Reclassification adjustment for (gains) losses included in net income (loss) 73,562 -- -- -- ------------ ------------ ------------ ------------ Comprehensive income (loss) $ (943,068) $ 225,490 $ (346,837) $ 221,085 Net income (loss) per common share: Basic $ (1.32) $ 1.19 $ (.39) $ 1.04 ------------ ------------ ------------ ------------ Diluted $ (1.32) $ 1.13 $ (.39) $ .96 ------------ ------------ ------------ ------------
See Notes to Consolidated Financial Statements Page 5 of 27 CLEAR CHANNEL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Nine Months Ended September 30, 2001 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (778,427) $ 440,760 RECONCILING ITEMS: Depreciation and amortization 1,911,372 820,800 Deferred tax (benefit) expenses (258,588) 194,236 (Recognition) deferral of deferred income (3,758) (100,049) (Gain) loss on disposal of assets 7,172 (1,222) (Gain) loss on sale of other investments 52,133 -- (Gain) loss on sale of assets related to mergers 57,390 (804,433) (Gain) loss on forward exchange contract and related securities (81,646) -- Increase (decrease) accrued income and other taxes (315,952) 195,446 Increase (decrease) other, net 12,884 8,782 Changes in other operating assets and liabilities, net of effects of acquisitions (248,447) (123,305) ------------ ------------ Net cash provided by operating activities 354,133 631,015 CASH FLOWS FROM INVESTING ACTIVITIES: (Investment in) liquidation of restricted cash, net 591,767 (1,027,997) Cash acquired in stock-for-stock mergers -- 312,122 Decrease (increase) in notes receivable - net 885 (25,359) Decrease (increase) in investments in and advances to nonconsolidated affiliates - net (30,336) 3,200 Purchases of investments (3,009) (61,704) Proceeds from sale of investments 595,634 -- Purchases of property, plant and equipment (419,412) (320,434) Proceeds from disposal of assets 99,632 384,250 Proceeds from divestitures placed in restricted cash 41,000 792,448 Acquisition of operating assets (519,404) (1,499,188) Acquired restricted cash -- 439,896 Acquisition of operating assets with restricted cash (362,075) (211,154) Decrease (increase) in other-net (34,231) (237,792) ------------ ------------ Net cash provided by (used in) investing activities (39,549) (1,451,712) CASH FLOWS FROM FINANCING ACTIVITIES: Draws on credit facilities 1,886,832 6,066,052 Payments on credit facilities (2,401,320) (6,705,037) Proceeds from issuance of long-term debt -- 3,138,182 Payments on long-term debt (4,964) (1,404,465) Proceeds from forward exchange contract 90,826 -- Proceeds from exercise of stock options, stock purchase plan and common stock warrants 192,603 34,087 Payments for purchase of treasury shares (9,000) -- ------------ ------------ Net cash (used in) provided by financing activities (245,023) 1,128,819 Net increase in cash and cash equivalents 69,561 308,122 Cash and cash equivalents at beginning of period 196,838 76,724 ------------ ------------ Cash and cash equivalents at end of period $ 266,399 $ 384,846 ------------ ------------
See Notes to Consolidated Financial Statements Page 6 of 27 CLEAR CHANNEL COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1: PREPARATION OF INTERIM FINANCIAL STATEMENTS The consolidated financial statements have been prepared by Clear Channel Communications, Inc. (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 2000 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. Investments in companies in which the Company owns 20 percent to 50 percent of the voting common stock or otherwise exercises significant influence over operating and financial policies of the company are accounted for under the equity method. All significant intercompany transactions are eliminated in the consolidation process. Certain reclassifications have been made to the 2000 consolidated financial statements to conform to the 2001 presentation. Note 2: RECENT ACCOUNTING PRONOUNCEMENTS On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement 133"), as amended. Statement 133 requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. Statement 133 requires the transition adjustment resulting from adopting these Statements to be reported in net income or accumulated other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle. Upon adoption, the Company recorded the fair value of its derivative instruments on its balance sheet. Adoption of Statement 133 had no impact on the Company's results of operations. Also upon adoption, the Company reclassified 2.0 million shares of its investment in American Tower Corporation ("AMT") that had been classified as available-for-sale securities to trading securities under Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity Securities ("Statement 115"). In accordance with Statement 115 and Statement 133, the shares were transferred to a trading classification at their fair market value on January 1, 2001, of $76.2 million, and an unrealized pretax holding gain of $69.7 million was recorded in earnings as "Gain on marketable securities". On July 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 141, Business Combinations ("Statement 141"). Statement 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. Statement 141 is effective for all business combinations initiated after June 30, 2001. Statement 141 eliminates the pooling-of-interest method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. Statement 141 also changes the criteria to recognize intangible assets apart from goodwill. As the Company has historically used the purchase method to account for all business combinations, adoption of this statement did not have a material impact on the Company's financial position or results of operations. In June 2001, the Financial Accounting Standards Board issued 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. Statement 142 is effective for fiscal years beginning after December 15, 2001. This statement establishes new accounting for goodwill and other intangible assets recorded in business combinations. Under the new rules, Page 7 of 27 goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statement. Other intangible assets will continue to be amortized over their useful lives. As the Company's amortization of goodwill and certain other indefinite lived intangibles is a significant non-cash expense that the Company currently records, Statement 142 will have a material impact on the Company's financial statements. For the three and nine months ended September 30, 2001, amortization expense related to goodwill and indefinite lived intangibles was approximately $440 million and $1.3 billion, respectively. In addition, upon adoption, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangibles. The Company is currently evaluating valuation techniques as well as other implementation issues. The Company's preliminary assessment is that an impairment charge under the new requirements of Statement 142 may possibly be recorded upon the adoption of Statement 142. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("Statement 144"). Statement 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of ("Statement 121"). Statement 144 is effective for fiscal years beginning after December 15, 2001. Statement 144 removes goodwill from its scope and retains the requirements of Statement 121 regarding the recognition of impairment losses on long-lived assets held for use. The Statement modifies the accounting for long-lived assets to be disposed of by sale and long-lived assets to be disposed of by other than by sale. Management does not believe adoption of this statement will materially impact the Company's financial position or results of operations. Note 3: ACQUISITIONS Restructuring Due to the Company's mergers with SFX Entertainment, Inc. ("SFX") and AMFM Inc. ("AMFM"), the Company formalized a plan to restructure the SFX and AMFM operations. 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 a portion of the SFX corporate office in New York was closed on June 30, 2001. Other operations of AMFM have either been discontinued or integrated into existing similar operations. As of September 30, 2001, the restructuring has resulted in the actual termination of 556 employees and the pending termination of approximately 100 more employees. The Company has recorded a liability in purchase accounting primarily related to severance for terminated employees and lease terminations as follows: (In thousands)
September 30, December 31, 2001 2000 -------------- -------------- Severance and lease termination costs: Accrual at January 1 $ 84,291 $ 4,348 Adjustments to restructuring accrual 41,389 120,797 Payments charged against restructuring accrual (64,974) (40,854) -------------- -------------- Remaining severance and lease termination accrual $ 60,706 $ 84,291 -------------- --------------
The remaining severance and lease accrual is comprised of $48.9 million of severance and $11.8 million of lease termination. During the nine months ended September 30, 2001, $62.4 million was paid and charged to the restructuring reserve related to severance. The adjustments to the restructuring accrual presented above, which are primarily related to additional severance, were recorded within goodwill. During the three months ended September 30, 2001, the Company made adjustments to finalize the purchase price allocation for both the AMFM and SFX mergers. Page 8 of 27 Pro Forma The Company completed its mergers with SFX and AMFM in August 2000 and acquired Donrey Media Group ("Donrey") in September 2000. Therefore, the results of operations for the nine-month period ending September 30, 2001 include the operations of these companies. Assuming the mergers with SFX and AMFM and the acquisition of Donrey had all occurred at January 1, 2000, unaudited pro forma consolidated results of operations for the nine months ended September 30, 2000 would have been as follows: (In thousands, except per share data) Net revenue $ 5,673,140 Net loss $ (356,946) Net loss per share basic and diluted $ (.61)
The pro forma information above is presented in response to applicable accounting rules relating to business acquisitions and is not necessarily indicative of the actual results that would have been achieved had the mergers/acquisitions of SFX, AMFM and Donrey occurred at the beginning of 2000, nor is it indicative of future results of operations. The Company had other acquisitions during 2000 and the first nine months of 2001, the effects of which, individually and in aggregate, were not material to the Company's consolidated financial position or results of operations. Other As a result of the Company's recent acquisitions, it has integrated operations and identified assets no longer used. As these assets were taken out of service and disposed of, the related carrying value of these assets were written off, resulting in an impairment charge for the nine months ended September 30, 2001 of approximately $110 million, which was recorded in depreciation expense. In addition, assets acquired in the AMFM merger were disposed of and goodwill was adjusted accordingly. Note 4: ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Statement 133 requires that all derivatives be recognized as either assets or liabilities at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will either be offset against the change in fair value of the hedged assets or liabilities through earnings, or recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. In accordance with the Company's risk management policies, it formally documents its hedging relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. The Company formally assesses, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting. The Company does not enter into derivative instruments for speculation or trading purposes. Interest Rate Risk Management The Company's policy is to manage interest expense using a mix of fixed and variable rate debt. To manage this mix in a cost-efficient manner, the Company enters into interest rate swap agreements in which the Company agrees to exchange, at specified variables, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps, designated as fair value hedges, hedge underlying fixed-rate debt obligations with a principal amount of $1.5 billion. The terms of the underlying debt and the interest rate swap agreements coincide; therefore the hedge qualifies for the short-cut method defined in Statement 133. Accordingly, no net gains or losses were recorded in income related to the Company's underlying Page 9 of 27 debt and interest rate swap agreements. In accordance with Statement 133, on January 1, 2001, the Company recorded an asset on the balance sheet as "Other long-term assets" of $49.0 million to reflect the fair value of the interest rate swap agreements and increased the carrying value of the underlying debt by an equal amount. On September 30, 2001, the fair value of the interest rate swap agreements was approximately $131.6 million. Accordingly, an adjustment was made to the asset and carrying value of the underlying debt on September 30, 2001 to reflect the increase in fair value. Secured Forward Exchange Contract On January 31, 2001, and again on June 25, 2001, Clear Channel Investments, Inc., a wholly-owned subsidiary of the Company, entered into two ten-year secured forward exchange contracts that monetized, in aggregate 2.9 million shares of the Company's investment in AMT. The secured forward exchange contracts protect the Company against decreases in the fair value of AMT stock while providing participation in increases in the fair value of the stock. During the term of the secured forward exchange contracts, the Company retains ownership of the AMT shares. The Company's obligation under the secured forward exchange contracts is collateralized by a security interest in the AMT shares. Under Statement 133, these contracts are considered hybrid instruments - long-term obligations with derivative instruments embedded into the contracts. Statement 133 requires a hybrid instrument to be bifurcated such that the long-term obligations and the embedded derivatives are accounted for separately under the appropriate accounting guidance. The long-term obligations have been recorded on the balance sheet as "Other long-term liabilities" at their inception fair value of $56.9 million and accrete to their maturity values totaling $103.0 million over their ten-year term, with the accretion classified as interest expense. As of September 30, 2001, the aggregate balance of the long-term obligations was $59.4 million while the aggregate balance of the embedded derivatives recorded on the balance sheet as "Other assets" was $26.2 million. For the three and nine months ended September 30, 2001, the fair value of the embedded derivative increased $19.4 million and $60.2 million, respectively. The increase in fair value was recorded in earnings as "Gain on marketable securities". On September 30, 2001, the fair market value of the 2.0 million shares of AMT previously reclassified as trading securities was $27.9 million. For the three and nine months ended September 30, 2001, the fair value of the AMT shares classified as trading securities had decreased $13.7 million and decreased $44.9 million, respectively. The change in the fair market value of these shares has been recorded in earnings as "Gain on marketable securities". For the nine months ended September 30, 2001, the amounts recorded in "Gain on marketable securities" relating to the secured forward exchange contracts were partially offset by a net loss of $52.1 million related to the impairment of various investments. Foreign Currency Rate Management As a result of the Company's foreign operations, the Company is exposed to foreign currency exchange risks related to its net assets in foreign countries. To manage this risk, the Company enters into foreign denominated debt to hedge a portion of the effect of movements in currency exchange rates on these net investments. The Company's major foreign currency exposure involves markets operating in Euros and the British pound. The primary purpose of the Company's foreign currency hedging activities is to offset the translation gain or losses associated with the Company's net investments denominated in foreign currencies. Since the debt is denominated in the same currency of the foreign denominated net investment, the hedge will offset a portion of the translation changes in the corresponding net investment. Since an assessment of this hedge revealed no ineffectiveness, all of the translation gains and losses associated with this debt are reflected as a translation adjustment within accumulated other comprehensive income within shareholders' equity. As of September 30, 2001, cumulative translation losses of $123.9 million have been reported as a part of "Accumulated other comprehensive income" within shareholders' equity. Note 5: CONVERSION OF LONG-TERM DEBT On May 7, 2001, the Company delivered notice of its intent to redeem on June 12, 2001 the total outstanding principal amount of its 5.50% Liquid Yield Option Notes ("LYONs"), recorded on the balance sheet as "Long-term debt". The redemption price was $581.25 per each $1,000 LYON outstanding at June 12, 2001. Each LYON was Page 10 of 27 convertible, at the option of the holder, at any time prior to the close of business June 12, 2001. Substantially all of the 5.50% LYONs converted into 3.9 million shares of the Company's common stock prior to the redemption date. Note 6: COMMON STOCK WARRANTS On September 18, 2001, common stock warrants, assumed by the Company as a part of our merger with Jacor, expired. Each warrant represented the right to purchase .2355422 shares of our common stock at an exercise price of $24.19 per full share. During the three months ended September 30, 2001, the Company received $122.2 million in proceeds and issued 5.1 million shares of common stock on the exercise of these warrants. Note 7: 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. Certain agreements relating to acquisitions provide for purchase price adjustments and other future contingent payments based on the financial performance of the acquired companies. The Company will continue to accrue additional amounts related to such contingent payments if and when it is determinable that the applicable financial performance targets will be met. The aggregate of these contingent payments, if performance targets are met, would not significantly impact the financial position or results of operations of the Company. Note 8: SEGMENT DATA The Company has three reportable segments, which best reflects how the Company is currently managed - radio broadcasting, outdoor advertising and live entertainment. Revenue and expenses earned and charged between segments are recorded at fair value.
(In thousands) Nine Months Ended Three Months Ended September 30, September 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net revenue Radio Broadcasting $ 2,564,928 $ 1,471,939 $ 866,106 $ 597,114 Outdoor Advertising 1,289,066 1,238,878 428,359 441,686 Live Entertainment 2,038,231 475,487 939,896 475,487 Other 314,587 184,858 100,777 81,222 Eliminations (98,955) (46,029) (34,905) (18,790) ------------ ------------ ------------ ------------ Consolidated $ 6,107,857 $ 3,325,133 $ 2,300,233 $ 1,576,719 Operating expenses Radio Broadcasting $ 1,513,224 $ 869,176 $ 512,569 $ 329,896 Outdoor Advertising 869,439 777,428 292,419 275,686 Live Entertainment 1,869,393 418,516 843,753 418,516 Other 242,763 125,883 82,745 56,976 Eliminations (98,955) (46,029) (34,905) (18,790) ------------ ------------ ------------ ------------ Consolidated $ 4,395,864 $ 2,144,974 $ 1,696,581 $ 1,062,284 Depreciation and Amortization Radio Broadcasting $ 1,233,948 $ 434,053 $ 425,613 $ 203,507 Outdoor Advertising 398,445 311,637 129,313 110,939 Live Entertainment 211,221 44,457 77,773 44,457 Other 67,758 30,653 20,072 13,156 ------------ ------------ ------------ ------------ Consolidated $ 1,911,372 $ 820,800 $ 652,771 $ 372,059 Operating income (loss) Radio Broadcasting $ (182,244) $ 165,014 $ (61,291) $ 59,937 Outdoor Advertising (11,493) 118,758 (7,665) 45,539 Live Entertainment (73,952) 10,326 13,966 10,326 Other (87,453) (29,752) (44,860) (15,994) ------------ ------------ ------------ ------------ Consolidated $ (355,142) $ 264,346 $ (99,850) $ 99,808
Page 11 of 27 SEGMENT DATA (Continued)
(In thousands) As of September 30, --------------------------- 2001 2000 ------------ ------------ Total identifiable assets Radio Broadcasting $ 33,718,740 $ 33,957,501 Outdoor Advertising 7,860,459 7,393,146 Live Entertainment 5,548,670 5,338,228 Other 1,262,542 4,061,213 ------------ ------------ Consolidated $ 48,390,411 $ 50,750,088
Net revenue of $929.6 million and $350.4 million for the nine and three months ended September 30, 2001, respectively and $649.5 million and $260.9 million for the nine and three months ended September 30, 2000, respectively, and identifiable assets of $2.9 billion and $2.5 billion as of September 30, 2001 and 2000, respectively are included in the data above and are derived from the Company's foreign operations. Note 9: SUBSEQUENT EVENTS On October 5, 2001, the Company entered into a merger agreement to acquire The Ackerley Group, Inc. ("Ackerley"). Ackerley holds a diversified group of outdoor, broadcasting and interactive media assets. This merger will be a tax-free, stock-for-stock transaction. Each share of Ackerley common stock will convert into 0.35 shares of the Company's common stock, on a fixed exchange basis, valuing the merger, based on average share value at the signing of the merger agreement, at approximately $474.9 million plus the assumption of Ackerley's debt, which was approximately $290.9 million at September 30, 2001. This merger is subject to regulatory approval and other closing conditions, including the approval from the Ackerley shareholders. The Company anticipates that this merger will close during the first half of 2002. On October 26, 2001, the Company completed a debt offering of $750.0 million 6% Senior Notes due November 1, 2006. Interest is payable on May 1 and November 1 of each year. The first interest payment on the notes will be made on May 1, 2002. Net proceeds of approximately $744.1 million were used to reduce the outstanding balance of the Company's $1.8 billion revolving credit facility. On October 22, 2001 and November 13, 2001, the Company sold 5.0 million shares and 5.4 million shares, respectively, of Lamar Advertising Company ("Lamar"). As a result of these sales, the Company received proceeds of $324.4 million, which will be used to pay down the Company's existing credit facility balance. In addition, the Company will recognize a loss of approximately $156.3 million related to the sale of these Lamar shares. At November 13, 2001, the Company no longer holds any Lamar common stock. Page 12 of 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS We evaluate the operating performance of our businesses using several measures, one of them being EBITDA (defined as net revenue less operating and corporate expenses). EBITDA eliminates the uneven effect across our business segments, as well as in comparison to other companies, of considerable amounts of non-cash depreciation and amortization recognized as a result of business combinations accounted for under the purchase method. Historically, we have accounted for all mergers and acquisitions under the purchase method. Non-cash depreciation and amortization is significant due to the consolidation in our industry. While we and many in the financial community consider EBITDA to be an important measure of operating performance, it should be considered in addition to, but not as a substitute for or superior to, other measures of financial performance prepared in accordance with generally accepted accounting principles such as operating income and net income. We measure the performance of our operating segments and managers based on a pro forma measurement. Pro forma includes adjustments to the prior period for all acquisitions. Adjustments are made to the prior period to include the operating results of each acquisition for the corresponding period of time that the acquisition was owned in the current period. In addition, results of operations from divested assets are excluded from all periods presented. We believe this pro forma is the best measure of our operating performance as it includes the performance of assets for the period of time we managed the assets. Pro forma is compared in constant U.S. dollars (i.e. a currency exchange adjustment is made to the current period actual results to present foreign revenues and expenses in prior period dollars) allowing for comparison of operations independent of foreign exchange movements. The following tables set forth our consolidated and segment results of operations on both a reported and a pro forma basis. Comparison of Three and Nine Months Ended September 30, 2001 to Three and Nine Months Ended September 30, 2000. CONSOLIDATED (In thousands)
As Reported Three Months Ended September 30, -------------------------------- % Change % Change 2001 2000 As Reported Pro Forma ------------ ------------ ------------ ------------ Net Revenue $ 2,300,233 $ 1,576,719 46% (1)% Operating Expenses 1,696,581 1,062,284 60% 8% Corporate Expenses 48,150 39,417 22% (23)% ------------ ------------ EBITDA $ 555,502 $ 475,018 17% (17)% ------------ ------------
As Reported Nine Months Ended September 30, ------------------------------- % Change % Change 2001 2000 As Reported Pro Forma ------------ ------------ ------------ ------------ Net Revenue $ 6,107,857 $ 3,325,133 84% (3)% Operating Expenses 4,395,864 2,144,974 105% 2% Corporate Expenses 140,832 91,862 53% (18)% ------------ ------------ EBITDA $ 1,571,161 $ 1,088,297 44% (14)% ------------ ------------
Page 13 of 27 On a reported basis, net revenue and operating expenses increased primarily due to our 2000 acquisitions. Included in our three and nine months ended September 30, 2001 reported basis amounts are the net revenues and operating expenses for our 2000 acquisitions, the most significant being SFX Entertainment, Inc. acquired on August 1, 2000, AMFM Inc. acquired on August 30, 2000, and Donrey acquired on September 1, 2000. Corporate expenses increased on a reported basis also due to the above acquisitions. On a pro forma basis, net revenue decreased in the three and nine months ended September 30, 2001 due to an overall softening of the advertising industry, especially as compared to the strong advertising environment during the first nine months of 2000. During the first nine months of 2000, advertising rates were higher in our radio and outdoor businesses related to the increased inventory demand within the advertising industry. For the three and nine months ended September 30, 2001, operating expenses increased primarily due to the increase in revenue within the entertainment division during the current periods as compared to the prior periods. For the nine months ended September 30, 2001, the increase in operating expenses related to the additional sales and other operating costs associated with the increase in revenue in the entertainment division, which was partially offset by a decrease in operating expenses in the radio division. In addition, as discussed below, the terrorist attacks on September 11, 2001 negatively impacted the overall operating results for the three and nine months ended September 30, 2001. Also, corporate expenses declined on a pro forma basis primarily related to savings associated with our recent mergers and other cost saving measures. Other Income and Expense Information Non-cash compensation expense of $2.6 million and $14.9 million was recorded during the three and nine months ended September 30, 2001, respectively. This expense is primarily due to unvested stock options assumed in the AMFM merger that are now convertible into Clear Channel stock. To the extent that these employees' options continue to vest, we recognize non-cash compensation expense over the remaining vesting period. Vesting dates range from January 2001 to April 2005. If no employees forfeit their unvested options by leaving the company, we expect to recognize non-cash compensation expense of approximately $10.8 million during the remaining vesting period. In addition to the expense associated with the assumed unvested stock options granted to AMFM employees, we have recognized expense associated with modifications made to existing options during specific employee contract negotiations. We expect to recognize non-cash compensation expense of approximately $6.2 million over the next five years relating to these specific contracts. For the three and nine months ended September 30, 2000 and 2001, depreciation and amortization expense increased from $372.1 million and $820.8 million, respectively to $652.8 million and $1.9 billion, respectively. The increase is due primarily to additional amortization of FCC licenses and goodwill associated with the AMFM acquisition and amortization of goodwill and other intangibles associated with the SFX acquisition. In addition to the increase relating to recent acquisitions, during the nine months ended September 30, 2001, we disposed of certain assets deemed to be no longer necessary in our ongoing operations. The majority of the assets identified resulted from the continuing integration of recent acquisitions, as well as analog television equipment, and an impairment of an operating contract. As we continue integration and identify assets to be disposed of, we will possibly recognize additional depreciation and amortization expense. Interest expense was $428.7 million and $230.8 million for the nine months ended September 30, 2001 and 2000, respectively. For the three months ended September 30, 2001 and 2000, interest expense increased $29.4 million from $105.3 million to $134.7 million, a 28% increase. The increase was due to the overall increase in average amounts of debt outstanding, partially offset by the decrease in LIBOR rates. At September 30, 2001, approximately 47% of our debt is variable-rate debt that bears interest based upon LIBOR. The 1-Month LIBOR rates decreased from 6.62% at September 30, 2000 to 2.63% at September 30, 2001. The loss on sale of assets related to mergers for the nine months ended September 30, 2001 of $57.4 million is primarily due to a loss of $78.7 million related to the sale of 14.5 million shares of Lamar Advertising Company that we acquired in the AMFM merger, and a net loss of $11.6 million related to write-downs of other investments acquired in mergers. This loss was partially offset by a gain of $32.9 million realized on the sale of five stations in connection with governmental directives regarding the AMFM merger. Subsequent to September 30, 2001, we sold all of our remaining shares of Lamar and received proceeds of $324.4 million, which will be used to Page 14 of 27 pay down our existing credit facility balance. As a result of these sales of Lamar shares, we will recognize a loss of approximately $156.3 million. The gain on marketable securities is primarily related to the reclassification of 2.0 million shares of American Tower Corporation to a trading security under Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity Securities and Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities. On January 1, 2001, the shares were transferred to a trading classification at their fair market value of $76.2 million and an unrealized pretax holding gain of $69.7 million was recognized. During the nine months ended September 30, 2001, we entered into two secured forward exchange contracts that monetized part of our investment in American Tower. The fair value adjustment of the American Tower trading shares and the secured forward exchange contract netted gains of $5.7 million and $15.3 million during the three and nine months ended September 30, 2001, respectively. In addition, during the first quarter of 2001, a net loss of $52.1 million was recognized related to impairments of other investments that had declines in their market values that were considered to be other than temporary. Equity in earnings of nonconsolidated affiliates for the nine months ended September 30, 2001 was $11.6 million as compared to $18.0 million for the same period of 2000. The decrease was due to declining operating results primarily in our radio broadcasting equity investments. For similar reasons, equity in earnings of nonconsolidated affiliates for the three months ended September 30, 2001 declined $1.4 million from $8.4 million for the three months ended September 30, 2000 to $7.0 million for the three months ended September 30, 2001. For the three and nine months ended September 30, 2001, Other income (expense) - net was an expense of $1.7 million and $19.0 million, respectively, as compared to an expense of $9.0 million and $7.3 million in the same periods of 2000, respectively. The additional expense recognized for the nine months ended September 30, 2001 related primarily to the reimbursements of capital costs within certain operating contracts as well as other miscellaneous expenses. The decrease in expense recognized for the three months ended September 30, 2001 related primarily to gains recognized related to the sale of national representation contracts. Income taxes for the three and nine months ended September 30, 2001 and 2000 were provided at the federal and state statutory rates plus permanent differences. The effective rates in all periods presented have been adversely impacted by permanent differences, primarily amortization of intangibles that is not deductible for tax purposes. The September 11, 2001 Terrorist Attacks We have been affected by the events of September 11, 2001, in New York, Washington, D.C., and Pennsylvania, as well as by the actions taken by the United States in response to such events. At this time, it is not known how significant the ongoing effect of these events will be on the radio broadcasting, outdoor advertising or live entertainment industries. However, as a result of expanded news coverage following the attacks and subsequent military action, we experienced a loss in advertising revenues and increased incremental operating expenses. The events of September 11 have further depressed economic activity in the United States and globally, including the markets in which we operate. As of the date of this report, we cannot determine whether the September 11 events or their aftermath will have a material impact on our financial position or our results of operations. RADIO BROADCASTING (In thousands)
As Reported Three Months Ended September 30, -------------------------------- % Change % Change 2001 2000 As Reported Pro Forma ------------ ------------ ------------ ------------ Net Revenue $ 866,106 $ 597,114 45% (8)% Operating Expenses 512,569 329,896 55% 1% ------------ ------------ EBITDA $ 353,537 $ 267,218 32% (19)% ------------ ------------
Page 15 of 27
As Reported Nine Months Ended September 30, ------------------------------- % Change % Change 2001 2000 As Reported Pro Forma ------------ ------------ ------------ ------------ Net Revenue $ 2,564,928 $ 1,471,939 74% (8)% Operating Expenses 1,513,224 869,176 74% (3)% ------------ ------------ EBITDA $ 1,051,704 $ 602,763 74% (13)% ------------ ------------
Net revenues and operating expenses increased on a reported basis due to our acquisitions completed during 2000. Included in our three and nine months ended September 30, 2001 reported amounts are net revenues and operating expenses from our acquisition of AMFM in August 2000. On a pro forma basis, net revenue for the three and nine months ended September 30 decreased due to weak economic conditions in 2001 versus the high inventory demands and advertising rates experienced during the first nine months of 2000 related to the overall strength of the U.S. economy and the rapid growth of the Internet industry. In addition, as previously discussed, the terrorist attacks of September 11, 2001 negatively impacted net revenue. On a pro forma basis, operating expenses for the nine months ended September 30, 2001 decreased primarily due to the decrease in net revenue. OUTDOOR ADVERTISING (In thousands)
As Reported Three Months Ended September 30, -------------------------------- % Change % Change 2001 2000 As Reported Pro Forma ------------ ------------ ------------ ------------ Net Revenue $ 428,359 $ 441,686 (3)% (9)% Operating Expenses 292,419 275,686 6% (1)% ------------ ------------ EBITDA $ 135,940 $ 166,000 (18)% (23)% ------------ ------------
As Reported Nine Months Ended September 30, ------------------------------- % Change % Change 2001 2000 As Reported Pro Forma ------------ ------------ ------------ ------------ Net Revenue $ 1,289,066 $ 1,238,878 4% (5)% Operating Expenses 869,439 777,428 12% 1% ------------ ------------ EBITDA $ 419,627 $ 461,450 (9)% (16)% ------------ ------------
Net revenues decreased during the three months ended September 30, 2001 as compared to the same period of 2000 due to difficult comparisons to the prior year period. Net revenues and operating expenses increased for the nine months ended September 30, 2001 as compared to the same period of 2000 on a reported basis due to our acquisitions completed during 2000. Included in the three and nine months ended September 30, 2001 reported basis amounts are net revenues and operating expenses from our acquisition of Donrey in September 2000, as well as other less significant acquisitions. On a pro forma basis, net revenues decreased during the three and nine months ended September 30, 2001 as compared to the same periods of 2000 as a result of both a decrease in rates charged and occupancy of the billboards and street furniture. Pro forma operating expenses decreased during the three months ended September 30, 2001 as a result of the decrease in revenue, whereas pro forma operating expenses increased during the nine months ended September 30, 2001 primarily due to increased expenses associated with investments and expansion of operations of recently acquired assets and contracts. Page 16 of 27 LIVE ENTERTAINMENT (In thousands)
As Reported Three Months Ended September 30, -------------------------------- % Change % Change 2001 2000 As Reported Pro Forma ------------ ------------ ------------ ------------ Net Revenue $ 939,896 $ 475,487 n/a 15% Operating Expenses 843,753 418,516 n/a 15% ------------ ------------ EBITDA $ 96,143 $ 56,971 n/a 15% ------------ ------------
As Reported Nine Months Ended September 30, ------------------------------- % Change % Change 2001 2000 As Reported Pro Forma ------------ ------------ ------------ ------------ Net Revenue $ 2,038,231 $ 475,487 n/a 7% Operating Expenses 1,869,393 418,516 n/a 8% ------------ ------------ EBITDA $ 168,838 $ 56,971 n/a (1)% ------------ ------------
We entered the live entertainment business with our acquisition of SFX in August 2000. Therefore, the as reported amounts shown above for the three and nine months ended September 30, 2000 only represents the results of operations for two months in 2000 as compared to the full three and nine month periods in 2001. On a pro forma basis, net revenue increased during the three and nine months ended September 30, 2001 as compared to the same periods of the prior year due to a change in the mix of live music events during 2001 as compared to 2000. Although the number of live events decreased over the prior period, there were more stadium and arena events in 2001, which generated higher revenues due to increased seating capacity. Operating expenses increased on a pro forma basis due to the increase in revenue. LIQUIDITY AND CAPITAL RESOURCES We expect to fund anticipated cash requirements including those for acquisitions, anticipated capital expenditures, share repurchases, payments of principal and interest on outstanding indebtedness and commitments with cash flows from operations and various externally generated funds. As of September 30, 2001 and December 31, 2000 we had the following debt outstanding: (In millions)
September 30, December 31, 2001 2000 -------------- -------------- Credit facilities - domestic $ 2,713.6 $ 3,203.8 Credit facility - international 69.1 118.3 Senior convertible notes 1,575.0 1,575.0 Liquid Yield Option Notes 242.5(a) 497.1 Long-term bonds 5,257.3(b) 5,153.6 Other borrowings 165.1 132.4 -------------- -------------- Total Debt 10,022.6(c) 10,680.2 Less: Cash and cash equivalents 266.4 196.8 -------------- -------------- $ 9,756.2 $ 10,483.4 -------------- --------------
(a) Includes $44.4 million in unamortized fair value purchase accounting adjustment related to the merger with Jacor Communications, Inc. (b) Includes $68.7 million in unamortized fair value purchase accounting adjustments related to the mergers with AMFM. Also includes $131.6 million related to fair value adjustments for interest rate swap agreements. (c) Total face value of outstanding debt was $9.9 billion at September 30, 2001. Page 17 of 27 SOURCES OF CAPITAL Domestic Credit Facilities We currently have three separate domestic credit facilities. These provide cash for both working capital needs as well as to fund certain acquisitions. The first credit facility is a $1.8 billion revolving credit facility. At September 30, 2001, $1.6 billion was outstanding and, taking into account outstanding letters of credit, $203.1 million was available for future borrowings. This credit facility began reducing on September 30, 2000, with quarterly repayment of the outstanding principal balance to continue over the next five years and the entire balance to be repaid by the last business day of June 2005. The second facility is a $1.5 billion, 364-day revolving credit facility, which we have the option, prior to its August 28, 2002 maturity, to convert into a term loan with a three-year maturity. There was no amount outstanding at September 30, 2001 and $1.5 billion was available for future borrowings. The third facility is a $1.5 billion, five-year multi-currency revolving credit facility. At September 30, 2001, the outstanding balance was $1.1 billion and, taking into account letters of credit, $297.4 million was available for future borrowings. During the nine months ended September 30, 2001, we made principal payments totaling $2.3 billion and drew down $1.8 billion on these credit facilities. As of November 9, 2001, the credit facilities aggregate outstanding balance was $1.7 billion and, taking into account outstanding letters of credit, $2.9 billion was available for future borrowings. International Credit Facility We have a $150.0 million five-year revolving credit facility with a group of international banks. This facility allows for borrowings in various foreign currencies, which are used to hedge net assets in those currencies and provides funds to our international operations for certain working capital needs and smaller acquisitions. At September 30, 2001, approximately $67.0 million was available for future borrowings and $69.1 million was outstanding. This credit facility expires on December 8, 2005. Restricted Cash In connection with the AMFM merger and related governmental directives, we divested five radio stations, which had been placed in a trust, for $41.0 million. These proceeds were placed in a restricted trust for the purchase of replacement properties. The following table details the activity in the restricted cash accounts: (In thousands) Restricted cash balance at January 1, 2001 $ 628,141 Proceeds from sale of stations 41,000 Restricted cash used in acquisitions (362,075) Interest, net of fees 4,626 Expired amount refunded (311,692) --------- Restricted cash balance at September 30, 2001 $ -- ---------
Page 18 of 27 Sale of Marketable Securities In connection with our merger with AMFM on August 30, 2000, Clear Channel and AMFM entered into a Consent Decree with the Department of Justice regarding AMFM's investment in Lamar Advertising Company. The Consent Decree, among other things, required us to sell all of our 26.2 million shares of Lamar by December 31, 2002 and relinquish all shareholder rights during the disposition period. As a result, we do not exercise significant influence and account for the investment under the cost method of accounting. During the nine months ended September 30, 2001, we received proceeds of $595.6 million relating to the sale of 14.5 million shares of Lamar common stock. Subsequent to September 30, 2001, we received proceeds of $324.4 million relating to the sale of our remaining 10.4 million shares of Lamar common stock. These proceeds will be used to pay down our existing credit facility balance. Common Stock Warrants We assumed common stock warrants, with an expiration date of September 18, 2001, as a part of our merger with Jacor. Each warrant represented the right to purchase .2355422 shares of our common stock at an exercise price of $24.19 per full share. During the three months ended September 30, 2001, we received $122.2 million in proceeds and issued 5.1 million shares of common stock on the exercise of these warrants. Issuance of Public Debt On October 26, 2001, we completed a debt offering of $750.0 million 6% Senior Notes due November 1, 2006. Interest is payable on May 1 and November 1 of each year. The first interest payment on the notes will be made on May 1, 2002. Net proceeds of approximately $744.1 million were used to reduce the outstanding balance of our $1.8 billion revolving credit facility. USES OF CAPITAL Acquisitions During the nine months ended September 30, 2001, we acquired 174 radio stations in 56 markets for $75.9 million in cash, $350.4 million in restricted cash plus the exchange of eight radio stations. We also acquired approximately 4,100 additional outdoor display faces in 32 domestic markets and approximately 17,550 additional display faces in 38 international markets for a total of $286.7 million in cash. Our outdoor segment also acquired investments in non-consolidated affiliates for a total of $19.2 million in cash. During the nine months ended September 30, 2001, our live entertainment segment acquired music, sports and racing events, promotional assets and sports talent representation contracts for $75.7 million in cash. We also acquired two FCC licenses of television stations, both of which we had previously been operating under a local marketing agreement, national representation contracts, and other Internet assets for a total of $61.9 million in cash and $11.7 million in restricted cash. Pending Merger On October 5, 2001, we entered into a merger agreement to acquire The Ackerley Group, Inc. Ackerley holds a diversified group of outdoor, broadcasting and interactive media assets. This merger will be a tax-free, stock-for-stock transaction. Each share of Ackerley common stock will convert into 0.35 shares of our common stock, on a fixed exchange basis, valuing the merger, based on average share value at the signing of the merger agreement, at approximately $474.9 million plus the assumption of Ackerley's debt, which was approximately $290.9 million at September 30, 2001. This merger is subject to regulatory approval and other closing conditions, including the approval from the Ackerley shareholders. We anticipate that this merger will close during the first half of 2002. Page 19 of 27 Capital Expenditures Capital expenditures increased from $320.4 million for the nine months ended September 30, 2000 to $419.4 million in same period of 2001. Overall, capital expenditures increased due the increase in the number of radio stations, billboards and displays owned during the nine months ended September 30, 2001 as compared to the nine months ended September 30, 2000. In addition, we incurred capital expenditures related to our new live entertainment segment during the nine months ended September 30, 2001 that we did not incur in the same period of 2000. The increase for the nine months ended September 30, 2001 primarily relates to additional spending relating to facility consolidation resulting from our acquisitions, technological upgrades of operating assets, and the construction and purchase of new revenue producing advertising displays. (In millions)
Nine Months Ended September 30, 2001 Capital Expenditures ----------------------------------------------------------------------------- Radio Outdoor Entertainment Other Total ------------- ------------- ------------- ------------- ------------- Recurring $ 29.5 $ 45.2 $ 9.5 $ 10.5 $ 94.7 Non-recurring projects 79.8 14.5 25.5 61.7 181.5 Revenue producing -- 128.2 15.0 -- 143.2 ------------- ------------- ------------- ------------- ------------- $ 109.3 $ 187.9 $ 50.0 $ 72.2 $ 419.4
Our radio broadcasting capital expenditures during the nine months ended September 30, 2001 are related primarily to expenditures associated with the consolidation of operations in certain markets in conjunction with acquisitions that are expected to result in improved operating results in such markets. Our outdoor advertising capital expenditures during the nine months ended September 30, 2001 are related primarily to the construction of new revenue producing advertising displays as well as replacement expenditures on our existing advertising displays. Our live entertainment capital expenditures during the nine months ended September 30, 2001 include expenditures primarily related to a consolidated sales and operations facility, new venues and improvements to existing venues. Included in "other" capital expenditures during the nine months ended September 30, 2001 is the purchase of land for an additional corporate facility to replace leased space, deposits on certain corporate assets, upgrades of our television related operating assets and other technological expenditures. Future acquisitions of radio broadcasting stations, outdoor advertising facilities, live entertainment assets and other media-related properties affected in connection with the implementation of our acquisition strategy are expected to be financed from increased borrowings under our existing credit facilities, additional public equity and debt offerings and cash flow from operations. We believe that cash flow from operations, as well as the proceeds from securities offerings made from time to time, will be sufficient to make all required future interest and principal payments on the credit facilities, senior convertible notes and bonds, and will be sufficient to fund all anticipated capital expenditures. Liquid Yield Option Notes We assumed 4.75% Liquid Yield Option Notes ("LYONs") due 2018 and 5.50% LYONs due 2011 as a part of the merger with Jacor. Each LYON has a principal amount at maturity of $1,000 and is convertible, at the option of the holder, at any time on or prior to maturity, into our common stock at a conversion rate of 7.227 shares per LYON and 15.522 shares per LYON for the 2018 and 2011 issues, respectively. On May 7, 2001, we delivered notice of our intent to redeem the total outstanding principal amount of the 5.50% LYONs on June 12, 2001. Pursuant to the indenture agreement, the redemption price of $581.25 per each $1,000 LYON outstanding at June 12, 2001 was equal to the issue price plus accrued original issue discount through the redemption date. Substantially all of the 5.50% LYONs converted into our common stock prior to the redemption date. The LYONs Page 20 of 27 balance, after conversions to common stock, amortization of purchase accounting premium, and accretion of interest, at September 30, 2001 was $242.5 million. Other During the nine months ended September 30, 2001, we made cash tax payments of $450.0 million relating to gains realized on divested radio stations during 2000. Also, we made payments of approximately $200.3 million related to severance and other merger related expenses during the nine months ended September 30, 2001. COMMITMENTS AND CONTINGENCIES There are various lawsuits and claims pending against us. We believe that any ultimate liability resulting from those actions or claims will not have a material adverse effect on our results of operations, financial position or liquidity. Certain agreements relating to acquisitions provide for purchase price adjustments and other future contingent payments based on the financial performance of the acquired companies. We will continue to accrue additional amounts related to such contingent payments if and when it is determinable that the applicable financial performance targets will be met. The aggregate of these contingent payments, if performance targets are met, would not significantly impact our financial position or results of operations. MARKET RISK Interest Rate Risk At September 30, 2001, approximately 47% of our long-term debt, including fixed rate debt on which we have entered interest rate swap agreements, bears interest at variable rates. Accordingly, our earnings are affected by changes in interest rates. Assuming the current level of borrowings at variable rates and assuming a two percentage point change in the quarter's average interest rate under these borrowings, it is estimated that our nine months ended September 30, 2001 interest expense would have changed by $90.7 million and that our nine months ended September 30, 2001 net loss would have changed by $56.2 million. In the event of an adverse change in interest rates, management may take actions to further mitigate its exposure. However, due to the uncertainty of the actions that would be taken and their possible effects, the analysis assumes no such actions. Further, the analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment. We have entered into interest rate swap agreements that effectively float interest at rates based upon LIBOR on $1.5 billion of our current fixed rate borrowings. These agreements expire from September 2003 to June 2005. The fair value of these agreements at September 30, 2001 was an asset of $131.6 million. Equity Price Risk The carrying value of our available-for-sale equity securities is affected by changes in their quoted market prices. It is estimated that a 20% change in the market prices of these securities would change their carrying value at September 30, 2001 by $108.2 million and would change accumulated comprehensive income by $67.1 million. In connection with the completion of the AMFM merger, Clear Channel and AMFM entered into a Consent Decree with the Department of Justice regarding our investment in Lamar Advertising Company. The Consent Decree, among other things, required us to sell all of our shares of Lamar by December 31, 2002. In accordance with APB 16, Business Combinations, our 26.2 million shares of Lamar were recorded at their quoted market price on the closing date of the merger, which was significantly higher than AMFM's historical purchase price. We will be exposed to changes in Lamar's market price, which may result in large gains or losses related to this disposition in future periods. At September 30, 2001, we held 10.4 million shares of Lamar Advertising common stock valued at $314.3 million. Subsequent to September 30, 2001, we sold all of our remaining shares of Lamar common stock. As a result of these sales, we will recognize a loss of approximately $156.3 million. Page 21 of 27 Foreign Currency We have operations in countries throughout the world. Foreign operations are measured in their local currencies except in hyper-inflationary countries in which we operate. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we have operations. To mitigate a portion of the exposure to risk of international currency fluctuations, we maintain a natural hedge through borrowings in currencies other than U.S. dollar. We review this hedge position monthly. We currently maintain no derivative instruments to mitigate the exposure to translation and/or transaction risk. However, this does not preclude the adoption of specific hedging strategies in the future. Our foreign operations reported a loss of $20.1 million for the nine months ended September 30, 2001. It is estimated that a 10% change in the value of the U.S. dollar to foreign currencies would change net loss for the nine months ended September 30, 2001 by $2.0 million. RECENT ACCOUNTING PRONOUNCEMENTS On July 1, 2001, we adopted Statement of Financial Accounting Standards No. 141, Business Combinations. Statement 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. Statement 141 is effective for all business combinations initiated after June 30, 2001. Statement 141 eliminates the pooling-of-interest method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. Statement 141 also changes the criteria to recognize intangible assets apart from goodwill. As we have historically used the purchase method to account for all business combinations, adoption of this statement did not have a material impact on our financial position or results of operations. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Statement 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. Statement 142 is effective for fiscal years beginning after December 15, 2001. This statement establishes new accounting for goodwill and other intangible assets recorded in business combinations. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statement. Other intangible assets will continue to be amortized over their useful lives. As our amortization of goodwill and certain other indefinite lived intangibles is a significant non-cash expense that we currently record, Statement 142 will have a material impact on our financial statements. For the three and nine months ended September 30, 2001, amortization expense related to goodwill and indefinite lived intangibles was approximately $440 million and $1.3 billion, respectively. We are currently evaluating valuation techniques as well as other implementation issues. Our preliminary assessment is that an impairment charge under the new requirements of Statement 142 may possibly be recorded upon the adoption of Statement 142. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. Statement 144 is effective for fiscal years beginning after December 15, 2001. Statement 144 removes goodwill from its scope and retains the requirements of Statement 121 regarding the recognition of impairment losses on long-lived assets held for use. The Statement modifies the accounting for long-lived assets to be disposed of by sale and long-lived assets to be disposed of by other than by sale. We do not believe adoption of this statement will materially impact our financial position or results of operations. Page 22 of 27 RATIO The ratio of earnings to fixed charges is as follows:
9 Months Ended September 30, Year Ended December 31, -------------------- ---------------------------------------------------- 2001 2000 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- -------- -------- (.41) 3.58 2.20 2.04 1.83 2.32 3.63
The ratio of earnings to fixed charges was computed on a consolidated basis. Earnings represent income from continuing operations before income taxes less equity in undistributed net income (loss) of unconsolidated affiliates plus fixed charges. Fixed charges represent interest, amortization of debt discount and expense, and the estimated interest portion of rental charges. We had no preferred stock outstanding for any period presented. For the nine-month period ended September 30, 2001, fixed charges exceeded earnings before income taxes and fixed charges by $830.8 million. 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 the strategic fit of radio assets; expansion of market share; our ability to capitalize on synergies between the live entertainment and radio broadcasting businesses; 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 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, including the effects of the September 11, 2001 terrorist attacks and their aftermath; o competition and general conditions in our radio broadcasting, outdoor advertising and live entertainment industries; o our ability to integrate the operations of recently acquired companies; o the availability of acceptable acquisition opportunities; o shifts in population and other demographics; o fluctuations in operating costs; o technological changes and innovations; o changes in labor conditions; o fluctuations in exchange rates and currency values; o capital expenditure requirements; o legislative or regulatory requirements, including the policies of the FCC, DOJ and FTC with respect to the conduct of our business and, the consummation of future or pending acquisitions; o interest rates; o the effect of leverage on our financial position and earnings; o taxes; o access to capital markets; and o certain other factors set forth in our SEC filings. Page 23 of 27 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. Required information is within Item 2 Page 24 of 27 PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. See Exhibit Index on Page 26 (b) Reports on Form 8-K
Filing Date Items Reported Financial Statements Reported ------ ---- -------------- ----------------------------- 8-K 10/09/01 Item 5 to announce None signing of a merger agreement with The Ackerley Group, Inc.
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. CLEAR CHANNEL COMMUNICATIONS, INC. Date November 13, 2001 /s/ Randall T. Mays Randall T. Mays Executive Vice President and Chief Financial Officer Date November 13, 2001 /s/ Herbert W. Hill, Jr. Herbert W. Hill, Jr. Senior Vice President and Chief Accounting Officer Page 25 of 27 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION 2.1 Agreement and Plan of Merger dated as of October 2, 1999, among Clear Channel, CCU Merger Sub, Inc. and AMFM Inc. (incorporated by reference to the exhibits of Clear Channel's Current Report on Form 8-K filed October 5, 1999). 2.2 Agreement and Plan of Merger dated as of February 28, 2000, among Clear Channel, CCU II Merger Sub, Inc. and SFX Entertainment, Inc. (incorporated by reference to the exhibits of Clear Channel's Current Report on Form 8-K filed February 29, 2000). 2.3 Agreement and Plan of Merger dated October 5, 2001, among Clear Channel Communications, Inc., The Ackerley Group, Inc., and CCMM Sub, Inc. (incorporated by reference to the exhibits of Clear Channel's Current Report on Form 8-K filed October 9, 2001). 2.4 Stockholder Voting and Support Agreement dated October 5, 2001, between Clear Channel Communications, Inc. and Barry A. Ackerley (incorporated by reference to the exhibits of Clear Channel's Current Report on Form 8-K filed October 9, 2001). 3.1 Current Articles of Incorporation of the Company (incorporated by reference to the exhibits of the Company's Registration Statement on Form S-3 (Reg. No. 333-33371) dated September 9, 1997). 3.2 Second Amended and Restated Bylaws of the Company (incorporated by reference to the exhibits of the Company's Registration Statement on Form S-3 (Reg. No. 333-33371) dated September 9, 1997). 3.3 Amendment to the Company's Articles of Incorporation (incorporated by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 3.4 Second Amendment to Clear Channel's Articles of Incorporation (incorporated by reference to the exhibits to Clear Channel's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999). 3.5 Third Amendment to Clear Channel's Articles of Incorporation (incorporated by reference to the exhibits to Clear Channel's Quarterly Report on Form 10-Q for the quarter ended May 31, 2000). 4.1 Buy-Sell Agreement by and between Clear Channel Communications, Inc., L. Lowry Mays, B. J. McCombs, John M. Schaefer and John W. Barger, dated May 31, 1977 (incorporated by reference to the exhibits of the Company's Registration Statement on Form S-1 (Reg. No. 33-289161) dated April 19, 1984). 4.2 Senior Indenture dated October 1, 1997, by and between Clear Channel Communications, Inc. and The Bank of New York as Trustee (incorporated by reference to exhibit 4.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 4.3 First Supplemental Indenture dated March 30, 1998 to Senior Indenture dated October 1, 1997, by and between the Company and The Bank of New York, as Trustee (incorporated by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 4.4 Second Supplemental Indenture dated June 16, 1998 to Senior Indenture dated October 1, 1997, by and between Clear Channel Communications, Inc. and the Bank of New York, as Trustee (incorporated by reference to the exhibits to the Company's Current Report on Form 8-K dated August 27, 1998). 4.5 Third Supplemental Indenture dated June 16, 1998 to Senior Indenture dated October 1, 1997, by and between Clear Channel Communications, Inc. and the Bank of New York, as Trustee (incorporated by reference to the exhibits to the Company's Current Report on Form 8-K dated August 27, 1998).
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EXHIBIT NUMBER DESCRIPTION 4.6 Fourth Supplement Indenture dated November 24, 1999 to Senior Indenture dated October 1, 1997, by and between Clear Channel and The Bank of New York as Trustee (incorporated by reference to the exhibits of the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 4.7 Fifth Supplemental Indenture dated June 21, 2000, to Senior Indenture dated October 1, 1997, by and between Clear Channel Communications, Inc. and The Bank of New York, as Trustee (incorporated by reference to the exhibits of Clear Channel's registration statement on Form S-3 (Reg. No. 333-42028) dated July 21, 2000). 4.8 Sixth Supplemental Indenture dated June 21, 2000, to Senior Indenture dated October 1, 1997, by and between Clear Channel Communications, Inc. and The Bank of New York, as Trustee (incorporated by reference to the exhibits of Clear Channel's registration statement on Form S-3 (Reg. No. 333-42028) dated July 21, 2000). 4.9 Seventh Supplemental Indenture dated July 7, 2000, to Senior Indenture dated October 1, 1997, by and between Clear Channel Communications, Inc. and The Bank of New York, as Trustee (incorporated by reference to the exhibits of Clear Channel's registration statement on Form S-3 (Reg. No. 333-42028) dated July 21, 2000). 4.10 Eighth Supplemental Indenture dated September 12, 2000, to Senior Indenture dated October 1, 1997, by and between Clear Channel Communications, Inc. and The Bank of New York, as Trustee (incorporated by reference to the exhibits to Clear Channel's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 4.11 Ninth Supplemental Indenture dated September 12, 2000, to Senior Indenture dated October 1, 1997, by and between Clear Channel Communications, Inc. and The Bank of New York, as Trustee (incorporated by reference to the exhibits to Clear Channel's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 4.12 Tenth Supplemental Indenture dated October 26, 2001, to Senior Indenture dated October 1, 1997, by and between Clear Channel Communications, Inc. and The Bank of New York, as Trustee. 11 Statement re: Computation of Earnings Per Share. 12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
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