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22: R4 Consolidated Statements of Comprehensive Income HTML 160K
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47: R5 Consolidated Statements of Changes of HTML 138K
Stockholders' Equity (Deficit)
88: R6 Consolidated Statements of Cash Flows HTML 186K
73: R7 Basis of Presentation HTML 71K
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57: R29 Income Taxes (Tables) HTML 57K
72: R30 Stockholder's Equity (Deficit) (Tables) HTML 142K
84: R31 Segment Data (Tables) HTML 242K
54: R32 BASIS OF PRESENTATION - Narrative (Details) HTML 72K
25: R33 BASIS OF PRESENTATION - Reconciliation of Cash, HTML 49K
Cash Equivalents, and Restricted Cash (Details)
71: R34 Emergence From Voluntary Reorganization Under HTML 127K
Chapter 11 Proceedings (Details)
83: R35 FRESH START ACCOUNTING - Reorganization Value HTML 62K
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53: R36 FRESH START ACCOUNTING - Schedule of Fresh Start HTML 307K
Adjustments to the Balance Sheet (Details)
24: R37 FRESH START ACCOUNTING - Narrative (Details) HTML 156K
70: R38 FRESH START ACCOUNTING - Reorganization HTML 65K
Adjustments - Sources and Uses of Cash (Details)
85: R39 FRESH START ACCOUNTING - Reorganization HTML 37K
Adjustments - Schedule of Net Impact on Accrued
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63: R40 FRESH START ACCOUNTING - Reorganization HTML 71K
Adjustments - Schedule of Liabilities Subject To
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96: R41 FRESH START ACCOUNTING - Reorganization HTML 78K
Adjustments - Schedule of Long-Term Debt (Details)
37: R42 FRESH START ACCOUNTING - Reorganization HTML 35K
Adjustments - Schedule of Effects on Other
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29: R43 FRESH START ACCOUNTING - Reorganization HTML 33K
Adjustments - Equity Issued (Details)
62: R44 FRESH START ACCOUNTING - Reorganization HTML 56K
Adjustments - Cumulative Effect of Emergence
(Details)
95: R45 FRESH START ACCOUNTING - Fresh Start Adjustments - HTML 61K
Schedule of Intangible Assets (Details)
36: R46 FRESH START ACCOUNTING - Fresh Start Adjustments - HTML 38K
Impact on Fair Value of Historical Fair Values
(Details)
28: R47 FRESH START ACCOUNTING - Fresh Start Adjustments - HTML 40K
Effects on Goodwill (Details)
61: R48 FRESH START ACCOUNTING - Fresh Start Adjustments - HTML 70K
Schedule of Cumulative Adjustments (Details)
97: R49 FRESH START ACCOUNTING - Schedules of HTML 47K
Reorganization Items, Net (Details)
81: R50 Discontinued Operations (Details) HTML 173K
67: R51 REVENUE - Disaggregation of Revenue (Details) HTML 89K
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Expenses (Details)
41: R53 REVENUE - Schedule of Contract Assets and HTML 36K
Liabilities (Details)
82: R54 REVENUE - Narrative (Details) HTML 34K
68: R55 REVENUE - Revenue From Leases (Details) HTML 43K
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40: R65 LONG-TERM DEBT - Schedule Of Long-Term Debt HTML 139K
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94: R66 LONG-TERM DEBT - Asset-based Revolving Credit HTML 72K
Facility due 2023 (Details)
60: R67 LONG-TERM DEBT - Term Loan Facility due 2026 HTML 62K
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32: R68 LONG-TERM DEBT - 6.375% Senior Secured Notes due HTML 41K
2026 (Details)
38: R69 LONG-TERM DEBT - 5.25% Senior Secured Notes due HTML 46K
2027 (Details)
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64: R76 Stockholder's Equity (DEFICIT) - Narrative HTML 92K
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Predecessor Common Stock (Details)
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Stock and Special Warrants (Details)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class
A Common Stock
"IHRT"
The NASDAQ Stock Market LLC
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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Smaller reporting company [ ] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes
[X] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Accounts receivable, net of allowance of $8,088 in 2019 and $26,584 in 2018
843,190
868,861
Prepaid
expenses
120,981
99,532
Other current assets
29,942
26,787
Current
assets of discontinued operations
—
1,015,800
Total Current Assets
1,271,163
2,235,017
PROPERTY,
PLANT AND EQUIPMENT
Property, plant and equipment, net
834,013
502,202
INTANGIBLE ASSETS AND GOODWILL
Indefinite-lived
intangibles - licenses
2,277,733
2,417,915
Other intangibles, net
2,238,423
200,422
Goodwill
3,325,546
3,412,753
OTHER
ASSETS
Operating lease right-of-use assets
886,333
—
Other assets
101,738
149,736
Long-term
assets of discontinued operations
—
3,351,470
Total Assets
$
10,934,949
$
12,269,515
CURRENT
LIABILITIES
Accounts payable
$
61,353
$
49,435
Current
operating lease liabilities
77,729
—
Accrued expenses
213,426
298,383
Accrued
interest
91,379
767
Deferred revenue
138,968
123,143
Current
portion of long-term debt
53,705
46,105
Current liabilities of discontinued operations
—
729,816
Total
Current Liabilities
636,560
1,247,649
Long-term debt
5,755,305
—
Series
A Mandatorily Redeemable Preferred Stock, par value $0.001, authorized 60,000 shares, 60,000 shares issued in 2019 and no shares issued in 2018
60,000
—
Noncurrent operating lease liabilities
794,307
—
Deferred
income taxes
783,856
—
Other long-term liabilities
58,004
229,679
Liabilities
subject to compromise
—
16,480,256
Long-term liabilities of discontinued operations
—
5,872,273
Commitments
and contingent liabilities (Note 9)
STOCKHOLDERS’ EQUITY (DEFICIT)
Noncontrolling interest
8,372
30,868
Predecessor
Preferred stock, par value $.001 per share, 150,000,000 shares authorized, no shares issued and outstanding
—
—
Predecessor common stock
—
92
Successor
Preferred stock, par value $.001 per share, 100,000,000 shares authorized, no shares issued and outstanding
—
—
Successor Class A Common Stock, par value $.001 per share, authorized 1,000,000,000 shares, 57,670,714 shares issued and outstanding in 2019 and no shares issued and outstanding in 2018
58
—
Successor
Class B Common Stock, par value $.001 per share, authorized 1,000,000,000 shares, 6,925,976 shares issued and outstanding in 2019 and no shares issued and outstanding in 2018
7
—
Successor Special Warrants, 81,289,306 issued and outstanding in 2019 and none issued and outstanding in 2018
—
—
Additional
paid-in capital
2,790,175
2,074,632
Retained earnings (Accumulated deficit)
51,167
(13,345,346
)
Accumulated
other comprehensive loss
(827
)
(318,030
)
Cost of shares (125,210 in 2019 and 805,982 in 2018) held in treasury
(2,035
)
(2,558
)
Total
Stockholders' Equity (Deficit)
2,846,917
(11,560,342
)
Total Liabilities and Stockholders' Equity (Deficit)
(1)
The Predecessor Company's Class D Common Stock and Preferred Stock are not presented in the data above as there were no shares issued and outstanding in 2019.
(1)
The Predecessor Company's Class D Common Stock and Preferred Stock are not presented in the data above as there were no shares issued and outstanding in 2018.
(1)
The Predecessor Company's Class D Common Stock and Preferred Stock are not presented in the data above as there were no shares issued and outstanding in 2019 or 2018.
(1)
The Predecessor Company's Class D Common Stock and Preferred Stock are not presented in the data above as there were no shares issued and outstanding in 2018 or 2017.
All references in this Quarterly Report on Form 10-Q to the “Company,”“we,”“us” and “our” refer to iHeartMedia, Inc. and its consolidated subsidiaries. The accompanying consolidated financial statements were 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 normal and recurring adjustments 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 U.S. generally accepted accounting principles (“GAAP”) 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. As described below, as a result of the application of fresh start accounting and the effects of the implementation of the Company's Plan of Reorganization (as defined below), the consolidated financial statements after the Effective Date (as defined below), are not comparable with the consolidated financial statements on or before that date. Refer to Note 3, Fresh Start Accounting, for additional information. The financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2018 Annual
Report on Form 10-K.
The consolidated financial statements include the accounts of the Company and its subsidiaries. Also included in the consolidated financial statements are entities for which the Company has a controlling financial interest or is the primary beneficiary. Investments in companies in which the Company owns 20% to 50% 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.
Unless otherwise indicated, information in these notes to the consolidated financial statements relates to continuing operations. Certain of the Company's operations have been presented as discontinued. The Company presents businesses that represent components as discontinued operations when the components meet the criteria for held for sale, are sold, or spun-off and their disposal represents a strategic shift that has, or will have, a major effect on its operations and financial results. See Note 4, Discontinued Operations.
As part of the Separation
and Reorganization (as defined below), the Company reevaluated its segment reporting, resulting in the presentation of two businesses:
▪
Audio, which provides media and entertainment services via broadcast and digital delivery and also includes the Company’s events and national syndication businesses and
▪
Audio & Media Services, which provides
other audio and media services, including the Company’s media representation business, Katz Media Group (“Katz Media”) and the Company's provider of scheduling and broadcast software, Radio Computing Services (“RCS”).
Prior periods have been recast to reflect the Company's current segment presentation. See Note 13, Segment Data.
Certain prior period amounts have been reclassified to conform to the 2019 presentation.
Voluntary Filing under Chapter 11
On March 14, 2018 (the "Petition Date"), the Company, iHeartCommunications, Inc. ("iHeartCommunications") and certain of the Company's direct and indirect domestic subsidiaries (collectively, the "Debtors") filed voluntary petitions for relief (the "Chapter 11 Cases") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"), in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the "Bankruptcy Court"). Clear Channel Outdoor Holdings, Inc. (“CCOH”) and its direct and indirect subsidiaries
did not file voluntary petitions for reorganization under the Bankruptcy Code and were not Debtors in the Chapter 11 Cases. On April 28, 2018, the Company and the other Debtors filed a plan of reorganization (as amended, the “Plan of Reorganization”) and a related disclosure statement with the Bankruptcy Court, which we subsequently amended by filing the second, third, fourth and fifth amended Plan of Reorganization and amended versions of the Disclosure Statement. On January 22, 2019, the Plan
of Reorganization was confirmed by the Bankruptcy Court.
On May 1, 2019 (the “Effective Date”), the conditions to the effectiveness of the Plan of Reorganization were satisfied and the Company emerged from Chapter 11 through (a) a series of transactions (the “Separation”) through which CCOH, its parent Clear Channel Holdings, Inc. (“CCH”) and its subsidiaries (collectively with CCOH and CCH, the “Outdoor Group”) were separated
from, and ceased to be controlled by, the Company and its subsidiaries (the “iHeart Group”), and (b) a series of transactions (the “Reorganization”) through which iHeartCommunications’ debt was reduced from approximately $16 billion to approximately $5.8 billion and a global compromise and settlement among holders of claims (“Claimholders”) in connection with the
Chapter 11 Cases was effected. The compromise and settlement involved, among others, (i) the restructuring of iHeartCommunications’ indebtedness by (A) replacing its “debtor-in-possession” credit facility with a $450 million senior secured asset-based revolving credit facility (the “ABL Facility”) and (B) issuing to certain Claimholders, on account of their claims, approximately $3.5 billion aggregate principal amount of new senior secured term loans (the “Term Loan Facility”), approximately $1.45 billion aggregate principal amount of new 8.375% Senior Notes due 2027 (the “Senior Unsecured Notes”) and approximately $800 million aggregate principal amount of new 6.375%
Senior Secured Notes due 2026 (the “6.375% Senior Secured Notes”), (ii) the Company’s issuance of new Class A common stock, new Class B common stock and special warrants to purchase shares of new Class A common stock and Class B common stock (“Special Warrants”) to Claimholders, subject to ownership restrictions imposed by the Federal Communications Commission (“FCC”), (iii) the settlement of certain intercompany transactions, and (iv) the sale of the preferred stock (the “iHeart Operations Preferred Stock”) of the Company’s wholly-owned subsidiary iHeart Operations, Inc. (“iHeart Operations”) in connection with the Separation.
Upon the Company's emergence from the Chapter 11 Cases, the Company adopted fresh start accounting, which resulted in a new basis of accounting and the Company becoming a new entity for financial reporting purposes. As a result of the application of fresh start accounting and the effects of the implementation of the Plan of Reorganization, the consolidated financial statements
after the Effective Date, are not comparable with the consolidated financial statements on or before that date. Refer to Note 3, Fresh Start Accounting, for additional information.
References to “Successor” or “Successor Company” relate to the financial position and results of operations of the Company after the Effective Date. References to "Predecessor" or "Predecessor Company" refer to the financial position and results of operations of the Company on or before the Effective Date.
During the Predecessor period, the Company applied Accounting Standards
Codification (“ASC”) 852 - Reorganizations (“ASC 852”) in preparing the consolidated financial statements. ASC 852 requires the financial statements, for periods subsequent to the commencement of the Chapter 11 Cases, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain charges incurred during 2018 and 2019 related to the Chapter 11 Cases, including the write-off of unamortized long-term debt fees and discounts associated with debt classified as liabilities subject to compromise, and professional fees incurred directly as a result of the Chapter 11 Cases are recorded as Reorganization items, net in the Predecessor period.
ASC 852 requires certain additional reporting for financial statements prepared between the bankruptcy
filing date and the date of emergence from bankruptcy, including:
•
Reclassification of Debtor pre-petition liabilities that are unsecured, under-secured or where it cannot be determined that the liabilities are fully secured, to a separate line item in the Consolidated Balance Sheet called, "Liabilities subject to compromise"; and
•
Segregation of Reorganization items, net as a separate line in the Consolidated Statement of Comprehensive Loss, included within income from continuing operations.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. During the Chapter 11 Cases, the Company’s ability to continue as a going concern was contingent upon the Company’s ability to successfully implement the Company’s Plan of Reorganization, among other factors. As a result of the effectiveness and implementation of the Plan
of Reorganization, there is no longer substantial doubt about the Company's ability to continue as a going concern.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance
Sheets to the total of the amounts reported in the Consolidated Statements of Cash Flows:
Total cash, cash equivalents and restricted cash in the Statement of Cash Flows(1)
$
288,337
$
227,465
(1)
The Predecessor Company's Total cash, cash equivalents and restricted cash as of December 31, 2018 in the table above exclude $202.8 million classified as current and long-term assets of discontinued operations.
New Accounting Pronouncements Recently Adopted
Leases
The Company adopted ASU No. 2016-02, which created ASC 842, Leases, and all subsequent ASUs relating to this Topic, as of January 1, 2019 (collectively, "ASC 842"). This new lease accounting standard, which supersedes previous lease accounting guidance under U.S.
GAAP, results in significant changes to the balance sheets of lessees, most significantly by requiring the recognition of a right-of-use ("ROU") asset and lease liability by lessees for those leases classified as operating leases. Lessor accounting is also updated to align with certain changes in the lessee model and the revenue recognition standard ("ASC Topic 606"), which was adopted in 2018.
The Company applied the transition provisions of this standard at January 1, 2019 following the optional transition method provided by ASU No. 2018-11; consequently, the consolidated financial statements and notes to the consolidated financial statements for periods before the date of adoption continue to be presented in accordance with ASC Topic 840. In addition, the
Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to not reassess whether expired or existing contracts are or contain leases and to carry forward the historical lease classification for those leases that commenced prior to the date of adoption.
Upon adoption of ASC 842, prepaid and deferred rent balances, which were historically presented separately, were combined and presented net within the ROU asset. Additionally, deferred gains related to previous transactions that were historically accounted for as sale and operating leasebacks in accordance with ASC Topic 840 were eliminated and recognized as a cumulative-effect adjustment to equity, resulting in an increase to equity, net of tax, of $128.9 million.
Under ASC Topic 840, such gains were recognized ratably over the lease term as a credit to operating lease expense, and operating lease expense for the three and nine months ended September 30, 2018 included credits of $1.3 million and $3.9 million, respectively, for the amortization of these gains, which were not recognized in any period after January 1, 2019.
Adoption of the new standard had a material impact on our consolidated balance sheets, but it did not have a material impact on our other consolidated financial statements. Additionally, the standard requires disclosures to meet the objective of enabling users of the financial statements
to assess the amount, timing, and uncertainty of cash flows arising from leases. Refer to Note 5, Revenue, and Note 6, Leases, for more information.
Intangible Assets and Goodwill
During the first quarter of 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This update eliminated the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Entities are required to record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. The standard is effective for annual and any interim impairment tests performed for periods beginning after December 15, 2019. The
Company early adopted the proposed guidance under ASU 2017-04 beginning on January 1, 2019 on a prospective basis. The implementation of ASU 2017-04 did not have a material impact on our consolidated financial statements and related disclosures.
During the third quarter of 2018, the FASB issued ASU 2018-15, Intangibles
- Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This update requires that a customer in a cloud computing arrangement that is a service contract follow the internal use software guidance in Accounting Standards Codification (ASC) 350-402 to determine which implementation costs to capitalize as assets. The standard is effective for fiscal years beginning after December 15, 2019. The Company early adopted the proposed guidance under ASU 2018-15 beginning on January
1, 2019 on a prospective basis. The implementation of ASU 2018-15 did not have a material impact on our consolidated financial statements and related disclosures.
NOTE 2 - EMERGENCE FROM VOLUNTARY REORGANIZATION UNDER CHAPTER 11 PROCEEDINGS
On or following the Effective Date and pursuant to the Plan of Reorganization,
the following occurred:
▪
CCOH was separated from and ceased to be controlled by iHeartCommunications and its subsidiaries.
▪
The existing indebtedness of iHeartCommunications of approximately $16 billion was discharged, the Company entered into the Term Loan Facility ($3,500 million)
and issued the 6.375% Senior Secured Notes ($800 million) and the Senior Unsecured Notes ($1,450 million), collectively the “Successor Emergence Debt.”
Shares
of the Predecessor Company’s issued and outstanding common stock immediately prior to the Effective Date were canceled, and on the Effective Date, reorganized iHeartMedia issued an aggregate of 56,861,941 shares of iHeartMedia Class A common stock, 6,947,567 shares of Class B common stock and special warrants to purchase 81,453,648 shares of Class A common stock or Class B common stock to holders of claims pursuant to the Plan of Reorganization.
▪
The following classes of claims received the Successor Emergence Debt
and 99.1% of the new equity, as defined in the Plan of Reorganization:
▪
Secured Term Loan / 2019 PGN Claims (Class 4)
▪
Secured Non-9.0% PGN Due 2019 Claims Other Than Exchange 11.25% PGN Claims (Class 5A)
▪
Secured
Exchange 11.25% PGN Claims (Class 5B)
▪
iHC 2021 / Legacy Notes Claims (Class 6)
▪
Guarantor Funded Debt against other Guarantor Debtors Other than CCH and TTWN (Class 7)
▪
The holders of the Guarantor Funded Debt Unsecured Claims
Against CCH (Class 7F) received their Pro Rata share of 100 percent of the CCOH Interests held by the Debtors and CC Finco, LLC and Broader Media, LLC. Refer to the discussion below regarding the Separation Transaction.
▪
Settled the following classes of claims in cash:
▪
General Unsecured Claims Against Non-Obligor Debtors (Class 7A); paid in full
▪
General
Unsecured Claims Against TTWN Debtors (Class 7B); paid in full
▪
iHC Unsecured Claims (Class 7D); paid 14.44% of allowed claim
▪
Guarantor General Unsecured Claims (Class 7G); paid minimum of 45% and maximum of 55% of allowed claim
The CCOH Due From Claims (Class 8) represent the negotiated claim between iHeartMedia and CCOH, which was settled in cash on the date of emergence at 14.44%.
▪
The Predecessor Company’s common stockholders
(Class 9) received their pro rata share of 1% of the new common stock; provided that 0.1% of the new common stock that otherwise would have been distributed to the Company's former sponsors was instead distributed to holders of Legacy Notes Claims.
▪
The Company entered into a new $450.0 million ABL Facility, which was undrawn at emergence.
▪
The
Company funded the Guarantor General Unsecured Recovery Cash Pool for $17.5 million in order to settle the Class 7G General Unsecured Claims.
▪
The Company funded the Professional Fee Escrow Account.
▪
On the Effective Date, the iHeartMedia, Inc. 2019 Equity Incentive Plan (the “Post-Emergence Equity Plan”) became effective. The Post-Emergence Equity Plan allows the
Company to grant stock options and restricted stock units representing up to 12,770,387 shares of Class A common stock for key members of management and service providers and up to 1,596,298 for non-employee members of the board of directors. The amounts of Class A common stock reserved under the Post-Emergence Equity Plan were equal to 8% and 1%, respectively, of the Company’s fully-diluted and distributed shares of Class A common stock as of the Effective Date.
In addition, as part of the Separation, iHeartCommunications and CCOH consummated the following transactions:
▪
the
cash sweep agreement under the then-existing corporate services agreement and any agreements or licenses requiring royalty payments to iHeartMedia by CCOH for trademarks or other intellectual property (“Trademark License Fees”) were terminated;
▪
iHeartCommunications, iHeartMedia, iHeartMedia Management Services, Inc. (“iHM Management Services”) and CCOH entered into a transition services agreement (the “Transition Services Agreement”) pursuant to which, the Company or its subsidiaries will provide
administrative services historically provided to CCOH by iHeartCommunications for a period of one year after the Effective Date, which may be extended under certain circumstances;
▪
the Trademark License Fees charged to CCOH during the post-petition period were waived by iHeartMedia;
▪
iHeartMedia contributed the rights, title and interest in and to all tradenames, trademarks, service marks, common law marks and
other rights related to the Clear Channel tradename (the “CC Intellectual Property”) to CCOH;
▪
iHeartMedia paid $115.8 million to CCOH, which consisted of the $149.0 million payment by iHeartCommunications to CCOH as CCOH’s recovery of its claims under the Due from iHeartCommunications Note, partially offset by the $33.2 million net amount payable to iHeartCommunications under the post-petition intercompany balance between iHeartCommunications and CCOH after adjusting for the post-petition Trademark License Fees which were waived as part of the
settlement agreement;
▪
iHeartCommunications entered into a revolving loan agreement with Clear Channel Outdoor, LLC (“CCOL”) and Clear Channel International, Ltd., wholly-owned subsidiaries of CCOH, to provide a line of credit in an aggregate amount not to exceed $200 million at the prime rate of interest, which was terminated by the borrowers on July 30, 2019 in connection with the closing of an underwritten public offering of common stock by CCOH; and
▪
iHeart
Operations, Inc. issued $60.0 million in preferred stock to a third party for cash (see Note 8, Long-term Debt).
In connection with the Company's emergence from bankruptcy and in accordance with ASC 852, the Company qualified for and adopted fresh start accounting on the Effective Date. The Company was required to adopt fresh start accounting because (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company and (ii) the reorganization value of the Company's assets immediately prior to confirmation
of the Plan of Reorganization was less than the post-petition liabilities and allowed claims.
In accordance with ASC 852, with the application of fresh start accounting, the Company allocated its reorganization value to its individual assets based on their estimated fair values in conformity with ASC 805, "Business Combinations." The reorganization value represents the fair value of the Successor Company's assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets is reported as goodwill. As a result of the application of fresh start accounting and the effects of the implementation of the Plan
of Reorganization, the consolidated financial statements after May 1, 2019 are not comparable with the consolidated financial statements as of or prior to that date.
Reorganization Value
As set forth in the Plan of Reorganization and the Disclosure Statement, the enterprise value of the Successor Company was estimated to be between $8.0 billion and $9.5 billion. Based on the estimates and assumptions discussed below, the Company estimated the enterprise value to be $8.75 billion,
which is the mid-point of the range of enterprise value.
Management and its valuation advisors estimated the enterprise value of the Successor Company, which was approved by the Bankruptcy Court. The selected publicly traded companies analysis approach, the discounted cash flow analysis (“DCF”) approach and the selected transactions analysis approach were all utilized in estimating the enterprise value. The use of each approach provides corroboration for the other approaches. To estimate enterprise value utilizing the selected publicly traded companies analysis method, valuation multiples derived from the operating data of publicly-traded benchmark companies to the same operating data of the Company were applied. The selected publicly traded companies analysis identified a group of comparable companies giving consideration to lines
of business and markets served, size and geography. The valuation multiples were derived based on historical and projected financial measures of revenue and earnings before interest, taxes, depreciation and amortization and applied to projected operating data of the Company.
To estimate enterprise value utilizing the discounted cash flow method, an estimate of future cash flows for the period 2019 to 2022 with a terminal value was determined and discounted the estimated future cash flows to present value. The expected cash flows for the period 2019 to 2022 with a terminal value were based upon certain financial projections and assumptions provided to the Bankruptcy Court. The expected cash flows for the period 2019 to 2022 were derived from earnings forecasts and assumptions regarding growth and margin projections, as applicable. A terminal
value was included, calculated using the terminal multiple method, which estimates a range of values at which the Successor Company will be valued at the end of the Projection Period based on applying a terminal multiple to final year OIBDAN, which is defined as consolidated operating income adjusted to exclude non-cash compensation expenses included within corporate expenses, as well as Depreciation and amortization, Impairment charges and Other operating income (expense), net.
To estimate enterprise value utilizing the selected transactions analysis, valuation multiples were derived from an analysis of consideration paid and net debt assumed from publicly disclosed merger or acquisition transactions, and such multiples were applied to the broadcast cash flows of the Successor Company. The selected transactions analysis identified companies and assets involved in publicly disclosed merger and acquisition transactions for
which the targets had operating and financial characteristics comparable in certain respects to the Successor Company.
The following table reconciles the enterprise value per the Plan of Reorganization to the implied value (for fresh start accounting purposes) of the Successor Company's common stock as of
the Effective Date:
(In thousands, except per share data)
Enterprise Value
$
8,750,000
Plus:
Cash and cash equivalents
63,142
Less:
Debt issued upon emergence
(5,748,178
)
Finance leases and short-term notes
(61,939
)
Mandatorily Redeemable Preferred Stock
(60,000
)
Changes in deferred tax liabilities(1)
(163,910
)
Noncontrolling interest
(8,943
)
Implied value of Successor Company common stock
$
2,770,172
Shares issued upon emergence (2)
145,263
Per share value
$
19.07
(1) Difference in the assumed effect of deferred taxes in the calculation of enterprise value versus the actual effect of deferred taxes as of May 1.
(2) Includes the Class A Common Stock, Class B Common Stock and Special Warrants issued at emergence.
The
reconciliation of the Company’s enterprise value to reorganization value as of the Effective Date is as follows:
(In thousands)
Enterprise Value
$
8,750,000
Plus:
Cash
and cash equivalents
63,142
Current liabilities (excluding Current portion of long-term debt)
426,944
Deferred tax liability
596,850
Other long-term liabilities
54,393
Noncurrent
operating lease obligations
818,879
Reorganization value
$
10,710,208
Consolidated Balance Sheet
The adjustments set forth in the following consolidated balance sheet as of May 1, 2019 reflect the effect of the Separation (reflected in the column "Separation
of CCOH Adjustments"), the consummation of the transactions contemplated by the Plan of Reorganization that are incremental to the Separation (reflected in the column "Reorganization Adjustments") and the fair value adjustments as a result of applying fresh start accounting (reflected in the column "Fresh Start Adjustments"). The explanatory notes highlight methods used to determine fair values or other amounts of the assets and liabilities, as well as significant assumptions or inputs.
(1) On May 1, 2019, as part of the Separation, the outstanding shares of both classes of CCOH common stock were consolidated such that CCH held all of the outstanding CCOH Class A common stock that was held by subsidiaries of iHeartCommunications, through a series of share distributions by other subsidiaries that held CCOH common stock and a
conversion of CCOH Class B common stock that CCH held to CCOH Class A common stock. Prior to the Separation, iHeartCommunications owned approximately 89.1% of the economic rights and approximately 99% of the voting rights of CCOH. To complete the Separation, CCOH merged with and into CCH, with CCH surviving the merger and changing its name to Clear Channel Outdoor Holdings, Inc. (“New CCOH”), and pre-merger shares of CCOH Class A common stock (other than shares of CCOH Class A common stock held by CCH or any direct or indirect wholly-owned subsidiary of CCH) were converted into an equal number of shares of post-merger common stock of New CCOH. iHeartCommunications transferred the post-merger common stock of New CCOH it held to Claimholders pursuant to the Plan of Reorganization but
retained 31,269,762 shares. Such retained shares were distributed to two affiliated Claimholders on July 18, 2019. Upon completion of the merger and Separation, New CCOH became an independent public company. Upon distribution of the shares held by iHeartCommunications, the Company does not hold any ownership interest in CCOH.
The assets and liabilities of CCOH have been classified as discontinued operations. The discontinued operations reflect the assets and liabilities of CCOH, which are presented as discontinued operations as of the Effective Date. CCOH’s assets and liabilities are adjusted to: (1) eliminate the balance on the Due from iHeartCommunications Note and the balance on the intercompany
payable due to iHeartCommunications from CCOH’s consolidated balance sheet, which are intercompany amounts that were eliminated in consolidation; (2) eliminate CCOH’s Noncontrolling interest and treasury shares; and (3) eliminate other intercompany balances.
(a) Approximately $30.5 million of professional fees paid at emergence were accrued as of May 1, 2019. These payments also reflect both the payment of success fees for $86.1 million and other
professionals paid directly at emergence.
Pursuant to the terms of the Plan
of Reorganization, on the Effective Date, the Company funded the Guarantor General Unsecured Recovery Cash Pool account in the amount of $17.5 million, which was reclassified as restricted cash within Other current assets. The Company made payments of $6.0 million through the Cash Pool at the time of emergence. Additionally, $3.4 million of restricted cash previously held to pay critical utility vendors was reclassified to cash.
(3)
Reflects
the write-off of prepaid expenses related to the $2.3 million of prepaid premium for Predecessor Company's director and officer insurance policy, offset by the accrual of future reimbursements of $1.9 million for negotiated discounts related to the professional fee escrow account.
(4) Reflects the reinstatement of $3.1 million of accounts payable included within Liabilities subject to compromise to be satisfied in the ordinary course of business.
Reflects the reduction of accrued expenses related to the $21.2 million of professional fees paid directly, $9.3 million of professional fees paid through the Professional Fee Escrow Account and other accrued expense items. Additionally, the Company reinstated accrued expenses included within Liabilities subject to compromise to be satisfied in the ordinary course of business.
(In
thousands)
Reinstatement of accrued expenses
$
551
Payment of professional fees
(21,177
)
Payment of professional fees through the escrow account
(9,260
)
Impact
on other accrued expenses
(2,364
)
Net impact on Accrued expenses
$
(32,250
)
(6)
Reflects the write-off of the DIP facility accrued interest associated with the DIP facility fees paid at emergence.
(7)
As
part of the Plan of Reorganization, the Bankruptcy Court approved the settlement of claims reported within Liabilities subject to compromise in the Company's Consolidated balance sheet at their respective allowed claim amounts.
The table below indicates the disposition of Liabilities subject to compromise:
(a) Includes finance lease liabilities and other debt of $6.6 million and $10.3 million classified as current and long-term debt, respectively.
(b) Reinstatement of Other long-term liabilities were as follows:
(In
thousands)
Reinstatement of long-term asset retirement obligations
$
3,527
Reinstatement of non-qualified deferred compensation plan
10,991
Total reinstated Other long-term liabilities
$
14,518
(8)
The exit financing consists of the Term Loan Facility of approximately $3.5 billion and 6.375% Senior Secured Notes totaling $800 million, both maturing seven years from the date of issuance, the Senior Unsecured Notes totaling $1.45 billion, maturing eight years from the date of issuance, and a $450 million ABL Facility with no amount drawn at emergence, which matures on June 14, 2023.
Upon emergence, the
Company paid cash of $1.8 million to settle certain creditor claims for which claims were designated to receive term loans pursuant to the Plan of Reorganization.
The remaining $10.3 million is related to the reinstatement of the Long-term portion of finance leases and other debt as described above.
(In thousands)
Term
Interest
Rate
Amount
Term Loan Facility
7 years
Libor + 4.00%
$
3,500,000
6.375% Senior Secured Notes
7 years
6.375%
800,000
Senior
Unsecured Notes
8 years
8.375%
1,450,000
Asset-based Revolving Credit Facility
4 years
Varies(a)
—
Total
Long-Term Debt - Exit Financing
$
5,750,000
Less:
Payment
of Term Loan Facility to settle certain creditor claims
(1,822
)
Net proceeds from exit financing at emergence
$
5,748,178
Long-term
portion of finance leases and other debt reinstated
10,338
Net impact on Long-term debt
$
5,758,516
(a)
Borrowings
under the ABL Facility bear interest at a rate per annum equal to the applicable rate plus, at iHeartCommunications’ option, either (x) a eurocurrency rate or (y) a base rate. The applicable margin for borrowings under the ABL Facility range from 1.25% to 1.75% for eurocurrency borrowings and from 0.25% to 0.75% for base-rate borrowings, in each case, depending on average excess availability under the ABL Facility based on the most recently ended fiscal quarter.
(9)
Reflects the issuance by iHeart Operations of $60.0
million in aggregate liquidation preference of its Series A Perpetual Preferred Stock, par value $0.001 per share. On May 1, 2029, the shares of the Preferred Stock will be subject to mandatory redemption for $60.0 million in cash, plus any accrued and unpaid dividends, unless waived by the holders of the Preferred Stock.
(10) Reflects the reinstatement of deferred tax liabilities included within Liabilities subject to compromise of $596.9 million, offset by an adjustment to net deferred tax liabilities of $21.5 million. Upon emergence from the Chapter 11 Cases, iHeartMedia’s federal and state net operating loss carryforwards were reduced in accordance with Section 108 of the U.S. Internal Revenue
Code of 1986, as amended (the “Code”), due to cancellation of debt income, which is excluded from U.S. federal taxable income. The estimated remaining deferred tax assets attributed to federal and state net operating loss carryforwards upon emergence totaled $114.9 million. The adjustments reflect a reduction in deferred tax assets for federal
and
state net operating loss carryforwards as described above, a reduction in deferred tax liabilities attributed to long-term debt as a result of the restructuring of our indebtedness upon emergence and a reduction in valuation allowance.
(11) Reflects the reinstatement of Other long-term liabilities from Liabilities subject to compromise, offset by the reduction of liabilities for unrecognized tax benefits classified as Other long-term liabilities that were discharged and effectively settled upon emergence.
(In thousands)
Reinstatement
of long-term asset retirement obligations
$
3,527
Reinstatement of non-qualified pension plan
10,991
Reduction of liabilities for unrecognized tax benefits
(79,042
)
Net impact to Other long-term liabilities
$
(64,524
)
(12)
Pursuant to the terms of the Plan of Reorganization, as of the Effective Date, all Predecessor common stock and stock-based compensation awards were canceled without any distribution. As a result of the cancellation, the Company recognized $1.5 million in compensation expense related to the unrecognized portion of share-based compensation as of the Effective Date.
(13) Reflects the issuance of Successor Company equity, including the issuance of 56,861,941 shares of iHeartMedia Class A common stock, 6,947,567 shares of Class B common stock and special warrants to purchase
81,453,648 shares of Class A common stock or Class B common stock in exchange for claims against or interests in iHeartMedia pursuant to the Plan of Reorganization.
(In thousands)
Equity issued to Class 9 Claimholders (prior equity holders)
$
27,701
Equity
issued to creditors in settlement of Liabilities subject to compromise
2,742,471
Total equity issued at emergence
$
2,770,172
(14) The table reflects the cumulative impact of the reorganization adjustments discussed above:
(In
thousands)
Gain on settlement of Liabilities subject to compromise
$
7,192,374
Payment of professional fees upon emergence
(11,509
)
Payment
of success fees upon emergence
(86,065
)
Cancellation of unvested stock-based compensation awards
(1,530
)
Cancellation of Predecessor prepaid director and officer insurance policy
(2,331
)
Write-off
of debt issuance and Mandatorily Redeemable Preferred Stock costs incurred at emergence
(8,726
)
Total Reorganization items, net
$
7,082,213
Income tax benefit
$
102,914
Cancellation of Predecessor Equity
2,074,190
(a)
Issuance of Successor Equity to prior equity holders
(27,701
)
Net
Impact on Accumulated deficit
$
9,231,616
(a) This value is reflective of Predecessor common stock, Additional paid in capital and the recognition of $1.5 million in compensation expense related to the unrecognized portion of share-based compensation, less Treasury stock.
We have applied fresh start accounting in accordance with ASC 852. Fresh start accounting requires the revaluation of our assets and liabilities to fair value, including both existing and new intangible assets, such as FCC licenses, developed technology, customer relationships and tradenames. Fresh start accounting also requires the elimination of all predecessor earnings or deficits in Accumulated deficit and Accumulated other comprehensive loss. These adjustments reflect the actual amounts recorded as of the Effective Date.
(1)
Reflects the fair value adjustment as of May 1, 2019 made to accounts receivable to reflect management's best estimate of the expected collectability of accounts receivable balances.
(2)
Reflects the fair value adjustment as of May 1, 2019 to eliminate certain prepaid expenses related to software implementation costs and other upfront payments. The Company historically incurred third-party implementation fees in connection
with installing various cloud-based software products, and these amounts were recorded as prepaid expenses and recognized as a component of selling, general and administrative expense over the term of the various contracts. The Company determined that the remaining unamortized costs related to such implementation fees do not provide any rights that result in future economic benefits. In addition, the Company pays signing bonuses to certain of its on-air personalities, and these amounts were recorded as prepaid expenses and recognized as a component of Direct operating expenses over the terms of the various contracts.
To the extent these contracts do not contain substantive claw-back provisions, these prepaid amounts do not provide any enforceable rights that result in future economic benefits. Accordingly, the balances related to these contracts as of May 1, 2019 were adjusted to zero.
(3) Reflects the fair value adjustment to eliminate receivables related to tenant allowances per certain lease agreements. These receivables were incorporated into the recalculated lease obligations per ASC 842.
(4)
Reflects the fair value adjustment to recognize the Company’s property, plant and equipment as of May 1, 2019 based on the fair values of such property, plant and equipment. Property was valued using a market approach comparing similar properties to recent market transactions. Equipment and towers were valued primarily using a replacement cost approach. Internally-developed and owned software technology assets were valued primarily using the Royalty Savings Method, similar to the approach used in valuing the Company’s tradenames and trademarks. Estimated royalty rates were determined for each of the software technology assets considering the relative contribution to the
Company’s overall profitability as well as available public market information regarding market royalty rates for similar assets. The selected royalty rates were applied to the revenue generated by the software technology assets. The forecasted cash flows expected to be generated as a result of the royalty savings were discounted to present value utilizing a discount rate considering overall business risks and risks associated with the asset being valued. For certain of the software technology assets, the Company used the cost approach which utilized historical financial data regarding development costs and expected future profit associated with the assets. The adjustment to the Company’s property, plant and equipment consists of a $182.9 million increase in tangible property and equipment and
a $151.0 million increase in software technology assets
(5) Historical goodwill and other intangible assets have been eliminated and the Company has recognized certain intangible assets at estimated current fair values as part of the application of fresh start accounting, with the most material intangible assets being the FCC licenses related to the Company’s 854 radio stations. The Company has also recorded customer-related and marketing-related intangible assets, including the iHeart tradename.
Elimination
of historical acquired intangible assets
$
(2,431,142
)
Fresh start adjustment to acquired intangible assets
2,195,984
(a) FCC licenses. The fair value of the indefinite-lived FCC licenses was determined
primarily using the direct valuation method of the Income Approach and, for smaller markets a combination of the Income approach and the Market Approach. The Company engaged a third-party valuation firm to assist it in the development of the assumptions and the Company’s determination of the fair value of its FCC licenses.
Under the direct valuation method, the fair value of the FCC licenses was calculated at the market level as prescribed by ASC 350. The application of the direct valuation method attempts to isolate the income that is properly attributable to the FCC licenses alone (that is, apart from tangible and identified intangible assets and goodwill). It is based upon modeling a hypothetical “greenfield”
build-up to a “normalized” enterprise that, by design, lacks inherent goodwill and whose only other assets have essentially been paid for (or added) as part of the build-up process. Under the direct valuation method, it is assumed that rather than acquiring FCC licenses as part of a going concern business, the buyer hypothetically obtains FCC licenses and builds a new operation with similar attributes from scratch. Thus, the buyer incurs start-up costs during the build-up phase which are normally associated with going concern value. Initial capital costs are deducted from the discounted cash flow model which results in value that is directly attributable to the FCC licenses. In applying the direct valuation method to the Company’s FCC licenses, the licenses are grouped by type (e.g. FM licenses vs. AM licenses) and market size in order to ensure appropriate assumptions are used
in valuing the various FCC licenses based on population and demographics that influence the level of revenues generated by each FCC license, using industry projections. The key assumptions used in applying the direct valuation method include market revenue growth rates, market share, profit margin, duration and profile of the build-up period, estimated start-up capital costs and losses incurred during the build-up period, the risk-adjusted discount rate (“WACC”) and terminal values. The WACC was calculated by weighting the required returns on interest-bearing debt and common equity capital in proportion to their estimated percentages based on a market participant capital structure.
For licenses valued using the Market Transaction Method, the Company used publicly available data, which
included sales of comparable radio stations and FCC auction data involving radio broadcast licenses to estimate the fair value of FCC licenses. Similar to the application of the Income approach for the FCC licenses, the Company grouped licenses by type and market size for comparison to historical market transactions.
The historical book value of the FCC licenses as of May 1, 2019 was subtracted from the fair value of the FCC licenses to determine the adjustment to decrease the value of Indefinite-lived intangible assets-licenses by $44.9 million.
(b) Other intangible assets. Definite-lived
intangible assets include customer/advertiser relationships, talent contracts for on-air personalities, trademarks and tradenames and other intangible assets. The Company engaged a third-party valuation firm to assist in developing the assumptions and determining the fair values of each of these assets.
For purposes of estimating the fair values of customer/advertiser relationships and talent contracts, the Company primarily utilized the Income Approach (specifically, the multi-period excess earnings method, or MPEEM) to
estimate fair value based on the present value of the incremental after-tax cash flows attributable only to the subject intangible assets after deducting contributory asset charges. The cash flows attributable to each grouping of customer/advertiser relationships were adjusted for the appropriate contributory asset charges (e.g., FCC licenses, working capital, tradenames, technology, workforce, etc.). The discount rate utilized to present-value the after-tax cash flows was selected based on consideration of the overall business risks and the risks associated with the specific assets being valued. Additionally, for certain advertiser relationships the
Company used the Cost Approach using historical financial data regarding the sales, administrative and overhead expenses related to the Company’s selling efforts associated with revenue for both existing and new advertisers. The ratio of expenses for selling efforts to revenue was applied to total revenue from new customers to determine an estimated cost per revenue dollar of revenue generated by new customers. This ratio was applied to total revenue from existing customers to estimate the replacement cost of existing customer/advertiser relationships. The historical book value of customer/advertiser relationships as of May 1, 2019 was subtracted from the fair value of the customer/advertiser relationships determined as described above to determine the adjustment to increase the value of the customer/advertiser relationship intangible
assets by $1,604.1 million.
For purposes of estimating the fair value of trademarks and tradenames, the Company primarily used the Royalty Savings Method, a variation of the Income approach. Estimated royalty rates were determined for each of the trademarks and tradenames considering the relative contribution to the Company’s overall profitability as well as available public information regarding market royalty rates for similar assets. The selected royalty rates were applied to the revenue generated by the trademarks and tradenames to determine the amount of royalty payments saved as a result of owning these assets. The forecasted cash flows expected to be generated
as a result of the royalty savings were discounted to present value utilizing a discount rate considering overall business risks and risks associated with the asset being valued. The historical book values of talent contracts, trademarks and tradenames and other intangible assets as of May 1, 2019 were subtracted from the fair values determined as described above to determine the adjustments as follows:
(c) Included within other intangible assets are permanent easements, which have an indefinite useful life. All other intangible assets are amortized over
the respective lives of the agreements, or over the period of time the assets are expected to contribute directly or indirectly to the Company’s future cash flows.
The following table sets forth the adjustments to goodwill:
(In thousands)
Reorganization value
$
10,710,208
Less:
Fair value of assets (excluding goodwill)
(7,386,843
)
Total goodwill upon emergence
3,323,365
Elimination of historical goodwill
(3,415,492
)
Fresh start adjustment to goodwill
$
(92,127
)
(6)
The operating lease obligation as of May 1, 2019 had been calculated using an incremental borrowing rate applicable to the Company while it was a debtor-in-possession before its emergence from bankruptcy. Upon application of fresh start accounting, the lease obligation was recalculated using the incremental borrowing rate applicable to the Company after emergence from bankruptcy and commensurate to its new capital structure. The incremental borrowing rate used decreased from 12.44% as
of March 31, 2019 to 6.54% as of May 1, 2019. As a result of this decrease, the Company's Operating lease liabilities and corresponding Operating lease right-of-use assets increased by $541.2 million to reflect the higher balances resulting from the application of a lower incremental borrowing rate. The Operating lease right-of-use-assets were further adjusted to reflect the
resetting of the Company's straight-line lease calculation. In addition, the Company increased the Operating lease right-of-use assets to recognize $13.1 million related to the favorable lease contracts.
(7)
Reflects the fair value adjustment to adjust deferred revenue and other liabilities as of May 1, 2019 to its estimated fair value. The fair value of
the deferred revenue was determined using the market approach and the cost approach. The market approach values deferred revenue based on the amount an acquirer would be required to pay a third party to assume the remaining performance obligations. The cost approach values deferred revenue utilizing estimated costs that will be incurred to fulfill the obligation plus a normal profit margin for the level of effort or assumption of risk by the acquirer. Additionally, a deferred gain was recorded at the time of the certain historical sale-leaseback transaction. During the implementation of ASC 842, the operating portion was written off as of January 1, 2019. The financing lease deferred gain remained. As part of fresh start accounting, this balance of $0.9 million was written off.
(8) Reflects
the fair value adjustment to adjust Long-term debt as of May 1, 2019. This adjustment is to state the Company's finance leases and other pre-petition debt at estimated fair values.
(9) Reflects the fair value adjustment to adjust Accrued expenses as of May 1, 2019. This adjustment primarily relates to adjusting vacation accruals to estimated fair values.
(10) Reflects a net increase to deferred tax liabilities for fresh start adjustments attributed primarily to property, plant and equipment and intangible assets, the effects of which are partially offset by a decrease in the valuation allowance. The
Company believes it is more likely than not that its deferred tax assets remaining after the Reorganization and emergence will be realized based on taxable income from reversing deferred tax liabilities primarily attributable to property, plant and equipment and intangible assets.
(11) Reflects the adjustment as of May 1, 2019 to state the noncontrolling interest balance at estimated fair value.
(12) The table below reflects the cumulative impact of the fresh start adjustments as discussed above:
(In thousands)
Fresh start adjustment to Accounts receivable, net
$
(10,810
)
Fresh
start adjustment to Other current assets
(1,668
)
Fresh start adjustment to Prepaid expenses
(24,642
)
Fresh start adjustment to Property, plant and equipment, net
333,991
Fresh start adjustment to Intangible assets
2,195,984
Fresh
start adjustment to Goodwill
(92,127
)
Fresh start adjustment to Operating lease right-of-use assets
554,278
Fresh start adjustment to Other assets
(54,683
)
Fresh start adjustment to Accrued expenses
(2,328
)
Fresh
start adjustment to Deferred revenue
(3,214
)
Fresh start adjustment to Debt
1,546
Fresh start adjustment to Operating lease obligations
(458,989
)
Fresh start adjustment to Other long-term liabilities
2,164
Fresh
start adjustment to Noncontrolling interest
(8,558
)
Total Fresh Start Adjustments impacting Reorganization items, net
$
2,430,944
Reset of Accumulated other comprehensive income
(14,175
)
Income tax expense
(185,419
)
Net
impact to Accumulated deficit
$
2,231,350
Reorganization Items, Net
The tables below present the Reorganization items incurred and cash paid for Reorganization items as a result of the Chapter 11 Cases during the periods presented:
Professional fees and other bankruptcy related costs
—
(157,487
)
(104,545
)
Net
gain on settlement of Liabilities subject to compromise
—
7,192,374
—
Impact of fresh start adjustments
—
2,430,944
—
Other
items, net
—
(4,005
)
—
Reorganization items, net
$
—
$
9,461,826
$
(313,270
)
Cash
payments for Reorganization items, net
$
18,268
$
183,291
$
52,213
As of September 30,
2019, $0.5 million of Reorganization items, net were unpaid and accrued in Accounts payable and Accrued expenses in the accompanying Consolidated Balance Sheet. As of September 30, 2018, $56.2 million of professional fees were unpaid and accrued in Accounts payable and Accrued expenses in the accompanying Consolidated Balance Sheet. The Company incurred additional professional fees related to the bankruptcy, post-emergence, of $12.4 million and $21.5 million for the three months ended September 30, 2019
and the period from May 2, 2019 through September 30, 2019, respectively, which are included within Other expenses, net in the Company's Consolidated Statements of Comprehensive Income (Loss).
NOTE 4 - DISCONTINUED OPERATIONS
Discontinued operations relate to our domestic and international outdoor advertising businesses and were previously reported as the Americas outdoor and International outdoor segments prior to the Separation. Assets, liabilities, revenue, expenses and cash flows for these businesses are separately reported
as assets, liabilities, revenue, expenses and cash flows from discontinued operations in the Company's financial statements for all periods presented.
The following shows the revenue, income (loss) from discontinued operations and gain on disposal of the Predecessor Company's discontinued operations for the periods presented:
The following table shows the classes of assets and liabilities classified as discontinued operations for the Predecessor Company as of December 31, 2018:
In connection with the Separation, the Company and its subsidiaries entered into the agreements described below.
Transition Services Agreement
On
the Effective Date, the Company, iHM Management Services, iHeartCommunications and CCOH entered into a transition services agreement (the “Transition Services Agreement”), pursuant to which iHM Management Services has agreed to provide, or cause the Company, iHeartCommunications, iHeart Operations or any member of the iHeart Group to provide, CCOH with certain administrative and support services and other assistance which CCOH will utilize in the conduct of its business as such business was conducted prior to the Separation, for one year from the Effective Date (subject to certain rights of CCOH to extend up to one additional year, as described below). The transition services may include, among other things, (a) treasury, payroll and other financial related services, (b) certain executive
officer services, (c) human resources and employee benefits, (d) legal and related services, (e) information systems, network and related services, (f) investment services and (g) procurement and sourcing support.
The charges for the transition services are generally consistent with the Corporate Services Agreement, dated as of November 10, 2005,
by and between iHM Management Services and CCOH (the “Corporate Services Agreement”), which governed the provision of certain services by the iHeart Group to the Outdoor Group prior to the Separation. The allocation of cost is based on various measures depending on the service provided, which measures include relative revenue, employee headcount, number of users of a service or other factors. CCOH may request an extension of the term for all services or individual services for one-month periods for up to an additional 12 months, and the price for transition services provided during such extended term will be increased for any service other than those identified in the schedules to the Transition Services Agreement as an “IT Service” or any other service the use and enjoyment of which requires the use of another IT Service.
CCOH may terminate the Transition Services Agreement with respect to all or any individual
service, in whole or in part, upon 30 days’ prior written notice, provided that any co-dependent services must be terminated concurrently.
New Tax Matters Agreement
On the Effective Date, the Company entered into a new tax matters agreement (the “New Tax Matters Agreement”) by and among the Company, iHeartCommunications, iHeart Operations, CCH, CCOH and CCOL, to allocate the responsibility of the Company and its subsidiaries, on the one hand, and the Outdoor Group, on the other, for the payment of taxes arising prior and subsequent
to, and in connection with, the Separation.
The New Tax Matters Agreement requires that the Company and iHeartCommunications indemnify CCOH and its subsidiaries, and their respective directors, officers and employees, and hold them harmless, on an after-tax basis, from and against (i) any taxes other than transfer taxes or indirect gains taxes imposed on the Company or any of its subsidiaries (other than CCOH and its subsidiaries) in connection with the Separation, (ii) any transfer
taxes and indirect gains taxes arising in connection with the Separation, and (iii) fifty percent of the amount by which the amount of taxes (other than transfer taxes or indirect gains taxes) imposed on CCOH or any of its subsidiaries in connection with the Separation that are paid to the applicable taxing authority on or before the third anniversary of the separation of CCOH exceeds $5 million, provided that, the obligations of the Company and iHeartCommunications to indemnify CCOH and its subsidiaries with respect taxes (other than transfer taxes or indirect gains taxes) imposed on CCOH or any of its subsidiaries
in connection with the Separation will not exceed $15 million. In addition, if the Company or its subsidiaries use certain tax attributes of CCOH and its subsidiaries (including net operating losses, foreign tax credits and other credits) and such use results in a decrease in the tax liability of the Company or its subsidiaries, then the Company is required to reimburse CCOH for the use of such
attributes based on the amount of tax benefit realized. The New Tax Matters Agreement provides that any reduction of the tax attributes of CCOH and its subsidiaries as a result of cancellation of indebtedness income realized in connection with the Chapter 11 Cases is not treated as a use of such attributes (and therefore does not require the Company or iHeartCommunications to reimburse CCOH for such reduction).
The New Tax Matters Agreement also requires that (i) CCOH indemnify the Company for any income taxes paid by the Company on behalf of CCOH and its subsidiaries
or, with respect to any income tax return for which CCOH or any of its subsidiaries joins with the Company or any of subsidiaries in filing a consolidated, combined or unitary return, the amount of taxes that would have been incurred by CCOH and its subsidiaries if they had filed a separate return, and (ii) except as described in the preceding paragraph, CCOH indemnify the Company and its subsidiaries, and their respective directors, officers
and employees, and hold them harmless, on an after-tax basis, from and against any taxes other than transfer taxes or indirect gains taxes imposed on CCOH or any of its subsidiaries in connection with the Separation.
Any tax liability of CCH attributable to any taxable period ending on or before the date of the completion of the Separation, other than any such tax liability resulting from CCH’s being a successor of CCOH in connection with the merger of CCOH with and into CCOH or arising from the operation of the business of CCOH and its subsidiaries after the merger of CCOH with and into CCH, will not be treated as a liability of CCOH and its subsidiaries
for purposes of the New Tax Matters Agreement.
Broadcast
Radio revenue is generated through the sale of advertising time on the Company’s domestic radio stations.
(2)
Digital revenue is generated through the sale of streaming and display advertisements on digital platforms, subscriptions to iHeartRadio streaming services, podcasting and the dissemination of other digital content.
(3)
Networks revenue is generated through the sale of advertising
on the Company’s Premiere and Total Traffic & Weather network programs and through the syndication of network programming to other media companies.
(4)
Sponsorship and events revenue is generated through local events and major nationally-recognized tent pole events and include sponsorship and other advertising revenue, ticket sales, and licensing, as well as endorsement and appearance fees generated by on-air talent.
(5)
Audio
and media services revenue is generated by services provided to broadcast industry participants through the Company’s Katz Media and RCS businesses. As a media representation firm, Katz Media generates revenue via commissions on media sold on behalf of the radio and television stations that it represents, while RCS generates revenue by providing broadcast and webcast software and technology and services to radio stations, television music channels, cable companies, satellite music networks and Internet stations worldwide.
(6)
Other revenue represents fees earned for miscellaneous services, including on-site promotions, activations, and
local marketing agreements.
(7)
Revenue from leases is primarily generated by the lease of towers to other media companies, which are all categorized as operating leases.
The
following table shows revenue streams from continuing operations for the Predecessor Company. The presentation of amounts in the Predecessor periods has been revised to conform to the Successor period presentation.
Due
to a re-evaluation of the Company’s internal segment reporting upon the effectiveness of the Plan of Reorganization, the Company’s RCS business is included in the Audio & Media Services results for all periods presented. See Note 1 for further information.
Trade and barter transactions represent the exchange of advertising spots for merchandise, services or other assets in the ordinary course of business. The transaction price for these contracts is measured at the estimated fair value of the non-cash consideration received unless this is not reasonably estimable, in which case the consideration is measured based on the standalone selling price of the advertising spots promised to the customer. Trade and barter revenues and expenses from continuing operations, which are included in consolidated revenue and selling, general and administrative expenses, respectively, were as follows:
Additions, net of revenue recognized during period, and other
95,862
79,228
101,380
Ending
balance
$
160,537
$
151,475
$
155,152
(1)
Deferred
revenue from contracts with customers, which excludes other sources of deferred revenue that are not related to contracts with customers, is included within deferred revenue and other long-term liabilities on the Consolidated Balance Sheets, depending upon when revenue is expected to be recognized. As described in Note 3, as part of the fresh start accounting adjustments on May 1, 2019, deferred revenue from contracts with customers was adjusted to its estimated fair value.
The Company’s contracts
with customers generally have terms of one year or less; however, as of September 30, 2019, the Company expects to recognize $191.0 million of revenue in future periods for remaining performance obligations from current contracts with customers that have an original expected duration greater than one year, with substantially all of this amount to be recognized over the next five years. Commissions related to the Company’s media representation business have been excluded from this amount as they are contingent upon future
sales.
As of September 30, 2019, the future lease payments to be received by the Successor Company are as follows:
(In
thousands)
2019
$
381
2020
1,317
2021
1,139
2022
833
2023
776
Thereafter
10,693
Total
$
15,139
NOTE
6 – LEASES
The Company enters into operating lease contracts for land, buildings, structures and other equipment. Arrangements are evaluated at inception to determine whether such arrangements contain a lease. Operating leases primarily include land and building lease contracts and leases of radio towers. Arrangements to lease building space consist primarily of the rental of office space, but may also include leases of other equipment, including automobiles and copiers. Operating leases are reflected on the Company's balance sheet within Operating lease right-of-use assets
and the related short-term and long-term liabilities are included within Current and Noncurrent operating lease liabilities, respectively.
The Company's finance leases are included within Property, plant and equipment with the related liabilities included within Long-term debt or within Liabilities subject to compromise.
ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the respective lease term. Lease expense is recognized on a straight-line basis over the lease term.
Certain of the
Company's operating lease agreements include rental payments that are adjusted periodically for inflationary changes. Payments due to changes in inflationary adjustments are included within variable rent expense, which is accounted for separately from periodic straight-line lease expense. Amounts related to insurance and property taxes in lease arrangements when billed on a pass-through basis are allocated to the lease and non-lease components of the lease based on their relative standalone selling prices.
Certain of the Company's leases provide options to extend the terms of the agreements. Generally, renewal periods are excluded from minimum lease payments when calculating the lease liabilities as, for most leases, the Company does not consider
exercise of such options to be reasonably certain. As a result, unless a renewal option is considered reasonably assured, the optional terms and related payments are not included within the lease liability. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The implicit rate within the Company's lease agreements is generally not determinable. As such, the Company uses the incremental borrowing rate ("IBR") to determine the present value of lease payments at the commencement of the lease. The IBR, as defined in ASC 842, is "the rate of interest that a lessee would
have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment." In connection with the Company's emergence from bankruptcy and in accordance with ASC 852, the Company applied the provisions of fresh start accounting to its Consolidated Financial Statements on the Effective Date. As a result, the Company adjusted the IBR used to value the Company's ROU assets and operating lease liabilities at the Effective Date (see Note 3, Fresh Start Accounting). In addition, upon adoption
of ASC 852 in the first quarter of 2019, the Company did not elect the practical expedient to combine non-lease components with the associated lease components. Upon application of fresh start accounting on the Effective Date, the Company elected to use the practical expedient to not separate non-lease components from the associated lease component for all classes of the Company's assets.
The following tables provide the components of lease expense included within the Consolidated Statement of Comprehensive Income (Loss) for the three months ended September 30, 2019 (Successor), the period from May 2, 2019 through September 30, 2019 (Successor) and the period from January 1, 2019 through May 1, 2019 (Predecessor):
The
following table provides the weighted average remaining lease term and the weighted average discount rate for the Company's leases as of September 30, 2019 (Successor):
The following table provides supplemental cash flow information related to leases for the period from May 2, 2019 through September 30, 2019 (Successor) and the period from January 1, 2019 through May 1, 2019 (Predecessor):
Cash
paid for amounts included in measurement of operating lease liabilities
$
57,102
$
44,888
Lease liabilities arising from obtaining right-of-use assets(1)
$
13,339
$
913,598
(1)
Lease liabilities from obtaining right-of-use assets include transition liabilities upon adoption of ASC 842, as well as new leases entered into during the period from May 2, 2019 through September 30, 2019 (Successor) and the period from January 1, 2019 through May 1, 2019 (Predecessor). Upon adoption of fresh start accounting upon emergence from the Chapter 11 Cases, the Company increased its operating lease obligation by $459.0 million to reflect its operating lease obligation as estimated fair value (see Note 3, Fresh Start Accounting).
NOTE
7 – PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE ASSETS AND GOODWILL
Property, Plant and Equipment
The Company’s property, plant and equipment consisted of the following classes of assets as of September 30, 2019 (Successor) and December 31, 2018 (Predecessor), respectively:
In
connection with the Company's emergence from bankruptcy and in accordance with ASC 852, the Company applied the provisions of fresh start accounting to its Consolidated Financial Statements on the Effective Date. As a result, the Company adjusted Property, plant and equipment to their respective fair values at the Effective Date (see Note 3, Fresh Start Accounting).
Indefinite-lived Intangible Assets
The Company’s indefinite-lived intangible assets consist of FCC broadcast licenses in its Audio
segment. In connection with the Company's emergence from bankruptcy and in accordance with ASC 852, the Company applied the provisions of fresh start accounting to its Consolidated Financial Statements on the Effective Date. As a result, the Company adjusted its FCC licenses to their respective estimated fair values as of the Effective Date of $2,281.7 million (see Note 3, Fresh Start Accounting).
Annual Impairment Test on Indefinite-lived Intangible Assets
The
Company performs its annual impairment test on indefinite-lived intangible assets as of July 1 of each year. The Company also tests indefinite-lived intangible assets at interim dates if events or changes in circumstances indicate that indefinite-lived intangible assets might be impaired.
Generally, the
annual impairment test includes a full quantitative assessment, which involves the preparation of a fair value estimate for each of the Company's reporting units based on the most recent projected financial results, market and industry factors, including comparison to peer companies and the application of the Company's current estimated WACC. However, in connection with emergence from bankruptcy, the Company qualified for and adopted fresh start accounting on the Effective Date. As of May 1, 2019, the Company allocated its estimated enterprise fair value to its individual assets
and liabilities based on their estimated fair values in conformity with ASC 805, "Business Combinations." As a result of the recent fair value exercise applied in connection with fresh start accounting, the Company opted to use a qualitative assessment for its annual indefinite-lived intangible asset impairment test as of July 1, 2019 in lieu of performing the full quantitative assessment, as permitted by ASC 350, "Intangibles - Goodwill and Other".
The qualitative impairment assessment performed for indefinite-lived intangible assets considered the general macroeconomic environment, industry and market specific conditions, financial performance, including changes in costs and actual versus forecasted results, as well other issues or events specific to the Audio segment.
Based
on this assessment and the totality of facts and circumstances, including the business environment in the third quarter of 2019, the Company determined that it was not more likely than not that the fair value of the Company and its reporting units is less than their respective carrying amounts. As such, the Company concluded no indefinite-lived intangible asset impairment was required for the three months ended September 30, 2019. During the period from January 1, 2019 through May 1, 2019, the Predecessor Company recognized
non-cash impairment charges of $91.4 million in relation to indefinite-lived FCC licenses as a result of an increase in the WACC used in performing the annual impairment test. The Predecessor Company recognized impairment charges related to its indefinite-lived intangible assets within several iHM radio markets of $33.2 million during the three and nine months ended September 30, 2018.
Other Intangible Assets
Other intangible assets include definite-lived intangible assets and permanent easements. The Company’s definite-lived
intangible assets primarily include customer and advertiser relationships, talent and representation contracts, trademarks and tradenames and other contractual rights, all of which are amortized over the shorter of either the respective lives of the agreements or over the period of time the assets are expected to contribute directly or indirectly to the Company’s future cash flows. Permanent easements are indefinite-lived intangible assets which include certain rights to use real property not owned by the Company. The Company periodically reviews the appropriateness of the amortization periods related to its definite-lived
intangible assets. These assets are recorded at amortized cost. In connection with the Company's emergence from bankruptcy and in accordance with ASC 852, the Company applied the provisions of fresh start accounting to its Consolidated Financial Statements on the Effective Date. As a result, the Company adjusted Other intangible assets to their respective fair values at the Effective Date (see Note 3, Fresh Start Accounting).
The following table presents the gross carrying amount and accumulated amortization for each major class of other intangible assets as of September 30,
2019 (Successor) and December 31, 2018 (Predecessor), respectively:
Total
amortization expense related to definite-lived intangible assets for the Successor Company for the three months ended September 30, 2019 and the period from May 2, 2019 through September 30, 2019 was $67.0 million and $109.5 million, respectively. Total amortization expense related to definite-lived intangible assets for the Predecessor Company for the three months ended September 30, 2018, the period from January 1, 2019 through May 1, 2019 and
the nine months ended September 30, 2018 was $19.2 million, $12.7 million and $101.1 million, respectively.
As acquisitions
and dispositions occur in the future, amortization expense may vary. The following table presents the Company’s estimate of amortization expense for each of the five succeeding fiscal years for definite-lived intangible assets:
(In thousands)
2020
$
263,125
2021
262,727
2022
257,502
2023
246,927
2024
246,237
Goodwill
Annual
Impairment Test to Goodwill
The Company performs its annual impairment test on goodwill as of July 1 of each year. The Company also tests goodwill at interim dates if events or changes in circumstances indicate that goodwill might be impaired.
Generally, the Company's annual impairment test includes a full quantitative assessment, which involves the preparation of a fair value estimate for each reporting unit based on the most recent projected financial results, market and industry factors, including comparison to peer companies and the application of the
Company's current estimated WACC. However, in connection with emergence from bankruptcy, the Company qualified for and adopted fresh start accounting on the Effective Date. As of May 1, 2019, the Company allocated its estimated enterprise fair value to its individual assets and liabilities based on their estimated fair values in conformity with ASC 805, "Business Combinations."
Upon application of fresh start accounting in accordance with ASC 852 in connection with the emergence from bankruptcy, the Company recorded goodwill of $3.3
billion, which represented the excess of Reorganization Value over the estimated fair value of the Company's assets and liabilities. Goodwill was further allocated to reporting units based on the relative fair values of the Company's reporting units as of May 1, 2019.
As a result of the recent fair value exercise applied in connection with fresh start accounting, the Company opted to use a qualitative assessment for its annual goodwill impairment test as of July 1, 2019 in lieu of performing the full
quantitative assessment, as permitted by ASC 350, "Intangibles - Goodwill and Other".
As of July 1, 2019, the qualitative impairment assessment performed for goodwill considered the general macroeconomic environment, industry and market specific conditions for each reporting unit, financial performance, including changes in costs and actual versus forecasted results, as well other issues or events specific to each reporting unit. In addition, the Company evaluated the impact of changes in the Company's stock price and the trading values of its publicly-traded debt from May 1, 2019 to July
1, 2019 to determine whether or not any changes would indicate a potential impairment of goodwill allocated to its reporting units.
Based on this assessment and the totality of facts and circumstances, including the business environment in the third quarter of 2019, the Company determined that it was not more likely than not that the fair value of the Company and its reporting units is less than their respective carrying amounts. As such, the Company concluded no goodwill impairment was required during the three months ended September 30, 2019
(Successor), the three months ended September 30, 2018 (Predecessor), the period from May 2, 2019 through September 30, 2019 (Successor), the period from January 1, 2019 through May 1, 2019 (Predecessor), and the nine months ended September 30, 2018 (Predecessor).
On August 7, 2019, iHeartCommunications issued $750.0 million of 5.25% Senior Secured Notes due 2027 (the “5.25% Senior Secured Notes”), the proceeds of which were used, together with cash on hand, to prepay at par $740.0 million of borrowings outstanding
under the Term Loan Facility, plus $0.8 million of accrued and unpaid interest to, but not including, the date of prepayment.
(2)
The Debtors-in-Possession Facility (the "DIP Facility"), which terminated with the emergence from the Chapter 11 Cases, provided for borrowings of up to $450.0 million. On the Effective Date, the DIP Facility was repaid and canceled and the Successor Company entered into the ABL Facility. As of September 30, 2019, the Successor Company had a facility size of $450.0 million under
iHeartCommunications' ABL Facility, had no outstanding borrowings and had $49.2 million of outstanding letters of credit, resulting in $400.8 million of excess availability.
(3)
Other secured subsidiary debt consists of finance lease obligations maturing at various dates from 2019 through 2045.
(4)
In connection with the
Company's Chapter 11 Cases, the $6,300.0 million outstanding under the Senior Secured Credit Facilities, the $1,999.8 million outstanding under the 9.0% Priority Guarantee Notes due 2019, the $1,750.0 million outstanding under the 9.0% Priority Guarantee Notes due 2021, the $870.5 million of 11.25% Priority Guarantee Notes due 2021, the $1,000.0 million outstanding under the 9.0% Priority Guarantee Notes due 2022, the $950.0 million outstanding under the 10.625% Priority
Guarantee Notes due 2023, $6.0 million outstanding Other Secured Subsidiary debt, the $1,781.6 million outstanding under the 14.0% Senior Notes due 2021, the $475.0 million outstanding under the Legacy Notes and $10.8 million outstanding Other Subsidiary Debt were reclassified to Liabilities subject to compromise in the Company's Consolidated Balance Sheet as of the Petition Date. As of the Petition Date, the Company ceased making principal and interest payments, and ceased accruing interest expense in relation to long-term debt reclassified as Liabilities subject to compromise
during the Predecessor period.
The Company’s weighted average interest rate was 6.7% and 9.9% as of September 30, 2019 (Successor) and December 31, 2018 (Predecessor), respectively. The aggregate market value of the Company’s debt based on market prices for which quotes were available was approximately $6.0 billion and $8.7 billion as of September 30,
2019 (Successor) and December 31, 2018 (Predecessor), respectively. Under the fair value hierarchy established by ASC 820-10-35, the market value of the Successor Company’s debt is classified as either Level 1 or Level 2.
Asset-based Revolving Credit Facility due 2023
On the Effective Date, iHeartCommunications, as borrower, entered into a Credit Agreement (the “ABL Credit Agreement”) with iHeartMedia Capital I, LLC, the direct parent of iHeartCommunications (“Capital I”), as guarantor, certain subsidiaries of iHeartCommunications, as guarantors, Citibank, N.A., as administrative and collateral agent, and the
lenders party thereto from time to time, governing the ABL Facility. The ABL Facility includes a letter of credit sub-facility and a swingline loan sub-facility.
Size and Availability
The ABL Facility provides for a senior secured asset-based revolving credit facility in the aggregate principal amount of up to $450.0 million, with amounts available from time to time (including in respect of letters of credit) equal to the lesser of (A) the borrowing base, which equals the sum of (i) 90.0% of the eligible accounts receivable of iHeartCommunications and the subsidiary guarantors and (ii) 100% of qualified cash, each subject to customary reserves and eligibility criteria, and (B) the aggregate revolving
credit commitments. Subject to certain conditions, iHeartCommunications may at any time request one or more increases in the amount of revolving credit commitments, in an amount up to the sum of (x) $150.0 million and (y) the amount by which the borrowing base exceeds the aggregate revolving credit commitments.
Interest Rate and Fees
Borrowings under the ABL Facility bear interest at a rate per annum equal to the applicable margin plus, at iHeartCommunications’ option, either (1) a eurocurrency rate or (2) a base rate. The applicable margin for borrowings under the ABL Facility range from 1.25% to 1.75% for eurocurrency borrowings and from 0.25% to 0.75%
for base-rate borrowings, in each case, depending on average excess availability under the ABL Facility based on the most recently ended fiscal quarter.
In addition to paying interest on outstanding principal under the ABL Facility, iHeartCommunications is required to pay a commitment fee to the lenders under the ABL Facility in respect of the unutilized commitments thereunder. The commitment fee rate ranges from 0.25% to 0.375% per annum dependent upon average unused commitments during the prior quarter. iHeartCommunications may also pay customary letter of credit fees.
Maturity
Borrowings under the ABL
Facility will mature, and lending commitments thereunder will terminate on June 14, 2023.
If at any time, the sum of the outstanding amounts under the ABL Facility exceeds the lesser of (i) the
borrowing base and (ii) the aggregate commitments under the facility (such lesser amount, the “line cap”), iHeartCommunications is required to repay outstanding loans and cash collateralize letters of credit in an aggregate amount equal to such excess. iHeartCommunications may voluntarily repay outstanding loans under the ABL Facility at any time without premium or penalty, other than customary “breakage” costs with respect to eurocurrency rate loans. Any voluntary prepayments made by iHeartCommunications will not reduce iHeartCommunications’ commitments under the ABL Facility.
Guarantees and Security
The ABL Facility is guaranteed by, subject to certain exceptions, the guarantors of iHeartCommunications’ Term Loan Facility. All obligations under the ABL Facility, and the
guarantees of those obligations, are secured by a perfected security interest in the accounts receivable and related assets of iHeartCommunications’ and the guarantors’ accounts receivable, qualified cash and related assets and proceeds thereof that is senior to the security interest of iHeartCommunications’ Term Loan Facility in such accounts receivable, qualified cash and related assets and proceeds thereof, subject to permitted liens and certain exceptions.
Certain Covenants and Events of Default
If borrowing availability is less than the greater of (a) $40.0 million and (b) 10% of the aggregate commitments under the ABL Facility, in each case, for two consecutive business days (a “Trigger
Event”), iHeartCommunications will be required to comply with a minimum fixed charge coverage ratio of at least 1.00 to 1.00, and must continue to comply with this minimum fixed charge coverage ratio for fiscal quarters ending after the occurrence of the Trigger Event until borrowing availability exceeds the greater of (x) $40.0 million and (y) 10% of the aggregate commitments under the ABL Facility, in each case, for 20 consecutive calendar days, at which time the Trigger Event shall no longer be deemed to be occurring.
Term Loan Facility due 2026
On the Effective Date, iHeartCommunications, as borrower, entered into a Credit Agreement (the “Term
Loan Credit Agreement”) with Capital I, as guarantor, certain subsidiaries of iHeartCommunications, as guarantors, and Citibank N.A., as administrative and collateral agent, governing the Term Loan Facility. On the Effective Date, iHeartCommunications issued an aggregate of approximately $3.5 billion principal amount of senior secured term loans under the Term Loan Facility to certain Claimholders pursuant to the Plan of Reorganization. As described below, on August 7, 2019, the proceeds from the issuance of $750.0 million in aggregate principal amount of 5.25% Senior Secured Notes due 2027 were used,
together with cash on hand, to prepay at par $740.0 million of borrowings outstanding under the Term Loan Facility due 2026. The Term Loan Facility matures on May 1, 2026.
Interest Rate and Fees
Term loans under the Term Loan Facility bear interest at a rate per annum equal to the applicable margin plus, at iHeartCommunications’ option, either (1) a base rate or (2) a eurocurrency rate. The applicable margin for such term loans is 3.00% with respect to base rate loans and 4.00% with respect to eurocurrency rate loans.
Collateral
and Guarantees
The Term Loan Facility is guaranteed by Capital I and each of iHeartCommunications’ existing and future material wholly-owned restricted subsidiaries, subject to certain exceptions. All obligations under the Term Loan Facility, and the guarantees of those obligations, are secured, subject to permitted liens and other exceptions, by a first priority lien in substantially all of the assets of iHeartCommunications and all of the guarantors’ assets, including a lien on the capital stock of iHeartCommunications and certain of its subsidiaries owned by a guarantor, other than the accounts receivable and related assets of iHeartCommunications and all of the subsidiary guarantors, and by
a second priority lien on accounts receivable and related assets securing iHeartCommunications’ ABL Facility.
iHeartCommunications is required to prepay outstanding term loans under the Term Loan Facility, subject to certain exceptions, with:
•
50% (which percentage may be reduced to 25% and to 0% based upon iHeartCommunications’ first lien leverage ratio) of iHeartCommunications’ annual excess cash flow, subject to customary credits, reductions and exclusions;
•
100% (which percentage may be reduced to 50% and 0% based upon iHeartCommunications’ first lien leverage ratio) of the net cash proceeds of sales or other dispositions of the assets of iHeartCommunications
or its wholly owned restricted subsidiaries, subject to reinvestment rights and certain other exceptions; and
•
100% of the net cash proceeds of any incurrence of debt, other than debt permitted under the Term Loan Facility.
iHeartCommunications may voluntarily repay outstanding loans under the Term Loan Facility at any time, without prepayment premium or penalty, except in connection with a repricing event within nine months of the Effective Date and
subject to customary “breakage” costs with respect to eurocurrency loans.
Certain Covenants and Events of Default
The Term Loan Facility does not include any financial covenants. However, the Term Loan Facility includes negative covenants that, subject to significant exceptions, limit Capital I’s ability and the ability of its restricted subsidiaries (including iHeartCommunications) to, among other things:
• incur additional indebtedness;
• create liens on assets;
• engage in mergers, consolidations, liquidations
and dissolutions;
• sell assets;
• pay dividends and distributions or repurchase Capital I’s capital stock;
• make investments, loans, or advances;
• prepay certain junior indebtedness;
• engage in certain transactions with affiliates;
• amend material agreements governing certain junior indebtedness; and
• change lines of business.
The Term Loan Facility includes certain customary representations and warranties, affirmative covenants and events of default, including but not limited to, payment defaults, breach of representations and warranties, covenant defaults, cross defaults
to certain indebtedness, certain bankruptcy-related events, certain events under ERISA, material judgments and a change of control. If an event of default occurs, the lenders under the Term Loan Facility are entitled to take various actions, including the acceleration of all amounts due under the Term Loan Facility and all actions permitted to be taken under the loan documents relating thereto or applicable law.
6.375% Senior Secured Notes due 2026
On the Effective Date, iHeartCommunications entered into an indenture (the “Senior Secured Notes Indenture”) with Capital I, as guarantor, the subsidiary guarantors party thereto, and U.S. Bank National
Association, as trustee and collateral agent, governing the $800.0 million aggregate principal amount of 6.375% Senior Secured Notes due 2026 that were issued to certain Claimholders pursuant to the Plan of Reorganization. The 6.375% Senior Secured Notes mature on May 1, 2026 and bear interest at a rate of 6.375% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, beginning on February 1, 2020.
The 6.375% Senior Secured Notes are guaranteed
on a senior secured basis by Capital I and the subsidiaries of iHeartCommunications that guarantee the Term Loan Facility or other credit facilities or capital markets debt securities. The 6.375% Senior Secured Notes and the related guarantees rank equally in right of payment with all of iHeartCommunications’ and the
guarantors’
existing and future indebtedness that is not expressly subordinated to the 6.375% Senior Secured Notes (including the Senior Unsecured Notes), effectively equal with iHeartCommunications’ and the guarantors’ existing and future indebtedness secured by a first priority lien on the collateral securing the 6.375% Senior Secured Notes, effectively subordinated in right of payment to all of iHeartCommunications’ and the guarantors’ existing and future indebtedness that is secured by assets that are not part of the collateral securing the 6.375% Senior Secured Notes, to the extent of the value of such assets, and structurally subordinated in right of payment to all existing and future indebtedness and other liabilities of any subsidiary of iHeartCommunications that is not a guarantor of the 6.375%
Senior Secured Notes.
The 6.375% Senior Secured Notes and the related guarantees are secured, subject to permitted liens and certain other exceptions, by a first priority lien on the capital stock of iHeartCommunications and substantially all of the assets of iHeartCommunications and the guarantors, other than accounts receivable and related assets, and by a second priority lien on accounts receivable and related assets securing the ABL Facility.
iHeartCommunications may redeem the 6.375% Senior Secured Notes at its option, in whole or in part, at any time prior to May 1, 2022, at a price equal to 100%
of the principal amount of the 6.375% Senior Secured Notes being redeemed, plus an applicable premium and plus accrued and unpaid interest to the redemption date. iHeartCommunications may redeem the 6.375% Senior Secured Notes at its option, in whole or in part, on or after May 1, 2022, at the redemption prices set forth in the 6.375% Senior Secured Notes Indenture plus accrued and unpaid interest to the redemption date. At any time prior to May 1, 2022, iHeartCommunications may redeem at its option, up to 40% of the aggregate principal amount of the 6.375%
Senior Secured Notes at a redemption price equal to 106.375% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, with the proceeds of one or more equity offerings.
The 6.375% Senior Secured Notes Indenture contains covenants that limit the ability of Capital I and its restricted subsidiaries, including iHeartCommunications, to, among other things:
•
incur
or guarantee additional debt or issue certain preferred stock;
•
create liens on certain assets;
•
redeem, purchase or retire subordinated debt;
•
make certain investments;
•
create
restrictions on the payment of dividends or other amounts from iHeartCommunications’ restricted subsidiaries;
•
enter into certain transactions with affiliates;
•
merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of iHeartCommunications’ assets;
•
sell
certain assets, including capital stock of iHeartCommunications’ subsidiaries;
pay dividends, redeem or repurchase capital stock or make other restricted payments.
5.25%
Senior Secured Notes due 2027
On August 7, 2019, iHeartCommunications entered into an indenture (the “New Senior Secured Notes Indenture”) with Capital I, as guarantor, the subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee and collateral agent, governing the $750.0 million aggregate principal amount of 5.25% Senior Secured Notes due 2027 that were issued in a private placement to qualified institutional buyers under Rule 144A under the Securities Act, and to persons outside the United States pursuant to Regulation S under
the Securities Act. The 5.25% Senior Secured Notes mature on August 15, 2027 and bear interest at a rate of 5.25% per annum. Interest is payable semi-annually on February 15 and August 15 of each year, beginning on February 15, 2020.
The 5.25% Senior Secured Notes are guaranteed on a senior secured basis by Capital I and the subsidiaries of iHeartCommunications that guarantee the Term Loan Facility. The 5.25% Senior Secured Notes and the related guarantees rank equally in right of payment with all of iHeartCommunications’
and the guarantors’ existing and future indebtedness that is not expressly subordinated to the 5.25% Senior Secured Notes (including the Term Loan Facility, the 6.375% Senior Secured Notes and the Senior Unsecured Notes), effectively equal with iHeartCommunications’ and the guarantors’ existing and future indebtedness secured by a first priority lien on the collateral securing the 5.25% Senior Secured Notes, effectively subordinated to all of iHeartCommunications’ and the guarantors’ existing and future indebtedness that is secured by assets that are not part of the collateral securing the 5.25% Senior Secured Notes, to the extent of the value of such collateral, and structurally subordinated to all existing and future indebtedness and other liabilities of any subsidiary of iHeartCommunications
that is not a guarantor of the 5.25% Senior Secured Notes.
The 5.25% Senior Secured Notes and the related guarantees are secured, subject to permitted liens and certain other exceptions, by a first priority lien on the capital stock of iHeartCommunications
and substantially all of the assets of iHeartCommunications and the guarantors, other than accounts receivable and related assets, and by a second priority lien on accounts receivable and related assets securing the ABL Facility.
iHeartCommunications may redeem the 5.25% Senior Secured Notes at its option, in whole or part, at any time prior to August 15, 2022, at a price equal to 100% of the principal amount of the 5.25% Senior Secured Notes redeemed, plus a make-whole premium, plus accrued and unpaid interest to the redemption date. iHeartCommunications may redeem the 5.25% Senior Secured Notes, in whole or in part, on or after August
15, 2022, at the redemption prices set forth in the 5.25% Senior Secured Notes Indenture plus accrued and unpaid interest to the redemption date. At any time on or before August 15, 2022, iHeartCommunications may elect to redeem up to 40% of the aggregate principal amount of the 5.25% Senior Secured Notes at a redemption price equal to 105.25% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, with the net proceeds of one or more equity offerings.
The 5.25% Senior Secured
Notes Indenture contains covenants that limit the ability of iHeartCommunications and its restricted subsidiaries, to, among other things:
•
incur or guarantee additional debt or issue certain preferred stock;
•
create liens on certain assets;
•
redeem,
purchase or retire subordinated debt;
•
make certain investments;
•
create restrictions on the payment of dividends or other amounts from iHeartCommunications’ restricted subsidiaries;
•
enter into certain
transactions with affiliates;
•
merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of iHeartCommunications’ assets;
•
sell certain assets, including capital stock of iHeartCommunications’ subsidiaries;
pay dividends, redeem or repurchase capital stock or make other restricted payments.
8.375% Senior Unsecured Notes due 2027
On the Effective Date, iHeartCommunications entered into an indenture (the “Senior
Unsecured Notes Indenture”) with Capital I, as guarantor, the subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee, governing the $1,450.0 million aggregate principal amount of 8.375% Senior Notes due 2027 that were issued to certain Claimholders pursuant to the Plan of Reorganization. The Senior Unsecured Notes mature on May 1, 2027 and bear interest at a rate of 8.375% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2019.
The
Senior Unsecured Notes are guaranteed on a senior unsecured basis by Capital I and the subsidiaries of iHeartCommunications that guarantee the Term Loan Facility or other credit facilities or capital markets debt securities. The Senior Unsecured Notes and the related guarantees rank equally in right of payment with all of iHeartCommunications’ and the guarantors’ existing and future indebtedness that is not expressly subordinated to the Senior Unsecured Notes, effectively subordinated in right of payment to all of iHeartCommunications’ and the guarantors’ existing and future indebtedness that is secured (including the 6.375% Senior Secured Notes, the 5.25% Senior Secured Notes and borrowings under the ABL Facility and the Term Loan Facility), to the extent of the value of the collateral
securing such indebtedness, and structurally subordinated in right of payment to all existing and future indebtedness and other liabilities of any subsidiary of iHeartCommunications that is not a guarantor of the Senior Unsecured Notes.
iHeartCommunications may redeem the Senior Unsecured Notes at its option, in whole or in part, at any time prior to May 1, 2022, at a price equal to 100% of the principal amount of the Senior Unsecured Notes being redeemed, plus an applicable premium and plus accrued and unpaid interest to the redemption date. iHeartCommunications may redeem the Senior Unsecured Notes at its option, in whole or in part, on or after May 1, 2022, at the redemption prices set forth in the Senior Unsecured Notes Indenture
plus accrued and unpaid interest to the redemption date. At any time prior to May 1, 2022, iHeartCommunications redeem at its option, up to 40% of the aggregate principal amount of the Senior Unsecured Notes at a redemption price equal to 108.375% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, with the proceeds of one or more equity offerings.
The Senior Unsecured Notes Indenture contains covenants that limit the ability of Capital I and its restricted subsidiaries, including iHeartCommunications, to, among other things:
•
incur or guarantee additional debt or issue certain preferred stock;
•
create
liens on certain assets;
•
redeem, purchase or retire subordinated debt;
•
make certain investments;
•
create restrictions on the payment of dividends or other amounts from iHeartCommunications’ restricted subsidiaries;
•
enter into certain transactions with affiliates;
•
merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of iHeartCommunications’ assets;
•
sell certain assets, including capital stock of iHeartCommunications’ subsidiaries;
pay dividends, redeem or repurchase capital stock or make other restricted payments.
Mandatorily Redeemable Preferred Stock
On
the Effective Date, in accordance with the Plan of Reorganization, iHeart Operations issued 60,000 shares of its Series A Perpetual Preferred Stock, par value $0.001 per share (the "iHeart Operations Preferred Stock"), having an aggregate initial liquidation preference of $60.0 million for a cash purchase price of $60.0 million. The iHeart Operations Preferred Stock was purchased by a third party investor. As of September 30, 2019, the liquidation preference of the iHeart Operations Preferred Stock was $60.0 million. As further described below, the iHeart
Operations Preferred Stock is mandatorily redeemable for cash at a date certain and therefore is classified as a liability in the Company's balance sheet.
There are no sinking fund provisions applicable to the iHeart Operations Preferred Stock. Shares of the iHeart Operations Preferred Stock, upon issuance, were fully paid and non-assessable. The shares of the iHeart Operations Preferred Stock are not convertible into, or exchangeable for, shares of any other class or series of stock or other securities of iHeart Operations. The holders of shares of the iHeart Operations Preferred Stock have no pre-emptive rights with respect to any shares of our capital stock or any of iHeart Operations’ other securities convertible into or carrying rights or options to purchase any such capital stock.
Holders
of the iHeart Operations Preferred Stock are entitled to receive, as declared by the board of directors of iHeart Operations, in respect of each share, cumulative dividends accruing daily and payable quarterly at a per annum rate equal to the sum of (1) the greater of (a) LIBOR and (b) two percent, plus (2) the applicable margin, which is calculated as a function of iHeartMedia’s consolidated total leverage ratio. Dividends are payable on the liquidation preference. Unless all accrued and unpaid dividends on the iHeart Operations Preferred Stock are paid in full, no dividends or distributions may be paid on any equity interests of iHeartMedia or its subsidiaries other than iHeart Operations, and no such equity interests may be repurchased or redeemed (subject to certain exceptions that are specified in the certificate of designation
for the iHeart Operations Preferred Stock). Dividends, if declared, will be payable on March 31, June 30, September 30 and December 31 of each year (or on the next business day if such date is not a business day). During the three months ended September 30, 2019 and the period from May 1, 2019 through September 30, 2019the Company recognized $2.0 million and $3.4 million, respectively, of interest expense related to dividends on mandatorily redeemable preferred stock.
Other than as set forth below, iHeart Operations
may not redeem the iHeart Operations Preferred Stock at its option prior to the third anniversary of the issue date of the iHeart Operations Preferred Stock. Upon consummation of certain equity offerings, iHeart Operations may, at its option, redeem all or a part of the iHeart Operations Preferred Stock for the liquidation preference plus a make-whole premium. At any time on or after the third anniversary of the issue date, the iHeart Operations Preferred Stock may be redeemed at the option of iHeart Operations, in whole or in part, for cash at a redemption price equal to the liquidation preference per share.
Upon (i) a liquidation, dissolution or winding up of iHeart Operations, iHeartMedia or iHeartCommunications, together with the subsidiaries of such entity, taken as a whole, (ii) a bankruptcy event, (iii) a change of control, (iv) a
sale or transfer of all or substantially all of iHeart Operations’, iHeartMedia’s or iHeartCommunications’ assets and the assets of such entity’s subsidiaries, taken as a whole in a single transaction (other than to iHeartMedia or any of its subsidiaries), or a series of transactions, (v) an acceleration or payment default of indebtedness of iHeart Operations, iHeartMedia or any of its subsidiaries of $100 million or more or (vi) consummation of certain equity offerings of iHeartMedia, iHeart Operations or iHeartCommunications or certain
significant subsidiaries, then any holder of shares of iHeart Operations Preferred Stock may require iHeartMedia to purchase such holder’s shares of iHeart Operations Preferred Stock at a purchase price equal to (a) the liquidation preference plus a make-whole premium, if such purchase is consummated prior to the third anniversary of the issue date or (b) the liquidation preference, if the purchase is consummated on or after the third anniversary of the issue date.
The shares of iHeart Operations Preferred Stock include
repurchase rights, pursuant to which the holders may require iHeartMedia or iHeartCommunications to purchase the iHeart Operations Preferred Stock after the fifth anniversary of the issue date.
On the tenth anniversary of the issue date, the shares of iHeart Operations Preferred Stock will be subject to mandatory redemption for an amount equal to the liquidation preference.
If a default occurs or dividends payable on the shares of iHeart Operations Preferred Stock have not been paid in cash for twelve consecutive quarters, the holders of the iHeart Operations Preferred Stock will have the right, voting as a class, to elect one director to iHeartMedia’s Board of Directors. Upon any termination of the rights of the holders of shares of the iHeart Operations Preferred Stock as a class to vote for a director as described above, the director so elected to iHeartMedia’s Board of Directors
will cease to be qualified as a director and the term of such director’s office shall terminate immediately.
Surety Bonds, Letters of Credit and Guarantees
As of September 30, 2019, the Successor Company and its subsidiaries had outstanding surety bonds and commercial standby letters of credit of $17.6 million and $49.2 million, respectively. Included within the Successor Company's outstanding commercial standby letters of credit were $0.9 million held on behalf of CCOH. These surety bonds and letters of credit relate to various operational matters including insurance,
lease and performance bonds as well as other items.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are involved in certain legal proceedings arising in the ordinary course of business and, as required, have accrued an estimate of the probable costs for the resolution of those claims for which the occurrence of loss is probable and the amount can be reasonably estimated. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations
for any particular period could be materially affected by changes in the Company’s assumptions or the effectiveness of its strategies related to these proceedings. Additionally, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company’s financial condition or results of operations.
Although the Company is involved in a variety of legal proceedings in the ordinary course of business, a large portion of the Company’s litigation arises in the following contexts:
commercial disputes; defamation matters; employment and benefits related claims; governmental fines; intellectual property claims; and tax disputes.
Chapter 11 Cases
iHeartCommunications' filing of the Chapter 11 Cases constituted an event of default that accelerated its obligations under its debt agreements. Due to the Chapter 11 Cases, however, the creditors' ability to exercise remedies under iHeartCommunications' debt agreements were stayed as of March 14, 2018, the Petition Date. On March 21, 2018, Wilmington Savings Fund Society, FSB ("WSFS"), solely in its capacity as successor indenture trustee to the 6.875% Senior Notes due 2018 and
7.25% Senior Notes due 2027, and not in its individual capacity, filed an adversary proceeding against the Company in the Chapter 11 Cases. In the complaint, WSFS alleged, among other things, that the "springing lien" provisions of the priority guarantee notes indentures and the priority guarantee notes security agreements amounted to "hidden encumbrances" on the Company's property, to which the holders of the 6.875% Senior Notes due 2018 and 7.25% Senior Notes due 2027 were entitled to "equal and ratable" treatment. On March
26, 2018, Delaware Trust Co. ("Delaware Trust"), in its capacity as successor indenture trustee to the 14% Senior Notes due 2021, filed a motion to intervene as a plaintiff in the adversary proceeding filed by WSFS. In the complaint, Delaware Trust alleged, among other things, that the indenture governing the 14% Senior Notes due 2021 also had its own "negative pledge" covenant, and, therefore, to the extent the relief sought by WSFS in its adversary proceeding was warranted, the holders of the 14% Senior Notes due 2021 would also be entitled to the same "equal and ratable" liens on the same property. On January
15, 2019, the Bankruptcy Court entered judgment in the Company's favor denying all relief sought by WSFS and all other parties. Pursuant to a settlement (the “Legacy Plan Settlement”) with WSFS and certain consenting Legacy Noteholders of all issues related to confirmation of the Plan of Reorganization, on May 1, 2019 upon the Company's confirmed Plan of Reorganization becoming
effective, this adversary proceeding was deemed withdrawn and/or dismissed, with respect to all parties thereto, with prejudice and in its entirety.
On October 9, 2018, WSFS, solely in its capacity as successor indenture trustee to the 6.875% Senior Notes due 2018 and 7.25% Senior Notes due 2027, and not in its individual capacity, filed an adversary proceeding against Clear Channel
Holdings, Inc. (“CCH”) and certain shareholders of iHeartMedia. The named shareholder defendants were Bain Capital LP; Thomas H. Lee Partners L.P.; Abrams Capital L.P.; and Highfields Capital Management L.P. In the complaint, WSFS alleged, among other things, that the shareholder defendants engaged in a “pattern of inequitable and bad faith conduct, including the abuse of their insider positions to benefit themselves at the expense of third-party creditors including particularly the Legacy Noteholders.” The complaint asked the court to grant relief in the form of equitable subordination of the shareholder defendants’ term loan, priority guarantee notes and 2021 notes claims to any and all claims of the legacy noteholders. In addition, the complaint sought to have any votes to accept the Plan of Reorganization by Abrams and Highfields on account of their 2021 notes
claims, and any votes to accept the Plan of Reorganization by defendant CCH on account of its junior notes claims, to be designated and disqualified. Pursuant to the Legacy Plan Settlement, on May 1, 2019 upon the Company's confirmed Plan of Reorganization becoming effective, this adversary proceeding was deemed withdrawn and/or dismissed, with respect to all parties thereto, with prejudice and in its entirety.
Stockholder Litigation
On May 9, 2016, a stockholder of CCOH filed a derivative lawsuit in the Court of Chancery
of the State of Delaware, captioned GAMCO Asset Management Inc. v. iHeartMedia, Inc. et al., C.A. No. 12312-VCS. The complaint named as defendants the Company, iHeartCommunications, Bain Capital Partners, LLC and Thomas H. Lee Partners, L.P., the Company's pre-bankruptcy private equity sponsors and pre-bankruptcy majority owners (together, the "Former Sponsor Defendants"), and the members of CCOH's board of directors. CCOH also was named as a nominal defendant. The complaint alleged that CCOH had been harmed by the intercompany agreements with iHeartCommunications, CCOH’s lack of autonomy over its own cash and the actions of the defendants in serving the interests of the
Company, iHeartCommunications and the Former Sponsor Defendants to the detriment of CCOH and its minority stockholders. The plaintiff sought, among other things, a ruling that the defendants breached their fiduciary duties to CCOH and that the Company, iHeartCommunications and the Former Sponsor Defendants aided and abetted the CCOH board of directors' breaches of fiduciary duty, rescission of payments made by CCOH to iHeartCommunications and its affiliates pursuant to dividends declared in connection with the offering of notes by Clear Channel International BV and certain asset sales by CCOH, and an order requiring the
Company, iHeartCommunications and the Former Sponsor Defendants to disgorge all profits they have received as a result of the alleged fiduciary misconduct.
On July 20, 2016, the defendants filed a motion to dismiss plaintiff's verified stockholder derivative complaint for failure to state a claim upon which relief can be granted. On November 23, 2016, the Court granted defendants' motion to dismiss all claims brought by the plaintiff. On December 19, 2016, the plaintiff filed a notice of appeal of the ruling. The oral hearing on the appeal was held on October 11, 2017. On October 12, 2017, the Supreme Court of Delaware affirmed the lower court's ruling,
dismissing the case.
On December 29, 2017, another stockholder of CCOH filed a derivative lawsuit (the “Norfolk Lawsuit”) in the Court of Chancery of the State of Delaware, captioned Norfolk County Retirement System, v. iHeartMedia, Inc., et al., C.A. No. 2017-0930-JRS. The complaint named as defendants the Company, iHeartCommunications, the Former Sponsor Defendants, and the members of CCOH's board of directors. CCOH was named as a nominal defendant. The complaint alleged that CCOH had been harmed by the CCOH Board’s November 2017 decision to extend the maturity date of the intercompany revolving note (the “Third Amendment”) at what the complaint described as far-below-market interest rates. The plaintiff sought, among other things, a ruling that the defendants breached their
fiduciary duties to CCOH, a modification of the Third Amendment to bear a commercially reasonable rate of interest, and an order requiring disgorgement of all profits, benefits and other compensation obtained by defendants as a result of the alleged breaches of fiduciary duties.
On March 7, 2018, the defendants filed a motion to dismiss plaintiff's verified derivative complaint for failure to state a claim upon which relief can be granted. On March 16, 2018, the Company filed a Notice of Suggestion of Pendency of Bankruptcy and Automatic Stay of Proceedings. On May 4, 2018, plaintiff filed its response to the motion to dismiss. On June 26, 2018,
the defendants filed a reply brief in further support of their motion to dismiss. Oral argument on the motion to dismiss was held on September 20, 2018.
On August 27, 2018, the same stockholder of CCOH that had filed a derivative lawsuit against the Company and others in 2016 (GAMCO Asset Management Inc.) filed a putative class action lawsuit (the “GAMCO II Lawsuit”) in the Court of Chancery of
the State of Delaware, captioned GAMCO Asset Management, Inc. v. Hendrix, et al., C.A. No. 2018-0633-JRS. The complaint named as defendants the Former Sponsor Defendants and the members of CCOH’s board of directors. The complaint alleged that minority shareholders in CCOH during the period November 8, 2017 to March 14, 2018 were harmed by decisions of the CCOH Board and the intercompany note committee of the Board relating to the Intercompany Note. The plaintiff sought, among other things, a ruling that the CCOH Board, the intercompany note committee, and the Sponsor Defendants breached their fiduciary duties and that the Sponsor Defendants aided and abetted the Board’s breach of fiduciary duty; and an award of
damages, together with pre- and post-judgment interests, to the putative class of minority shareholders.
On December 16, 2018, the Debtors, CCOH, GAMCO Asset Management, Inc., and Norfolk County Retirement System entered into a settlement (the “CCOH Separation Settlement”) of all claims, objections, and other causes of action that have been or could be asserted by or on behalf of CCOH, GAMCO Asset Management, Inc., and/or Norfolk County Retirement System by and among the Debtors, CCOH, GAMCO Asset Management, Inc., certain individual defendants in the GAMCO Asset Management, Inc. action and/or the Norfolk County Retirement System action, and the Former Sponsor Defendants in such actions. The CCOH Separation Settlement provided for the consensual separation of the Debtors and CCOH, including approximately $149.0 million of
recovery to CCOH on account of its claim against iHeartCommunications in the Chapter 11 cases, a $200 million unsecured revolving line of credit from certain of the Debtors to CCOH for a period of up to three years, the transfer of certain of the Debtors’ intellectual property to CCOH, the waiver by the Debtors of the setoff for the value of the transferred intellectual property, mutual releases, the termination of the cash sweep under the existing Corporate Services Agreement, the termination of any agreements or licenses requiring royalty payments from CCOH to the Debtors for trademarks or other intellectual property, the waiver of any post-petition amounts owed by CCOH relating to such trademarks or other intellectual property, and the execution of a new transition services agreement and other separation documents. The CCOH Separation Settlement was approved by the Bankruptcy
Court and the United States District Court for the Southern District of Texas on January 22, 2019. On May 1, 2019, the Debtors’ Plan of Reorganization went effective, and the Norfolk Lawsuit and GAMCO II Lawsuit were each subsequently dismissed with prejudice.
The effective tax rate for the Successor Company for the three months ended September 30, 2019 and the period from May 2, 2019 through September 30, 2019 was 57.5% and 39.0%, respectively. The effective tax rates for both periods were primarily impacted by tax expense from non-deductible expenses and the provision for state
income taxes.
The effective tax rate for continuing operations of the Predecessor Company for the period from January 1, 2019 through May 1, 2019 (Predecessor) was 0.4%. The income tax expense for the period from January 1, 2019 through May 1, 2019 (Predecessor) primarily consists of the income tax impacts from reorganization and fresh start adjustments, including adjustments to our valuation allowance. The Company recorded income tax benefits of $102.9 million for reorganization adjustments in the Predecessor period, primarily consisting of: (1) tax
expense for the reduction in federal and state net operating loss (“NOL”) carryforwards from the cancellation of debt income ("CODI") realized upon emergence; (2) tax benefit for the reduction in deferred tax liabilities attributed primarily to long-term debt that was discharged upon emergence; (3) tax benefit for the effective settlement of liabilities for unrecognized tax benefits that were discharged upon emergence; and (4) tax benefit for the reduction in valuation allowance resulting from the adjustments described above. The Company recorded income tax expense of $185.4 million for fresh start adjustments in the Predecessor period, consisting of $529.1 million tax expense for the increase in deferred tax liabilities resulting from fresh start accounting adjustments, which
was partially offset by $343.7 million tax benefit for the reduction in the valuation allowance on our deferred tax assets.
The effective tax rate for the three and nine months ended September 30, 2018 (Predecessor) was 8.2% and 4.3%, respectively. The 2018 effective tax rates were primarily impacted by the valuation allowance recorded against deferred tax assets resulting from current period interest expense limitation carryforward in U.S. federal and certain state jurisdictions due to uncertainty regarding our ability to realize those assets in future periods.
As a result of the Plan
of Reorganization, the Company expects the majority of its federal NOL carryforwards and certain state NOL carryforwards to be reduced or eliminated as a result of the CODI realized from the bankruptcy emergence. Pursuant to the attribute reduction and ordering rules set forth in the Internal Revenue Code of 1986, as amended (the “Code”), the reduction in the Company’s tax attributes for excludible CODI does not occur until the last day of the Company’s tax year, December 31, 2019. Accordingly, the tax adjustments recorded in the Predecessor period represent our best estimate using all available information at September 30,
2019. Additionally, the Company recognized a capital loss for tax purposes as a result of the series of transactions to effect the Plan of Reorganization. This capital loss may be carried forward to offset capital gains recognized by the Company in the next five years, subject to annual limitations under Section 382 of the Code. The deferred tax asset associated with the capital loss carryforward is offset by a valuation allowance due to significant uncertainty regarding the Company’s ability to utilize the carryforward prior to its expiration. The final tax impacts of the bankruptcy emergence,
as well as the Plan of Reorganization’s overall effect on the Company’s tax attributes and tax basis in assets will be refined based on the Company’s final December 31, 2019 financial position as required under the Code. The final tax impacts on the Company's tax attributes could change significantly from the current estimates.
NOTE 11 – STOCKHOLDER'S EQUITY (DEFICIT)
Historically, the
Company granted restricted shares of the Company's Class A common stock to certain key individuals. In connection with the effectiveness of the Plan of Reorganization, all unvested restricted shares were canceled.
Pursuant to the Post-Emergence Equity Plan the Company adopted in connection with the effectiveness of our Plan of Reorganization, the Company has granted restricted stock units and options to purchase shares of the
Company's Class A common stock to certain key individuals.
This Post-Emergence Equity Plan is designed to provide an incentive to certain key members of management and service providers of the Company or any of its subsidiaries and non-employee members of the Board of Directors and to offer an additional inducement in obtaining the services of such individuals. The Post-Emergence Equity Plan provides for the grant of (a) options and (b) restricted stock units, which, in each case, may be subject to contingencies or restrictions as set forth under the plan and applicable award agreement.
The aggregate number of shares of Class A common stock that may be issued or used for reference purposes with respect to
which awards may be granted under the plan shall be equal to the sum of (a) 12,770,387 shares of Class A common stock for awards to key members of management and service providers plus (b) 1,596,298 shares of Class A common stock for awards to non-employee members of the Board. Such shares of common stock may, in the discretion of the Board of Directors, consist either in whole or in part of authorized but unissued shares of common stock or shares of common stock held in the treasury of the Company.
The Company shall at all times during the term of the plan reserve and keep available such number of shares of common stock as will be sufficient to satisfy the requirements of the plan.
The Company granted 5,542,668 stock options and 3,205,360 restricted stock units on May 30, 2019 in connection with the Company's emergence from bankruptcy (the "Emergence Awards").
Share-based
compensation expenses are recorded in corporate expenses and were $17.1 million and $20.2 million for the Successor Company for three months ended September 30, 2019 and the period from May 2, 2019 through September 30, 2019, respectively. Share-based compensation expenses for the Predecessor Company were $0.5 million, 0.5 million and 1.6 million for three months ended September 30, 2018, the period from January
1, 2019 through May 1, 2019 and the nine months ended September 30, 2018, respectively.
As of September 30, 2019, there was $63.1 million of unrecognized compensation cost related to unvested share-based compensation arrangements with vesting based on service conditions. This cost is expected to be recognized over a weighted average period of approximately 3.6 years.
Stock Options
The term of each option granted pursuant to the plan may not exceed (a) six (6)
years from the date of grant thereof in the case of the awards granted upon emergence and (b) ten (10) years from the date of grant thereof in the case of all other options; subject, however, in either case, to earlier termination as hereinafter provided.
Options granted under the plan are exercisable at such time or times and subject to such terms and conditions as shall be determined by the Compensation Committee of the Board (the "Committee") at the time of grant.
The options granted as Emergence Awards vest (or vested, as applicable), subject to a participant’s continued full-time employment or service with the Company through each applicable vesting date, (a) 20% on July 22, 2019, and (b) an
additional 20% vesting on each of the next four anniversaries of the grant date.
No option granted under the plan will provide for any dividends or dividend equivalents thereon.
Restricted Stock Units ("RSUs")
RSUs may be issued either alone or in addition to other awards granted under the plan.
The RSUs granted in respect of the Emergence Awards vest or vested (as applicable), subject to a participant’s continued full-time employment or service with the Company through each applicable vesting date, (a) 20% on July 22, 2019, and (b) an additional 20%
vesting on each of the next four anniversaries of the grant date.
Each RSU (representing one share of common stock) awarded to a participant will be credited with dividends paid in respect of one share of common stock (“Dividend Equivalents”). Dividend Equivalents will be withheld by the Company for the participant’s account, and interest may be credited on the amount of cash Dividend Equivalents withheld at a rate and subject to such terms as determined by the Committee. Dividend Equivalents credited to a participant’s account and attributable to any particular RSU (and earnings thereon, if applicable) shall be distributed to the participant upon settlement of such RSU and, if such RSU is forfeited, the participant shall have no right to such Dividend Equivalents.
The following table presents the balances of the Predecessor Company's Class A, Class B, Class C and Class D Common Stock as of September 30, 2019 (Successor) and December 31, 2018 (Predecessor):
Predecessor
Class A Common Stock, par value $.001 per share, authorized 400,000,000 shares, no shares issued in 2019 and 32,292,944 shares issued in 2018
—
32
Predecessor Class B Common Stock, par value $.001 per share, authorized 150,000,000 shares, no shares issued in 2019 and 555,556 shares issued in 2018
—
1
Predecessor
Class C Common Stock, par value $.001 per share, authorized 100,000,000 shares, no shares issued in 2019 and 58,967,502 shares issued in 2018
—
59
Predecessor Class D Common Stock, par value $.001 per share, authorized 200,000,000 shares, no shares issued in 2019 and 2018
—
—
Successor
Common Stock and Special Warrants
The following table presents the Successor Company's Class A Common Stock, Class B Common Stock and Special Warrants issued and outstanding as of September 30, 2019:
Successor
Class A Common Stock, par value $.001 per share,1,000,000,000 shares authorized
57,670,714
Successor Class B Common Stock, par value $.001 per share, 1,000,000,000 shares authorized
6,925,976
Successor Special Warrants
81,289,306
Total Successor Class A Common Stock, Class B Common Stock and Special Warrants issued and outstanding
145,885,996
Class
A Common Stock
Holders of shares of the Successor Company's Class A common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the Successor Company's Class A common stock will have the exclusive right to vote for the election of directors. There will be no cumulative voting rights in the election of directors.
Holders of shares of the Successor Company's Class A common stock are entitled to receive dividends, on a per share basis, when and if declared by the Company's Board out of funds legally available therefor and whenever any dividend is made on the shares of the Successor Company's Class B common stock subject to certain exceptions set forth in our certificate.
The Successor
Company may not subdivide or combine (by stock split, reverse stock split, recapitalization, merger, consolidation or any other transaction) its shares of Class A common stock or Class B common stock without subdividing or combining its shares of Class B common stock or Class A common stock, respectively, in a similar manner.
Upon our dissolution or liquidation or the sale of all or substantially all of the Successor Company's assets, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of the Successor Company's Class A common stock will be entitled to receive pro rata together with holders of the Successor Company's Class B common stock our remaining assets available for distribution.
New Class A common stock certificates issued upon transfer or new issuance of Class
A common stock shares will contain a legend stating that such shares of Class A common stock are subject to the provisions of our amended and restated certificate of incorporation, including but not limited to provisions governing compliance with requirements of the Communications Act and regulations thereunder, including, without limitation, those concerning foreign ownership and media ownership.
On
July 18, 2019, the Company’s Class A common stock was listed and began trading on the NASDAQ Global Select Market ("Nasdaq") under the ticker symbol “IHRT”.
Class B Common Stock
Holders of shares of the Successor Company's Class B common stock are not entitled to vote for the election of directors or, in general, on any other matter submitted to a vote of the Company’s stockholders, but are entitled to one vote per share on the following matters: (a) any amendment or modification of any specific rights or obligations of the holders of Class B common stock that does not similarly affect the rights or obligations of the holders of Class A common stock,
in which case the holders of Class B Common Stock will be entitled to a separate class vote, with each share of Class B common stock having one vote; and (b) to the extent submitted to a vote of our stockholders, (i) the retention or dismissal of outside auditors by the Company, (ii) any dividends or distributions to our stockholders, (ii) any material sale of assets, recapitalization, merger, business combination, consolidation, exchange of stock or other similar reorganization of the Company or any of its subsidiaries, (iv) the adoption of any amendment to our certificate of incorporation, (v) other than in connection
with any management equity or similar plan adopted by the Company's Board, any authorization or issuance of equity interests, or any security or instrument convertible into or exchangeable for equity interests, in the Company or any of its subsidiaries, and (vi) the liquidation of the Company, in which case in respect to any such vote concerning the matters described in clause (b), the holders of Class B common stock are entitled to vote with the holders of the Class A common stock, with each share of common stock having one vote and voting together as a single class.
Holders of
shares of the Successor Company's Class B common stock are generally entitled to convert shares of Class B common stock into shares of Class A common stock on a one-for-one basis, subject to the Company’s ability to restrict conversion in order to comply with the Communications Act and FCC regulations.
Holders of shares of the Successor Company's Class B common stock are entitled to receive dividends when and if declared by the Company's Board out of funds legally available therefor and whenever any dividend is made on the shares of the Successor Company's Class A common stock subject to certain exceptions set forth in our certificate of incorporation. Upon our dissolution
or liquidation or the sale of all or substantially all of our assets, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of the Successor Company's Class B common stock will be entitled to receive pro rata with holders of the Successor Company's Class A common stock our remaining assets available for distribution.
During the three months ended September 30, 2019, 21,591 shares of the Class B common stock were converted into Class A common stock.
Special Warrants
Each Special Warrant issued under the special warrant agreement entered into in connection with the Reorganization may
be exercised by its holder to purchase one share of Successor Class A common stock or Successor Class B common stock at an exercise price of $0.001 per share, unless the Company in its sole discretion believes such exercise would, alone or in combination with any other existing or proposed ownership of common stock, result in, subject to certain exceptions, (a) such exercising holder owning more than 4.99 percent of the Successor Company's outstanding Class A common stock, (b) more than 22.5 percent of the Successor Company's capital stock or voting interests being owned directly or indirectly by foreign individuals or entities, (c) the Company exceeding any foreign
ownership threshold set by the FCC pursuant to a declaratory ruling or specific approval requirement or (d) the Company violating any provision of the Communications Act or restrictions on ownership or transfer imposed by the Company's certificate of incorporation or the decisions, rules and policies of the FCC. Any holder exercising Special Warrants must complete and timely deliver to the warrant agent the required exercise forms and certifications required under the special warrant agreement.
To the extent there are any dividends declared or distributions made with respect to the Successor Class A common stock or Successor Class B common stock, those dividends or
distributions will also be made to holders of Special Warrants concurrently and on a pro rata basis based on their ownership of common stock underlying their Special Warrants on an as-exercised basis; provided, that no such distribution will be made to holders of Special Warrants if (x) the Communications Act or an FCC rule prohibits such distribution to holders of Special Warrants or (y) our FCC counsel opines that such distribution is reasonably likely to cause (i) the Company to violate the Communications Act or any applicable FCC rule or (ii) any such holder not to be deemed to hold a noncognizable (under FCC rules governing foreign ownership) future equity interest in the Company; provided
further, that, if any distribution of common stock or any other securities to a holder of Special Warrants is not permitted pursuant to clauses
(x) or (y), the Company will cause economically equivalent warrants to be distributed to such holder in lieu thereof, to the extent that such
distribution of warrants would not violate the Communications Act or any applicable FCC rules.
The Special Warrants will expire on the earlier of the twentieth anniversary of the issuance date and the occurrence of a change in control of the Company.
During the three months ended September 30, 2019, 164,342 shares of the Special Warrants were converted into Class A common stock.
Net
income (loss) attributable to the Company – common shares
$
51,167
$
11,184,141
$
(416,815
)
Exclude:
Income
(loss) from discontinued operations, net of tax
$
—
$
1,685,123
$
(206,968
)
Noncontrolling interest from discontinued operations,
net of tax - common shares
—
19,028
10,732
Total income (loss) from discontinued operations, net of tax - common shares
$
—
$
1,704,151
$
(196,236
)
Income
(loss) from continuing operations
$
51,167
$
9,479,990
$
(220,579
)
DENOMINATOR(1):
Weighted
average common shares outstanding - basic
145,543
86,241
85,348
Stock options and restricted stock(2):
112
—
—
Weighted
average common shares outstanding - diluted
145,655
86,241
85,348
Net
income (loss) attributable to the Company per common share:
From continuing operations - Basic
$
0.35
$
109.92
$
(2.58
)
From
discontinued operations - Basic
$
—
$
19.76
$
(2.30
)
From continuing operations - Diluted
$
0.35
$
109.92
$
(2.58
)
From
discontinued operations - Diluted
$
—
$
19.76
$
(2.30
)
(1)
All
of the outstanding Special Warrants issued at emergence are included in both the basic and diluted weighted average common shares outstanding of the Successor Company for the three months ended September 30, 2019 and the period from May 2, 2019 through September 30, 2019.
(2)
Outstanding equity awards representing 8.1 million and 5.6 million shares of Class A common stock of the Successor Company
for the three months ended September 30, 2019 and the period from May 2, 2019 through September 30, 2019 were not included in the computation of diluted earnings per share because to do so would have been antidilutive. Outstanding equity awards representing 6.6 million, 5.9 million and 7.6 million shares of Class A common stock of the Predecessor Company for the period for the three months ended September 30, 2018, the period from January 1, 2019 through
May 1, 2019 and the nine months ended September 30, 2018 respectively, were not included in the computation of diluted earnings per share because to do so would have been antidilutive.
NOTE 12 — OTHER INFORMATION
Other Comprehensive Income (Loss)
There was no change in deferred income tax liabilities resulting from adjustments to comprehensive loss for the three months ended September 30, 2019 (Successor), the three
months ended September 30, 2018 (Predecessor), the period from May 2, 2019 through September 30, 2019 (Successor), the period from January 1, 2019 through May 2 (Predecessor) and the nine months ended September 30, 2018 (Predecessor).
NOTE 13 – SEGMENT DATA
The Company’s primary business is included
in its Audio segment. Revenue and expenses earned and charged between Audio, Corporate and the Company's Audio & Media Services businesses are eliminated in consolidation. The Audio segment provides media and entertainment services via broadcast and digital delivery and also includes the Company’s events and national syndication businesses. The Audio & Media Services business provides other audio and media services, including the Company’s media representation business (Katz Media) and its provider of scheduling and broadcast software (RCS). Corporate includes infrastructure and support, including executive, information technology, human resources, legal, finance and administrative functions for the
Company’s businesses. Share-based payments are recorded in corporate expense.
In connection with the Separation and the Reorganization, the Company revised its segment reporting, as discussed in Note 1 and all prior periods have been restated to conform with this presentation.
The following table presents the Company's segment results for the Predecessor Company for the periods indicated. The presentation of prior period amounts has been restated to conform to the presentation of the Successor period.
NOTE 14 – CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
iHeartCommunications Line of Credit
On the Effective Date, iHeartCommunications entered into a revolving loan agreement with CCOL and Clear Channel International, Ltd., both subsidiaries of CCOH, governing a revolving credit facility that provided for borrowings of up to $200
million. The iHeartCommunications line of credit was unsecured. On July 30, 2019, in connection with the consummation of an underwritten public offering of common stock of CCOH, the borrowers terminated the iHeartCommunications line of credit. As of the date of termination there were no amounts drawn under the facility.
Transition Services Agreement
On the Effective Date, the Company, iHM Management Services, iHeartCommunications and CCOH entered into the Transition Services Agreement. For information regarding the Transition Services Agreement, refer to Note 4, Discontinued Operations.
New
Tax Matters Agreement
On the Effective Date, the Company entered into the New Tax Matters Agreement by and among the Company, iHeartCommunications, iHeart Operations, CCH, CCOH and Clear Channel Outdoor, Inc., to allocate the responsibility of the Company and its subsidiaries, on the one hand, and the Outdoor Group, on the other, for the payment of taxes arising prior and subsequent to, and in connection with, the Separation. For information regarding the New Tax Matters Agreement, refer to Note 4, Discontinued
Operations.
57
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Format of Presentation
Management’s discussion and analysis of our financial condition and results of operations (“MD&A”) should be read in conjunction with the consolidated financial statements and related footnotes contained in Item 1 of this Quarterly Report on Form 10-Q. Our discussion is presented on both a consolidated and segment basis.
Our primary business
provides media and entertainment services via broadcast and digital delivery, including our networks businesses, through our Audio segment. We also operate businesses that provide audio and media services, including our full-service media representation business, Katz Media Group (“Katz Media”) and our provider of scheduling and broadcast software and services, Radio Computing Services ("RCS"). Following the Separation, we ceased to operate the outdoor business, which prior to the Separation was presented as our Americas outdoor segment and our International outdoor segment. The historical results of the outdoor business have been reclassified as results from discontinued operations.
On May 1, 2019, we consummated the Separation and Reorganization, resulting in a substantial reduction in our long-term indebtedness and corresponding cash interest expenses, and
significantly extending the maturities of our outstanding indebtedness, as more fully described under “Liquidity and Capital Resources” below. Over the past ten years, we have transitioned our Audio business from a single platform radio broadcast operator to a company with multiple platforms including podcasting, networks and live events. We have also invested in numerous technologies and businesses to increase the competitiveness of our inventory with our advertisers and our audience. We believe that our ability to generate free cash flow from these business initiatives coupled with the significant reduction in interest payments due to our reduced level of indebtedness and our continued efforts to refinance our exit indebtedness with indebtedness with lower interest rates and the elimination of the majority of our near-term debt maturities will enable us to generate sufficient cash flows to operate our businesses and de-lever our balance sheet over time.
Description
of our Business
Our Audio strategy centers on delivering entertaining and informative content where our listeners want to find us across multiple platforms, including broadcast, mobile and digital, as well as events. Our primary source of revenue is derived from selling broadcast local and national advertising time on our radio stations, with contracts typically less than one year in duration. The programming formats of our radio stations are designed to reach audiences with targeted demographic characteristics. We are working closely with our advertising and marketing partners to develop tools and leverage data to enable advertisers to effectively reach their desired audiences. We continue to expand the choices for listeners and we deliver our content and sell advertising across multiple distribution channels including digitally via
our iHeartRadio mobile application, our station websites and other digital platforms which reach national, regional and local audiences. We also generate revenues from our Networks, including Premiere and Total Traffic & Weather, as well as through sponsorships and our nationally recognized live events and other revenue streams. We also generate revenue by providing audio and media services to radio and TV broadcast industry participants through our Katz Media and RCS businesses.
Our advertising revenue is highly correlated to changes in gross domestic product (“GDP”) as advertising spending has historically trended in line with GDP. Our broadcast national and local revenue, as well as our Katz Media revenue, are generally impacted by political cycles.
Emergence
from Bankruptcy
On March 14, 2018, iHeartMedia, Inc. (the “Company,”"iHeartMedia,""we" or "us"), iHeartCommunications, Inc. (“iHeartCommunications”) and certain of the Company's direct and indirect domestic subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”), in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”). On April 28, 2018, the Debtors filed a plan
of reorganization and a related disclosure statement (as amended, the “Disclosure Statement”) with the Bankruptcy Court, which was subsequently amended by filing the second, third, fourth and fifth amended Plan of Reorganization and amended versions of the Disclosure Statement. On January 22, 2019, the Modified Fifth Amended Joint Chapter 11 Plan of Reorganization of iHeartMedia, Inc. and Its Debtor Affiliates (as further modified, the “Plan of Reorganization”) was confirmed by the Bankruptcy Court.
On May 1, 2019 (the “Effective Date”),
the conditions to the effectiveness of the Plan of Reorganization were satisfied and the Company emerged from Chapter 11 through (a) a series of transactions (the “Separation”) through which Clear Channel Outdoor Holdings, Inc. (“CCOH”), its parent Clear Channel Holdings, Inc. (“CCH”) and its subsidiaries (collectively with CCOH and CCH, the “Outdoor Group”) were separated from, and ceased to be controlled by, the Company and its subsidiaries (the “iHeart Group”), and (b) a series of transactions
(the “Reorganization”) through which iHeartCommunications’ debt was reduced from approximately $16 billion to approximately $5.8 billion and a global compromise and settlement among holders of claims
58
(“Claimholders”) in connection with the Chapter 11 Cases was effected. The compromise and settlement involved, among others, (i) the restructuring of iHeartCommunications’ indebtedness by (A) replacing its “debtor-in-possession” credit facility with a $450 million senior secured asset-based revolving credit facility (the “ABL Facility”) and (B) issuing to certain Claimholders, on account of their claims, approximately $3.5 billion aggregate principal amount of new senior secured term loans (the “Term Loan Facility”), approximately
$1.45 billion aggregate principal amount of new 8.375% Senior Notes due 2027 (the “Senior Unsecured Notes”) and approximately $800 million aggregate principal amount of new 6.375% Senior Secured Notes due 2026 (the “6.375% Senior Secured Notes”), (ii) the Company’s issuance of new Class A common stock, new Class B common stock and special warrants to purchase shares of new Class A common stock and Class B common stock (“Special Warrants”) to Claimholders, subject to ownership restrictions imposed by the Federal Communications’ Commission (“FCC”), (iii) the settlement of certain intercompany transactions, and (iv) the sale of the preferred stock (the “iHeart Operations Preferred Stock”) of the Company’s wholly-owned subsidiary iHeart Operations, Inc. (“iHeart
Operations”) in connection with the Separation.
Beginning on the Effective Date, the Company applied fresh start accounting, which resulted in a new basis of accounting and the Company becoming a new entity for financial reporting purposes. As a result of the application of fresh start accounting and the effects of the implementation of the Plan
of Reorganization, the consolidated financial statements after May 1, 2019 are not comparable with the consolidated financial statements on or prior to that date. Refer to Note 3, Fresh Start Accounting, to our Consolidated Financial Statements for further details.
Executive Summary
The key developments that impacted our business during the quarter are summarized below:
•
Revenue of $948.3 million increased $27.8 million or 3.0%
during quarter ended September 30, 2019 compared to the same period of 2018.
•
Operating income of $140.8 million was down from $186.8 million in the prior year’s quarter.
•
Net income of $12.4 million
was down from $71.8 million in the prior year's quarter.
•
Adjusted EBITDA(1) of $274.7 million, was up 0.3% year-over-year.
•
Cash flows provided by operating activities from continuing operations of $180.3 million increased
$24.8 million or 16.0%.
•
Free cash flow(2) of $151.5 million increased $16.1 million or 11.9%.
•
iHeartCommunications issued $750.0 million of new 5.25% Senior Secured Notes due 2027. Proceeds from the new notes, together
with cash on hand, were used to prepay at par $740.0 million of borrowings outstanding under the Term Loan Facility.
The table below presents a summary of our historical results of operations for the periods presented:
(In thousands)
Successor Company
Predecessor
Company
Three Months Ended September 30,
Three Months Ended September 30,
%
2019
2018
Change
Revenue
$
948,338
$
920,492
3.0
%
Operating
income
$
140,822
$
186,844
(24.6
)%
Net income
$
12,374
$
71,783
(82.8
)%
Cash
provided by operating activities from continuing operations
$
180,341
$
155,528
16.0
%
Adjusted
EBITDA(1)
$
274,656
$
273,804
0.3
%
Free cash flow from continuing operations(2)
$
151,471
$
135,386
11.9
%
(1)
For a definition of Adjusted EBITDA and a reconciliation to Operating income, the most closely comparable GAAP measure, and to Net Income (Loss), please see "Reconciliation of Operating Income to Adjusted EBITDA" and "Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA" in this MD&A.
59
(2) For a definition of Free cash flow from continuing operations and a reconciliation to Cash provided by operating activities from continuing operations, the most closely comparable GAAP measure, please see “Reconciliation of Cash provided by operating activities from continuing operations to Free cash flow from continuing operations” in this MD&A.
Results
of Operations
Our financial results for the periods from January 1, 2019 through May 1, 2019 and for the three and nine months ended September 30, 2018 are referred to as those of the “Predecessor” period. Our financial results for the three months ended September 30, 2019 and the period from May 2, 2019 through September 30, 2019 are referred to as those of the “Successor” period. Our results of operations as reported in our Consolidated
Financial Statements for these periods are prepared in accordance with GAAP. Although GAAP requires that we report our results for the period from January 1, 2019 through May 1, 2019 and the period from May 2, 2019 through September 30, 2019 separately, management views the Company’s operating results for the nine months ended September 30, 2019 by combining the results of the applicable Predecessor and Successor periods because such presentation provides the most meaningful comparison of our results
to prior periods.
The Company cannot adequately benchmark the operating results of the period from May 2, 2019 through September 30, 2019 against any of the previous periods reported in its Consolidated Financial Statements without combining it with the period from January 1, 2019 through May 1, 2019 and does not believe that reviewing the results of this period in isolation would be useful in identifying trends in or reaching conclusions regarding the Company’s overall operating performance. Management believes
that the key performance metrics such as revenue, operating income and Adjusted EBITDA for the Successor period when combined with the Predecessor, period provide more meaningful comparisons to other periods and are useful in identifying current business trends. Accordingly, in addition to presenting our results of operations as reported in our Consolidated Financial Statements in accordance with GAAP, the tables and discussion below also present the combined results for the nine months ended September 30, 2019.
The combined results for the nine months ended September 30, 2019, which we refer to herein as the results for the "nine months ended
September 30, 2019" represent the sum of the reported amounts for the Predecessor period from January 1, 2019 through May 1, 2019 and the Successor period from May 2, 2019 through September 30, 2019. These combined results are not considered to be prepared in accordance with GAAP and have not been prepared as pro forma results per applicable regulations. The combined operating results do not reflect the actual results we would have achieved absent our emergence from bankruptcy and may not be indicative of future results.
60
The
table below presents the comparison of our historical results of operations for the periods presented:
Consolidated
results for the three months ended September 30, 2019 compared to the consolidated results for the three months ended September 30, 2018 and combined results for the nine months ended September 30, 2019 compared to the consolidated results for the nine months ended September 30, 2018 were as follows:
Revenue
Revenue increased $27.8 million
during the three months ended September 30, 2019 compared to the same period of 2018. Revenue increased primarily as a result of higher digital revenue which increased $24.2 million driven by growth in podcasting, primarily as a result of our acquisition of Stuff Media in October 2018, as well as other digital revenue, including on-demand services. Revenue from our Network businesses increased $13.5 million, driven primarily by growth in our Total Traffic & Weather business. Broadcast spot revenue decreased $3.4 million, driven by a $5.8 million decrease in political revenue as a result of 2018 being a mid-term congressional election year, partially offset by increased programmatic buying by our national customers. Audio and Media Services revenue decreased $10.0 million as a result of a $10.0 million
decrease in political revenue. Excluding political, revenue increased $43.8 million.
Revenue increased $72.4 million during the nine months ended September 30, 2019 compared to the same period of 2018. The increase in revenue is primarily due to higher digital revenue of $63.3 million driven by growth in podcasting, primarily as a result of our acquisition of Stuff Media in October 2018, as well as other digital revenue, including live radio and other on-demand services and revenue from our Network businesses, which increased $29.0 million. Broadcast spot revenue decreased $14.1 million, due to a $16.7
million decrease in political revenue as a result of 2018 being a mid-term congressional election year. Audio and Media Services revenue decreased $10.8 million, primarily due to a $15.2 million decrease in political revenue. Excluding political, revenue increased $104.5 million.
Direct Operating Expenses
Direct operating expenses increased $22.4 million during the three months ended September 30, 2019 compared to the same period of 2018. Higher direct operating expenses were driven primarily by higher variable expenses, including compensation-related expenses, primarily resulting from the acquisitions
of Stuff Media and Jelli in the fourth quarter of 2018, digital royalties, content costs and production expenses from higher podcasting and digital subscription revenue. We also incurred a $2.1 million increase in lease expense, primarily as a result of the adoption of the new leasing standard in the first quarter of 2019 and the application of fresh start accounting.
Direct operating expenses increased $61.5 million during the nine months ended September 30, 2019 compared to the same period of 2018. Higher direct operating expenses were driven primarily by higher digital royalties, content costs and compensation-related
expenses, primarily resulting from the acquisitions of Stuff Media and Jelli in the fourth quarter of 2018, and from higher podcasting and digital subscription revenue, as well as higher net production costs related to our events, including the iHeartRadio Music Awards. We also incurred a $4.4 million increase in lease expense due to the impact of the adoption of the new leasing standard in the first quarter of 2019 and the adoption of fresh start accounting.
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses increased $11.9 million during the three months ended September 30, 2019 compared to the same period of 2018.
Higher fees related to increased digital revenue, along with higher employee costs, primarily resulting from the acquisitions of Stuff Media and Jelli in the fourth quarter of 2018, were partially offset by lower commissions as a result of our revenue mix.
63
SG&A expenses increased $1.1 million during the nine months ended September 30, 2019 compared to the same period of 2018. The increase in our SG&A expenses
was due primarily to higher digital fees, driven by the increase in digital revenue, along with higher employee costs, primarily resulting from the acquisitions of Stuff Media and Jelli in the fourth quarter of 2018. The increase in SG&A expenses was partially offset by lower trade and barter expenses, primarily resulting from timing, and lower commissions as a result of our revenue mix.
Corporate Expenses
Corporate expenses increased $13.3 million during the three months ended September 30, 2019 compared to the same period of 2018, as a result of higher share-based compensation expense, which increased $16.7 million as
a result of our new equity compensation plan entered into in connection with our Plan of Reorganization. This increase was partially offset by lower employee expenses, including variable incentive compensation expenses and lower employee benefit expenses.
Corporate expenses increased $8.4 million during the nine months ended September 30, 2019 compared to the same period of 2018, as a result of higher share-based compensation expense, which increased $19.0 million as a result of our new equity compensation plan entered into in connection
with our Plan of Reorganization. This increase was partially offset by lower variable incentive compensation expenses and higher amortization of retention bonuses related to the bankruptcy in the prior period.
Depreciation and Amortization
Depreciation and amortization increased $52.0 million and $31.9 million during the three and nine months ended September 30, 2019, compared to the same periods of 2018, respectively, primarily as a result of the
application of fresh start accounting, which resulted in significantly higher values of our tangible and intangible long-lived assets.
Impairment Charges
We perform our annual impairment test on our goodwill, FCC licenses and other intangible assets as of July 1 of each year. No impairment charges were recorded in the third quarter of 2019 in connection with our annual impairment test. We recognized non-cash impairment charges of $33.2 million in the third quarter of 2018 related to several of our radio markets. In addition, we test for impairment of intangible assets whenever events and circumstances indicate that such assets might be impaired. We recognized non-cash impairment charges of $91.4 million in the first quarter of 2019 on our indefinite-lived FCC licenses as a result of
an increase in the weighted average cost of capital. See Note 7 to the consolidated financial statements located in Item 1 of this Quarterly Report on Form 10-Q for a further description of the impairment charges.
Other Operating Expense, Net
Other operating expense, net of $9.9 million and $2.5 million for the three months ended September 30, 2019 and 2018, respectively, and Other operating expense, net of $6.8 million and $6.9
million for the nine months ended September 30, 2019 and 2018, respectively, relate to net gains and losses recognized on asset disposals.
Interest Expense
Interest expense increased $98.9 million during the three months ended September 30, 2019, compared to the same period of 2018 as a result of the interest recognized on the new debt issued in connection with our emergence from the Chapter 11
Cases. During the period from March 14, 2018 to May 1, 2019, while the Company was a debtor-in-possession, no interest expense was recognized on pre-petition debt. Interest expense decreased $163.7 million during the nine months ended September 30, 2019 compared to the same period of 2018 as a result of the interest recognized in the prior period to the Petition Date of March 14, 2018, offset by the interest recognized in the current period in connection with
the new debt issued upon emergence.
In the Predecessor periods, we ceased to accrue interest expense on long-term debt, which was reclassified as Liabilities subject to compromise as of the Petition Date, resulting in $533.4 million in contractual interest not being accrued on pre-petition indebtedness for the period from January 1, 2019 to May 1, 2019 and $812.4 million in contractual interest not being accrued in the nine months ended September 30, 2018.
Gain (Loss) on Investments, net
During the three months ended September 30,
2019, we recognized a gain on investments, net of $1.7 million and during the nine months ended September 30, 2019, we recognized a loss of $8.5 million, primarily in connection with other-than-temporary declines in the value of our investments. Gain on investments, net was $9.4 million for the nine months ended September 30, 2018.
64
Other
Expense, Net
Other expense, net was $12.5 million and $21.6 million for the three and nine months ended September 30, 2019, respectively, which related primarily to professional fees incurred in connection with the Chapter 11 Cases in the Successor period. Such expenses were included within Reorganization items, net in the Predecessor period while the Company was a debtor-in-possession.
Other expense,
net was $0.3 million and $22.8 million for the three and nine months ended September 30, 2018, respectively. Amounts in the nine months ended September 30, 2018 related primarily to professional fees incurred directly in connection with the Chapter 11 Cases before the March 14, 2018 Petition Date. Such expenses were included within Reorganization items, net in the post-petition period while the Company was a debtor-in-possession.
Reorganization
Items, Net
During the nine months ended September 30, 2019, we recognized Reorganization items, net of $9,461.8 million related to our emergence from the Chapter 11 Cases, which consisted primarily of the net gain from the consummation of the Plan of Reorganization and the related settlement of liabilities. In addition, Reorganization items, net included professional fees recognized between the March 14, 2018 Petition Date and the May 1, 2019 Effective Date in connection with the
Chapter 11 Cases. See Note 3 to our Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
During the three and nine months ended September 30, 2018, we recognized Reorganization items, net of $52.5 million and $313.3 million, respectively, related to the Chapter 11 Cases, consisting of the write-off of long-term debt fees and original issue discounts on debt subject to compromise, costs incurred in connection with our DIP facility and professional fees. See Note 3 to our Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
Income
Tax Benefit (Expense)
The effective tax rate for the Successor Company for the three months ended September 30, 2019 and the period from May 2, 2019 through September 30, 2019 was 57.5% and 39.0%, respectively. The effective tax rates for both periods were primarily impacted by tax expense from non-deductible expenses and the provision for state income taxes.
The effective tax rate for continuing operations of the Predecessor Company for period from January
1, 2019 through May 1, 2019 (Predecessor) and nine months ended September 30, 2019 was 0.4% and 0.7%, respectively. The income tax expense for the period from January 1, 2019 through May 1, 2019 (Predecessor) and the nine months ended September 30, 2019 primarily consists of the income tax impacts from reorganization and fresh start adjustments, including adjustments to our valuation allowance. The Company recorded income tax benefits of $102.9 million
for reorganization adjustments in the Predecessor period, primarily consisting of: (1) tax expense for the reduction in federal and state net operating loss (“NOL”) carryforwards from the cancellation of debt income ("CODI") realized upon emergence; (2) tax benefit for the reduction in deferred tax liabilities attributed primarily to long-term debt that was discharged upon emergence; (3) tax benefit for the effective settlement of liabilities for unrecognized tax benefits that were discharged upon emergence; and (4) tax benefit for the reduction in valuation allowance resulting from the adjustments described above. The Company recorded income tax expense of $185.4 million related to fresh start adjustments in the Predecessor period, consisting of $529.1 million in tax expense, related to the increase in deferred tax liabilities resulting from fresh start accounting adjustments,
offset by $343.7 million in tax benefit for the reduction in the valuation allowance on our deferred tax assets.
The effective tax rate for continuing operations for the three and nine months ended September 30, 2018 was 8.2% and 4.3%, respectively. The 2018 effective tax rates were primarily impacted by the valuation allowance recorded against deferred tax assets resulting from current period interest expense limitation carryforward in U.S. federal and certain state jurisdictions due to uncertainty regarding our ability to realize those assets in future periods.
As
a result of the Plan of Reorganization, the Company expects the majority of its federal NOL carryforwards and certain state NOL carryforwards to be reduced or eliminated as a result of the CODI realized from the bankruptcy emergence. Pursuant to the attribute reduction and ordering rules set forth in the Internal Revenue Code of 1986, as amended (the “Code”), the reduction in the Company’s tax attributes for excludible CODI does not occur until the last day of the Company’s tax year, December 31, 2019. Accordingly, the tax adjustments recorded in the Predecessor period
represent our best estimate using all available information at June 30, 2019. Additionally, the Company recognized a capital loss for tax purposes as a result of the series of transactions to effect the Plan of Reorganization. This capital loss may be carried forward to offset capital gains recognized by the Company in the next five years, subject to annual limitations under Section 382 of the Code. The deferred tax asset associated with the capital loss carryforward is offset by a valuation allowance due to significant uncertainty regarding the Company’s ability to utilize
the
65
carryforward prior to its expiration. The final tax impacts of the bankruptcy emergence, as well as the Plan of Reorganization’s overall effect on the Company’s tax attributes and tax basis in assets will be refined based on the Company’s final December 31, 2019 financial position as required under the Code. The final tax impacts on the Company's tax attributes
could change significantly from the current estimates.
Reconciliation of Operating Income to Adjusted EBITDA
(Income)
loss from discontinued operations, net of tax
—
(1,685,123
)
(1,685,123
)
206,968
Income
tax (benefit) expense
32,761
39,095
71,856
(9,828
)
Interest expense (income), net
170,678
(499
)
170,179
333,843
Depreciation
and amortization
154,651
52,834
207,485
175,546
EBITDA
$
409,257
$
9,571,420
$
9,980,677
$
278,982
Reorganization
items, net
—
(9,461,826
)
(9,461,826
)
313,270
(Gain) loss on investments, net
(1,735
)
10,237
8,502
(9,361
)
Other
income (expense), net
21,614
(23
)
21,591
22,755
Equity in loss of nonconsolidated
affiliates
25
66
91
93
Impairment charges
—
91,382
91,382
33,150
Other
operating expense, net
6,634
154
6,788
6,912
Share-based compensation expense
20,151
498
20,649
1,628
Restructuring
and reorganization expenses
13,463
13,241
26,704
21,132
Adjusted EBITDA(1)
$
469,409
$
225,149
$
694,558
$
668,561
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(1)
We
define Adjusted EBITDA as consolidated Operating income adjusted to exclude restructuring and reorganization expenses included within Direct operating expenses, Selling, General and Administrative expenses, (“SG&A”) and Corporate expenses and share-based compensation expenses included within Corporate expenses, as well as the following line items presented in our Statements of Operations: Depreciation and amortization, Impairment charges and Other operating income (expense), net. Alternatively, Adjusted EBITDA is calculated as Net income (loss), adjusted to exclude (Income) loss from discontinued operations, net of tax, Income tax (benefit) expense, Interest expense, Depreciation and amortization, Reorganization items, net, Other (income) expense, net, Gain (loss) on investments, net, Impairment charges, Other operating (income) expense, net, Share-based compensation, and restructuring and reorganization expenses. Restructuring expenses
primarily include severance expenses incurred in connection with cost saving initiatives, as well as certain expenses, which, in the view of management, are outside the ordinary course of business or otherwise not representative of the Company's operations during a normal business cycle. Reorganization expenses primarily include the amortization of retention bonus amounts paid or payable to certain members of management directly as a result of the Reorganization. We use Adjusted EBITDA, among other measures, to evaluate the Company’s operating performance. This measure is among the primary measures used by management for the planning and forecasting of future periods, as well as for measuring performance for compensation of executives and other members of management. We believe
this measure is an important indicator of our operational strength and performance of our business because it provides a link between operational performance and operating income. It is also a primary measure used by management in evaluating companies as potential acquisition targets. We believe the presentation of this measure is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by management. We believe it helps improve investors’ ability to understand our operating performance and makes it easier to compare our results with other companies that have different capital structures or tax rates. In addition, we believe this measure is also among the primary measures used externally by our investors, analysts and peers in our industry for purposes of valuation and comparing our operating performance to other companies in our industry. Since Adjusted EBITDA is not a measure calculated in accordance with
GAAP, it should not be considered in isolation of, or as a substitute for, operating income or net income (loss) as an indicator of operating performance and may not be comparable to similarly titled measures employed by other companies. Adjusted EBITDA is not necessarily a measure of our ability to fund our cash needs. Because it excludes certain financial information compared with operating income and compared with consolidated net income (loss), the most directly comparable GAAP financial measures, users of this financial information should consider the types of events and transactions which are excluded.
Reconciliation of Cash provided by operating activities from continuing operations to Free cash flow from continuing operations
Cash
provided by (used for) operating activities from continuing operations
$
263,542
$
(7,505
)
$
256,037
$
515,713
Purchases
of property, plant and equipment by continuing operations
(46,305
)
(36,197
)
(82,502
)
(47,448
)
Free
cash flow from (used for) continuing operations(1)
$
217,237
$
(43,702
)
$
173,535
$
468,265
(1)
We
define Free cash flow from (used for) continuing operations ("Free Cash Flow") as Cash provided by (used for) operating activities from continuing operations less capital expenditures, which is disclosed as Purchases of property, plant and equipment by continuing
68
operations in the Company's Consolidated Statements of Cash Flows. We use Free Cash Flow, among other measures, to evaluate the Company’s liquidity and its ability to generate cash flow. We believe that Free Cash Flow is meaningful to investors because
we review cash flows generated from operations after taking into consideration capital expenditures due to the fact that these expenditures are considered to be a necessary component of ongoing operations. In addition, we believe that Free Cash Flow helps improve investors' ability to compare our liquidity with other companies. Since Free Cash Flow is not a measure calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, Cash provided by operating activities and may not be comparable to similarly titled measures employed by other companies. Free Cash Flow is not necessarily a measure of our ability to fund our cash needs.
Share-Based Compensation Expense
Historically, we had granted restricted shares of the Company's Class A common stock to certain
key individuals. In connection with the effectiveness of our Plan of Reorganization, all unvested restricted shares were canceled.
Pursuant to the new equity incentive plan (the "Post-Emergence Equity Plan") we adopted in connection with the effectiveness of our Plan of Reorganization, we have granted restricted stock units and options to purchase shares of the Company's Class A common stock to certain key individuals.
Share-based compensation expenses are recorded in corporate expenses and were $17.1 million and $0.5 million
for the three months ended September 30, 2019 and 2018, respectively, and $20.6 million and $1.6 million for the nine months ended September 30, 2019 and 2018, respectively.
As of September 30, 2019, there was $63.1 million of unrecognized compensation cost related to unvested
share-based compensation arrangements with vesting based on service conditions. This cost is expected to be recognized over a weighted average period of approximately 3.6 years.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following discussion highlights cash flow activities during the periods presented:
(1)
For a definition of Free cash flow from continuing operations and a reconciliation to Cash provided by operating activities from continuing operations, the most closely comparable GAAP measure, please see “Reconciliation of Cash provided by operating activities from continuing operations to Free cash flow from continuing operations” in this MD&A.
Operating Activities
Cash provided by operating activities for the nine months ended September 30, 2019 was $223.4 million compared to $663.3 million of cash provided by operating
activities in the nine months ended September 30, 2018. The primary driver for the change in cash provided by operating activities was a $180.3 million decrease in operating cash flows provided by discontinued operations, which decreased from a cash inflow of $147.6 million in the nine months ended September 30, 2018 to a cash outflow of $32.7 million in the nine months ended September 30, 2019.
Cash
provided by operating activities from continuing operations decreased from $515.7 million in the nine months ended September 30, 2018 to $256.0 million in the nine months ended September 30, 2019 primarily as a result of cash payments for Reorganization items, including payments for pre-petition liabilities and for bankruptcy professional fees, upon our emergence from bankruptcy on May 1, 2019. Such payments for Reorganization items were $149.3 million higher in the nine
months ended
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September 30, 2019 compared to the nine months ended September 30, 2018. In addition, cash interest payments made by continuing operations increased $61.7 million as a result of interest payments on our debt issued upon our emergence compared to pre-petition interest payments made in the prior year. The Company ceased paying interest on long-term debt classified as Liabilities subject to compromise
after the March 14, 2018 petition date.
Investing Activities
Cash used for investing activities of $305.0 million during the nine months ended September 30, 2019 primarily reflects $222.4 million in cash used for investing activities from discontinued operations. In addition, we used $82.5 million for capital expenditures. We spent $68.4 million for capital expenditures in our Audio segment primarily related to IT infrastructure,
$4.1 million in our Audio & Media Services segment, primarily related to acquired software and $10.0 million in Corporate primarily related to equipment and software purchases.
Cash used for investing activities of $134.9 million during the nine months ended September 30, 2018 primarily reflects $105.3 million in cash used for investing activities from discontinued operations. In addition, we used $47.4 million for capital expenditures. We spent $40.8 million
for capital expenditures in our Audio segment primarily related to IT infrastructure, $2.5 million in our Audio & Media Services segment, primarily related to acquired software and $4.1 million in Corporate primarily related to equipment and software purchases.
Financing Activities
Cash used for financing activities of $60.7 million during the nine months ended September 30, 2019 primarily resulted from the net payment by iHeartCommunications to CCOH as CCOH's recovery of its claims under the Due from iHeartCommunications Note and settlement of the post-petition intercompany note balance, partially offset
by $60.0 million in proceeds received from the issuance of the iHeart Operations Preferred Stock.
Cash used for financing activities of $493.1 million during the nine months ended September 30, 2018 primarily resulted from payments on long-term debt and on our receivables based credit facility. In connection with the replacement of the iHeartCommunications' receivables based credit facility with a new DIP Facility on June 14, 2018, we repaid the outstanding $306.4 million and $74.3 million balances of the receivables based credit facility's term loan and revolving credit commitments, respectively. An additional $125.0 million principal amount was repaid under the DIP Facility during the
three months ended September 30, 2018.
Anticipated Cash Requirements
The Separation and Reorganization resulted in a new capital structure with significantly lower levels of long-term debt and a corresponding decrease in debt service requirements after emergence compared to historical debt levels. As a result of the Separation and Reorganization, our consolidated long-term debt decreased from approximately $16 billion to $5.8 billion. In the Successor period from May 2, 2019 to September 30, 2019, we paid $79.3 million of cash interest.
In connection with the Separation and Reorganization, we paid
CCOH $115.8 million in settlement of intercompany payable balances, including settlement of the Due from iHeartCommunications Note and post-petition intercompany balances, $15.8 million to cure contracts, $17.5 million for a general unsecured claims reserve, and $201.6 million for professional fees (of which $126.3 million was paid on the Effective Date).
Our primary sources of liquidity are cash on hand, which consisted of $277.1 million as of September 30, 2019, cash flow from operations and borrowing capacity under our ABL Facility. As of September 30,
2019, we had a facility size of $450.0 million under iHeartCommunications' ABL Facility, had no borrowings outstanding and $49.2 million of outstanding letters of credit, resulting in $400.8 million of excess availability.
We expect that our primary anticipated uses of liquidity will be to fund our working capital, make interest payments and voluntary prepayments of principal on our long-term debt and to fund capital expenditures and other obligations. These other obligations include dividend payments to be due to the investor of preferred stock of iHeart Operations, the terms of which are further described in Note 8 to our financial statements included herein. We anticipate that we will have approximately $105 million
of cash interest payments in the fourth quarter of 2019 and approximately $400 million of cash interest payments in 2020. Over the past ten years, we have transitioned our Audio business from a single platform radio broadcast operator to a company with multiple platforms, including podcasting, networks and live events. We have also invested in numerous technologies and businesses to increase the competitiveness of our inventory with our advertisers and our audience. We believe that our ability to generate cash flow from operations from these business initiatives and borrowing capacity under our ABL Facility, taken together, will provide sufficient resources to fund and operate our business, fund capital expenditures and other obligations and make interest payments on our long-term debt for at least the next 12 months and thereafter for the foreseeable future.
70
On
August 7, 2019, iHeartCommunications completed the sale of $750.0 million in aggregate principal amount of 5.25% Senior Secured Notes due 2027 (the "5.25% Senior Secured Notes") in a private placement. We used the net proceeds from the 5.25% Senior Secured Notes, together with cash on hand, to prepay at par $740.0 million of borrowings outstanding under our Term Loan Facility. Our Term Loan Facility called for quarterly principal payments of approximately $8.75 million in addition to interest payments at LIBOR + 4.00%. As a result of our $740.0 million prepayment, no such principal payments are required for the remaining term of the Term Loan Facility - resulting in an approximately $35 million annual reduction in required debt service payments. In addition, annual cash interest payments are expected to be approximately $4 million lower than would have been required
before the refinancing transaction.
On
August 7, 2019, iHeartCommunications issued the 5.25% Senior Secured Notes, the proceeds of which were used, together with cash on hand, to prepay at par $740.0 million of borrowings outstanding under the Term Loan Facility, plus approximately $0.8 million of accrued and unpaid interest to, but not including, the date of prepayment.
(2)
The Debtors-in-Possession Facility (the "DIP" Facility), which terminated with our emergence from the Chapter 11 Cases, provided for borrowings of up to $450.0 million. On the Effective Date, the DIP Facility was repaid and canceled and iHeartCommunications entered into the ABL Facility. As of September 30,
2019, we had a facility size of $450.0 million under the ABL Facility, had no outstanding borrowings and had $49.2 million of outstanding letters of credit, resulting in $400.8 million of excess availability.
(3)
In connection with our Chapter 11 Cases, the $6.3 billion outstanding under the Senior Secured Credit Facilities, the $1,999.8 million outstanding under the 9.0% Priority Guarantee Notes due 2019, the $1,750.0 million
outstanding under the 9.0% Priority Guarantee Notes due 2021, the $870.5 million of 11.25% Priority Guarantee Notes due 2021, the $1,000.0 million outstanding under the 9.0% Priority Guarantee Notes due 2022, the $950.0 million outstanding under the 10.625% Priority Guarantee Notes due 2023, $6.0 million outstanding Other Secured Subsidiary Debt, the $1,781.6 million outstanding under the 14.0% Senior Notes due 2021, the $475.0 million outstanding under the Legacy Notes and $10.8 million outstanding Other Subsidiary Debt were reclassified to Liabilities subject to compromise in our Consolidated Balance Sheet as of December 31,
2018. As of the Petition Date, we ceased accruing interest expense in relation to long-term debt reclassified as Liabilities subject to compromise.
For additional information regarding our debt, including the terms of the governing documents, refer to Note 8, Long-Term Debt.
71
Supplemental Financial Information under Debt Agreements and Certificate of Designation Governing the iHeart Operations Preferred Stock
Pursuant to iHeartCommunications' material debt agreements, Capital I, the parent guarantor and a subsidiary of iHeartMedia, is permitted to satisfy its reporting obligations
under such agreements by furnishing iHeartMedia’s consolidated financial information and an explanation of the material differences between iHeartMedia’s consolidated financial information, on the one hand, and the financial information of Capital I and its consolidated restricted subsidiaries, on the other hand. Because neither iHeartMedia nor iHeartMedia Capital II, LLC, a wholly-owned direct subsidiary of iHeartMedia and the parent of Capital I, have any operations or material assets or liabilities, there are no material differences between iHeartMedia’s consolidated financial information for the three and nine months ended September 30, 2019, and Capital I’s and its consolidated restricted subsidiaries’
financial information for the same periods.
According to the certificate of designation governing the iHeart Operations Preferred Stock, iHeart Operations is required to provide certain supplemental financial information of iHeart Operations in comparison to the Company and its consolidated subsidiaries. iHeart Operations and its subsidiaries comprised 88.5% of the Company's consolidated assets as of September 30, 2019. For the three
months ended September 30, 2019 and the period from May 2, 2019 through September 30, 2019, iHeart Operations and its subsidiaries comprised 84.3% and 84.8% of the Company's consolidated revenues, respectively.
Uses of Capital
Debt Repayments, Maturities and Other
On August 7, 2019,
iHeartCommunications completed the sale of $750.0 million in aggregate principal amount of 5.25% Senior Secured Notes due 2027 in a private placement to qualified institutional buyers under Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to persons outside the United States pursuant to Regulation S under the Securities Act. iHeartCommunications used the net proceeds from the 5.25% Senior Secured Notes, together with cash on hand, to prepay at par $740.0 million of borrowings outstanding under the Term Loan Facility due 2026.
Certain Relationships with Related Parties
Prior to the Effective Date, we were party to a management agreement with certain affiliates of our former sponsors and certain other parties pursuant to which such affiliates of the former sponsors provided management and financial advisory services until December
31, 2018. These arrangements required management fees to be paid to such affiliates of the former sponsors for such services at a rate not greater than $15.0 million per year, plus reimbursable expenses. The Company did not recognize management fees following the Petition Date. The Company recognized management fees and reimbursable expenses of $2.9 million for the nine months ended September 30, 2018. As of the Effective Date, these management fees were waived.
Commitments, Contingencies and Guarantees
We are currently involved in certain legal proceedings arising
in the ordinary course of business and, as required, have accrued our estimate of the probable costs for resolution of those claims for which the occurrence of loss is probable and the amount can be reasonably estimated. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings. Please refer to “Legal Proceedings” in Part II, Item 1 of this Quarterly Report on Form 10-Q.
SEASONALITY
Typically, the Audio segment experiences its lowest financial performance in the first
quarter of the calendar year. We expect this trend to continue in the future. Due to this seasonality and certain other factors, the results for the interim periods may not be indicative of results for the full year. In addition, our Audio segment and our Audio and media representation business are impacted by political cycles and generally experience higher revenues in congressional election years, and particularly in presidential election years. This cyclicality may affect comparability of results between years.
MARKET RISK
We are exposed to market risks arising from changes in market rates and prices, including movements in interest rates and inflation.
Interest Rate Risk
72
A
significant amount of our long-term debt bears interest at variable rates. Accordingly, our earnings will be affected by changes in interest rates. As of September 30, 2019, approximately 48% of our aggregate principal amount of long-term debt bore interest at floating rates. Assuming the current level of borrowings and assuming a 50% change in LIBOR, it is estimated that our interest expense for the period from May 2, 2019 through September 30, 2019 would have changed by $14.5 million.
In the event of an adverse change in interest rates, management may take actions to mitigate our exposure. However, due to the uncertainty of the actions that
would be taken and their possible effects, the preceding interest rate sensitivity 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.
Inflation
Inflation is a factor in the economies in which we do business and we continue to seek ways to mitigate its effect. Inflation has affected our performance in terms of higher costs for wages, salaries and equipment. Although the exact impact of inflation is indeterminable, we believe we have offset these higher costs by increasing the effective advertising rates of most of our broadcasting stations in our Audio operations.
CRITICAL ACCOUNTING
ESTIMATES
The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. On an ongoing basis, we evaluate our estimates that are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such difference could be material. Our significant
accounting policies are discussed in the notes to our consolidated financial statements included in Note 1 of this Quarterly Report on Form 10-Q. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. The following narrative describes these critical accounting estimates, the judgments and assumptions and the effect if actual results differ from these assumptions.
Fresh Start Accounting
In connection with our emergence from bankruptcy and in accordance with ASC 852, we qualified for and adopted fresh start accounting on the Effective Date. We were required
to adopt fresh start accounting because (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan of Reorganization was less than the post-petition liabilities and allowed claims.
In accordance with ASC 852, with the application of fresh start accounting, we allocated our reorganization value to our individual assets based on our estimated fair values in conformity with ASC 805, "Business Combinations." The reorganization value represents the fair value of the Successor Company's assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets
is reported as goodwill.
Reorganization Value
As set forth in the Plan of Reorganization and the Disclosure Statement, the enterprise value of the Successor Company was estimated to be between $8.0 billion and $9.5 billion. Based on the estimates and assumptions discussed below, we estimated the enterprise value to be $8.75 billion, which is the mid-point of the range of enterprise value.
Management and its valuation advisors estimated the enterprise value of the Successor Company, which was approved by the Bankruptcy Court. The selected publicly traded companies
analysis approach, the discounted cash flow analysis (“DCF”) approach and the selected transactions analysis approach were all utilized in estimating enterprise value. The use of each approach provides corroboration for the other approaches. To estimate enterprise value utilizing the selected publicly traded companies analysis method, valuation multiples derived from the operating data of publicly-traded benchmark companies to the same operating data of the Company were applied. The selected publicly traded companies analysis identified a group of comparable companies giving consideration to lines of business and markets served, size and geography. The valuation multiples were derived based on
73
historical
and projected financial measures of revenue and earnings before interest, taxes, depreciation and amortization and applied to projected operating data of the Company.
To estimate enterprise value utilizing the discounted cash flow method, an estimate of future cash flows for the period 2019 to 2022 with a terminal value was determined and discounted the estimated future cash flows to present value. The expected cash flows for the period 2019 to 2022 with a terminal value were based upon certain financial projections and assumptions provided to the Bankruptcy Court. The expected cash flows for the period 2019 to 2022 were derived from earnings forecasts and assumptions regarding growth and margin projections, as applicable. A terminal value was included, calculated using the terminal multiple method, which estimates a range of values at which
the Successor Company will be valued at the end of the Projection Period based on applying a terminal multiple to final year OIBDAN, which is defined as consolidated operating income adjusted to exclude non-cash compensation expenses included within corporate expenses, as well as Depreciation and amortization, Impairment charges and Other operating income (expense), net.
To estimate enterprise value utilizing the selected transactions analysis, valuation multiples were derived from an analysis of consideration paid and net debt assumed from publicly disclosed merger or acquisition transactions, and such multiples were applied to the broadcast cash flows of the Successor Company. The selected transactions analysis identified companies and assets involved in publicly disclosed merger and acquisition transactions for which the targets had operating and financial characteristics comparable in certain respects to the Successor
Company.
For information regarding fresh start accounting, refer to Note 3, Fresh Start Accounting to our Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
Annual Goodwill and Indefinite-lived Intangible Asset Impairment Test
We perform our annual impairment test on goodwill and indefinite-lived intangible assets as of July 1 of each year. We also test goodwill or indefinite-lived intangible assets at interim dates if events or changes in circumstances indicate that goodwill or indefinite-lived intangible assets might be impaired.
Generally, our annual impairment test includes a full quantitative assessment, which involves the preparation of a fair value
estimate for each of our reporting units based on our most recent projected financial results, market and industry factors, including comparison to peer companies and the application of our current estimated weighted average cost of capital ("WACC"). However, in connection with our emergence from bankruptcy, we qualified for and adopted fresh start accounting on the Effective Date. As of May 1, 2019, we allocated our estimated enterprise fair value to our individual assets and liabilities based on their estimated fair values in conformity with ASC 805, "Business Combinations." As a result of the recent fair value exercise applied in connection with fresh start accounting, we opted to use a qualitative assessment for our annual goodwill and indefinite-lived intangible asset impairment test as of July 1, 2019 in lieu of performing the full quantitative assessment,
as permitted by ASC 350, "Intangibles - Goodwill and Other".
Indefinite-lived Intangible Assets
In connection with our Plan of Reorganization, we applied fresh start accounting as required by ASC 852 and recorded all of our assets and liabilities at estimated fair values, including our FCC licenses, which are included within our Audio reporting unit. As of July 1, 2019, the qualitative impairment assessment performed for indefinite-lived intangible assets considered the general macroeconomic environment, industry and market specific conditions, financial performance, including changes in costs and actual versus forecasted results, as well other issues or events specific to the Audio reporting
unit.
Based on this assessment and the totality of facts and circumstances, including the business environment in the third quarter of 2019, the Company determined that it was not more likely than not that the fair value of the Company and its reporting units is less than their respective carrying amounts. As such, the Company concluded no impairment of indefinite-lived intangible assets was required as of July 1, 2019.
Goodwill
Upon
application of fresh start accounting in accordance with ASC 852 in connection with our emergence from bankruptcy, we recorded goodwill of $3.3 billion, which represented the excess of estimated enterprise fair value over the estimated fair value of our assets and liabilities. Goodwill was further allocated to our reporting units based on the relative fair values of our reporting units as of May 1, 2019. See Note 3 to the consolidated financial statements located in Item 1 of this Quarterly Report on Form 10-Q for further information.
As of July 1, 2019, the qualitative impairment assessment performed for goodwill considered the general macroeconomic environment, industry and market specific conditions for each reporting unit, financial performance, including changes in costs
74
and actual versus forecasted results, as well other issues or events specific to each reporting unit. In addition, we evaluated the impact of changes in our stock price and the trading values of our publicly-traded debt from May 1, 2019 to July 1, 2019 to determine whether or not any changes would indicate a potential impairment of goodwill allocated to our reporting units.
Based on this assessment and the totality of facts and circumstances, including the business environment in the third quarter of 2019, the
Company determined that it was not more likely than not that the fair value of the Company and its reporting units is less than their respective carrying amounts. As such, the Company concluded no impairment of goodwill was required as of July 1, 2019.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. This report contains various forward-looking statements which represent our expectations
or beliefs concerning future events, including, without limitation, our future operating and financial performance, our ability to comply with the covenants in the agreements governing our indebtedness and the availability of capital and the terms thereof. Statements expressing expectations and projections with respect to future matters are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We caution that these forward-looking statements involve a number of risks and uncertainties and are subject to many variables which could impact our future 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 performance. There can be no assurance, however, that management’s expectations will necessarily come to pass. Actual future events and performance may differ materially from the expectations reflected in our forward-looking
statements. We do not intend, nor do we undertake any duty, to update any forward-looking statements.
A wide range of factors could materially affect future developments and performance, including but not limited to:
•
risks associated with weak or uncertain global economic conditions and their impact on the level of expenditures on advertising;
•
intense competition including increased competition from alternative media platforms and technologies;
•
dependence
upon the performance of on-air talent, program hosts and management as well as maintaining or enhancing our master brand;
•
fluctuations in operating costs;
•
technological changes and innovations;
•
shifts in population and other demographics;
•
the
impact of future dispositions, acquisitions and other strategic transactions;
•
legislative or regulatory requirements;
•
regulations and consumer concerns regarding privacy and data protection, and breaches of information security measures;
•
risks associated with our emergence from the Chapter
11 Cases;
•
volatility in the trading price of our Class A common stock, which has a limited trading history;
•
substantial market overhang from securities issued in the Reorganization;
•
regulations impacting our business and the ownership of our securities; and
•
certain
other factors set forth in our other filings with the SEC.
This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative and is not intended to be exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Required information is presented under “Market Risk” within Item 2 of this Part I.
ITEM
4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in reports that are filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported
within the time periods specified by the SEC. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2019 at the reasonable assurance level.
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART
II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We currently are involved in certain legal proceedings arising in the ordinary course of business and, as required, have accrued an estimate of the probable costs for the resolution of those claims for which the occurrence of loss is probable and the amount can be reasonably estimated. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings. Additionally, due to the inherent uncertainty
of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on our financial condition or results of operations.
Although we are involved in a variety of legal proceedings in the ordinary course of business, a large portion of our litigation arises in the following contexts: commercial disputes; defamation matters; employment and benefits related claims; governmental fines; intellectual property claims; and tax disputes.
For information regarding legal proceedings, refer to Note 9, Commitments and Contingencies to our Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
There
have been no material changes to the risk factors disclosed under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, as updated and supplemented by the risk factors disclosed under Part II, Item 1A “Risk Factors” in our Quarterly Report on Form 10-Q for the period ended June 30, 2019.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth our purchases of shares of our Class A common stock made during the quarter ended September 30, 2019:
Period
Total
Number of Shares Purchased(1)
Average Price Paid per Share(1)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 through July 31
121,651
$
16.25
—
$
—
August
1 through August 31
1,180
16.46
—
—
September 1 through September 30
2,379
16.25
—
—
Total
125,210
$
16.25
—
$
—
(1)
The
shares indicated consist of shares of our Class A common stock tendered by employees to us during the three months ended September 30, 2019 to satisfy the employees’ tax withholding obligation in connection with the vesting and release of restricted shares, which are repurchased by us based on their fair market value on the date the relevant transaction occurs.
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.
