EXHIBIT 99.1
Clear Channel Communications, Inc.
200 East Basse Road
San Antonio, Texas 78209
,
2005
Dear Clear Channel Communications, Inc. Stockholder:
We are pleased to inform you that
on ,
2005, the Board of Directors of Clear Channel Communications,
Inc. approved the spin-off of CCE Spinco, Inc., a wholly-owned
subsidiary of Clear Channel Communications, which we believe is
one of the worlds largest diversified promoters and
producers of, and venue operators for, live entertainment events.
The spin-off of CCE Spinco will occur
on ,
2005 by way of a pro rata dividend to Clear Channel
Communications stockholders. Each Clear Channel
Communications stockholder will be entitled to receive a
dividend of one share of CCE Spinco common stock (and a related
stock purchase right) for every eight shares of Clear
Channel Communications common stock held at the close of
business on the record date of the
spin-off, ,
2005. The dividend will be paid in book-entry form, and physical
stock certificates will be issued only upon request. No
fractional shares of CCE Spinco common stock will be issued. If
you would be entitled to a fractional share of CCE Spinco common
stock in the distribution, you will receive its net cash value
instead.
Stockholder approval of the spin-off is not required, and you
are not required to take any action to receive your CCE Spinco
common stock.
Following the spin-off, you will own shares in both Clear
Channel Communications and CCE Spinco. Clear Channel
Communications common stock will continue to trade on the New
York Stock Exchange under the symbol CCU. CCE
Spincos common stock has been approved for listing on the
New York Stock Exchange under the symbol LYV.
The enclosed information statement, which is being mailed to all
Clear Channel Communications stockholders, describes the
spin-off in detail and contains important information about CCE
Spinco, including its financial statements.
We look forward to your continued support as a stockholder in
both Clear Channel Communications and CCE Spinco.
Sincerely,
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L. Lowry Mays
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Mark P. Mays |
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Randall T. Mays |
Chairman
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President and |
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Executive Vice President and |
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Chief Executive Officer |
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Chief Financial Officer |
CCE Spinco,
Inc.
9348 Civic Center Drive
Beverly Hills, California 90210
Dear CCE Spinco, Inc. Stockholder:
It is my pleasure to welcome you as a stockholder of our new
company, CCE Spinco, Inc. We believe we are one of the
worlds largest diversified promoters and producers of, and
venue operators for, live entertainment events. For the year
ended December 31, 2004, we promoted or produced over
28,500 events, including music concerts, theatrical shows,
specialized motor sports and other events, with total attendance
exceeding 61 million. In addition, we believe we operate
one of the largest networks of venues used principally for music
concerts and theatrical performances in the United States and
Europe. As of September 30, 2005, we owned or operated 117
venues, consisting of 75 domestic and 42 international venues.
As a separate publicly-traded company, CCE Spinco will continue
to provide high-quality, customer-oriented live entertainment
services to our clients. We plan to continue to focus our
energies on producing and promoting compelling live
entertainment events.
Our common stock has been approved for listing on the New York
Stock Exchange under the symbol LYV in connection
with the spin-off.
I invite you to learn more about CCE Spinco by reviewing the
enclosed information statement. We look forward to our future as
a separate publicly-traded company and to your support as a
holder of CCE Spinco common stock.
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Sincerely, |
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Randall T. Mays |
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Chairman of the Board of Directors |
Subject to Completion, dated November 29, 2005
INFORMATION STATEMENT
[LOGO]
CCE Spinco, Inc.
Common Stock
(Par Value $0.01 per share)
This information statement is being furnished in connection with
the distribution of all the outstanding shares of CCE Spinco,
Inc. common stock by Clear Channel Communications, Inc. to
holders of its common stock.
Shares of our common stock will be distributed to holders of
Clear Channel Communications common stock of record as of the
close of business
on ,
2005, which will be the record date. These stockholders will be
entitled to receive one share of our common stock (and a related
stock purchase right) for every eight shares of Clear
Channel Communications common stock held on the record date. The
distribution will be effective at 11:59 p.m., New York City
time,
on ,
2005. No fractional shares of our common stock will be issued.
Any stockholder that would be entitled to fractional shares will
receive net cash in lieu of such shares. The distribution is
intended to be tax-free to Clear Channel Communications and its
stockholders for U.S. federal income tax purposes, except
for any cash received in lieu of fractional shares.
No stockholder approval of the distribution is required or
sought. We are not asking you for a proxy and you are requested
not to send us a proxy. Clear Channel Communications
stockholders will not be required to pay for the shares of our
common stock to be received by them in the distribution, or to
surrender or to exchange shares of Clear Channel Communications
common stock in order to receive our common stock or to take any
other action in connection with the distribution. There is no
current trading market for our common stock. However, we expect
that a limited market, commonly known as a
when-issued trading market, for our common stock
will develop on or shortly before the record date for the
spin-off, and we expect regular way trading of our
common stock will begin the first trading day after the
spin-off. Our common stock has been approved for listing on the
New York Stock Exchange under the symbol LYV.
In reviewing this information statement, you should carefully
consider the matters described under the caption Risk
Factors beginning on page 20.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these
securities or determined if this information statement is
truthful or complete. Any representation to the contrary is a
criminal offense.
This information statement is not an offer to sell, or a
solicitation of an offer to buy, any securities.
The date of this information statement
is ,
2005.
Clear Channel Communications first mailed this document to its
stockholders
on ,
2005.
* See inside back cover for a map of our international venues.
TABLE OF CONTENTS
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F-1 |
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INDUSTRY DATA
This information statement includes industry data, forecasts and
information that we have prepared based, in part, upon industry
data, forecasts and information obtained from independent
industry publications and surveys and other information
available to us. Some data are also based on our good faith
estimates, which are derived from managements knowledge of
the industry and independent sources. The primary sources for
third-party industry data and forecasts were Nielsen Media
Research, Inc., Pollstar, Inc., The League of American Theatres
and Producers, Inc. and other industry reports and articles.
These third-party publications and surveys generally state that
they believe the information contained therein was obtained from
sources they believe to be reliable, but that they can give no
assurance as to the accuracy or completeness of included
information. We have not independently verified any of the data
from third-party sources nor have we ascertained the underlying
economic assumptions relied upon therein. Similarly, we believe
our internal research is reliable, but it has not been verified
by any independent sources.
SUMMARY
This summary highlights information contained elsewhere in
this information statement and provides an overview of our
company and the material aspects of our spin-off from Clear
Channel Communications, Inc. You should read this entire
information statement carefully, especially the risk factors
discussed beginning on page 20 and our combined historical
and pro forma financial statements and notes to those statements
appearing elsewhere in this information statement. References in
this information statement to (i) Clear Channel
Entertainment, CCE Spinco, we,
our and us refer to CCE Spinco, Inc. and
its consolidated subsidiaries and (ii) Clear Channel
Communications refers to Clear Channel Communications,
Inc. and its consolidated subsidiaries (other than us), unless
the context otherwise requires.
We describe in this information statement the businesses to
be transferred to us by Clear Channel Communications in
connection with the distribution as if the transferred
businesses were our business for all historical periods
described herein. However, we are a newly formed entity that has
not conducted any operations prior to the distribution.
References in this information statement to our historical
assets, liabilities, products, businesses or activities of our
business are generally intended to refer to the historical
assets, liabilities, services, businesses or activities of the
transferred businesses as the businesses were conducted as a
part of Clear Channel Communications and its subsidiaries prior
to the distribution. Following the distribution, we will be a
separate publicly-traded company and Clear Channel
Communications will have no continuing stock ownership in us.
Our historical financial results as part of Clear Channel
Communications contained herein may not reflect our financial
results in the future as an independent company or what our
financial results would have been had we been operated as a
separate publicly-traded company during the periods
presented.
CCE Spinco, Inc.
Our Business
We believe we are one of the worlds largest diversified
promoters and producers of, and venue operators for, live
entertainment events. For the year ended December 31, 2004,
we promoted or produced over 28,500 events, including music
concerts, theatrical performances, specialized motor sports and
other events, with total attendance exceeding 61 million.
In addition, we believe we operate one of the largest networks
of venues used principally for music concerts and theatrical
performances in the United States and Europe. As of
September 30, 2005, we owned or operated 117 venues,
consisting of 75 domestic and 42 international venues. These
venues include 39 amphitheaters, 58 theaters, 14 clubs,
four arenas and two festival sites. In addition, through equity,
booking or similar arrangements we have the right to book events
at 33 additional venues. For the year ended December 31,
2004, we generated revenues of approximately $2.8 billion,
net income of approximately $16.3 million, and operating
income (loss) before depreciation, amortization, loss (gain) on
sale of operating assets and non-cash compensation expense, or
OIBDAN, of approximately $130.5 million. Please read
Summary Historical and Pro Forma Financial and
Other Data Non-GAAP Financial Measures for an
explanation of OIBDAN and a reconciliation of OIBDAN to
operating income. Approximately 90% of our total revenues for
2004 resulted from our promotion or production of music concerts
and theatrical performances and from revenues related to our
owned or operated venues.
We operate in two reportable business segments: global music and
global theater. In addition, we operate in the specialized motor
sports, sport representation and other businesses, which are
included under other.
Global Music. Our global music business principally
involves the promotion or production of live music shows and
tours by music artists in our owned and operated venues and in
rented third-party
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venues. For the year ended December 31, 2004, our global
music business generated approximately $2.2 billion, or
78%, of our total revenues. We promoted or produced over 10,000
events in 2004, including tours for artists such as Madonna,
Sting, Dave Matthews Band and Toby Keith. In addition, we
produced several large festivals in Europe, including Rock
Werchter in Belgium and the North Sea Jazz Festival in Holland.
Part of our growth strategy is to expand our promotion and
production of festivals, particularly in Europe. While our
global music business operates year-round, we experience higher
revenues during the second and third quarters due to the
seasonal nature of our amphitheaters and international
festivals, which are primarily used during or occur in May
through September.
Global Theater. Our global theater business promotes,
which we commonly refer to as presents, and produces
touring and other theatrical performances. Our touring
theatrical performances consist primarily of revivals of
previous commercial successes and new productions of theatrical
performances playing on Broadway in New York City or the West
End in London. For the year ended December 31, 2004, our
global theater business generated approximately
$314.0 million, or 11%, of our total revenues. In 2004, we
presented or produced over 12,000 theatrical performances
of productions such as The Producers, The Lion King, Mamma
Mia! and Chicago. We pre-sell tickets for our touring
shows through one of the largest subscription series in the
United States and Canada in approximately 45 touring markets.
While our global theater business operates year-round, we
experience higher revenues during September through April, which
coincides with the theatrical touring season.
Other. We believe we are one of the largest promoters and
producers of specialized motor sports events, primarily in North
America. In 2004, we held over 600 events in stadiums, arenas
and other venues, including monster truck shows, supercross
races, motocross races, freestyle motocross events and
motorcycle road racing. In addition, we own numerous trademarked
properties, including monster trucks such as Grave
Diggertm
and Blue
Thundertm,
which generate additional licensing revenues. While our
specialized motor sports business operates year-round, we
experience higher revenues during January through March, which
is the period when a larger number of specialized motor sports
events occur.
We also provide integrated sports marketing and management
services, primarily for professional athletes. Our marketing and
management services generally involve our negotiation of player
contracts with professional sports teams and of endorsement
contracts with major brands. As of September 30, 2005, we
had approximately 600 clients, including Tracy McGrady
(basketball), David Ortiz (baseball), Tom Lehman (golf), Andy
Roddick (tennis), Roy E. Williams (football) and Steven
Gerrard (soccer).
We also promote and produce other live entertainment events,
including family shows such as Dora the Explorer and
Blues Clues, as well as museum and other
exhibitions, such as Saint Peter and The Vatican: The Legacy
of the Popes. In addition, we produce and distribute
television shows and DVDs, including programs such as A&E
Biographies: Rod Stewart and HBO Sports The Curse
of the Bambino.
For the year ended December 31, 2004, businesses included
under other generated approximately
$291.1 million, or 11%, of our total revenues.
We principally act in the following capacities, performing one,
some or all of these roles in connection with our events and
tours:
Promotion. As a promoter, we typically book performers,
arrange performances and tours, secure venues, provide for
third-party production services, sell tickets and advertise
events to attract audiences. We earn revenues primarily from the
sale of tickets and pay performers under one of several
formulas, including a fixed guaranteed amount and/or a
percentage of ticket sales. For each event, we either use a
venue we own or operate, or rent a third-party venue. In our
global theater business, we generally refer to promotion as
presentation. Revenues related to promotion
activities represent the majority of our combined revenues.
These revenues are generally related to the volume of ticket
sales and ticket prices. Event costs, included in divisional
operating expenses, such as artist and production service
expenses, are
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typically substantial in relation to the revenues they generate.
As a result, significant increases or decreases in promotion
revenue do not typically result in comparable changes to
operating income.
Production. As a producer, we generally develop event
content, hire directors and artistic talent, develop sets and
costumes, and coordinate the actual performances of the events.
We produce tours on a global, national and regional basis. We
generate revenues from fixed producer fees and by sharing in a
percentage of event or tour profits primarily related to the
sale of tickets, merchandise and event and tour sponsorships.
Venue Operation. As a venue operator, we contract with
promoters to rent our venues for events and provide related
services such as concessions, merchandising, parking, security,
ushering and ticket-taking. We generate revenues primarily from
rental income, ticket service charges, premium seating and venue
sponsorships, as well as sharing in percentages of concessions,
merchandise and parking. Our outdoor entertainment venues are
primarily used, and our international festivals occur, during
May through September. As a result, we experience higher
revenues during the second and third quarters. Revenues
generated from venue operations, which are partially driven by
attendance, typically have a higher margin than promotion or
production revenues and therefore typically have a more direct
relationship to operating income.
Sponsorships and Advertising. We actively pursue the sale
of national and local sponsorships and placement of advertising,
including signage, promotional programs, naming of subscription
series and tour sponsorships. Many of our venues also have
name-in-title sponsorship programs. We believe national
sponsorships allow us to maximize our network of venues and to
arrange multi-venue branding opportunities for advertisers. Our
national sponsorship programs have included companies such as
American Express, Anheuser Busch and Coca-Cola. Our local and
venue-focused sponsorships include venue signage, promotional
programs, on-site activation, hospitality and tickets, and are
derived from a variety of companies across various industry
categories. Revenues generated from sponsorships and advertising
typically have a higher margin than promotion or production
revenues and therefore typically have a more direct relationship
to operating income.
Our Strategy
We are pursuing the following key strategies:
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We seek to maximize cash flow from operations through the
ownership and operation of a leading distribution network of
live entertainment venues. |
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We seek to attract large audiences by securing, promoting and
producing compelling live entertainment events in our own venues
and third party venues. |
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We seek to use our venues, live events and customers to develop
and maintain relationships with our sponsorship and marketing
partners, and sell an expanded line of products and services to
our customers. |
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We intend to selectively pursue investments and acquisitions
that enhance our business where the returns and growth potential
are consistent with our goal of increasing stockholder value. |
Our Challenges
We face a number of risks associated with our business and
industry and must overcome a variety of challenges in
implementing our operating strategy in order to be successful.
For instance:
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We will have substantial indebtedness and lease obligations
after the spin-off and will not be able to rely on Clear Channel
Communications to fund our future capital requirements. Our
total indebtedness for borrowed money will be approximately
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ness could have adverse consequences on our business and results
of operations. If our cash flow and capital resources are
insufficient to service our debt, we may be forced to sell
assets, seek additional equity or debt capital or restructure
our debt and business. |
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The live entertainment industry is highly competitive and the
success of our events are primarily dependent on public taste
and our ability to secure popular artists. Many events require
substantial upfront costs before they generate any receipts and
it is extremely difficult to predict if an event will be a
success. To be successful, we must promote and present live
entertainment events that generate significant receipts to
offset fixed promotion and overhead costs. |
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We have not operated as an independent company and have in the
past relied on Clear Channel Communications for financing and
other services. We may be unable to make the changes necessary
to operate as an independent company or to obtain necessary
financing and other services from unrelated third parties on
reasonable terms or at all. |
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We are subject to extensive governmental regulation. Regulations
regarding permitting, health, safety, food and alcoholic
beverage service, working conditions, the Americans with
Disabilities Act, and taxes, among others, may restrict our live
entertainment operations. From time to time, state and federal
governmental bodies propose legislation that may introduce
additional restrictions on us. |
For further discussion of these challenges and other risks that
we face, see Risk Factors beginning on page 20.
4
Questions and Answers about CCE Spinco and the
Distribution
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Why is Clear Channel Communications separating CCE Spinco and
distributing its stock? |
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The board of directors of Clear Channel Communications has
determined that the separation of CCE Spinco from Clear Channel
Communications is in the best interests of Clear Channel
Communications, its stockholders and us, by providing each
company with certain opportunities and benefits, such as: |
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The separation will allow us and Clear Channel
Communications to better attract, retain and motivate current
and future employees through the use of equity-based
compensation policies that more directly link employee
compensation with our respective financial performances. |
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The separation will permit the independent
management of each of Clear Channel Communications and us to
focus its attention and its companys financial resources
on its respective distinct business and business challenges and
to lead each independent company to adopt strategies and pursue
objectives that are appropriate to its respective business. |
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Both we and Clear Channel Communications expect to
have better access to the equity capital markets in connection
with acquisitions and financings after the separation as our
investors will not be forced to understand and make investment
decisions with respect to Clear Channel Communications
business and Clear Channel Communications investors will
not be forced to understand and make investment decisions with
respect to our business. |
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See The Distribution. |
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Why is the separation of the two companies structured as a
spin-off? |
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Clear Channel Communications believes that a tax-free
distribution of shares in CCE Spinco offers Clear Channel
Communications and its stockholders long-term value in a tax
efficient way to separate the companies. |
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How will the separation and distribution work? |
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The separation and distribution will be accomplished through a
series of transactions in which substantially all of the assets
and liabilities of Clear Channel Communications
entertainment business comprised of global music, global
theater, specialized motor sports and sport representation
businesses will be transferred to us and all of the shares of
our common stock will be distributed by Clear Channel
Communications to its stockholders on a pro rata basis. |
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What do stockholders need to do to participate in the
distribution? |
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Nothing. You are not required to take any action to receive CCE
Spinco common stock in the distribution, although we urge you to
read this entire document carefully. You do not need to mail in
Clear Channel Communications common stock certificates to
receive CCE Spinco common stock. No stockholder approval of the
distribution is required or sought. We are not asking you for a
proxy and you are requested not to send us a proxy. You will not
be required either to pay anything for the new shares or to
surrender any shares of Clear Channel Communications common
stock. If you own Clear Channel Communications common stock as
of the close of business on the record date, a book-entry
account statement reflecting your ownership of CCE Spinco shares
will be mailed to you, or your |
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brokerage account will be credited for the shares, on or
about ,
2005. Following the distribution, stockholders whose shares are
held in book-entry form may request that their shares of our
common stock be transferred to a brokerage or other account at
any time as well as delivery of physical stock certificates for
their shares, in each case without charge. |
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When will the distribution occur? |
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We expect that Clear Channel Communications will distribute the
shares of our common stock
on ,
2005 to holders of record of Clear Channel Communications common
stock
on ,
2005, the record date. |
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Can Clear Channel Communications decide to cancel the
distribution of the common stock even if all the conditions have
been met? |
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Yes. The distribution is conditioned upon satisfaction or waiver
of certain conditions. See The Distribution
Distribution Conditions and Termination. Clear Channel
Communications has the right to terminate the stock
distribution, even if all of these conditions are met, if at any
time Clear Channel Communications board of directors
determines, in its sole discretion, that Clear Channel
Communications and CCE Spinco are better served being a combined
company, thereby making the distribution not in the best
interest of Clear Channel Communications and its stockholders,
or that market conditions are such that it is not advisable to
spin-off the entertainment business. |
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Does CCE Spinco plan to pay dividends? |
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No. We do not expect to pay any cash dividends in the
foreseeable future. Moreover, we anticipate the terms of our
credit agreement governing our senior secured credit facility
and designations governing Holdco #2s preferred stock will
limit the amount of funds which we will have available to
declare and distribute as dividends on our common stock. Payment
of future cash dividends, if any, will be at the discretion of
our board of directors in accordance with applicable law. See
Dividend Policy and Description of
Indebtedness. |
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What are the U.S. federal income tax consequences of the
distribution to Clear Channel Communications stockholders? |
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The spin-off is conditioned upon Clear Channel
Communications receipt of a private letter ruling from the
IRS and the opinion of Skadden, Arps, Slate, Meagher &
Flom LLP, in each case, to the effect that the spin-off will
qualify as a tax-free distribution for U.S. federal income
tax purposes under Sections 355 and 368(a)(1)(D) of the
Internal Revenue Code of 1986, as amended (the
Code). Assuming the spin-off so qualifies, for
U.S. federal income tax purposes, no gain or loss will be
recognized by you, and no amount will be included in your
income, upon the receipt of shares of our common stock pursuant
to the spin-off. You will generally recognize gain or loss with
respect to cash received in lieu of a fractional share of our
common stock. See The Distribution Material
U.S. Federal Income Tax Consequences of the
Distribution. |
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What will the relationship between Clear Channel
Communications and CCE Spinco be following the distribution? |
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After the distribution, Clear Channel Communications will not
own any shares of our common stock and we will not own any
shares of Clear Channel Communications common stock. Three of
our directors will also be directors of Clear Channel
Communications, and our chairman will continue to serve as chief
financial officer of Clear Channel Communications. In addition,
in connection with the distribution, we and Clear Channel
Communications are entering into a number of agree- |
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ments that will govern our spin-off from Clear Channel
Communications and our future relationship. We cannot assure you
that these agreements will be on terms as favorable to us as
agreements with other third parties. See Our Relationship
with Clear Channel Communications After the Distribution.
In addition, if Clear Channel Communications acquires knowledge
of a potential transaction or matter which may be a corporate
opportunity for both us and Clear Channel Communications, our
certificate of incorporation provides that we will generally
renounce our interest in the corporate opportunity. See
Description of Capital Stock Provisions of our
Amended and Restated Certificate of Incorporation Relating to
Related-Party Transactions and Corporate Opportunities. |
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What if I want to sell my Clear Channel Communications common
stock or my CCE Spinco common stock? |
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You should consult with your own financial advisors, such as
your stockbroker, bank or tax advisor. Clear Channel
Communications does not make any recommendations on the
purchase, retention or sale of shares of Clear Channel
Communications common stock or CCE Spinco common stock to be
distributed. |
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If you do decide to sell any shares, you should make sure your
stockbroker, bank or other nominee understands whether you want
to sell your Clear Channel Communications common stock or your
CCE Spinco common stock after it is distributed, or both. |
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Where will I be able to trade shares of CCE Spinco common
stock? |
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There is not currently a public market for our common stock. Our
common stock has been approved for listing on the New York
Stork Exchange, or NYSE, under the symbol LYV. We
anticipate that trading in shares of our common stock will begin
on a when-issued basis on or shortly before the
record date and before the distribution date, and regular
way trading will begin on the first trading day following
the distribution date. If trading does begin on a
when-issued basis, you may purchase or sell our
common stock after that time, but your transaction will not
settle until after the distribution date. On the first trading
day following the distribution date, when-issued trading in
respect of our common stock will end and regular way trading
will begin. We cannot predict the trading prices for our common
stock before or after the distribution date. |
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Will the number of Clear Channel Communications shares I own
change as a result of the distribution? |
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No. The number of shares of Clear Channel Communications
common stock you own will not change as a result of the
distribution. |
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What will happen to the listing of Clear Channel
Communications common stock? |
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Nothing. Clear Channel Communications common stock will continue
to be traded on the NYSE under the symbol of CCU. |
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Will the distribution affect the market price of my Clear
Channel Communications shares? |
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Yes. As a result of the distribution, we expect the trading
price of Clear Channel Communications shares immediately
following the distribution to be lower than immediately prior to
the distribution because the trading price should no longer
reflect the value of the CCE Spinco businesses. Furthermore,
until the market has fully analyzed the operations of Clear
Channel Communications without these businesses, the price of
Clear Channel Communications shares may fluctuate significantly.
In addition, the combined trading prices of Clear Channel Commu- |
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nications common stock and CCE Spinco common stock after the
distribution may be less than the trading price of Clear Channel
Communications common stock prior to the distribution. |
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Are there risks to owning CCE Spinco common stock? |
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Yes. Our business is subject both to general and specific
business risks relating to our leverage, our business, our
relationship with Clear Channel Communications and our being a
separate publicly-traded company, as well as risks related to
the nature of the spin-off transaction itself. These risks are
described in the Risk Factors section of this
information statement beginning on page 20. We encourage
you to read that section carefully. |
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Where can Clear Channel Communications stockholders get more
information? |
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Before the distribution, if you have any questions relating to
the distribution, you should contact: |
|
|
|
Clear Channel Communications, Inc.
Investor Relations
P.O. Box 659512
San Antonio, Texas 78265-9512
Tel: (210) 822-2828
Fax: (210) 822-2299
www.clearchannel.com |
|
|
|
After the distribution, if you have any questions relating to
our common stock, you should contact: |
|
|
|
CCE Spinco, Inc.
Investor Relations
c/o Brainerd Communicators, Inc.
521
5th
Avenue
New York, New York 10175
Tel: (212) 986-6667
Fax: (212) 986-8302 |
|
Who will be the distribution agent, transfer agent and
registrar for our common stock? |
|
The Bank of New York Company, Inc.
101 Barclay Street
New York, New York 10286
Toll-Free Shareholder Services Line: 1-800-524-4458
Email: shareowners@bankofny.com |
8
Summary of the Transactions
The following is a brief summary of the terms of the
distribution and other concurrent transactions:
|
|
|
Distributing company |
|
Clear Channel Communications, Inc. After the spin-off, Clear
Channel Communications will not own any shares of our capital
stock. |
|
Distributed company |
|
CCE Spinco, Inc. is currently a wholly-owned subsidiary of Clear
Channel Communications. After the spin-off, CCE Spinco will be a
separate publicly-traded company. However, three of our
directors will also be directors of Clear Channel
Communications, and our chairman will continue to serve as chief
financial officer of Clear Channel Communications. |
|
Securities to be distributed |
|
Shares of CCE Spinco common stock, which will constitute all of
the outstanding shares of our common stock immediately after the
distribution. |
|
|
|
Delivery of a share of our common stock in connection with the
distribution also will constitute the delivery of the preferred
stock purchase right associated with the share. The existence of
the preferred stock purchase rights may deter a potential
acquiror from making a hostile takeover proposal or a tender
offer. For a more detailed discussion of these rights, see
Description of Our Capital Stock The Rights
Agreement. |
|
Distribution ratio |
|
Each holder of Clear Channel Communications common stock will be
entitled to receive a dividend of one share of our common stock
(and a related stock purchase right) for every eight shares
of Clear Channel Communications common stock held on the record
date. Cash will be distributed in lieu of fractional shares. |
|
|
Fractional shares |
|
Fractional shares of our common stock will not be distributed.
In lieu of fractional shares of our common stock, stockholders
of Clear Channel Communications will receive cash. Fractional
shares you would otherwise be entitled to receive will be
aggregated and sold in the public market by the distribution
agent, who will determine in its sole discretion the timing and
terms of such sale. The aggregate net cash proceeds of these
sales will be distributed ratably to those stockholders who
would otherwise have received fractional shares of our common
stock in accordance with their fractional share interests. If
you own fewer than eight shares of Clear Channel
Communications common stock on the record date, you will not
receive any shares of our common stock in the distribution, but
you will receive cash in lieu of a fractional share. The receipt
of cash in lieu of fractional shares will generally be taxable
to the recipient stockholders. For more information, see
The Distribution Manner of Effecting the
Distribution and The Distribution
Material U.S. Federal Income Tax Consequences of the
Distribution. |
|
|
Record date |
|
The record date is the close of business
on ,
2005. |
|
Distribution date |
|
11:59 p.m., New York City time,
on ,
2005. |
9
|
|
|
Incurrence of debt |
|
Prior to or concurrently with the completion of the
distribution, one of our operating subsidiaries, Holdco #3,
will enter into a $575.0 million senior secured credit
facility consisting of: |
|
|
|
a $325.0 million
71/2-year
term loan; and |
|
|
|
a $250.0 million
61/2-year
revolving credit facility, of which up to $200.0 million
will be available for the issuance of letters of credit and up
to $100.0 million will be available for borrowings in
foreign currencies. |
|
|
|
|
Subject to then market pricing and maturity extending longer
than that of the senior secured credit facility, we will be able
to add additional term and revolving credit facilities in an
aggregate amount not to exceed $250.0 million. We
anticipate that the senior secured credit facility will be
secured by a first priority lien on substantially all of our
domestic assets (other than real property and deposits
maintained by us in connection with promoting or producing live
entertainment events) and a pledge of the capital stock of our
domestic subsidiaries and a portion of the capital stock of
certain of our foreign subsidiaries. Borrowings in foreign
currencies by our foreign subsidiaries will, in addition, be
secured by a first priority lien on substantially all of our
foreign assets (other than real property and deposits maintained
by us in connection with promoting or producing live
entertainment events) and a pledge of the capital stock of all
subsidiaries held by such borrowing subsidiary. |
|
|
|
|
|
After giving effect to the borrowings under the senior secured
credit facility, we expect to have approximately
$367.6 million of indebtedness for borrowed money
outstanding. We intend to use $200.0 million of borrowings
under the term loan portion of our senior secured credit
facility and the $20 million of proceeds from the issuance
of the Series A redeemable preferred stock of
Holdco #2 to repay a portion of the indebtedness we owe
Clear Channel Communications. We intend to use the remaining
$125.0 million of borrowings under the term loan portion of
our senior secured credit facility for general corporate
purposes, including working capital, potential acquisitions and
stock repurchases. We expect that approximately
$200.0 million of the revolving credit facility will remain
available for working capital and general corporate purposes of
Holdco #3 and its subsidiaries immediately following the
completion of the distribution and after the transfer of
approximately $50.0 million of letters of credit previously
issued under Clear Channel Communications credit
facilities on behalf of certain Holdco #3 subsidiaries. The
issuance of letters of credit will reduce this availability by
the notional amount of issued letters of credit. However, on or
prior to the distribution date, we may draw advances under the
senior secured credit facility for working capital and other
general corporate purposes. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources and
Description of Indebtedness. |
|
10
|
|
|
|
|
The agreements governing the senior secured credit facility are
subject to ongoing negotiation. We cannot be certain the terms
described herein will not change or be supplemented. See
Description of Indebtedness. |
|
Preferred stock issuance |
|
Prior to the completion of the distribution, third-party
investors unrelated to Clear Channel Communications will acquire
all of the shares of Series A (voting) and
Series B (non-voting) mandatorily redeemable preferred
stock of Holdco #2, the parent company of Holdco #3,
one of our operating subsidiaries, which operating subsidiary
owns more than 95% of the gross value of our assets. The
preferred stock will have an aggregate liquidation preference of
$40 million. We expect the Series A redeemable
preferred stock will have a liquidation preference of
$20 million and will be issued to a third-party investor
for $20 million. We anticipate the Series B redeemable
preferred stock will have a liquidation preference of
$20 million and will be issued to Clear Channel
Communications in connection with the Holdco #3 Exchange
for no cash and immediately resold to a third-party purchaser
for $20 million. See Our Relationship with Clear
Channel Communications After the Distribution Tax
Matters Agreement Holdco #3 Loss. We will
not receive any of the proceeds from the sale of the
Series B redeemable preferred stock sold by Clear Channel
Communications. The issuance and sale of the Series A and
Series B redeemable preferred stock together with the
Holdco #3 Exchange are structured to raise desired
financing and to facilitate the overall tax efficiency of the
distribution. |
|
|
|
The holders of Series A redeemable preferred stock will
have the right to appoint one out of four members to
Holdco #2s board of directors and to otherwise
control 25% of the voting power of all outstanding shares of
Holdco #2. The Series B redeemable preferred stock
will have no voting rights other than the right to vote as a
class with the Series A redeemable preferred stock to elect
one additional member to the board of directors of
Holdco #2 in the event Holdco #2 breaches certain
terms of the designations of the preferred stock. The holders of
Holdco #2 preferred stock will not have the right to
appoint or vote for any of our directors. Each of the
Series A and Series B preferred stock is expected to
pay an annual cash dividend of approximately 10% and will be
mandatorily redeemable upon the six year anniversary of the date
of issuance. Holdco #2 will be required to make an offer to
purchase the Series A and Series B redeemable preferred stock at
101% of each series liquidation preference in the event of a
change of control. The terms of the preferred stock are subject
to ongoing negotiation. We cannot be certain the terms described
in this information statement will not change or be
supplemented. See Description of Subsidiary Preferred
Stock and Corporate Information and
Structure below. |
|
Payment of intercompany note |
|
Prior to the completion of the distribution, Clear Channel
Communications will contribute to our capital
$383.0 million of |
11
|
|
|
|
|
|
the intercompany indebtedness owed by us. Prior to or
concurrently with the completion of the distribution, we intend
to use all proceeds from borrowings from our term loan under our
senior secured credit facility and the $20 million of
proceeds from the issuance of the Series A redeemable
preferred stock of Holdco #2 to repay the remaining portion
of the intercompany note. |
|
|
Tax consequences to stockholders |
|
The spin-off is conditioned upon Clear Channel
Communications receipt of a private letter ruling from the
IRS and the opinion of Skadden, Arps, Slate, Meagher &
Flom LLP, in each case to the effect that the spin-off will
qualify as a tax-free distribution for U.S. federal income
tax purposes under Sections 355 and 368(a)(1)(D) of the
Code. Assuming the spin-off so qualifies, for U.S. federal
income tax purposes, no gain or loss will be recognized by, and
no amount will be included in the income of, a holder of Clear
Channel Communications common stock upon the receipt of shares
of our common stock pursuant to the spin-off. A holder of Clear
Channel Communications common stock will generally recognize
gain or loss with respect to cash received in lieu of a
fractional share of our common stock. See The
Distribution Material U.S. Federal Income Tax
Consequences of the Distribution for a more detailed
description of the U.S. federal income tax consequences of
the spin-off. |
|
Anti-takeover effects |
|
Some provisions of our amended and restated certificate of
incorporation, our amended and restated bylaws, our rights plan
and Delaware law may have the effect of making more difficult an
acquisition of control of us in a transaction not approved by
our board of directors. We also will indemnify Clear Channel
Communications under the tax matters agreement we have entered
into in connection with the distribution for the tax, if any,
resulting from any acquisition or issuance of our stock that
triggers the application of Section 355(e) of the Code, and
this potential liability could discourage, delay or prevent a
change of control. See Our Relationship with Clear Channel
Communications After the Distribution and
Description of Our Capital Stock. |
Our Relationship with Clear Channel Communications
Since August 2000, our predecessor companies have been
wholly-owned by Clear Channel Communications, Inc. In connection
with the distribution, we and Clear Channel Communications will
be parties to a number of agreements that will govern our
spin-off from Clear Channel Communications and our future
relationship. These agreements will be entered into with Clear
Channel Communications in the context of our relationship as a
wholly-owned subsidiary of Clear Channel Communications.
Accordingly, some of the terms and provisions of these
agreements may be considered more or less favorable to us than
terms and provisions we could have obtained in arms length
negotiations with unaffiliated third parties.
In anticipation of the spin-off, we believe we have developed
and implemented systems and infrastructure to support our
operation as a separate publicly-traded company. However, these
newly developed systems and infrastructure may be inadequate and
we may be required to develop or otherwise acquire other systems
and infrastructure, which could reduce our profitability. In the
past, Clear Channel
12
Communications has generally provided capital for our general
corporate purposes and has at times guaranteed some of our
contractual obligations under contracts with some clients. We
have also historically used cash from Clear Channel
Communications to fund our operations. After the distribution,
Clear Channel Communications will not provide funds to finance
our operations or guarantee our contractual obligations. After
the spin-off, we will initially have a nine member Board of
Directors, and three of our directors will serve as directors of
Clear Channel Communications, and our chairman will continue to
serve as chief financial officer of Clear Channel Communications.
For a description of certain provisions of our amended and
restated certificate of incorporation concerning the allocation
of business opportunities that may be suitable for both us and
Clear Channel Communications, see Description of Our
Capital Stock. This policy is not necessarily favorable to
us.
For a further discussion of the spin-off and our relationship
with Clear Channel Communications and the related risks, see
Our Relationship with Clear Channel Communications After
the Distribution and Risk Factors Risk
Factors Relating to Our Relationship with Clear Channel
Communications.
Corporate Information and Structure
We were formed through acquisitions of various entertainment
businesses and assets by our predecessors, and a number of our
businesses have been operating in the live entertainment
industry for more than 30 years. On August 1, 2000,
Clear Channel Communications acquired our live entertainment
business, which was initially formed in 1997. We were
incorporated in our current form as a Delaware corporation on
August 2, 2005 to own substantially all of the
entertainment business of Clear Channel Communications, Inc. Our
principal executive offices are located at 9348 Civic Center
Drive, Beverly Hills, California 90210, and our telephone number
is (310) 867-7000. Our international executive offices are
located at 220 West 42nd Street, New York, New York 10036,
and our telephone number at that location is
(917) 421-4000. We maintain a Web site at
www. .com.
Our Web site and the information contained on that site, or
connected to that site, are not incorporated into this
information statement. Various trademarks, copyrights, service
marks, and other types of marks are used throughout this
information statement, including the trademarks Grave
Digger and Blue Thunder, which are owned
by us.
13
The following diagram depicts our corporate structure after
giving effect to the distribution and the other concurrent
transactions described in this information statement:
|
|
(1) |
Holdco #1 owns certain theatrical property located in New
York City, which represents less than 5% of the gross value of
our assets. |
|
(2) |
Holdco #1 will own 100% of Holdco #2s common
stock, will control 75% of the voting power of all outstanding
shares of Holdco #2 and, absent a breach by Holdco #2 of
certain terms of the designations of the Holdco #2 preferred
stock, will have the ability to elect three out of four members
of Holdco #2s board of directors. |
|
(3) |
The holders of Series A mandatorily redeemable preferred
stock will have the right to appoint one out of four members to
Holdco #2s board of directors and to otherwise
control 25% of the voting power of all outstanding shares of
Holdco #2. |
|
(4) |
The Series B mandatorily redeemable preferred stock will
have no voting rights other than the right to vote as a class
with the Series A redeemable preferred stock to elect one
additional member to the board of directors of Holdco #2 in
the event Holdco #2 breaches certain terms of the
designations of the preferred stock. |
|
(5) |
Holdco #3, together with its subsidiaries, represent more
than 95% of the gross value of our assets. |
14
Summary Historical and Pro Forma Financial and Other Data
The table below presents our summary historical financial
information prepared on a combined basis and has been derived
from our audited combined financial statements for the years
ended December 31, 2002, December 31, 2003 and
December 31, 2004, and our unaudited combined interim
financial statements for the nine months ended
September 30, 2004 and September 30, 2005, each of
which is included elsewhere in this information statement. The
unaudited combined interim financial statements have been
prepared on a basis consistent with the audited combined
financial statements and, in the opinion of management, include
all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such data. The
results for the nine months ended September 30, 2005 are
not necessarily indicative of the results to be expected for the
full year.
The following table also presents our summary unaudited pro
forma condensed combined financial information, which has been
derived from our unaudited pro forma condensed combined
financial information included elsewhere in this information
statement.
Our unaudited pro forma combined financial statements give pro
forma effect to:
|
|
|
|
|
the distribution of our common stock to the stockholders of
Clear Channel Communications; |
|
|
|
the incurrence of debt and related debt issuance costs,
comprised of a $325.0 million senior secured term loan
under the $575.0 million senior secured credit facility to
be entered into prior to or concurrently with the completion of
the distribution; |
|
|
|
the issuance of mandatorily redeemable Series A preferred
stock by Holdco #2 having a liquidation preference of
$20 million to a third-party investor for $20 million; |
|
|
|
|
the issuance to Clear Channel Communications of mandatorily
redeemable Series B preferred stock by Holdco #2
having a liquidation preference of $20 million in
connection with the Holdco #3 Exchange, for which we will not
receive any cash; |
|
|
|
|
|
the contribution by Clear Channel Communications to our capital
of $508.0 million of the intercompany debt owed to Clear
Channel Communications; |
|
|
|
|
|
the retention of $125.0 million of the proceeds from
borrowings under the term loan portion of our senior secured
credit facility to be used for general corporate purposes,
including working capital, potential acquisitions and stock
repurchases; and |
|
|
|
|
|
the use of $200.0 million from borrowings under the term
loan portion of our senior secured credit facility and
$20 million of proceeds from the sale of the Series A
preferred stock offering to repay the remaining portion of
intercompany debt owed to Clear Channel Communications. |
|
Each of the Series A and Series B preferred stock is
expected to pay an annual cash dividend of approximately 10% and
will be mandatory redeemable upon the six year anniversary of
the date of issuance.
The unaudited pro forma financial data presented as of the year
ended December 31, 2004 and for the nine months ended
September 30, 2005 are derived from our unaudited pro forma
combined financial statements. The pro forma balance sheet
assumes the items listed above occurred as of September 30,
2005. The unaudited pro forma income statement data for the year
ended December 31, 2004, and the nine months ended
September 30, 2005, assumes the items listed above occurred
as of January 1, 2004. A more complete explanation can be
found in our unaudited pro forma combined financial statements
included elsewhere in this information statement.
You should read the summary and unaudited pro forma combined
financial information in conjunction with our audited and
unaudited combined financial statements and the notes to the
audited and unaudited combined financial statements. You should
also read the sections Selected Combined Financial
Data, Unaudited Pro Forma Condensed Combined
Financial Data and Managements Discussion and
Analysis of Financial Condition and Results of Operations.
The summary historical and
15
unaudited pro forma combined financial information is qualified
by reference to these sections, the audited and unaudited
combined financial statements and the notes to the audited and
unaudited combined financial statements that are included
elsewhere in this information statement.
The historical financial and other data have been prepared on a
combined basis from Clear Channel Communications
consolidated financial statements using the historical results
of operations and bases of the assets and liabilities of Clear
Channel Communications businesses and give effect to allocations
of expenses from Clear Channel Communications. The unaudited pro
forma combined financial information is not indicative of our
future performance or what our results of operations and
financial position would have been if we had operated as a
separate company during the periods presented or if the
transactions reflected therein had actually occurred as of
January 1, 2004 or September 30, 2005, as the case may
be. The unaudited pro forma condensed combined statement of
income does not reflect the complete impact of one-time and
ongoing incremental costs required to operate as a separate
company. Clear Channel Communications allocated to us
$8.5 million in 2002, $9.2 million in 2003 and
$9.8 million in 2004 of expenses incurred by it for
providing us accounting, treasury, tax, legal, public affairs,
executive oversight, human resources and other services. Through
September 30, 2005, Clear Channel Communications allocated
to us $6.9 million of expenses. By the end of 2005, we
expect to have assumed responsibility for substantially all of
these services and their related expenses. We currently believe
the estimate for the costs of these services could be
approximately $11.0 million to $13.0 million in 2006,
our first full year as a separate publicly-traded company.
However, the actual total costs of these services associated
with our transition to, and operation as, a separate
publicly-traded company could be significantly greater than our
estimates.
16
The following table presents a non-GAAP financial measure,
OIBDAN, which we use to evaluate segment and combined
performance of our business. OIBDAN is not calculated or
presented in accordance with U.S. generally accepted
accounting principles, or GAAP. In Note 3 and
Non-GAAP Financial Measure below, we
explain OIBDAN and reconcile it to operating income (loss), its
most directly comparable financial measure calculated and
presented in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
Nine Months Ended September 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
Pro Forma | |
|
2004 | |
|
2005 | |
|
Pro Forma | |
(In thousands, except per share amounts) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
Results of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
2,473,319 |
|
|
$ |
2,707,902 |
|
|
$ |
2,806,128 |
|
|
$ |
2,806,128 |
|
|
$ |
2,261,879 |
|
|
$ |
2,184,588 |
|
|
$ |
2,184,588 |
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
2,302,707 |
|
|
|
2,506,635 |
|
|
|
2,645,293 |
|
|
|
2,645,293 |
|
|
|
2,107,785 |
|
|
|
2,050,631 |
|
|
|
2,050,631 |
|
|
Depreciation and amortization
|
|
|
64,836 |
|
|
|
63,436 |
|
|
|
64,095 |
|
|
|
64,095 |
|
|
|
47,499 |
|
|
|
46,392 |
|
|
|
46,392 |
|
|
Loss (gain) on sale of operating assets
|
|
|
(15,241 |
) |
|
|
(978 |
) |
|
|
6,371 |
|
|
|
6,371 |
|
|
|
7,400 |
|
|
|
(426 |
) |
|
|
(426 |
) |
|
Corporate expenses
|
|
|
26,101 |
|
|
|
30,820 |
|
|
|
31,386 |
|
|
|
31,386 |
|
|
|
19,977 |
|
|
|
38,391 |
|
|
|
38,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
94,916 |
|
|
|
107,989 |
|
|
|
58,983 |
|
|
|
58,983 |
|
|
|
79,218 |
|
|
|
49,600 |
|
|
|
49,600 |
|
Interest expense
|
|
|
3,998 |
|
|
|
2,788 |
|
|
|
3,119 |
|
|
|
28,374 |
|
|
|
2,198 |
|
|
|
2,671 |
|
|
|
21,612 |
|
Intercompany interest expense
|
|
|
58,608 |
|
|
|
41,415 |
|
|
|
42,355 |
|
|
|
|
|
|
|
32,550 |
|
|
|
35,719 |
|
|
|
|
|
Equity in earnings (loss) of nonconsolidated affiliates
|
|
|
(212 |
) |
|
|
1,357 |
|
|
|
2,906 |
|
|
|
2,906 |
|
|
|
3,231 |
|
|
|
157 |
|
|
|
157 |
|
Other income (expense) net
|
|
|
332 |
|
|
|
3,224 |
|
|
|
(1,690 |
) |
|
|
(1,690 |
) |
|
|
(1,437 |
) |
|
|
(4,157 |
) |
|
|
(4,157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and cumulative effect of a change in
accounting principle
|
|
|
32,430 |
|
|
|
68,367 |
|
|
|
14,725 |
|
|
|
31,825 |
|
|
|
46,264 |
|
|
|
7,210 |
|
|
|
23,988 |
|
Income tax benefit (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(40,102 |
) |
|
|
68,272 |
|
|
|
55,946 |
|
|
|
49,106 |
|
|
|
42,633 |
|
|
|
11,975 |
|
|
|
5,264 |
|
|
Deferred
|
|
|
11,103 |
|
|
|
(79,607 |
) |
|
|
(54,411 |
) |
|
|
(54,411 |
) |
|
|
(37,808 |
) |
|
|
(14,859 |
) |
|
|
(14,859 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting
principle
|
|
|
3,431 |
|
|
|
57,032 |
|
|
|
16,260 |
|
|
$ |
26,520 |
|
|
|
51,089 |
|
|
|
4,326 |
|
|
$ |
14,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in accounting principle, net of
tax of $198,640(1)
|
|
|
(3,932,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(3,928,576 |
) |
|
$ |
57,032 |
|
|
$ |
16,260 |
|
|
|
|
|
|
$ |
51,089 |
|
|
$ |
4,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted pro forma income before cumulative effect of a
change in accounting principle per common share(2)
|
|
$ |
0.05 |
|
|
$ |
0.84 |
|
|
$ |
0.24 |
|
|
$ |
0.39 |
|
|
$ |
0.76 |
|
|
$ |
0.06 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
1,821,215 |
|
|
$ |
2,069,857 |
|
|
$ |
2,201,007 |
|
|
|
|
|
|
$ |
1,793,072 |
|
|
$ |
1,708,369 |
|
|
|
|
|
|
Global Theater
|
|
|
296,460 |
|
|
|
318,219 |
|
|
|
313,974 |
|
|
|
|
|
|
|
222,871 |
|
|
|
233,265 |
|
|
|
|
|
|
Other
|
|
|
355,644 |
|
|
|
319,826 |
|
|
|
291,147 |
|
|
|
|
|
|
|
245,936 |
|
|
|
242,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
2,473,319 |
|
|
$ |
2,707,902 |
|
|
$ |
2,806,128 |
|
|
|
|
|
|
$ |
2,261,879 |
|
|
$ |
2,184,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
97,731 |
|
|
$ |
111,326 |
|
|
$ |
85,457 |
|
|
|
|
|
|
$ |
94,269 |
|
|
$ |
85,604 |
|
|
|
|
|
|
Global Theater
|
|
|
30,352 |
|
|
|
22,714 |
|
|
|
20,996 |
|
|
|
|
|
|
|
12,973 |
|
|
|
2,742 |
|
|
|
|
|
|
Other
|
|
|
(1,342 |
) |
|
|
10,156 |
|
|
|
(11,147 |
) |
|
|
|
|
|
|
(4,281 |
) |
|
|
2,923 |
|
|
|
|
|
|
Corporate
|
|
|
(31,825 |
) |
|
|
(36,207 |
) |
|
|
(36,323 |
) |
|
|
|
|
|
|
(23,743 |
) |
|
|
(41,669 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$ |
94,916 |
|
|
$ |
107,989 |
|
|
$ |
58,983 |
|
|
|
|
|
|
$ |
79,218 |
|
|
$ |
49,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
Year Ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
(In thousands) |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
142,237 |
|
|
$ |
138,713 |
|
|
$ |
119,898 |
|
|
$ |
88,557 |
|
|
$ |
2,203 |
|
|
Investing activities
|
|
$ |
(31,329 |
) |
|
$ |
(51,960 |
) |
|
$ |
(84,076 |
) |
|
$ |
(64,662 |
) |
|
$ |
(72,603 |
) |
|
Financing activities
|
|
$ |
(112,281 |
) |
|
$ |
(56,894 |
) |
|
$ |
23,254 |
|
|
$ |
44,331 |
|
|
$ |
156,618 |
|
Capital expenditures
|
|
$ |
68,185 |
|
|
$ |
69,936 |
|
|
$ |
73,435 |
|
|
$ |
56,516 |
|
|
$ |
71,997 |
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDAN:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
127,881 |
|
|
$ |
145,725 |
|
|
$ |
119,062 |
|
|
$ |
118,412 |
|
|
$ |
112,935 |
|
|
Global Theater
|
|
|
41,489 |
|
|
|
35,899 |
|
|
|
35,647 |
|
|
|
23,929 |
|
|
|
14,133 |
|
|
Other
|
|
|
1,242 |
|
|
|
19,643 |
|
|
|
6,126 |
|
|
|
11,753 |
|
|
|
6,889 |
|
|
Corporate
|
|
|
(24,700 |
) |
|
|
(29,518 |
) |
|
|
(30,302 |
) |
|
|
(19,216 |
) |
|
|
(36,656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OIBDAN(3)
|
|
$ |
145,912 |
|
|
$ |
171,749 |
|
|
$ |
130,533 |
|
|
$ |
134,878 |
|
|
$ |
97,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of September 30, 2005 | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
Historical | |
|
Pro Forma | |
(in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
104,897 |
|
|
$ |
116,360 |
|
|
$ |
179,137 |
|
|
$ |
273,474 |
|
|
$ |
398,474 |
|
Current assets
|
|
|
396,687 |
|
|
|
423,617 |
|
|
|
472,557 |
|
|
|
782,320 |
|
|
|
907,320 |
|
Property, plant and equipment net
|
|
|
745,239 |
|
|
|
782,154 |
|
|
|
793,316 |
|
|
|
815,270 |
|
|
|
815,270 |
|
Total assets
|
|
|
1,518,644 |
|
|
|
1,495,715 |
|
|
|
1,478,706 |
|
|
|
1,892,233 |
|
|
|
2,019,733 |
|
Current liabilities
|
|
|
530,314 |
|
|
|
547,751 |
|
|
|
579,345 |
|
|
|
799,778 |
|
|
|
803,028 |
|
Long-term debt, including current maturities
|
|
|
622,831 |
|
|
|
617,838 |
|
|
|
650,675 |
|
|
|
768,079 |
|
|
|
367,584 |
|
Total liabilities
|
|
|
1,287,730 |
|
|
|
1,307,432 |
|
|
|
1,321,730 |
|
|
|
1,658,217 |
|
|
|
1,297,722 |
|
Owners equity
|
|
|
230,914 |
|
|
|
188,283 |
|
|
|
156,976 |
|
|
|
234,016 |
|
|
|
722,011 |
|
Total liabilities and owners equity
|
|
|
1,518,644 |
|
|
|
1,495,715 |
|
|
|
1,478,706 |
|
|
|
1,892,233 |
|
|
|
2,019,733 |
|
|
|
(1) |
Cumulative effect of change in accounting principle for the year
ended December 31, 2002, related to impairment of goodwill
recognized in accordance with the adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. |
|
(2) |
Basic and diluted income before cumulative effect of a change in
accounting principle per share is calculated by dividing income
before cumulative effect of a change in accounting principle by
the weighted average number of common shares outstanding. The
historic and pro forma basic and diluted income per share before
cumulative effect of changes in accounting principles is based
on 67,565,491 shares outstanding (based upon the number of
outstanding shares of Clear Channel Communications common
stock at November 4, 2005). |
|
(3) |
We evaluate segment and combined performance based on several
factors, one of the primary measures of which is operating
income (loss) before depreciation, amortization, loss (gain) on
sale of operating assets and non-cash compensation expense,
which we refer to as OIBDAN. See Non-GAAP
Financial Measure below, Unaudited Pro Forma
Condensed Combined Financial Data and
Managements Discussion and Analysis of Financial
Condition and Results of Operations OIBDAN
elsewhere herein. |
Non-GAAP Financial Measure
In addition to operating income, we evaluate segment and
combined performance based on other factors, one primary measure
of which is operating income (loss) before depreciation,
amortization, loss
18
(gain) on sale of operating assets and non-cash compensation
expense, which we refer to as OIBDAN. We use OIBDAN as a measure
of the operational strengths and performance of our business and
not as a measure of liquidity. However, a limitation of the use
of OIBDAN as a performance measure is that it does not reflect
the periodic costs of certain capitalized tangible and
intangible assets used in generating revenues in our business.
Accordingly, OIBDAN should be considered in addition to, and not
as a substitute for, operating income (loss), net income (loss)
and other measures of financial performance reported in
accordance with U.S. GAAP. Furthermore, this measure may
vary among other companies; thus, OIBDAN as presented below may
not be comparable to similarly titled measures of other
companies.
We believe OIBDAN is useful to investors and other external
users of our financial statements in evaluating our operating
performance because it helps investors more meaningfully
evaluate and compare the results of our operations from period
to period and with those of other companies in the entertainment
industry (to the extent the same components of OIBDAN are used),
in each case without regard to items such as non-cash
depreciation and amortization and non-cash compensation expense,
which can vary depending upon the accounting method used and the
book value of assets.
Our management uses OIBDAN (i) as a measure for planning
and forecasting overall and individual expectations and for
evaluating actual results against such expectations,
(ii) as a basis for incentive bonuses paid to certain
employees and (iii) in presentations to our board of
directors to enable them to have the same consistent measurement
basis of operating performance used by management.
The following table presents a reconciliation of OIBDAN to
operating income, which is a GAAP measure of our operating
results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
Year Ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Actual | |
|
Actual | |
|
|
| |
|
| |
|
|
|
|
(unaudited) | |
Reconciliation of OIBDAN
to Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDAN
|
|
$ |
145,912 |
|
|
$ |
171,749 |
|
|
$ |
130,533 |
|
|
$ |
134,878 |
|
|
$ |
97,301 |
|
|
Depreciation and amortization
|
|
|
64,836 |
|
|
|
63,436 |
|
|
|
64,095 |
|
|
|
47,499 |
|
|
|
46,392 |
|
|
Loss (gain) on sale of operating assets
|
|
|
(15,241 |
) |
|
|
(978 |
) |
|
|
6,371 |
|
|
|
7,400 |
|
|
|
(426 |
) |
|
Non-cash compensation expense*
|
|
|
1,401 |
|
|
|
1,302 |
|
|
|
1,084 |
|
|
|
761 |
|
|
|
1,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
94,916 |
|
|
$ |
107,989 |
|
|
$ |
58,983 |
|
|
$ |
79,218 |
|
|
$ |
49,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Non-cash compensation expense, which is based on an allocation
from Clear Channel Communications and is related to issuance of
Clear Channel Communications stock awards, is included in
corporate expenses in our statement of operations. |
19
RISK FACTORS
You should carefully consider each of the following risks and
all of the other information set forth in this information
statement. The following risks relate principally to our
leverage, our business, our relationship with Clear Channel
Communications and our being a separate publicly-traded company,
as well as risks related to the nature of the spin-off
transaction itself. The risks and uncertainties described below
are not the only ones facing our company. Additional risks and
uncertainties not presently known to us or that we currently
believe to be immaterial may also adversely affect our business.
If any of the following risks and uncertainties develop into
actual events, this could have a material adverse effect on our
business, financial condition or results of operations. In that
case, the trading price of our common stock could decline.
Risks Associated with Our Leverage
Following the spin-off, we will have substantial debt and
lease obligations that could restrict our operations and impair
our financial condition.
Historically, we have not had significant indebtedness for
borrowed money, other than our intercompany promissory note to
Clear Channel Communications. Following the spin-off, we will
have substantial indebtedness and lease obligations. Giving
effect to borrowings and advances anticipated to be made under
the senior secured credit facility prior to or concurrently with
the completion of the spin-off, our total indebtedness for
borrowed money will be approximately $367.6 million, and
such prospective indebtedness is currently rated B1 by
Moodys Investors Services, Inc. and B+ by
Standards & Poors Ratings Services, a division of
The McGraw-Hill Companies, Inc., which is currently below the
ratings given to Clear Channel Communications senior debt
by such ratings agencies. We expect that available borrowing
capacity under the senior secured credit facility initially will
be approximately $575.0 million, consisting of our
$325.0 million term loan facility, all of which will be
borrowed at closing, and our $250.0 million revolving
credit facility, of which $200.0 million will be available
for working capital and general corporate purposes immediately
following its closing, with $200.0 million of such amount
being available for letters of credit; outstanding letters of
credit, of which approximately $50.0 million will be
initially outstanding, will reduce borrowing availability under
the revolving credit facility, and $100.0 million will be
available for borrowings in foreign currencies. We may also
incur additional substantial indebtedness in the future.
Our substantial indebtedness could have adverse consequences,
including:
|
|
|
|
|
increasing our vulnerability to adverse economic, regulatory and
industry conditions; |
|
|
|
limiting our ability to compete and our flexibility in planning
for, or reacting to, changes in our business and the industry; |
|
|
|
limiting our ability to borrow additional funds; and |
|
|
|
requiring us to dedicate a substantial portion of our cash flow
from operations to payments on our debt, thereby reducing funds
available for working capital, capital expenditures,
acquisitions and other purposes. |
In addition, as of September 30, 2005, we had approximately
$760.5 million in operating lease agreements, of which
approximately $55.3 million is due in 2006 and
$50.7 million is due in 2007.
If our cash flow and capital resources are insufficient to
service our debt or lease obligations, we may be forced to sell
assets, seek additional equity or debt capital or restructure
our debt. However, these measures might be unsuccessful or
inadequate in permitting us to meet scheduled debt or lease
service obligations. We may be unable to restructure or
refinance our obligations and obtain additional equity financing
or sell assets on satisfactory terms or at all. As a result, the
inability to meet our debt or lease obligations could cause us
to default on those obligations. If we fail to meet any minimum
financial requirements contained in instruments governing our
debt, we would be in default under such instruments,
20
which, in turn, could result in defaults under other debt
instruments. Any such defaults could materially impair our
financial condition and liquidity. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources for
a discussion of our obligations following the spin-off.
To service our debt, lease and preferred stock obligations
and to fund potential capital expenditures, we will require a
significant amount of cash to meet our needs, which depends on
many factors beyond our control.
Our ability to service our debt, lease and preferred stock
obligations and to fund potential capital expenditures for venue
construction, expansion or renovation will require a significant
amount of cash, which depends on many factors beyond our
control. Our ability to make payments on and to refinance our
debt, including our senior secured credit facility, will also
depend on our ability to generate cash in the future. This, to
an extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are
beyond our control.
We cannot assure you that our business will generate sufficient
cash flow or that future borrowings will be available to us in
an amount sufficient to enable us to pay our debt, or to fund
our other liquidity needs. As of December 31, 2004, on a
pro forma basis, approximately $4.5 million of total
indebtedness (excluding interest) is due in 2005,
$5.8 million is due in 2006 and 2007, $5.9 million is
due in 2008 and 2009, and $330.6 million is due thereafter.
See the pro forma table in Managements Discussion
and Analysis of Financial Condition and Results of
Operations Contractual Obligations and
Commitments Firm Commitments. If our future
cash flow from operations and other capital resources are
insufficient to pay our obligations as they mature or to fund
our liquidity needs, we may be forced to reduce or delay our
business activities and capital expenditures, sell assets,
obtain additional equity capital or restructure or refinance all
or a portion of our debt, including the notes, on or before
maturity. We cannot assure you that we will be able to refinance
any of our debt on a timely basis or on satisfactory terms, if
at all. In addition, the terms of our existing debt, including
our senior secured credit facility, and other future debt may
limit our ability to pursue any of these alternatives. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources.
Our senior secured credit facility may restrict our ability
to finance operations and capital needs and our operating
flexibility.
We anticipate that our senior secured credit facility may
include restrictive covenants that, among other things, restrict
our ability to:
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incur additional debt; |
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pay dividends and make distributions; |
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make certain investments; |
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repurchase our stock and prepay certain indebtedness; |
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create liens; |
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enter into transactions with affiliates; |
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modify the nature of our business; |
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enter into sale-leaseback transactions; |
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transfer and sell material assets; and |
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merge or consolidate. |
In addition, we anticipate that the senior secured credit
facility will include additional restrictions, including
requirements to maintain certain financial ratios. Our failure
to comply with the terms and covenants in our indebtedness could
lead to a default under the terms of those documents, which would
21
entitle the lenders to accelerate the indebtedness and declare
all amounts owed due and payable. The agreements governing our
senior secured credit facility are subject to ongoing
negotiations. We cannot be certain the terms described herein
will not change or be supplemented. See Description of
Indebtedness.
We are a holding company and depend on our subsidiaries for
repayment of our debt, which will be structurally subordinated
to the liabilities of our subsidiaries.
We conduct almost all of our business through subsidiaries of
Holdco #3. As a result, our debt, the majority of which will be
owed by Holdco #3, will be effectively subordinated to all
existing and future liabilities (including trade payables) of
such subsidiaries. As of September 30, 2005, we had current
liabilities of $799.8 million and long-term liabilities,
net of any debt to Clear Channel Communications, of
$132.9 million. All of these liabilities are held by
subsidiaries of Holdco #3 except for current liabilities of
$5.7 million. Future acquisitions may be made through
present or future subsidiaries; therefore, our cash flow from
operations and consequent ability to service our debt, is, in
part, dependent upon the earnings of our subsidiaries and the
distribution (through dividends or otherwise) of those earnings
to Holdco #3, or upon loans, advances or other payments of
funds by those subsidiaries to Holdco #3. Moreover, the
payment of dividends and the making of loans or advances to us
by our subsidiaries are subject to various state laws and
business considerations of the subsidiaries.
Our subsidiaries will have no obligation, contingent or
otherwise, to make any funds available to us or Holdco #3
for payment of the principal of or interest on our debt. To the
extent our assets are or will be held by our subsidiaries, the
claims of holders of our debt will, in effect, be subordinated
to the claims of creditors, including trade creditors, of such
subsidiaries. As of September 30, 2005, substantially all
of our assets on a book value basis were held by operating
subsidiaries and, for fiscal year ended December 31, 2004
and for the nine months ended September 30, 2005,
substantially all of our revenues came from the operations of
our subsidiaries. We anticipate that under the terms of
instruments governing senior secured credit facility of
Holdco #3, certain of its subsidiaries will be restricted
in their ability to incur debt in the future. See
Description of Indebtedness.
Risk Factors Relating to Our Business
Our live entertainment business is highly sensitive to public
tastes and dependent on our ability to secure popular artists
and other live entertainment events, and we may be unable to
anticipate changes in consumer preferences, which may result in
decreased demand for our services.
Our ability to generate revenues from our entertainment
operations is highly sensitive to rapidly changing public tastes
and dependent on the availability of popular artists and events.
Our success depends in part on our ability to anticipate the
tastes of consumers and to offer events that appeal to them.
Since we rely on unrelated parties to create and perform live
entertainment content, any unwillingness to tour or lack of
availability of popular artists, touring theatrical
performances, specialized motor sports talent and other
performers could limit our ability to generate revenues. In
addition, we typically book our live music tours one to four
months in advance of the beginning of the tour and often agree
to pay an artist a fixed guaranteed amount prior to our
receiving any operating income. Therefore, if the public is not
receptive to the tour or we or a performer cancel the tour, we
may incur a loss for the tour depending on the amount of the
fixed guarantee or incurred costs relative to any revenues
earned, as well as foregone revenue we could have earned at
booked venues. Furthermore, consumer preferences change from
time to time, and our failure to anticipate, identify or react
to these changes could result in reduced demand for our
services, which would adversely affect our operating results and
profitability.
We have incurred net losses and may experience future net
losses; therefore, we may not sustain our profitability.
Our operating results have been adversely affected by, among
other things, a global economic slowdown, increased cost of
entertainers and a decline in attendance at live entertainment
events. We
22
generated net income of approximately $4.3 million and
$51.1 million for the nine months ended September 30,
2005 and 2004, respectively, and net income of approximately
$16.3 million and $57.0 million for the years ended
2004 and 2003, respectively, and incurred a net loss of
approximately $3.9 billion for the year ended 2002,
primarily as a result of a $3.9 billion write-off of
goodwill. Our net income would have been $29.5 million for
2004 and $16.6 million for the nine months ended
September 30, 2005, on a pro forma basis after giving
effect to the distribution and the concurrent transactions
described in this information statement. We may face reduced
demand for our live entertainment events and other factors that
could adversely affect our results of operations in the future.
We cannot predict whether we will achieve profitability in
future periods.
In the 2002 to 2004 period, our global music revenues increased
from $1.8 billion to $2.2 billion although our
operating income decreased from $97.7 million to
$85.5 million. Our growth in revenues in global music
during this period resulted primarily from increased ticket
prices and acquisitions. During the same period, our global
theater revenues increased from $296.5 million to
$314.0 million while our operating income decreased from
$30.4 million to $21.0 million. Our overall operating
income decreased 45% from 2003 to 2004 due primarily to a
decline in attendance and the number of our events, a loss on
sale of operating assets in 2004, as well as other economic and
geopolitical factors. In 2005, we instituted a ticket price and
service charge reduction program. For the nine months ended
September 30, 2005 and 2004, our global music revenues were
$1.7 billion and $1.8 billion, respectively, and our
operating income was $85.6 million and $94.3 million,
respectively. For the nine months ended September 30, 2005
and 2004, our global theater revenues were $233.3 million
and $222.9 million, respectively, and our operating income
was $2.7 million and $13.0 million, respectively.
We have no operating history as a separate publicly-traded
company and our historical and pro forma combined financial
information are not necessarily representative of the results we
would have achieved as a separate publicly-traded company and
may not be a reliable indicator of our future results.
We are being spun-off from Clear Channel Communications, our
parent company, and, therefore, we have no operating history as
a separate publicly-traded company. The historical and pro forma
combined financial information included in this information
statement does not reflect the financial condition, results of
operations or cash flows we would have achieved as a separate
publicly-traded company during the periods presented or those we
will achieve in the future. This is primarily a result of the
following factors:
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Our historical and pro forma combined financial results reflect
allocations of corporate expenses from Clear Channel
Communications. Those allocations are less than the comparable
expenses we would have incurred had we operated as a separate
publicly-traded company. |
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Our working capital requirements and capital for our general
corporate purposes, including acquisitions and capital
expenditures, have historically been satisfied as part of the
corporate-wide cash management policies of Clear Channel
Communications. Subsequent to this distribution, Clear Channel
Communications will not be providing us with funds to finance
our working capital or other cash requirements. Without the
opportunity to obtain financing from Clear Channel
Communications, we may need to obtain additional financing from
banks, or through public offerings or private placements of debt
or equity securities, strategic relationships or other
arrangements. We initially expect to have a credit rating that
is lower than Clear Channel Communications credit rating
and, as a result, will incur debt on terms and at interest rates
that will not be as favorable as those generally enjoyed by
Clear Channel Communications. |
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Currently, our business is integrated with the other businesses
of Clear Channel Communications. We share economies of scope and
scale in costs, employees, vendor relationships and customer
relationships. While we expect to enter into short-term
transition agreements that will govern certain commercial and
other relationships with Clear Channel Communications after the
spin-off, those temporary arrangements may not capture the
benefits our businesses have enjoyed as a result of common
ownership prior to the spin-off. The loss of these benefits as a
consequence of the spin- |
23
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off could have an adverse effect on our business, results of
operations and financial condition following the spin-off. |
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Significant changes may occur in our cost structure, management,
financing and business operations as a result of our operating
as a company separate from Clear Channel Communications. These
changes will result in increased costs associated with reduced
economies of scale, stand-alone costs for services currently
provided by Clear Channel Communications, the need for
additional personnel to perform services currently provided by
Clear Channel Communications and the legal, accounting,
compliance and other costs associated with being a public
company with equity securities listed on a national stock
exchange. We will temporarily continue to use certain services
of Clear Channel Communications under the transition services
agreements and we may not be able to adequately replace the
services that Clear Channel Communications provides us in a
timely manner or on comparable terms. |
Prior to the spin-off, we will not have been an independent
company and we may be unable to make, on a timely or
cost-effective basis, the changes necessary to operate as an
independent company.
Prior to the spin-off, our business was operated by Clear
Channel Communications as part of its broader corporate
organization, rather than as an independent company. Clear
Channel Communications senior management oversaw the
strategic direction of our businesses and Clear Channel
Communications performed various corporate functions for us,
including, but not limited to:
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selected human resources related functions; |
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tax administration; |
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selected legal functions (including compliance with the
Sarbanes-Oxley Act of 2002), as well as external reporting; |
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treasury administration, investor relations, internal audit and
insurance functions; and |
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selected information technology and telecommunications services. |
Following the spin-off, neither Clear Channel Communications nor
any of its affiliates will have any obligation to provide these
functions to us other than those services that will be provided
by Clear Channel Communications pursuant to the transition
services agreement between us and Clear Channel Communications.
See Our Relationship with Clear Channel Communications
After the Distribution Transition Services
Agreement. If, once our transition services agreement
terminates, we do not have in place our own systems and business
functions, we do not have agreements with other providers of
these services or we are not able to make these changes cost
effectively, we may not be able to operate our business
effectively and our losses may increase. If Clear Channel
Communications does not continue to perform effectively the
services that are required under the transition services
agreement, we may not be able to operate our business
effectively after the spin-off.
Our separation from Clear Channel Communications could also
adversely affect our ability to attract and retain dedicated
employees. We may be required to accept less favorable terms in
contracts with entertainers, sponsors, professional athletes,
performers and independent sales intermediaries, increase our
fees, change long-term selling and marketing agreements and take
other action to maintain our relationship with our sponsors,
professional athletes, performers, independent sales
intermediaries, entertainers, suppliers, customers and dedicated
sales specialists, all of which could have an adverse effect on
our financial condition and results of operations.
Our operations are seasonal and our results of operations
vary from quarter to quarter, so our financial performance in
certain financial quarters may not be indicative of or
comparable to our financial performance in subsequent financial
quarters.
We believe our financial results and cash needs will vary
greatly from quarter to quarter depending on, among other
things, the timing of tours and theatrical productions, tour
cancellations, capital
24
expenditures, seasonal and other fluctuations in our operating
results, the timing of guaranteed payments and receipt of ticket
sales, financing activities, acquisitions and investments and
receivables management. Because our results may vary
significantly from quarter to quarter, our financial results for
one quarter cannot necessarily be compared to another quarter
and may not be indicative of our future financial performance in
subsequent quarters. Typically, our global music segment
experiences its lowest financial performance in the first and
fourth quarters of the calendar year as our outdoor venues are
primarily used during May through September. Our global theater
segment experiences its strongest demand in the first, second
and fourth quarters of the calendar year as the theatrical
touring season runs during September through April.
The following table sets forth our operating income (loss) for
the last seven fiscal quarters (in thousands):
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Operating | |
Fiscal Quarter |
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Income | |
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March 31, 2004
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$ |
293 |
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June 30, 2004
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$ |
8,056 |
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September 30, 2004
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$ |
70,869 |
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December 31, 2004
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$ |
(20,235 |
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March 31, 2005
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$ |
(27,526 |
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June 30, 2005
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$ |
15,258 |
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September 30, 2005
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$ |
61,868 |
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Our senior management team is new in their current positions,
and there can be no assurance that it will be able to operate
our business effectively.
On August 18, 2005, Michael Rapino, who previously served
as chief executive officer and president of Clear Channel
Entertainment Global Music, was appointed our new chief
executive officer, and most members of our management team are
new to their positions. Our success depends, in part, upon the
contributions of our senior management and key employees, in
particular, those that have long-standing relationships with
popular music performers, agents and other influential persons
in the entertainment industry, which we depend on to obtain
bookings of popular performers and arrange tours. Therefore,
losing the services of one or more members of our senior
management or our key employees could adversely affect our
business and results of operations. In late 2004 and 2005, we
reorganized our management, and, as a result, the former chief
executive officer, chief financial officer, general counsel and
two co-heads of music are no longer with the company or have
different responsibilities. If our new management team is not
able to develop and implement an effective business strategy to
optimize and grow our current business, our business and results
of operations could be adversely affected.
We may be adversely affected by a general deterioration in
economic conditions, which could affect consumer and corporate
spending and, therefore, significantly adversely impact our
operating results.
A decline in attendance at live entertainment events has had an
adverse effect on our revenues and operating income. In
addition, during the most recent economic slowdown in the United
States, many consumers reduced their discretionary spending and
advertisers reduced their advertising expenditures. The impact
of slowdowns on our business is difficult to predict, but they
may result in reductions in ticket sales, sponsorship
opportunities and our ability to generate revenues. The risks
associated with our businesses become more acute in periods of a
slowing economy or recession, which may be accompanied by a
decrease in attendance at live entertainment events.
Our business depends on discretionary consumer and corporate
spending. Many factors related to corporate spending and
discretionary consumer spending, including economic conditions
affecting disposable consumer income such as employment, fuel
prices, interest and tax rates and inflation can significantly
impact our operating results. Business conditions, as well as
various industry conditions, including corporate marketing and
promotional spending and interest levels, can also significantly
impact
25
our operating results. These factors can affect attendance at
our events, premium seats, sponsorship, advertising and
hospitality spending, concession and souvenir sales, as well as
the financial results of sponsors of our venues, events and the
industry. Negative factors such as challenging economic
conditions, public concerns over additional terrorism and
security incidents, particularly when combined, can impact
corporate and consumer spending, and one negative factor can
impact our results more than another. There can be no assurance
that consumer and corporate spending will not be adversely
impacted by economic conditions, thereby possibly impacting our
operating results and growth.
Doing business in foreign countries creates certain risks not
found in doing business in the United States.
Doing business in foreign countries involves certain risks that
may not exist when doing business in the United States. For the
nine months ended September 30, 2005, and the year ended
December 31, 2004, our international operations accounted
for approximately 31% and 28%, respectively, of our revenues
during those periods. The risks involved in foreign operations
that could result in losses against which we are not insured
include:
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exposure to local economic conditions; |
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potential adverse changes in the diplomatic relations of foreign
countries with the United States; |
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hostility from local populations; |
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restrictions on the withdrawal of foreign investment and
earnings; |
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government policies against businesses owned by foreigners; |
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investment restrictions or requirements; |
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expropriations of property; |
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potential instability of foreign governments; |
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risks of insurrections; |
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risks of renegotiation or modification of existing agreements
with governmental authorities; |
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diminished ability to legally enforce our contractual rights in
foreign countries; |
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foreign exchange restrictions; |
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withholding and other taxes on remittances and other payments by
subsidiaries; and |
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changes in foreign taxation structures. |
In addition, we may incur substantial tax liabilities if we
repatriate any of the cash generated by our international
operations back to the United States due to our current
inability to recognize any foreign tax credits that would be
associated with such repatriation. We are not currently in a
position to recognize any tax assets in the United States that
are the result of payments of income or withholding taxes in
foreign jurisdictions.
Exchange rates may cause fluctuations in our results of
operations that are not related to our operations.
Because we own assets overseas and derive revenues from our
international operations, we may incur currency translation
losses or gains due to changes in the values of foreign
currencies relative to the United States Dollar. We cannot
predict the effect of exchange rate fluctuations upon future
operating results. For the nine months ended September 30,
2005, and the year ended December 31, 2004, our
international operations accounted for approximately 31% and
28%, respectively, of our revenues during those periods.
Although we cannot predict the future relationship between the
United States Dollar and the currencies used by our
international businesses, principally the British Pound and the
Euro, for the years ended December 31, 2004, 2003 and 2002
and the nine months ended September 30, 2005 and 2004, we
experienced foreign exchange rate net gains of
$6.3 million, $7.6 million, $3.7 million,
$0.3 million and
26
$4.1 million, respectively, for those periods, which had a
positive effect on our OIBDAN. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Quantitative and Qualitative Disclosure
about Market Risk Foreign Currency Risk.
We may be unsuccessful in our future acquisition endeavors,
if any, which may have an adverse effect on our business. Our
compliance with antitrust, competition and other regulations may
limit our operations and future acquisitions.
Our future growth rate depends in part on our selective
acquisition of additional businesses. We may be unable to
identify suitable targets for acquisition or make acquisitions
at favorable prices. If we identify a suitable acquisition
candidate, our ability to successfully implement the acquisition
would depend on a variety of factors, including our ability to
obtain financing on acceptable terms and requisite government
approvals.
Acquisitions involve risks, including those associated with
integrating the operations, financial reporting, technologies
and personnel of acquired companies; managing geographically
dispersed operations; the diversion of managements
attention from other business concerns; the inherent risks in
entering markets or lines of business in which we have either
limited or no direct experience; unknown risks; and the
potential loss of key employees, customers and strategic
partners of acquired companies. We may not successfully
integrate any businesses or technologies we may acquire in the
future and may not achieve anticipated revenue and cost
benefits. Acquisitions may be expensive, time consuming and may
strain our resources. Acquisitions may not be accretive to our
earnings and may negatively impact our results of operations as
a result of, among other things, the incurrence of debt,
one-time write-offs of goodwill and amortization expenses of
other intangible assets. In addition, future acquisitions that
we may pursue could result in dilutive issuances of equity
securities.
We are also subject to laws and regulations, including those
relating to antitrust, that could significantly affect our
ability to expand our business through acquisitions. For
example, the Federal Trade Commission and the Antitrust Division
of the U.S. Department of Justice with respect to our
domestic acquisitions, and the European Commission, the
antitrust regulator of the European Union, with respect to our
European acquisitions, have the authority to challenge our
acquisitions on antitrust grounds before or after the
acquisitions are completed. State agencies may also have
standing to challenge these acquisitions under state or federal
antitrust law. Comparable authorities in foreign countries also
have the ability to challenge our foreign acquisitions. Our
failure to comply with all applicable laws and regulations could
result in, among other things, regulatory actions or legal
proceedings against us, the imposition of fines, penalties or
judgments against us or significant limitations on our
activities. In addition, the regulatory environment in which we
operate is subject to change. New or revised requirements
imposed by governmental regulatory authorities could have
adverse effects on us, including increased costs of compliance.
We also may be adversely affected by changes in the
interpretation or enforcement of existing laws and regulations
by these governmental authorities.
In addition, restrictions contained in the tax matters agreement
and the credit agreement for the senior secured credit facility
may restrict our ability to make acquisitions following the
distribution.
There is the risk of personal injuries and accidents in
connection with our live entertainment events, which could
subject us to personal injury or other claims and increase our
expenses, as well as reduce attendance at our live entertainment
events, causing a decrease in our revenues.
There are inherent risks involved with producing live
entertainment events. As a result, personal injuries and
accidents have, and may, occur from time to time, which could
subject us to claims and liabilities for personal injuries.
Incidents in connection with our live entertainment events at
any of our venues or venues that we rent could also result in
claims, reducing operating income or reducing attendance at our
events, causing a decrease in our revenues. We are currently
subject to wrongful death claims, as well as other litigation.
While we maintain insurance polices that provide coverage within
limits that are sufficient, in managements judgment, to
protect us from material financial loss for personal
27
injuries sustained by persons at our venues or accidents in the
ordinary course of business, there can be no assurance that such
insurance will be adequate at all times and in all circumstances.
Costs associated with, and our ability to, obtain adequate
insurance could adversely affect our profitability and financial
condition.
Heightened concerns and challenges regarding property, casualty,
liability, business interruption and other insurance coverage
have resulted from the terrorist and related security incidents
on and after September 11, 2001 in the United States, as
well as the more recent terrorist attacks in Madrid, London and
Amman. We have been covered by Clear Channel
Communications insurance policies. Following the spin-off,
we expect we may experience increased difficulty as an
independent company obtaining high policy limits of coverage at
reasonable costs, including coverage for acts of terrorism. We
have a material investment in property and equipment at each of
our venues, which are generally located near highly populated
cities and which hold events typically attended by large numbers
of fans. At September 30, 2005, we had property and
equipment with a net book value of approximately
$815.3 million.
These operational, geographical and situational factors, among
others, have resulted in, and may continue to result in,
significant increases in insurance premium costs and
difficulties obtaining sufficiently high policy limits with
deductibles that we believe to be reasonable. We cannot assure
you that future increases in insurance costs and difficulties
obtaining high policy limits will not adversely impact our
profitability, thereby possibly impacting our operating results
and growth.
We cannot guarantee that our insurance policy coverage limits,
including insurance coverage for property, casualty, liability
and business interruption losses and acts of terrorism, would be
adequate under the circumstances should one or multiple events
occur at or near any of our venues, or that our insurers would
have adequate financial resources to sufficiently or fully pay
our related claims or damages. When we are independent from
Clear Channel Communications, we cannot guarantee that adequate
coverage limits will be available, offered at reasonable costs,
or offered by insurers with sufficient financial soundness. The
occurrence of such an incident or incidents affecting any one or
more of our venues could have a material adverse effect on our
financial position and future results of operations if asset
damage and/or company liability were to exceed insurance
coverage limits or if an insurer were unable to sufficiently or
fully pay our related claims or damages.
Costs associated with capital improvements could adversely
affect our profitability.
Growth or maintenance of our existing revenues depends in part
on consistent investment in our venues. Therefore, we expect to
continue to make substantial capital improvements in our venues
to meet long-term increasing demand, to increase entertainment
value and to increase revenues. We frequently have a number of
significant capital projects under way. Numerous factors, many
of which are beyond our control, may influence the ultimate
costs and timing of various capital improvements at our venues,
including:
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availability of financing on favorable terms; |
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unforeseen changes in design; |
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increases in the cost of construction materials and labor; |
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additional land acquisition costs; |
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fluctuations in foreign exchange rates; |
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litigation, accidents or natural disasters affecting the
construction site; |
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national or regional economic changes; |
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environmental or hazardous conditions; and |
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undetected soil or land conditions. |
28
The amount of capital expenditures can vary significantly from
year to year. In addition, actual costs could vary materially
from our estimates if the factors listed above and our
assumptions about the quality of materials or workmanship
required or the cost of financing such construction were to
change. Construction is also subject to governmental permitting
processes which, if changed, could materially affect the
ultimate cost.
We are subject to extensive governmental regulation, and our
failure to comply with these regulations could adversely affect
our business, results of operations and financial condition.
Our live entertainment venue operations are subject to federal,
state and local laws, both domestically and internationally,
governing matters such as construction, renovation and operation
of our venues as well as:
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licensing and permitting; |
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human health, safety and sanitation requirements; |
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the service of food and alcoholic beverages; |
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working conditions, labor, minimum wage and hour, citizenship
and employment laws; |
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compliance with The Americans with Disabilities Act of 1990; |
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sales and other taxes and withholding of taxes; |
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historic landmark rules; and |
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environmental protection. |
While we believe that our venues are in material compliance with
these laws, we cannot predict the extent to which any future
laws or regulations will impact our operations. The regulations
relating to our food and support service in our venues are many
and complex. Although we generally contract with a third-party
vendor for these services at our operated venues, we cannot
assure you that we or our third-party vendors are in full
compliance with all applicable laws and regulations at all times
or that we or our third-party vendors will be able to comply
with any future laws and regulations or that we will not be held
liable for violations by third-party vendors. Furthermore,
additional or amended regulations in this area may significantly
increase the cost of compliance.
We also serve alcoholic beverages at many of our venues during
live entertainment events and must comply with applicable
licensing laws, as well as state and local service laws,
commonly called dram shop statutes. Dram shop statutes generally
prohibit serving alcoholic beverages to certain persons such as
an individual who is intoxicated or a minor. If we violate dram
shop laws, we may be liable to third parties for the acts of the
patron. Although we generally hire outside vendors to provide
these services at our operated venues and regularly sponsor
training programs designed to minimize the likelihood of such a
situation, we cannot guarantee that intoxicated or minor patrons
will not be served or that liability for their acts will not be
imposed on us. There can be no assurance that additional
regulation in this area would not limit our activities in the
future or significantly increase the cost of regulatory
compliance. We must also obtain and comply with the terms of
licenses in order to sell alcoholic beverages in the states in
which we serve alcoholic beverages.
From time to time, state and federal governmental bodies have
proposed legislation that could have an effect on our business.
For example, some legislatures have proposed laws in the past
that would impose potential liability on us and other promoters
and producers of live entertainment events for entertainment
taxes and for incidents that occur at our events, particularly
relating to drugs and alcohol.
In addition, we and our venues are subject to extensive
environmental laws and regulations relating to the use, storage,
disposal, emission and release of hazardous and non-hazardous
substances, as well as zoning and noise level restrictions which
may affect, among other things, the hours of operations of our
venues.
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We face intense competition in the live entertainment
industry, and we may not be able to maintain or increase our
current revenues, which could adversely affect our financial
performance.
Our business segments are in highly competitive industries, and
we may not be able to maintain or increase our current live
entertainment revenues. We compete in the global music and
global theater industries, and within such industries we compete
with other venues to book performers, and, in the markets in
which we promote musical concerts, we face competition from
other promoters, as well as from certain performers who promote
their own concerts. Our competitors also compete with us for key
employees who have relationships with popular music artists that
have a history of being able to book such artists for concerts
and tours. These competitors may engage in more extensive
development efforts, undertake more far-reaching marketing
campaigns, adopt more aggressive pricing policies and make more
attractive offers to existing and potential artists. Our
competitors may develop services, advertising options or
entertainment venues that are equal or superior to those we
provide or that achieve greater market acceptance and brand
recognition than we achieve. It is possible that new competitors
may emerge and rapidly acquire significant market share. Other
variables that could adversely affect our financial performance
by, among other things, leading to decreases in overall
revenues, the numbers of advertising customers, event
attendance, ticket prices or profit margins include:
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an increased level of competition for advertising dollars, which
may lead to lower sponsorships as we attempt to retain
advertisers or which may cause us to lose advertisers to our
competitors offering better programs that we are unable or
unwilling to match; |
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unfavorable fluctuations in operating costs, including increased
guarantees to performers, which we may be unwilling or unable to
pass through to our customers; |
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our competitors may offer more favorable terms than we do in
order to obtain agreements for new venues; |
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technological changes and innovations that we are unable to
adopt or are late in adopting that offer more attractive
entertainment alternatives than what we currently offer, which
may lead to reduction in attendance at live events, a loss of
ticket sales or to lower ticket prices; |
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other entertainment options available to our audiences that we
do not offer; |
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unfavorable changes in labor conditions which may require us to
spend more to retain and attract key employees; and |
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unfavorable shifts in population and other demographics which
may cause us to lose audiences as people migrate to markets
where we have a smaller presence, or which may cause sponsors to
be unwilling to pay for sponsorship and advertising
opportunities if the general population shifts into a less
desirable age or geographical demographic from an advertising
perspective. |
We believe that barriers to entry into the live entertainment
promotion business are low and that certain local promoters are
increasingly expanding the geographic scope of their operations.
We depend upon unionized labor for the provision of some of
our services and any work stoppages or labor disturbances could
disrupt our business.
The stagehands at some of our venues, and the actors, musicians
and others involved in some of our business operations are
subject to collective bargaining agreements. Our union
agreements typically have a term of three years and thus
regularly expire and require negotiation in the course of our
business. Upon the expiration of any of our collective
bargaining agreements, however, we may be unable to negotiate
new collective bargaining agreements on terms favorable to us,
and our business operations may be interrupted as a result of
labor disputes or difficulties and delays in the process of
renegotiating our collective bargaining agreements. A work
stoppage at one or more of our owned or operated venues or at
our produced or presented events could have a material adverse
effect on our business, results of operations and financial
condition. We cannot predict the effect that new collective
bargaining agreements will have
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on our expenses or that caps on agents fees will have on
the revenues and operating income of our sports representation
business.
We are dependent upon our ability to lease, acquire and
develop live entertainment venues, and if we are unable to do so
on acceptable terms, or at all, our results of operations could
be adversely affected.
We require access to venues to generate revenues from live
entertainment events. For these events, we use venues that we
own, but we also operate a number of our live entertainment
venues under various agreements which include leases with
third-parties or equity or booking agreements, which are
agreements where we contract to book the events at a venue for a
specific period of time. Our long-term success in the live
entertainment business will depend in part on the availability
of venues, our ability to lease these venues and our ability to
enter into booking agreements upon their expiration. As many of
these agreements are with third parties over whom we have little
or no control, we may be unable to renew these agreements or
enter into new agreements on acceptable terms or at all, and may
be unable to obtain favorable agreements with venues. Our
ability to renew these agreements or obtain new agreements on
favorable terms depends on a number of other factors, many of
which are also beyond our control, such as national and local
business conditions and competition from other promoters. If the
cost of renewing these agreements is too high or the terms of
any new agreement with a new venue are unacceptable or
incompatible with our existing operations, we may decide to
forgo these opportunities. There can be no assurance that we
will be able to renew these agreements on acceptable terms or at
all, or that we will be able to obtain attractive agreements
with substitute venues, which could have a material adverse
effect on our results of operations.
We plan to continue to expand our operations through the
development of live entertainment venues and the expansion of
existing live entertainment venues, which poses a number of
risks, including:
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construction of live entertainment venues may result in cost
overruns, delays or unanticipated expenses; |
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desirable sites for live entertainment venues may be unavailable
or costly; and |
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the attractiveness of our venue locations may deteriorate over
time. |
Additionally, the market potential of live entertainment venues
sites cannot be precisely determined, and our live entertainment
venues may face competition in markets from unexpected sources.
Newly constructed live entertainment venues may not perform up
to our expectations. We face significant competition for
potential live entertainment venue locations and for
opportunities to acquire existing live entertainment venues.
Because of this competition, we may be unable to add to the
number of our live entertainment venues on terms we consider
acceptable.
Our separation from Clear Channel Communications could
adversely affect our business and profitability due to Clear
Channel Communications strong brand and reputation. In
addition, our new brand will not be immediately recognized,
which will cause us to spend significant amounts of time and
resources to build a brand identity.
As a subsidiary of Clear Channel Communications, some of our
businesses have marketed many of their products and services
using the Clear Channel brand name and logo, and we
believe our association with Clear Channel Communications has
provided many benefits, including:
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an established brand associated with trust, integrity and
longevity; |
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perception of high-quality products and services; |
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preferred status among our customers, suppliers, sponsors,
performers, independent sales intermediaries, entertainers and
employees; |
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a strong capital base and financial strength; and |
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established relationships with U.S. federal and state and
non-U.S. regulators. |
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Our business will be conducted under our new brand name
following completion of the distribution, which may not be
immediately recognized by our customers and suppliers or by
potential employees we are trying to recruit. In addition, Clear
Channel Communications may engage in activities that overlap our
business, such as its local radio stations continuing to promote
concerts and other events that are similar to those customarily
promoted by our entertainment business, which would increase the
risks associated with our establishing a new strong brand in the
live entertainment industry. We will need to expend significant
time, effort and resources to establish our new brand name in
the marketplace, particularly in our industry. We cannot
guarantee that this effort will ultimately be successful. If our
efforts to establish our new brand identity is unsuccessful, our
business, financial condition and results of operations may
suffer.
Our revenues depend on the promotional success of our
marketing campaigns, and there can be no assurance that such
advertising, promotional and other marketing campaigns will be
successful or will generate revenues or profits.
Similar to many companies, we spend significant amounts on
advertising, promotional and other marketing campaigns for our
live entertainment events and other business activities. Such
marketing activities include, among others, promotion of ticket
sales, premium seat sales, hospitality and other services for
our events and venues and advertising associated with our
wholesale and retail distribution of related souvenir
merchandise and apparel. In the nine months ended
September 30, 2005 and September 30, 2004, we spent
approximately 5.4% and 6.4%, respectively, of our revenues on
marketing, including advertising, and there can be no assurance
that such advertising, promotional and other marketing campaigns
will be successful or will generate revenues or profits.
Our sports representation business can be significantly
adversely affected by factors beyond our control.
The amount of endorsement and other revenues that our sports
representation clients generate is a function of, among other
things, our clients professional performances and public
appeal. Factors beyond our control, such as injuries to such
clients, declining skill, labor unrest or limits on agent fees
by the sports leagues, among others, could have an adverse
effect on the results of operations of our sports representation
business. Representation agreements with clients vary by sport
but generally are for a term of three years with automatic
renewal options. A significant number of the representation
agreements are terminable on 15 days notice, although
we would continue to be entitled to certain of the revenue
streams generated during the remaining term of such terminated
agreements.
Poor weather adversely affects attendance at our live
entertainment events, which could negatively impact our
financial performance from period to period.
We promote many live entertainment events. Weather conditions
surrounding these events affect sales of tickets, concessions
and souvenirs, among other things. Poor weather conditions can
have a material effect on our results of operations particularly
because we promote a finite number of events. Due to weather
conditions, we may be required to reschedule an event to the
next available day or a different venue, which would increase
our costs for the event and could negatively impact the
attendance at the event, and food, beverage and merchandise
sales. Poor weather can affect current periods as well as
successive events in future periods. If we are unable to
reschedule events due to poor weather, we are forced to refund
the tickets for those events.
We may be adversely affected by the occurrence of
extraordinary events, such as terrorist attacks.
The occurrence and threat of extraordinary events, such as
terrorist attacks, intentional or unintentional mass-casualty
incidents, natural disasters or similar events, may
substantially decrease the use of and demand for our services
and the attendance at live entertainment events, which may
decrease our revenues or expose us to substantial liability. The
terrorism and security incidents of September 11, 2001,
military actions in Iraq, and periodic elevated terrorism alerts
have raised numerous challenging operating factors, including
public concerns regarding air travel, military actions and
additional national or local catastrophic incidents, causing a
nationwide disruption of commercial and leisure activities.
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Following September 11, 2001, some artists refused to
travel or book tours, which adversely affected our music
business, and many people did not travel to New York City, which
caused us to experience lower attendance levels at our
theatrical performances playing on Broadway in New York City and
adversely affected our theatrical business. The occurrence of
the recent terrorist attacks in London, England, also caused us
to experience lower attendance levels at our theatrical
performances playing on the West End in London. The occurrence
or threat of future terrorist attacks, military actions by the
United States, contagious disease outbreaks, natural disasters
such as earthquakes and severe floods or similar events cannot
be predicted, and their occurrence can be expected to negatively
affect the economies of the United States and other foreign
countries where we do business generally, specifically the
market for live entertainment.
Risk Factors Relating to Our Relationship with Clear Channel
Communications
We will not be able to rely on Clear Channel Communications
to fund our future capital requirements, and financing from
other sources may not be available on favorable terms or at
all.
In the past, our capital requirements have been funded by Clear
Channel Communications. However, following our separation, Clear
Channel Communications will not provide funds to finance our
working capital or other cash requirements. We believe our
capital requirements will vary greatly from quarter to quarter
depending on, among other things, capital expenditures, seasonal
and other fluctuations in our operating results, financing
activities, acquisitions and investments and receivables
management. We believe that the amounts under our credit
facility, along with our future cash flow from operations, will
be sufficient to satisfy our working capital and capital
expenditure requirements for the foreseeable future. However, we
may require or choose to obtain additional debt or equity
financing in order to finance acquisitions or other investments
in our business. Future equity financings would be dilutive to
the existing holders of our common stock. Future debt financings
could involve restrictive covenants. We do not expect to be able
to obtain financing with interest rates or debt ratings as
favorable as those that Clear Channel Communications could
obtain, and our current debt ratings are below those of Clear
Channel Communications.
Conflicts of interest may arise between us and Clear Channel
Communications that could be resolved in a manner unfavorable to
us.
Questions relating to conflicts of interest may arise between us
and Clear Channel Communications in a number of areas relating
to our past and ongoing relationships. After the spin-off, three
of our directors will continue to serve as directors of Clear
Channel Communications, and our chairman will continue to serve
as chief financial officer and a director of Clear Channel
Communications.
Areas in which conflicts of interest between us and Clear
Channel Communications could arise include, but are not limited
to, the following:
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Cross Directorships, Officerships and Stock Ownership.
Ownership interests of our directors or officers in the common
stock of Clear Channel Communications or service as a director
or officer of both us and Clear Channel Communications could
create, or appear to create, potential control issues or
conflicts of interest when directors and officers are faced with
decisions that could have different implications for the two
companies. For example, these decisions could relate to: |
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the nature, quality and cost of services rendered to us by Clear
Channel Communications; |
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competition for potential acquisition opportunities; or |
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employee retention or recruiting. |
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Our intercompany agreements were negotiated when we were a
subsidiary of Clear Channel Communications. We have entered
into agreements with Clear Channel Communications pursuant to
which Clear Channel Communications will provide to us certain
management, |
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administrative, accounting, tax, legal and other services, for
which we will reimburse Clear Channel Communications on a cost
basis. In addition, we have entered into a number of
intercompany agreements covering matters such as tax sharing and
our responsibility for certain liabilities previously undertaken
by Clear Channel Communications for certain of our businesses.
The terms of these agreements were established while we were a
wholly-owned subsidiary of Clear Channel Communications, and
hence were not the result of arms length negotiations. In
addition, conflicts could arise in the interpretation or any
extension or renegotiation of the foregoing agreements after the
spin-off. See Our Relationship with Clear Channel
Communications After the Distribution. |
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Intercompany Transactions. From time to time, Clear
Channel Communications or its affiliates may enter into
transactions with us or our subsidiaries or other affiliates.
Although the terms of any such transactions will be established
based upon negotiations between employees of the transacting
companies and, when appropriate, subject to the approval of the
independent directors on our board or a committee of
disinterested directors, there can be no assurance that the
terms of any such transactions will be as favorable to us or our
subsidiaries or affiliates as would be the case where the
parties were completely at arms length. |
If Clear Channel Communications engages in the same type of
business we conduct or takes advantage of business opportunities
that might be attractive to us, our ability to successfully
operate and expand our business may be hampered.
Our amended and restated certificate of incorporation provides
that, subject to any contractual provision to the contrary,
Clear Channel Communications will have no obligation to refrain
from:
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engaging in the same or similar business activities or lines of
business as us; or |
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doing business with any of our clients, customers or vendors. |
Clear Channel Communications radio business conducts
concert events from time to time. In the event Clear Channel
Communications expands its operations in this area, it may
compete with us.
In addition, the corporate opportunity policy set forth in our
amended and restated certificate of incorporation addresses
potential conflicts of interest for officers and directors of
Clear Channel Communications who are also officers or directors
of our company. The policy provides that if one of our directors
or officers who is also a director or officer of Clear Channel
Communications learns of a potential transaction or matter that
may be a corporate opportunity for both us and Clear Channel
Communications, we will have renounced our interest in the
corporate opportunity unless that opportunity is expressly
offered to that person in writing solely in his or her capacity
as our director or officer. If one of our officers or directors,
who also serves as a director or officer of Clear Channel
Communications, learns of a potential transaction or matter that
may be a corporate opportunity for both us and Clear Channel
Communications, our amended and restated certificate of
incorporation provides that the director or officer will have no
duty to communicate or present that corporate opportunity to us
and will not be liable to us or our stockholders for breach of
fiduciary duty by reason of Clear Channel Communications
actions with respect to that corporate opportunity. This policy
could interfere with our ability to take advantage of certain
corporate opportunities.
By becoming a stockholder in our company, you will be deemed to
have notice of and have consented to these provisions of our
amended and restated certificate of incorporation. The
principles for resolving such potential conflicts of interest
are described under Description of Our Capital
Stock Provisions of Our Amended and Restated
Certificate of Incorporation Relating to Related-Party
Transactions and Corporate Opportunities.
The spin-off could result in significant tax liability to our
initial public stockholders.
Clear Channel Communications has requested a private letter
ruling from the IRS substantially to the effect that the
distribution of our common stock to its stockholders will
qualify as a tax-free distribution for U.S. federal income
tax purposes under Sections 355 and 368(a)(1)(D) of the
Code. Although a
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private letter ruling from the IRS generally is binding on the
IRS, if the factual representations or assumptions made in the
letter ruling request are untrue or incomplete in any material
respect, we will not be able to rely on the ruling.
Furthermore, the IRS will not rule on whether a distribution
satisfies certain requirements necessary to obtain tax-free
treatment under Section 355 of the Code. Rather, the ruling
will be based upon representations by Clear Channel
Communications that these conditions have been satisfied, and
any inaccuracy in such representations could invalidate the
ruling. Therefore, in addition to obtaining the ruling from the
IRS, Clear Channel Communications has made it a condition to the
spin-off that Clear Channel Communications obtain an opinion of
Skadden, Arps, Slate, Meagher & Flom LLP that the
distribution will qualify as a tax-free distribution for
U.S. federal income tax purposes under Sections 355
and 368(a)(1)(D) of the Code. The opinion will rely on the
ruling as to matters covered by the ruling. In addition, the
opinion will be based on, among other things, certain
assumptions and representations as to factual matters made by
Clear Channel Communications and us, which if incorrect or
inaccurate in any material respect would jeopardize the
conclusions reached by counsel in its opinion. The opinion will
not be binding on the IRS or the courts, and the IRS or the
courts may not agree with the opinion.
Notwithstanding receipt by Clear Channel Communications of the
ruling and opinion of counsel, the IRS could assert that the
distribution does not qualify for tax-free treatment for
U.S. federal income tax purposes. If the IRS were
successful in taking this position, our initial public
stockholders could be subject to significant U.S. federal
income tax liability. In general, our initial public
stockholders could be subject to tax as if they had received a
taxable distribution equal to the fair market value of our
common stock that was distributed to them. For a more complete
discussion of the U.S. federal income tax consequences of
the distribution, see The Distribution
Material U.S. Federal Income Tax Consequences of the
Distribution.
The spin-off could result in significant tax-related
liabilities to us.
As discussed above, notwithstanding receipt by Clear Channel
Communications of the ruling and the opinion of counsel, the IRS
could assert that the distribution does not qualify for tax-free
treatment for U.S. federal income tax purposes. If the IRS
were successful in taking this position, Clear Channel
Communications could be subject to significant U.S. federal
income tax liability. In general, Clear Channel Communications
would be subject to tax as if it had sold the common stock of
our company in a taxable sale for its fair market value. In
addition, even if the distribution otherwise were to qualify
under Section 355 of the Code, it may be taxable to Clear
Channel Communications as if it had sold the common stock of our
company in a taxable sale for its fair market value under
Section 355(e) of the Code, if the distribution were later
deemed to be part of a plan (or series of related transactions)
pursuant to which one or more persons acquire directly or
indirectly stock representing a 50% or greater interest in Clear
Channel Communications or us. For this purpose, any acquisitions
of Clear Channel Communications stock or of our stock within the
period beginning two years before the distribution and ending
two years after the distribution are presumed to be part of such
a plan, although we or Clear Channel Communications may be able
to rebut that presumption. For a more complete discussion of the
U.S. federal income tax consequences of the distribution,
see The Distribution Material
U.S. Federal Income Tax Consequences of the
Distribution.
Although such corporate-level taxes, if any, resulting from a
taxable distribution generally would be imposed on Clear Channel
Communications, we have agreed in the tax matters agreement to
indemnify Clear Channel Communications and its affiliates
against tax-related liabilities, if any, caused by the failure
of the spin-off to qualify as a tax-free transaction under
Section 355 of the Code (including as a result of
Section 355(e) of the Code) if the failure to so qualify is
attributable to actions, events or transactions relating to our
stock, assets or business, or a breach of the relevant
representations or covenants made by us in the tax matters
agreement. If the failure of the spin-off to qualify under
Section 355 of the Code is for any reason for which neither
we nor Clear Channel Communications is responsible, we and Clear
Channel Communications have agreed in the tax matters agreement
that we will each be responsible for 50% of the tax-related
liabilities arising from the failure to so qualify. See
Our Relationship with Clear
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Channel Communications After the Distribution Tax
Matters Agreement for a more detailed discussion of the
tax matters agreement between Clear Channel Communications and
us.
We could be liable for income taxes owed by Clear Channel
Communications.
Each member of the Clear Channel Communications consolidated
group, which includes Clear Channel Communications, our company
and Clear Channel Communications other subsidiaries, is
jointly and severally liable for the U.S. federal income
tax liability of each other member of the consolidated group.
Consequently, we could be liable in the event any such liability
is incurred, and not discharged, by any other member of the
Clear Channel Communications consolidated group. Disputes or
assessments could arise during future audits by the IRS in
amounts that we cannot quantify. In addition, Clear Channel
Communications expects to recognize a capital loss for
U.S. federal income tax purposes (the Holdco #3
Loss) in connection with the distribution and the
Holdco #3 Exchange. The amount of such loss is not
determinable prior to the Holdco #3 Exchange since it will
depend upon Clear Channel Communications tax basis in the
stock of Holdco #3 under applicable income tax regulations
as well as the fair market value of Holdco #3 stock, in
each case, as of the time of the Holdco #3 Exchange. If
Clear Channel Communications is unable to deduct such capital
loss for U.S. federal income tax purposes as a result of
any action we take following the spin-off or our breach of a
relevant representation or covenant made by us in the tax
matters agreement, we have agreed in the tax matters agreement
to indemnify Clear Channel Communications for the lost tax
benefits that Clear Channel Communications would have otherwise
realized if it were able to deduct the Holdco #3 Loss. See
Our Relationship with Clear Channel Communications After
the Distribution Tax Matters Agreement.
Risks Related to Our Common Stock and the Distribution
There is no existing market for our common stock and a
trading market that will provide you with adequate liquidity may
not develop for the common stock, and you could lose all or part
of your investment.
Prior to the distribution, there has been no public market for
our common stock. However, our common stock has been approved
for listing on the NYSE under the symbol LYV. We
anticipate that trading will commence on a when-issued basis on
or shortly before the record date. On the first trading day
following the distribution date, when-issued trading in respect
of the common stock will end and regular way trading will begin.
We cannot predict the extent to which investor interest will
lead to the development of an active and liquid trading market
in our common stock on the NYSE or otherwise. If an active
trading market does not develop, you may have difficulty selling
any of your shares of common stock or receiving a price when you
sell your shares of common stock that will be favorable.
We cannot predict the prices at which our common stock may
trade after the spin-off.
The market price of our common stock may decline below the
initial price on the distribution date. The market price of our
common stock may fluctuate significantly due to a number of
factors, some of which may be beyond our control, including:
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our business profile and market capitalization may not fit the
investment objectives of Clear Channel Communications
stockholders, causing them to sell our shares after the
spin-off; this is particularly true of Clear Channel
Communications stockholders who hold Clear Channel
Communications stock based on its inclusion in the S&P 500
Index, as our common stock would not be eligible to be included
in the S&P 500 Index; |
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our quarterly or annual earnings, or those of other companies in
our industry; |
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actual or anticipated fluctuations in our operating results due
to the seasonality of our business and other factors related to
our business; |
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our loss or inability to obtain significant popular artists or
theatrical productions; |
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changes in accounting standards, policies, guidance,
interpretations or principles; |
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announcements by us or our competitors of significant contracts
or acquisitions; |
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the failure of securities analysts to cover our common stock
after the distribution or changes in financial estimates by
analysts; |
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changes in earnings estimates by securities analysts or our
ability to meet those estimates; |
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the operating and stock price performance of other comparable
companies; |
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overall market fluctuations; and |
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general economic conditions. |
In particular, the realization of any of the risks described in
these Risk Factors could have a significant and
adverse impact on the market price of our common stock. In
addition, the stock market in general has experienced extreme
price and volume volatility that has often been unrelated to the
operating performance of particular companies. This volatility
has had a significant impact on the market price of securities
issued by many companies, including companies in our industry.
The changes frequently appear to occur without regard to the
operating performance of these companies. The price of our
common stock could fluctuate based upon factors that have little
or nothing to do with our company, and these fluctuations could
materially reduce our stock price.
The price of our common stock may fluctuate significantly,
and you could lose all or part of the value of your common
stock.
In recent years, the stock market has experienced extreme price
and volume fluctuations. This volatility has had a significant
impact on the market price of securities issued by many
companies, including companies in our industry. The changes
frequently appear to occur without regard to the operating
performance of these companies. The price of our common stock
could fluctuate based upon factors that have little or nothing
to do with our company, and these fluctuations could materially
reduce our stock price.
In the past, some companies that have had volatile market prices
for their securities have been subject to securities class
action suits filed against them. If a suit were to be filed
against us, regardless of the outcome, it could result in
substantial legal costs and a diversion of our managements
attention and resources. This could have a material adverse
effect on our business, results of operations and financial
condition.
Substantial sales of our common stock following the
distribution may have an adverse impact on the trading price of
our common stock.
Clear Channel Communications expects that under the United
States federal securities laws, all of our shares of common
stock may be resold immediately in the public market, except for
shares held by our affiliates.
Some of the Clear Channel Communications stockholders who
receive our shares of common stock may decide that their
investment objectives do not include ownership of shares in a
small capitalization company, and may sell their shares of
common stock following the distribution. In particular, certain
Clear Channel Communications stockholders that are institutional
investors have investment parameters that depend on their
portfolio companies maintaining a minimum market capitalization
that we may not achieve after the distribution or paying
dividends, which we do not currently intend to do. We cannot
predict whether stockholders will resell large numbers of our
shares of common stock in the public market following the
distribution or how quickly they may resell these shares. If our
stockholders sell large numbers of our shares of common stock
over a short period of time, or if investors anticipate large
sales of our shares of common stock over a short period of time,
this could adversely affect the trading price of our shares of
common stock.
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If we are not able to grow our business as planned, we may
not be able to pay the annual dividend on the Holdco #2
preferred stock or redeem the Holdco #2 preferred stock,
and our failure to make these payments could have a material
adverse effect on our business and results of operations.
In connection with our spin-off from Clear Channel
Communications, third-party investors unrelated to Clear Channel
Communications are expected to acquire all of the voting and
non-voting preferred stock of Holdco #2, one of our
subsidiaries. The preferred stock will have an aggregate
liquidation preference of $40 million. We expect the voting
and non-voting preferred stock will pay an annual dividend of
approximately 10% and will be mandatorily redeemable six years
after issuance. The holders of Series A redeemable
preferred stock will have the right to appoint one out of four
members to Holdco #2s board of directors and to
otherwise control 25% of the voting power of all outstanding
shares of Holdco #2. The Series B redeemable preferred
stock will have no voting rights other than the right to vote as
a class with the Series A redeemable preferred stock to
elect one additional member to the board of directors of
Holdco #2 in the event the subsidiary breaches certain
terms of the designations of the preferred stock. Our ability to
make scheduled payments of the dividend and redeem the preferred
stock will depend on our ability to grow our business as planned
and generate sufficient cash flow to make these payments, as
well as our ability to dividend such funds to Holdco #2. If
we fail to make these payments, such failure to pay could have a
material adverse effect on our business and results of
operation. In addition, the board of directors of Holdco #2
may owe conflicting fiduciary duties to the holders of the
preferred stock and us, as the indirect sole common stockholder
of Holdco #2.
We currently do not intend to pay dividends on our common
stock.
We do not expect to pay dividends on our common stock in the
foreseeable future. In addition, the terms of the credit
agreement governing our senior secured credit facility and the
designations governing Holdco #2s preferred stock
will limit the amount of dividends we may pay on our common
stock. Moreover, if we could pay dividends, we would first have
to pay dividends on the Series A redeemable preferred stock
and Series B redeemable preferred stock of Holdco #2
prior to the payment of dividends on our common stock.
Accordingly, if you receive shares of our common stock in the
spin-off, the price of our common stock must appreciate in order
to realize a gain on your investment. This appreciation may not
occur.
Our corporate governance documents, rights agreement and
Delaware law may delay or prevent an acquisition of us that
stockholders may consider favorable, which could decrease the
value of your shares.
Our amended and restated certificate of incorporation and
amended and restated bylaws and Delaware law contain provisions
that could make it more difficult for a third-party to acquire
us without the consent of our board of directors. These
provisions include restrictions on the ability of our
stockholders to remove directors and supermajority voting
requirements for stockholders to amend our organizational
documents, a classified board of directors and limitations on
action by our stockholders by written consent. Three of our
initial nine directors will also be directors of Clear
Channel Communications. In addition, our board of directors has
the right to issue preferred stock without stockholder approval,
which could be used to dilute the stock ownership of a potential
hostile acquiror. Delaware law, for instance, also imposes some
restrictions on mergers and other business combinations between
any holder of 15% or more of our outstanding common stock and
us. Although we believe these provisions protect our
stockholders from coercive or otherwise unfair takeover tactics
and thereby provide for an opportunity to receive a higher bid
by requiring potential acquirers to negotiate with our board of
directors, these provisions apply even if the offer may be
considered beneficial by some stockholders. See
Description of Our Capital Stock.
Our amended and restated certificate of incorporation provides
that, subject to any written agreement to the contrary, which
agreement does not currently exist, Clear Channel Communications
will have no duty to refrain from engaging in the same or
similar business activities or lines of business as us or doing
business with any of our customers or vendors or employing or
otherwise engaging or soliciting any of our officers, directors
or employees. Our amended and restated certificate of
incorporation provides that if Clear Channel Communications
acquires knowledge of a potential transaction or matter which
may be a
38
corporate opportunity for both us and Clear Channel
Communications, we will generally renounce our interest in the
corporate opportunity. Our amended and restated certificate of
incorporation renounces any interest or expectancy in such
corporate opportunity that will belong to Clear Channel
Communications. Clear Channel Communications will, to the
fullest extent permitted by law, have satisfied its fiduciary
duty with respect to such a corporate opportunity and will not
be liable to us or our stockholders for breach of any fiduciary
duty as our stockholder by reason of the fact that it acquires
or seeks the corporate opportunity for itself, directs that
corporate opportunity to another person or does not present that
corporate opportunity to us. These provisions could make an
acquisition of us less advantageous to a third-party.
Our obligation to indemnify, under certain circumstances, Clear
Channel Communications and its affiliates pursuant to the tax
matters agreement against tax-related liabilities, if any,
caused by the failure of the spin-off to qualify as a tax-free
transaction under Section 355 of the Code (including as a
result of Section 355(e) of the Code) could deter a change
of control of us.
We have also adopted a stockholder rights plan intended to deter
hostile or coercive attempts to acquire us. Under the plan, if
any person or group acquires, or begins a tender or exchange
offer that could result in such person acquiring, 15% or more of
our common stock, and in the case of certain Schedule 13G
filers, 20% or more of our common stock, without approval of our
Board of Directors under specified circumstances, our other
stockholders have the right to purchase shares of our common
stock, or shares of the acquiring company, at a substantial
discount to the public market price. Therefore, the plan makes
an acquisition much more costly to a potential acquirer. See
Description of Our Capital Stock The Rights
Agreement.
Increased costs associated with corporate governance
compliance may significantly affect our results of
operations.
The Sarbanes-Oxley Act of 2002 and the Securities Exchange Act
of 1934, as amended, will require changes in our corporate
governance and securities disclosure and compliance practices,
and will require a review of our internal control procedures. We
expect these developments to increase our legal compliance and
financial reporting costs. In addition, they could make it more
difficult for us to attract and retain qualified members of our
board of directors, or qualified executive officers. Finally,
director and officer liability insurance for public companies
like us has become more difficult and more expensive to obtain,
and we may be required to accept reduced coverage or incur
higher costs to obtain coverage than what we paid under Clear
Channel Communications policies that is satisfactory to us
and our officers or directors. We are presently evaluating and
monitoring regulatory developments and cannot estimate the
timing or magnitude or additional costs we may incur as a result.
If, following the spin-off, we are unable to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act of
2002, or our internal control over financial reporting is not
effective, the reliability of our financial statements may be
questioned and our stock price may suffer.
Section 404 of the Sarbanes-Oxley Act of 2002 requires any
company subject to the reporting requirements of the
U.S. securities laws to do a comprehensive evaluation of
its and its consolidated subsidiaries internal control
over financial reporting. To comply with this statute, we will
be required to document and test our internal control
procedures; our management will be required to assess and issue
a report concerning our internal control over financial
reporting; and our independent auditors will be required to
issue an opinion on managements assessment of those
matters. Our compliance with Section 404 of the
Sarbanes-Oxley Act will first be tested in connection with the
filing of our annual Report on Form 10-K for the fiscal
year ending December 31, 2006. The rules governing the
standards that must be met for management to assess our internal
control over financial reporting are new and complex and require
significant documentation, testing and possible remediation to
meet the detailed standards under the rules. During the course
of its testing, our management may identify material weaknesses
or deficiencies which may not be remedied in time to meet the
deadline imposed by the Sarbanes-Oxley Act. If our management
cannot favorably assess the effectiveness of our internal control
39
over financial reporting or our auditors identify material
weaknesses in our internal control, investor confidence in our
financial results may weaken, and our stock price may suffer.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this information
statement, including the sections entitled Summary,
Risk Factors, Managements Discussion and
Analysis of Financial Condition and Results of Operations
and Business, that are based on our
managements beliefs and assumptions and on information
currently available to our management. Forward-looking
statements include, but are not limited to, the information
concerning our possible or assumed future results of operations,
business strategies, financing plans, competitive position,
potential growth opportunities, potential operating performance
improvements, benefits resulting from our spin-off from Clear
Channel Communications, the effects of competition and the
effects of future legislation or regulations. Forward-looking
statements include all statements that are not historical facts
and can be identified by the use of forward-looking terminology
such as the words believe, expect,
plan, intend, anticipate,
estimate, predict,
potential, continue, may,
will, should or the negative of these
terms or similar expressions.
Forward-looking statements involve risks, uncertainties and
assumptions. Actual results may differ materially from those
expressed in these forward-looking statements. The risk factors
discussed in Risk Factors beginning on page 20
set forth many of the risks and uncertainties that may cause
actual results to differ from those expressed in the forward
looking statements. There may be other risks and uncertainties
that could have a similar impact. Therefore, you should not put
undue reliance on any forward-looking statements. We do not have
any intention or obligation to update forward-looking statements
after we distribute this information statement.
40
THE DISTRIBUTION
Reasons for the Spin-Off
In April 2005, Clear Channel Communications announced, among
other things, that it had determined that the separation of CCE
Spinco from Clear Channel Communications is in the best
interests of Clear Channel Communications, its stockholders and
us, by providing each company with certain opportunities and
benefits, such as:
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The separation will allow us to develop incentive programs to
better attract, retain and motivate current and future employees
through the use of equity-based compensation policies that more
directly link employee compensation with our financial
performance. Similarly, the removal of our fundamentally
different business from Clear Channel Communications will more
closely correlate Clear Channel Communications
equity-based compensation with Clear Channel
Communications financial performance. |
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The separation will permit the independent management of each of
us and Clear Channel Communications to focus its attention and
its companys financial resources on its respective
distinct business and business challenges and to lead each
independent company to adopt strategies and pursue objectives
that are appropriate to its respective business. This is of
particular importance given the fundamental differences between
our respective businesses: Clear Channel Communications
other two synergistic businesses radio broadcasting
and outdoor advertising typically generate high cash
flows on a relatively stable basis and have low capital
expenditure requirements while our business tends to be a more
volatile, lower margin, capital intensive business. |
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We anticipate that we may use our stock in the future in
connection with acquisitions and financings. In this regard, we
expect to have better access to the equity capital markets after
the separation as our investors will not be forced to understand
and make investment decisions with respect to Clear Channel
Communications other two businesses that are fundamentally
different from our business. At the same time, Clear Channel
Communications, which also expects to use its stock in the
future in connection with acquisitions and financings, will
similarly benefit since its investors will not need to
understand and make investment decisions with respect to our
business. |
Clear Channel Communications announced a plan to strategically
realign its businesses on April 29, 2005 through the
initial public offering, or IPO, of 10% of the common stock of
Clear Channel Outdoor and a 100% spin-off of CCE Spinco. The
strategic plan also provided for a 50% increase to Clear Channel
Communications regular dividend and the return of
approximately $1.6 billion of capital to stockholders in
the form of dividends, share repurchase or both. After
evaluating various alternatives, the board of directors of Clear
Channel Communications determined that this series of
transactions represented the best course of action for
stockholders. The timing of the transactions was undertaken
simultaneously as part of the April 29th announcement to
effect the required internal reorganizations and other
activities in an efficient manner and, in part, to help fund the
$1.6 billion return of capital to stockholders.
The decision to sell 10% of Clear Channel Outdoors shares
in an IPO was based on several factors, including the ability to
establish a separately traded currency to highlight the value of
the outdoor business and attract a stockholder base interested
in this business while permitting Clear Channel Communications
stockholders to benefit from the retained interest in the
business. Clear Channel Communications believes that a tax-free
distribution of shares in CCE Spinco offers Clear Channel
Communications and its stockholders the greatest long-term value
as described above and is the most tax efficient way to separate
the companies. On November 11, 2005, Clear Channel
Communications completed the IPO of 35,000,000 shares of
Class A common stock of Clear Channel Outdoor at a price of
$18.00 per share. Clear Channel Communications retained
315,000,000 shares of Class B common stock of Clear
Channel Outdoor, each of which is entitled to 20 votes per
share. After the IPO, Clear Channel Communications retained and
owns 90% of the outstanding stock of Clear Channel Outdoor,
representing 99.4% of its total voting power.
41
The Separation of CCE Spinco from Clear Channel
Communications
We are currently a wholly-owned subsidiary of Clear Channel
Communications. We were incorporated in Delaware on
August 2, 2005, in preparation for our spin-off from Clear
Channel Communications. Prior to the distribution, Clear Channel
Communications will contribute or otherwise transfer to us
generally all of the entertainment assets, and we will assume
generally all of the liabilities, comprising the CCE Spinco
business. We call this transfer of assets and assumption of
liabilities the separation. We and Clear Channel
Communications have agreed to transfer legal title to any
remaining assets of the CCE Spinco business not transferred
prior to the distribution, most of which are foreign assets and
liabilities subject to regulatory and other delays, as soon as
practicable. In the interim, we will operate and receive the
economic benefits of (and bear the economic burdens of) these
assets. These assets are not, individually or in the aggregate,
material to our business. The information included in this
information statement, including our combined financial
statements, assumes the completion of all of these transfers.
Description of the Spin-Off
Clear Channel Communications will effect the spin-off by
distributing on a pro rata basis 100% of our outstanding common
stock to Clear Channel Communications stockholders, which we
refer to as the distribution, or the spin-off,
on ,
2005, the distribution date. As a result of the distribution,
each Clear Channel Communications stockholder will:
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receive one share of our common stock (and a related preferred
stock purchase right) for every eight shares of Clear
Channel Communications common stock it owns; and |
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retain its shares in Clear Channel Communications. |
Manner of Effecting the Distribution
You will receive one share of our common stock (and a related
preferred stock purchase right) for every eight shares of
Clear Channel Communications common stock held on the record
date. The shares of our common stock will be validly issued,
fully paid and nonassessable.
Clear Channel Communications stockholders will not be
required to pay for shares of our common stock received in the
distribution or to surrender or exchange shares of Clear Channel
Communications common stock in order to receive our common stock
or to take any other action in connection with the distribution.
No vote of Clear Channel Communications stockholders is required
or sought in connection with the distribution, and Clear Channel
Communications stockholders have no appraisal rights in
connection with the distribution.
As part of the spin-off, we will be adopting a book-entry share
transfer and registration system for our common stock. Instead
of receiving physical share certificates, registered holders of
eight or more shares of Clear Channel Communications common
stock on the record date will have their shares of CCE Spinco
common stock distributed on the date of the spin-off credited to
book-entry accounts established for them by the distribution
agent. The distribution agent will mail an account statement to
each such registered holder stating the number of shares of our
common stock credited to the holders account. After the
spin-off, any holder may request:
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a transfer of all or a portion of their CCE Spinco shares to a
brokerage or other account; and |
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receipt of one or more physical share certificates representing
their CCE Spinco shares. |
Registered holders of fewer than eight shares of Clear
Channel Communications common stock, or any multiple thereof, on
the record date, which would entitle them to receive less than
one whole share of our common stock, will receive cash in lieu
of fractional shares. Fractional shares of our common stock will
not be issued to Clear Channel Communications stockholders as
part of the distribution nor credited to book-entry accounts.
Instead, the distribution agent will aggregate all of these
fractional shares and sell them in the open market at then
prevailing prices on behalf of these holders. These holders will
receive
42
cash payments in the amount of their proportionate share of the
net sale proceeds from the sale of the aggregated fractional
shares, based upon the average gross selling price per share of
our common stock after making appropriate deductions for any
required withholdings for U.S. federal income tax purposes.
See Material U.S. Federal Income Tax
Consequences of the Distribution for a discussion of the
U.S. federal income tax treatment of proceeds received from
the sale of fractional shares. We will bear the cost of
brokerage fees incurred in connection with these sales. The
amount of these brokerage fees is not expected to be material to
us. We anticipate that these sales will occur as soon after the
date of the spin-off as practicable as determined by the
distribution agent. None of Clear Channel Communications, CCE
Spinco or the distribution agent will guarantee any minimum sale
price for the fractional shares of CCE Spinco common stock.
Neither we nor Clear Channel Communications will pay any
interest on the proceeds from the sale of fractional shares. The
distribution agent will have the sole discretion to select the
broker-dealer(s) through which to sell the shares and to
determine when, how and at what price to sell the shares.
Further, neither the distribution agent nor the selected
broker-dealer(s) will be our affiliates or affiliates of Clear
Channel Communications.
If you become a registered holder of our common stock in
connection with the spin-off and you prefer to receive one or
more physical share certificates representing your shareholding
of our common stock, you will receive one or more certificates
for all whole shares of CCE Spinco common stock and, if
applicable, cash for any fractional interest. The distribution
agent will mail you certificates representing your proportionate
number of whole shares of our common stock as soon after the
date of request as practicable.
For those holders of Clear Channel Communications common stock
who hold their shares through a broker, bank or other nominee,
the distribution agent will credit the shares of our common
stock to the accounts of those nominees who are registered
holders, who, in turn, will credit their customers
accounts with our common stock. We and Clear Channel
Communications anticipate that brokers, banks and other nominees
will generally credit their customers accounts with CCE
Spinco common stock on or shortly
after ,
2005.
Delivery of a share of our common stock in connection with the
distribution also will constitute the delivery of the preferred
stock purchase right associated with the share. The existence of
the preferred stock purchase rights may deter a potential
acquirer from making a hostile takeover proposal or a tender
offer. For a more detailed discussion of these rights, see
Description of Our Capital Stock The Rights
Agreement.
Results of the Separation and the Distribution
After the separation and distribution, we will be a separate
publicly-traded company. Immediately following the distribution,
we expect to have
approximately beneficial
holders of shares of our common stock, based on the number of
beneficial stockholders of Clear Channel Communications common
stock on November 4, 2005, and approximately
67,565,591 shares of our common stock outstanding. The
actual number of shares to be distributed will be determined on
the record date and will reflect any exercise of Clear Channel
Communications options between the date Clear Channel
Communications board declares the dividend for the
spin-off and the record date for the spin-off.
We and Clear Channel Communications will be parties to a number
of agreements that govern our spin-off from Clear Channel
Communications and our future relationship. For a more detailed
description of these agreements, see Our Relationship with
Clear Channel Communications After the Distribution.
The distribution will not affect the number of outstanding
shares of Clear Channel Communications common stock or any
rights of Clear Channel Communications stockholders.
Incurrence of Debt
In the past, our capital requirements have been funded by Clear
Channel Communications. However, following the spin-off, Clear
Channel Communications will not provide funds to finance our
working
43
capital or other cash requirements. Therefore, we currently plan
to enter into a senior secured credit facility with lenders to
fund a portion of our working capital or other cash requirements
after the spin-off. We also intend to issue Series A and
Series B redeemable preferred stock of Holdco #2 as
described below prior to or concurrently with the completion of
the spin-off. We intend to use $200.0 million of borrowings
under the term loan portion of our senior secured credit
facility and the $20 million of proceeds from the issuance
of the Series A redeemable preferred stock of
Holdco #2 to repay a portion of the indebtedness we owe
Clear Channel Communications. We intend to use the remaining
$125.0 million of borrowings under the term loan portion of
our senior secured credit facility for general corporate
proposals, including working capital, potential acquisitions and
stock repurchases.
Senior Secured Credit Facility. Prior to or concurrently
with the completion of the distribution, one of our operating
subsidiaries, Holdco #3, which owns more than 95% of the
gross value of our assets, will enter into a $575.0 million
senior secured credit facility consisting of:
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a $325.0 million
71/2-year
term loan; and |
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a $250.0 million
61/2-year
revolving credit facility, of which up to $200.0 million
will be available for the issuance of letters of credit and up
to $100.0 million will be available for borrowings in
foreign currencies. |
Subject to then market pricing and maturity extending longer
than that of the senior secured credit facility, we will be able
to add additional term and revolving credit facilities in an
aggregate amount not to exceed $250.0 million. We
anticipate that the senior secured credit facility will be
secured by a first priority lien on substantially all of our
domestic assets (other than real property and deposits
maintained by us in connection with promoting or producing live
entertainment events) and a pledge of the capital stock of our
domestic subsidiaries and a portion of the capital stock of
certain of our foreign subsidiaries. Borrowings in foreign
currencies by our foreign subsidiaries will, in addition, be
secured by a first priority lien on substantially all of our
foreign assets (other than real property and deposits maintained
by us in connection with promoting or producing live
entertainment events) and a pledge of the capital stock of all
subsidiaries held by such borrowing subsidiary. We expect that
approximately $200.0 million of the revolving credit
facility will remain available for working capital and general
corporate purposes of Holdco #3 and its subsidiaries
immediately following the completion of the distribution, and
after the transfer of approximately $50.0 million of
letters of credit previously issued under Clear Channel
Communications credit facilities on behalf of certain
Holdco #3 subsidiaries. The issuance of letters of credit
will reduce this availability by the notional amount of issued
letters of credit. However, on or prior to the distribution
date, we may draw advances under the senior secured credit
facility for working capital and other general corporate
purposes. See Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources and Description of
Indebtedness for more information.
The agreements governing the senior secured credit facility are
subject to ongoing negotiation. We cannot be certain the terms
described herein will not change or be supplemented. See
Description of Indebtedness.
Preferred Stock Issuance
Prior to the completion of the distribution, third-party
investors unrelated to Clear Channel Communications will acquire
all of the shares of Series A (voting) and
Series B (non-voting) mandatorily redeemable preferred
stock of Holdco #2, the parent company of Holdco #3,
one of our operating subsidiaries which owns more than 95% of
the gross value of our assets. The preferred stock will have an
aggregate liquidation preference of $40 million. We expect
the Series A redeemable preferred stock will have a
liquidation preference of $20 million and will be issued to
a third-party investor for $20 million. We anticipate the
Series B redeemable preferred stock will have a liquidation
preference of $20 million and will be issued to Clear
Channel Communications in connection with the Holdco #3
Exchange for no cash and immediately resold by Clear Channel
Communications to a third-party purchaser for $20 million.
See Our Relationship with Clear Channel Communications
After the Distribution Tax Matters Agree-
44
ment Holdco #3 Loss. We will not receive
any of the proceeds from the sale of the Series B
redeemable preferred stock sold by Clear Channel Communications.
The issuance and sale of the Series A and Series B
redeemable preferred stock together with the Holdco #3
Exchange are structured to raise desired financing and to
facilitate the overall tax efficiency of the distribution.
The holders of Series A redeemable preferred stock will
have the right to appoint one out of four members to
Holdco #2s board of directors and to otherwise
control 25% of the voting power of all outstanding shares of
Holdco #2. The Series B redeemable preferred stock
will have no voting rights other than the right to vote as a
class with the Series A redeemable preferred stock to elect
one additional member to the board of directors of
Holdco #2 in the event Holdco #2 breaches certain
terms of the designations of the preferred stock. The holders of
Holdco #2 preferred stock will not have the right to
appoint or vote for any of our directors. Each of the
Series A and Series B preferred stock is expected to
pay an annual cash dividend of approximately 10% and will be
mandatorily redeemable upon the six year anniversary of the date
of issuance. Holdco #2 will be required to make an offer to
purchase the Series A and Series B redeemable
preferred stock at 101% of each series liquidation
preference in the event of a change of control. The terms of the
preferred stock are subject to ongoing negotiation. We cannot be
certain the terms described in this information statement will
not change or be supplemented.
We will use the $20 million from the issuance of the
Series A preferred stock to repay a portion of our
intercompany promissory note to Clear Channel Communications.
The issuance of the Series B redeemable preferred stock to
Clear Channel Communications will be part of the Holdco #3
Exchange, and the sale thereof to a third-party will raise
$20 million for Clear Channel Communications, from which we
will not receive any proceeds. We intend to use all proceeds
from borrowings under the term loan portion of our senior
secured credit facility and the $20 million of proceeds
from the issuance of the Series A redeemable preferred
stock of Holdco #2 to repay a portion of the intercompany
note.
Material U.S. Federal Income Tax Consequences of the
Distribution
The following is a summary of certain material U.S. federal
income tax consequences relating to our spin-off from Clear
Channel Communications. This summary is based on the Code, the
Treasury regulations promulgated thereunder, and interpretations
of the Code and the Treasury regulations by the courts and the
IRS, in effect as of the date hereof, and all of which are
subject to change, possibly with retroactive effect. This
summary does not discuss all the tax considerations that may be
relevant to Clear Channel Communications stockholders in light
of their particular circumstances, nor does it address the
consequences to Clear Channel Communications stockholders
subject to special treatment under the U.S. federal income
tax laws (such as non-U.S. persons, insurance companies,
dealers or brokers in securities or currencies, tax-exempt
organizations, financial institutions, mutual funds,
pass-through entities and investors in such entities, holders
who hold their shares as a hedge or as part of a hedging,
straddle, conversion, synthetic security, integrated investment
or other risk-reduction transaction or who are subject to
alternative minimum tax or holders who acquired their shares
upon the exercise of employee stock options or otherwise as
compensation). In addition, this summary does not address the
U.S. federal income tax consequences to those Clear Channel
Communications stockholders who do not hold their Clear Channel
Communications common stock as a capital asset. Finally, this
summary does not address any state, local or foreign tax
consequences. CLEAR CHANNEL COMMUNICATIONS STOCKHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
U.S. FEDERAL, STATE AND LOCAL AND NON-U.S. TAX
CONSEQUENCES OF THE SPIN-OFF TO THEM.
The spin-off is conditioned upon Clear Channel
Communications receipt of a private letter ruling from the
IRS and the opinion of Skadden, Arps, Slate, Meagher &
Flom LLP, in each case, to the effect that the spin-off will
qualify as a tax-free distribution for U.S. federal income
tax purposes under Sections 355 and 368(a)(1)(D) of the
Code. Assuming the spin-off so qualifies: (i) no gain or
loss will be recognized by (and no amount will be included in
the income of) Clear Channel Communications common stockholders
upon their receipt of shares of CCE Spinco common stock in the
spin-off; (ii) any cash received in lieu of fractional
share interests in CCE Spinco will give rise to gain or loss
equal to the
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difference between the amount of cash received and the tax basis
allocable to the fractional share interests (determined as
described below), and such gain or loss will be capital gain or
loss if the Clear Channel Communications common stock on which
the distribution is made is held as a capital asset on the date
of the spin-off; (iii) the aggregate basis of the Clear
Channel Communications common stock and the CCE Spinco common
stock in the hands of each Clear Channel Communications common
stockholder after the spin-off (including any fractional
interests to which the stockholder would be entitled) will equal
the aggregate basis of Clear Channel Communications common stock
held by the stockholder immediately before the spin-off,
allocated between the Clear Channel Communications common stock
and the CCE Spinco common stock in proportion to the relative
fair market value of each on the date of the spin-off; and
(iv) the holding period of the CCE Spinco common stock
received by each Clear Channel Communications common stockholder
will include the holding period at the time of the spin-off for
the Clear Channel Communications common stock on which the
distribution is made, provided that the Clear Channel
Communications common stock is held as a capital asset on the
date of the spin-off.
Although a private letter ruling from the IRS generally is
binding on the IRS, if the factual representations or
assumptions made in the letter ruling request are untrue or
incomplete in any material respect, we will not be able to rely
on the ruling. Furthermore, the IRS will not rule on whether a
distribution satisfies certain requirements necessary to obtain
tax-free treatment under Section 355 of the Code. Rather,
the ruling will be based upon representations by Clear Channel
Communications that these conditions have been satisfied, and
any inaccuracy in such representations could invalidate the
ruling. Therefore, in addition to obtaining the ruling from the
IRS, Clear Channel Communications has made it a condition to the
spin-off that Clear Channel Communications obtain an opinion of
Skadden, Arps, Slate, Meagher & Flom LLP that the
distribution will qualify as a tax-free distribution for
U.S. federal income tax purposes under Sections 355
and 368(a)(1)(D) of the Code. The opinion will rely on the
ruling as to matters covered by the ruling. In addition, the
opinion will be based on, among other things, certain
assumptions and representations as to factual matters made by
Clear Channel Communications and us, which if incorrect or
inaccurate in any material respect would jeopardize the
conclusions reached by counsel in its opinion. The opinion will
not be binding on the IRS or the courts, and the IRS or the
courts may not agree with the opinion.
Notwithstanding receipt by Clear Channel Communications of the
ruling and opinion of counsel, the IRS could assert that the
distribution does not qualify for tax-free treatment for
U.S. federal income tax purposes. If the IRS were
successful in taking this position, our initial public
stockholders and Clear Channel Communications could be subject
to significant U.S. federal income tax liability. In
general, Clear Channel Communications would be subject to tax as
if it had sold the common stock of our company in a taxable sale
for its fair market value and our initial public stockholders
would be subject to tax as if they had received a taxable
distribution equal to the fair market value of our common stock
that was distributed to them. In addition, even if the
distribution otherwise were to qualify under Section 355 of
the Code, it may be taxable to Clear Channel Communications (but
not to Clear Channel Communications stockholders) under
Section 355(e) of the Code, if the distribution were later
deemed to be part of a plan (or series of related transactions)
pursuant to which one or more persons acquire directly or
indirectly stock representing a 50% or greater interest in Clear
Channel Communications or us. For this purpose, any acquisitions
of Clear Channel Communications stock or of our common stock
within the period beginning two years before the distribution
and ending two years after the distribution are presumed to be
part of such a plan, although we or Clear Channel Communications
may be able to rebut that presumption.
Although the taxes, if any, resulting from a taxable
distribution generally would be imposed on Clear Channel
Communications and our initial public stockholders, we have
agreed in the tax matters agreement to indemnify Clear Channel
Communications and its affiliates against all tax-related
liabilities, if any, caused by the failure of the spin-off to
qualify as a tax-free transaction under Section 355 of the
Code (including as a result of Section 355(e) of the Code)
if the failure to so qualify is attributable to actions, events
or transactions relating to our stock, assets or business, or a
breach of the relevant representations or covenants made by us
in the tax matters agreement. If the failure of the spin-off to
qualify under
46
Section 355 of the Code is for any reason for which neither
we nor Clear Channel Communications is responsible, we and Clear
Channel Communications have agreed in the tax matters agreement
that we will each be responsible for 50% of the tax related
liabilities arising from the failure to so qualify. See
Our Relationship with Clear Channel Communications After
the Distribution Tax Matters Agreement for a
more detailed discussion of the tax matters agreement between
Clear Channel Communications and us.
U.S. Treasury regulations require each stockholder that
receives stock in a spin-off to attach to the stockholders
U.S. federal income tax return for the year in which the
spin-off occurs a detailed statement setting forth certain
information relating to the tax-free nature of the spin-off.
Shortly after the spin-off, Clear Channel Communications will
provide stockholders who will receive CCE Spinco shares in the
spin-off with the information necessary to comply with that
requirement.
YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISORS CONCERNING THE
U.S. FEDERAL, STATE AND LOCAL AND NON-U.S. TAX
CONSEQUENCES OF THE SPIN-OFF TO YOU.
For a description of the agreements under which we and Clear
Channel Communications have provided for tax sharing and other
tax matters, see Our Relationship with Clear Channel
Communications After the Distribution Tax Matters
Agreement.
Market for Our Common Stock
There is currently no public market for our common stock. A
condition to the distribution is the listing on the New York
Stock Exchange of our common stock. Our common stock has been
approved for listing on the NYSE under the symbol
LYV. We anticipate that trading of our common stock
will commence trading on a when-issued basis on or shortly
before the record date. When-issued trading refers
to a sale or purchase made conditionally because the security
has been authorized but not yet issued. On the first trading day
following the distribution date, when-issued trading with
respect to our common stock will end and regular way trading
will begin. Regular way trading refers to trading
after a security has been issued and typically involves a
transaction that settles on the third full business day
following the date of the transaction. We cannot predict what
the trading prices for our common stock will be before or after
the distribution date. In addition, we cannot predict any change
that may occur in the trading price of Clear Channel
Communications common stock as a result of the
distribution.
The shares of our common stock distributed to Clear Channel
Communications stockholders will be freely transferable, except
for shares received by persons that may have a special
relationship or affiliation with us.
Pre-Distribution Transactions and Distribution Conditions
We expect that the distribution will be effective on the
distribution
date, ,
2005, provided that, among other conditions and transactions
described in this information statement:
|
|
|
|
|
the SEC has declared effective our registration statement on
Form 10, of which this information statement is a part,
under the Securities Exchange Act of 1934, as amended, and no
stop order relating to the registration statement is in effect; |
|
|
|
we and Clear Channel Communications have received all permits,
registrations and consents required under the securities or blue
sky laws of states or other political subdivisions of the United
States or of foreign jurisdictions in connection with the
distribution; |
|
|
|
Clear Channel Communications has received a private letter
ruling from the IRS and the opinion of Skadden, Arps, Slate,
Meagher & Flom LLP, in each case, to the effect that
the spin-off will qualify as a tax-free distribution for
U.S. federal income tax purposes under Sections 355
and 368(a)(1)(D) of the Code; |
|
|
|
Clear Channel Communications has contributed $383.0 million
of our outstanding intercompany note to Clear Channel
Communications to our capital and we have repaid the remaining
portion of |
47
|
|
|
|
|
the intercompany note to Clear Channel Communications, prior to
or concurrently with the distribution date; |
|
|
|
no order, injunction or decree issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing
consummation of the distribution or any of the transactions
related thereto, including the transfers of assets and
liabilities contemplated by the master separation and
distribution agreement, is in effect; |
|
|
|
we and Clear Channel Communications have received an opinion
that we will be solvent following the distribution and the
concurrent transactions described herein; |
|
|
|
the Series A redeemable preferred stock and the
Series B redeemable preferred stock described under
The Distribution Preferred Stock
Issuance have been issued; |
|
|
|
we have entered into the senior secured credit facility
described under Description of Indebtedness; and |
|
|
|
we have received any material government approvals and other
consents necessary to consummate the distribution. |
The fulfillment of the foregoing transactions and conditions
will not create any obligations on Clear Channel
Communications part to effect the distribution, and Clear
Channel Communications board of directors has reserved the
right to amend, modify or abandon the distribution and the
related transactions at any time prior to the distribution date.
Clear Channel Communications board of directors may, in
its sole discretion, also waive any of these conditions.
In addition, Clear Channel Communications has the right not to
complete the distribution if, at any time, Clear Channel
Communications board of directors determines, in its sole
discretion, that the distribution is not in the best interest of
Clear Channel Communications or its stockholders, or that market
conditions are such that it is not advisable to spin-off the
entertainment business.
Reason for Furnishing this Information Statement
This information statement is being furnished solely to provide
information to Clear Channel Communications stockholders who
will receive shares of CCE Spinco common stock in the
distribution. It is not and is not to be construed as an
inducement or encouragement to buy, hold or sell any of our
securities. We believe that the information contained in this
information statement is accurate as of the date set forth on
the cover. Changes may occur after that date and neither Clear
Channel Communications nor we undertake any obligation to update
the information except in the normal course of our respective
public disclosure obligations.
DIVIDEND POLICY
We presently intend to retain future earnings, if any, to
finance the expansion of our business. Therefore, we do not
expect to pay any cash dividends in the foreseeable future.
Moreover, the terms of our senior secured credit facility and
the designations of Holdco #2s preferred stock limit
the amount of funds which we will have available to declare and
distribute as dividends on our common stock. Payment of future
cash dividends, if any, will be at the discretion of our board
of directors in accordance with applicable law after taking into
account various factors, including our financial condition,
operating results, current and anticipated cash needs, plans for
expansion and contractual restrictions with respect to the
payment of dividends.
48
CAPITALIZATION
The following table sets forth our capitalization (1) on an
actual basis as of September 30, 2005 and (2) on pro
forma basis as of September 30, 2005 as adjusted to give
effect to:
|
|
|
|
|
the distribution of our common stock to the stockholders of
Clear Channel Communications; |
|
|
|
the incurrence of debt and related debt issuance costs,
comprised of a $325.0 million senior secured term loan
under the $575.0 million senior secured credit facility to
be entered into prior to or concurrently with the completion of
the distribution; |
|
|
|
the issuance of mandatorily redeemable Series A preferred
stock by Holdco #2 having a liquidation preference of
$20 million to a third-party investor for $20 million; |
|
|
|
the issuance to Clear Channel Communications of mandatorily
redeemable Series B preferred stock by Holdco #2
having a liquidation preference of $20 million in
connection with the Holdco #3 Exchange, for which we will
not receive any cash; |
|
|
|
|
the contribution by Clear Channel Communications to our capital
of $508.0 million of the intercompany debt owed to Clear
Channel Communications; |
|
|
|
|
|
the retention of $125.0 million of the proceeds from
borrowings under the term loan portion of our senior secured
credit facility to be used for general corporate purposes,
including working capital, potential acquisitions and stock
repurchases; and |
|
|
|
|
|
the use of $200.0 million from borrowings under the term
loan portion of our senior secured credit facility and
$20 million of proceeds from the sale of the Series A
preferred stock offering to repay the remaining portion of
intercompany debt owed to Clear Channel Communications. |
|
Each of the Series A and Series B preferred stock is
expected to pay an annual cash dividend of approximately 10% and
will be mandatory redeemable upon the six year anniversary of
the date of issuance.
This table should be read in conjunction with Selected
Combined Financial Data, Unaudited Pro Forma
Condensed Combined Financial Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our combined financial statements and the
notes to our combined financial statements included elsewhere in
this information statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005 | |
|
|
| |
|
|
Actual | |
|
As Adjusted | |
(In thousands) |
|
| |
|
| |
|
|
(unaudited) | |
Cash and cash equivalents
|
|
$ |
273,474 |
|
|
$ |
398,474 |
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$ |
22,546 |
|
|
$ |
25,796 |
|
Long-term debt, net of current portion:
|
|
|
|
|
|
|
|
|
|
Debt with Clear Channel Communications
|
|
|
725,495 |
|
|
|
|
|
|
Senior secured credit facility
|
|
|
|
|
|
|
321,750 |
|
|
Other long-term debt
|
|
|
20,038 |
|
|
|
20,038 |
|
Mandatorily redeemable preferred stock(1):
|
|
|
|
|
|
|
|
|
|
Holdco #2 Series A preferred stock
|
|
|
|
|
|
|
20,000 |
|
|
Holdco #2 Series B preferred stock
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt and mandatorily redeemable preferred stock
|
|
|
745,533 |
|
|
|
381,788 |
|
Total owners equity
|
|
|
234,016 |
|
|
|
722,011 |
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
1,002,095 |
|
|
$ |
1,129,595 |
|
|
|
|
|
|
|
|
49
|
|
(1) |
We classify the mandatorily redeemable preferred stock as other
long-term obligations in accordance with Statement of Financial
Accounting Standards No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity. |
50
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited pro forma condensed combined financial
information is derived from our audited combined financial
statements for the year ended December 31, 2004 and our
unaudited combined interim financial statements for the nine
months ended September 30, 2005, each of which is included
elsewhere in this information statement. The unaudited combined
interim financial statements are derived from our unaudited
accounting records for that period and have been prepared on a
basis consistent with the audited combined financial statements
and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a
fair presentation of such data. The results for the nine months
ended September 30, 2005 are not necessarily indicative of
the results to be expected for the full year. The unaudited pro
forma condensed combined financial information has been prepared
to reflect adjustments to our historical financial information
to give effect to the following transactions, each as described
elsewhere in this information statement, as if those
transactions had been completed at earlier dates:
|
|
|
|
|
the distribution of our common stock to the stockholders of
Clear Channel Communications; |
|
|
|
the incurrence of debt and related debt issuance costs,
comprised of a $325.0 million senior secured term loan
under the $575.0 million senior secured credit facility to
be entered into prior to or concurrently with the completion of
the distribution; |
|
|
|
the issuance of mandatorily redeemable Series A preferred
stock by Holdco #2 having a liquidation preference of
$20 million to a third-party investor for $20 million; |
|
|
|
the issuance to Clear Channel Communications of mandatorily
redeemable Series B preferred stock by Holdco #2
having a liquidation preference of $20 million in
connection with the Holdco #3 Exchange, for which we will
not receive any cash; |
|
|
|
|
the contribution by Clear Channel Communications to our capital
of $508.0 million of the intercompany debt owed to Clear
Channel Communications; |
|
|
|
|
|
the retention of $125.0 million of the proceeds from
borrowings under the term loan portion of our senior secured
credit facility to be used for general corporate purposes,
including working capital, potential acquisitions and stock
repurchases; and |
|
|
|
|
|
the use of $200.0 million from borrowings under the term
loan portion of our senior secured credit facility and
$20 million of proceeds from the sale of the Series A
preferred stock offering to repay the remaining portion of
intercompany debt owed to Clear Channel Communications. |
|
Each of the Series A and Series B preferred stock is
expected to pay an annual cash dividend of approximately 10% and
will be mandatory redeemable upon the six year anniversary of
the date of issuance.
The unaudited pro forma condensed combined statements of income
assume that these transactions occurred as of January 1,
2004 and the unaudited pro forma condensed combined balance
sheet assumes that these transactions occurred as of
September 30, 2005.
You should read the unaudited pro forma condensed combined
financial information in conjunction with our audited and
unaudited combined financial statements and the notes to the
audited and unaudited combined financial statements included
elsewhere herein. You should also read the sections
Selected Combined Financial Data and
Managements Discussion and Analysis of Financial
Condition and Results of Operations. The unaudited pro
forma condensed combined financial information is qualified by
reference to these sections, the audited and unaudited combined
financial statements and the notes to the audited and unaudited
combined financial statements, each of which is included
elsewhere in this information statement.
The historical financial and other data have been prepared on a
combined basis from Clear Channel Communications
consolidated financial statements using the historical results
of operations and bases of the assets and liabilities of Clear
Channel Communications businesses and give effect to allocations
of expenses
51
from Clear Channel Communications. The unaudited pro forma
combined financial information is not indicative of our future
performance or what our results of operations and financial
position would have been if we had operated as a separate
company during the periods presented or if the transactions
reflected therein had actually occurred as of January 1,
2004 or September 30, 2005, as the case may be. The
unaudited pro forma condensed combined statement of income does
not reflect the complete impact of one-time and ongoing
incremental costs required to operate as a separate
publicly-traded company. Clear Channel Communications allocated
to us $8.5 million in 2002, $9.2 million in 2003 and
$9.8 million in 2004 of expenses incurred by it for
providing us accounting, treasury, tax, legal, public affairs,
executive oversight, human resources and other services. Through
September 30, 2005, Clear Channel Communications allocated
to us $6.9 million of expenses. By the end of 2005, we
expect to have assumed responsibility for substantially all of
these services and their related expenses. We currently believe
the estimate for the costs of these services could be
approximately $11.0 million to $13.0 million in 2006,
our first full year as a separate publicly-traded company.
However, the actual total costs of these services associated
with our transition to, and operating as, a separate
publicly-traded company could be significantly greater than our
estimates.
Unaudited Pro Forma Condensed Combined Statements of
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 | |
|
Nine Months Ended September 30, 2005 | |
|
|
| |
|
| |
|
|
Historical | |
|
Adjustments | |
|
Pro Forma | |
|
Historical | |
|
Adjustments | |
|
Pro Forma | |
(In thousands, except per share amounts) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
2,806,128 |
|
|
$ |
|
|
|
$ |
2,806,128 |
|
|
$ |
2,184,588 |
|
|
$ |
|
|
|
$ |
2,184,588 |
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
2,645,293 |
|
|
|
|
|
|
|
2,645,293 |
|
|
|
2,050,631 |
|
|
|
|
|
|
|
2,050,631 |
|
|
Depreciation and amortization
|
|
|
64,095 |
|
|
|
|
|
|
|
64,095 |
|
|
|
46,392 |
|
|
|
|
|
|
|
46,392 |
|
|
Loss (gain) on sale of operating assets
|
|
|
6,371 |
|
|
|
|
|
|
|
6,371 |
|
|
|
(426 |
) |
|
|
|
|
|
|
(426 |
) |
|
Corporate expenses
|
|
|
31,386 |
|
|
|
|
|
|
|
31,386 |
|
|
|
38,391 |
|
|
|
|
|
|
|
38,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
58,983 |
|
|
|
|
|
|
|
58,983 |
|
|
|
49,600 |
|
|
|
|
|
|
|
49,600 |
|
Interest expense
|
|
|
3,119 |
|
|
|
25,255 |
(b) |
|
|
28,374 |
|
|
|
2,671 |
|
|
|
18,941 |
(b) |
|
|
21,612 |
|
Intercompany interest expense
|
|
|
42,355 |
|
|
|
(42,355 |
)(c) |
|
|
|
|
|
|
35,719 |
|
|
|
(35,719 |
)(c) |
|
|
|
|
Equity in earnings of nonconsolidated affiliates
|
|
|
2,906 |
|
|
|
|
|
|
|
2,906 |
|
|
|
157 |
|
|
|
|
|
|
|
157 |
|
Other income (expense) net
|
|
|
(1,690 |
) |
|
|
|
|
|
|
(1,690 |
) |
|
|
(4,157 |
) |
|
|
|
|
|
|
(4,157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
14,725 |
|
|
|
17,100 |
|
|
|
31,825 |
|
|
|
7,210 |
|
|
|
16,778 |
|
|
|
23,988 |
|
Income tax benefit (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
55,946 |
|
|
|
(6,840 |
)(d) |
|
|
49,106 |
|
|
|
11,975 |
|
|
|
(6,711 |
)(d) |
|
|
5,264 |
|
|
Deferred
|
|
|
(54,411 |
) |
|
|
|
|
|
|
(54,411 |
) |
|
|
(14,859 |
) |
|
|
|
|
|
|
(14,859 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
16,260 |
|
|
$ |
10,260 |
|
|
$ |
26,520 |
|
|
$ |
4,326 |
|
|
$ |
10,067 |
|
|
$ |
14,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted pro forma net income per common share(a)
|
|
$ |
0.24 |
|
|
|
|
|
|
$ |
0.39 |
|
|
$ |
0.06 |
|
|
|
|
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Unaudited Pro Forma Condensed Combined Statements of
Income
|
|
|
(a) |
|
Basic and diluted net income per share is calculated by dividing
net income available to common stockholders by
67,565,491 shares (based upon the number of outstanding
shares of Clear Channel Communications common stock at
November 4, 2005). |
|
|
(b) |
|
Includes estimated interest expense of $2.0 million and
$2.0 million related to dividends associated with the
Series A and Series B Preferred Stock, respectively.
Also includes estimated annual interest |
|
52
|
|
|
|
|
|
expense of $21.3 million related to $325.0 million of
indebtedness that we expect to incur prior to or concurrently
with the completion of the distribution, at an estimated annual
interest rate of 6.54%, which is based upon the current 12-month
LIBOR plus 1.75. Several factors could change the annual
interest rate, including but not limited to a change in our
credit rating or a change in the reference rates used under the
credit facilities. A 25 basis point change to the annual
interest rate would change our annual interest expense by
$0.8 million. We may incur additional interest expense if
we draw down under the $250.0 million revolving credit that
we expect to enter into prior to or concurrently with the
completion of the distribution. |
|
|
(c) |
|
Represents the elimination of intercompany interest expense
incurred pursuant to intercompany indebtedness between Clear
Channel Communications and us. |
|
(d) |
|
Represents estimated tax (expense) benefit related to the
estimated interest expense adjustments discussed in
notes (b) and (c) above at our combined statutory tax rate
of 40% for the year ended December 31, 2004 and for the
nine months ended September 30, 2005. |
Unaudited Pro Forma Condensed Combined Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005 | |
|
|
| |
|
|
Historical | |
|
Adjustments | |
|
Pro Forma | |
(In thousands) |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
Assets |
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
273,474 |
|
|
$ |
125,000 |
(a) |
|
$ |
398,474 |
|
|
Accounts receivable, net
|
|
|
241,936 |
|
|
|
|
|
|
|
241,936 |
|
|
Prepaid expenses
|
|
|
218,293 |
|
|
|
|
|
|
|
218,293 |
|
|
Other current assets
|
|
|
48,617 |
|
|
|
|
|
|
|
48,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
782,320 |
|
|
|
125,000 |
|
|
|
907,320 |
|
Property, plant & equipment, net
|
|
|
815,270 |
|
|
|
|
|
|
|
815,270 |
|
Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangibles, net
|
|
|
12,787 |
|
|
|
|
|
|
|
12,787 |
|
|
Goodwill
|
|
|
143,170 |
|
|
|
|
|
|
|
143,170 |
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
6,436 |
|
|
|
|
|
|
|
6,436 |
|
|
Investments in, and advances to, nonconsolidated affiliates
|
|
|
25,281 |
|
|
|
|
|
|
|
25,281 |
|
|
Deferred tax asset
|
|
|
87,069 |
|
|
|
|
|
|
|
87,069 |
|
|
Other assets
|
|
|
19,900 |
|
|
|
2,500 |
(b) |
|
|
22,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
1,892,233 |
|
|
$ |
127,500 |
|
|
$ |
2,019,733 |
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005 | |
|
|
| |
(In thousands) |
|
Historical | |
|
Adjustments | |
|
Pro Forma | |
|
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
|
Liabilities and Owners Equity |
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
67,125 |
|
|
$ |
|
|
|
$ |
67,125 |
|
|
Deferred income
|
|
|
240,753 |
|
|
|
|
|
|
|
240,753 |
|
|
Accrued expenses
|
|
|
469,354 |
|
|
|
|
|
|
|
469,354 |
|
|
Current portion of long-term debt
|
|
|
22,546 |
|
|
|
3,250 |
(c) |
|
|
25,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
799,778 |
|
|
|
3,250 |
|
|
|
803,028 |
|
Long-term debt
|
|
|
20,038 |
|
|
|
321,750 |
(c) |
|
|
341,788 |
|
Debt with Clear Channel Communications
|
|
|
725,495 |
|
|
|
(725,495 |
)(d) |
|
|
|
|
Other long-term liabilities
|
|
|
84,399 |
|
|
|
|
|
|
|
84,399 |
|
|
Holdco #2 Series A and Series B Preferred Stock
|
|
|
|
|
|
|
40,000 |
(e) |
|
|
40,000 |
|
Minority interest
|
|
|
28,507 |
|
|
|
|
|
|
|
28,507 |
|
Owners Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
676 |
(f) |
|
|
676 |
|
|
Additional paid-in capital
|
|
|
|
|
|
|
4,896,622 |
(g) |
|
|
4,896,622 |
|
|
Owners net investment
|
|
|
4,409,303 |
|
|
|
(4,409,303 |
)(h) |
|
|
|
|
|
Retained deficit
|
|
|
(4,183,529 |
) |
|
|
|
|
|
|
(4,183,529 |
) |
|
Accumulated other comprehensive income
|
|
|
8,242 |
|
|
|
|
|
|
|
8,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Owners Equity
|
|
|
234,016 |
|
|
|
487,995 |
|
|
|
722,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Owners Equity
|
|
$ |
1,892,233 |
|
|
$ |
127,500 |
|
|
$ |
2,019,733 |
|
|
|
|
|
|
|
|
|
|
|
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
as of September 30, 2005
|
|
|
|
(a) |
|
Represents $125.0 million of the net proceeds from
borrowings under the term loan portion of our senior secured
credit facility that will be retained as cash to be used for
general corporate purposes, including working capital, potential
acquisitions and stock repurchases. |
|
|
|
(b) |
|
We expect to record approximately $2.5 million in debt
issuance costs in connection with the incurrence of the debt
described in note (c) below. |
|
|
|
(c) |
|
Prior to or concurrently with the completion of the
distribution, we intend to incur $325.0 million in
long-term indebtedness, of which $3.3 million represents
the current portion. We may incur additional indebtedness if we
draw down under the $250.0 million revolving credit
facility that we expect to enter into prior to or concurrently
with the completion of the distribution. |
|
|
|
(d) |
|
Our debt with Clear Channel Communications will be paid or
otherwise contributed to our capital concurrently with or prior
to the distribution. |
|
|
|
(e) |
|
Represents the redemption value of the 200,000 shares of
Series A and the 200,000 shares of Series B preferred
stock issued by Holdco #2. |
|
|
|
(f) |
|
Represents the par value of 67,565,491 shares of our common
stock (based on the number of outstanding shares of Clear
Channel Communications common stock outstanding at
November 4, 2005). |
|
|
|
(g) |
|
Represents (i) the reclassification of owners
net investment into Additional paid-in
capital, (ii) the portion of our debt with Clear
Channel Communications that was contributed to our capital, and
(iii) the balancing entry to set up the par value of our
common stock. |
|
|
|
(h) |
|
Represents a reclassification into additional paid-in capital. |
|
54
SELECTED COMBINED FINANCIAL DATA
The historical financial and other data have been prepared on a
combined basis from Clear Channel Communications consolidated
financial statements using the historical results of operations
and bases of the assets and liabilities of Clear Channel
Communications businesses and give effect to allocations
of expenses from Clear Channel Communications. The historical
combined statement of income data set forth below does not
reflect changes that will occur in the operations and funding of
our company as a result of our spin-off from Clear Channel
Communications. The historical combined balance sheet data set
forth below reflect the assets and liabilities that were or are
expected to be transferred to our company in accordance with the
master agreement.
The selected combined financial data should be read in
conjunction with, and are qualified by reference to,
Unaudited Pro Forma Condensed Combined Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
historical audited and interim unaudited financial statements
and the accompanying notes thereto of us and our consolidated
subsidiaries included elsewhere in this information statement.
The combined statements of operations set forth below for the
period from August 1, 2000 through December 31, 2000
and the year ended December 31, 2001 and the combined
balance sheet data as of December 31, 2000 and 2001 are
derived from our unaudited financial statements. The combined
balance sheet data for the year ended December 31, 2002 is
derived from our audited financial statements. The combined
statements of operations and cash flow data for each of the
three years in the period ended December 31, 2004, and the
combined balance sheet data for each of the periods as of
December 31, 2003 and 2004, are derived from the audited
combined financial statements included elsewhere in this
information statement, and should be read in conjunction with
those combined financial statements and the accompanying notes.
The combined statement of operations and cash flow data set
forth below for the nine months ended September 30, 2005
and 2004, and the consolidated balance sheet data for the nine
months ended September 30, 2005, are derived from the
unaudited consolidated financial statements included elsewhere
in this information statement. In managements opinion,
these unaudited combined financial statements have been prepared
on substantially the same basis as the audited financial
statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation
of the financial data for the periods presented. The results of
operations for the interim period are not necessarily indicative
of the operating results for the entire year or any future
period.
We have not presented cash flow data for the five months
ended December 31, 2000 because this was our first partial
year of operations as a subsidiary of Clear Channel
Communications and this period is not comparable to the annual
periods presented. We also have not presented cash flow data for
the year ended December 31, 2001 because we believe it is
not comparable to the three subsequent years, which are
presented, because 2001 was the first full year after the
acquisition of our business by Clear Channel Communications and
during 2002, 2003 and 2004 Clear Channel Communications
significantly expanded our operations. Therefore, the cash flow
statements for these periods are not otherwise available and we
believe that the cost associated with creating the cash flow
statement for these periods would outweigh the benefits that the
data would provide to our stockholders.
The financial information presented below may not reflect what
our results of operations, financial position and cash flows
would have been had we operated as a separate, stand-alone
entity during the periods presented or what our results of
operations, financial position and cash flows will be in the
future.
55
The following table presents a non-GAAP financial measure,
OIBDAN, which we use to evaluate segment and consolidated
performance of our business. OIBDAN is not calculated or
presented in accordance with U.S. generally accepted
accounting principles, or GAAP. In Note 4 and
Non-GAAP Financial Measure below, we
explain OIBDAN and reconcile it to operating income (loss), its
most directly comparable financial measure calculated and
presented in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months | |
|
|
|
Nine Months Ended | |
|
|
Ended | |
|
Year Ended December 31, | |
|
September 30, | |
|
|
December 31, | |
|
| |
|
| |
(In thousands, except per share amounts) |
|
2000(1) | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
|
|
|
|
|
|
|
(unaudited) | |
Results of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
984,048 |
|
|
$ |
2,543,668 |
|
|
$ |
2,473,319 |
|
|
$ |
2,707,902 |
|
|
$ |
2,806,128 |
|
|
$ |
2,261,879 |
|
|
$ |
2,184,588 |
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
904,442 |
|
|
|
2,386,504 |
|
|
|
2,302,707 |
|
|
|
2,506,635 |
|
|
|
2,645,293 |
|
|
|
2,107,785 |
|
|
|
2,050,631 |
|
|
Depreciation and amortization
|
|
|
118,040 |
|
|
|
299,343 |
|
|
|
64,836 |
|
|
|
63,436 |
|
|
|
64,095 |
|
|
|
47,499 |
|
|
|
46,392 |
|
|
Loss (gain) on sale of operating assets
|
|
|
(369 |
) |
|
|
(1,278 |
) |
|
|
(15,241 |
) |
|
|
(978 |
) |
|
|
6,371 |
|
|
|
7,400 |
|
|
|
(426 |
) |
|
Corporate expenses
|
|
|
14,422 |
|
|
|
49,294 |
|
|
|
26,101 |
|
|
|
30,820 |
|
|
|
31,386 |
|
|
|
19,977 |
|
|
|
38,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(52,487 |
) |
|
|
(190,195 |
) |
|
|
94,916 |
|
|
|
107,989 |
|
|
|
58,983 |
|
|
|
79,218 |
|
|
|
49,600 |
|
Interest expense
|
|
|
17,758 |
|
|
|
9,476 |
|
|
|
3,998 |
|
|
|
2,788 |
|
|
|
3,119 |
|
|
|
2,198 |
|
|
|
2,671 |
|
Intercompany interest expense
|
|
|
17,643 |
|
|
|
65,501 |
|
|
|
58,608 |
|
|
|
41,415 |
|
|
|
42,355 |
|
|
|
32,550 |
|
|
|
35,719 |
|
Equity in earnings (loss) of nonconsolidated affiliates
|
|
|
1,958 |
|
|
|
6,690 |
|
|
|
(212 |
) |
|
|
1,357 |
|
|
|
2,906 |
|
|
|
3,231 |
|
|
|
157 |
|
Other income (expense) net
|
|
|
1,985 |
|
|
|
3,213 |
|
|
|
332 |
|
|
|
3,224 |
|
|
|
(1,690 |
) |
|
|
(1,437 |
) |
|
|
(4,157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative effect of a
change in accounting principle
|
|
|
(83,945 |
) |
|
|
(255,269 |
) |
|
|
32,430 |
|
|
|
68,367 |
|
|
|
14,725 |
|
|
|
46,264 |
|
|
|
7,210 |
|
Income tax benefit (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
213,056 |
|
|
|
44,112 |
|
|
|
(40,102 |
) |
|
|
68,272 |
|
|
|
55,946 |
|
|
|
42,633 |
|
|
|
11,975 |
|
|
Deferred
|
|
|
(206,942 |
) |
|
|
(43,581 |
) |
|
|
11,103 |
|
|
|
(79,607 |
) |
|
|
(54,411 |
) |
|
|
(37,808 |
) |
|
|
(14,859 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of a change in accounting
principle
|
|
|
(77,831 |
) |
|
|
(254,738 |
) |
|
|
3,431 |
|
|
|
57,032 |
|
|
|
16,260 |
|
|
|
51,089 |
|
|
|
4,326 |
|
Cumulative effect of a change in accounting principle, net of
tax of $198,640(2)
|
|
|
|
|
|
|
|
|
|
|
(3,932,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(77,831 |
) |
|
$ |
(254,738 |
) |
|
$ |
(3,928,576 |
) |
|
$ |
57,032 |
|
|
$ |
16,260 |
|
|
$ |
51,089 |
|
|
$ |
4,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted pro forma income (loss) before cumulative
effect of a change in accounting principle per common share(3)
|
|
$ |
(1.15 |
) |
|
$ |
(3.77 |
) |
|
$ |
0.05 |
|
|
$ |
0.84 |
|
|
$ |
0.24 |
|
|
$ |
0.76 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
695,162 |
|
|
$ |
1,847,731 |
|
|
$ |
1,821,215 |
|
|
$ |
2,069,857 |
|
|
$ |
2,201,007 |
|
|
$ |
1,793,072 |
|
|
$ |
1,708,369 |
|
|
Global Theater
|
|
|
137,547 |
|
|
|
316,159 |
|
|
|
296,460 |
|
|
|
318,219 |
|
|
|
313,974 |
|
|
|
222,871 |
|
|
|
233,265 |
|
|
Other
|
|
|
151,339 |
|
|
|
379,778 |
|
|
|
355,644 |
|
|
|
319,826 |
|
|
|
291,147 |
|
|
|
245,936 |
|
|
|
242,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$ |
984,048 |
|
|
$ |
2,543,668 |
|
|
$ |
2,473,319 |
|
|
$ |
2,707,902 |
|
|
$ |
2,806,128 |
|
|
$ |
2,261,879 |
|
|
$ |
2,184,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months | |
|
|
|
Nine Months Ended | |
|
|
Ended | |
|
Year Ended December 31, | |
|
September 30, | |
|
|
December 31, | |
|
| |
|
| |
|
|
2000(1) | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
(26,407 |
) |
|
$ |
(102,037 |
) |
|
$ |
97,731 |
|
|
$ |
111,326 |
|
|
$ |
85,457 |
|
|
$ |
94,269 |
|
|
$ |
85,604 |
|
|
Global Theater
|
|
|
(11,879 |
) |
|
|
(26,155 |
) |
|
|
30,352 |
|
|
|
22,714 |
|
|
|
20,996 |
|
|
|
12,973 |
|
|
|
2,742 |
|
|
Other
|
|
|
3,804 |
|
|
|
(4,817 |
) |
|
|
(1,342 |
) |
|
|
10,156 |
|
|
|
(11,147 |
) |
|
|
(4,281 |
) |
|
|
2,923 |
|
|
Corporate
|
|
|
(18,005 |
) |
|
|
(57,186 |
) |
|
|
(31,825 |
) |
|
|
(36,207 |
) |
|
|
(36,323 |
) |
|
|
(23,743 |
) |
|
|
(41,669 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
$ |
(52,487 |
) |
|
$ |
(190,195 |
) |
|
$ |
94,916 |
|
|
$ |
107,989 |
|
|
$ |
58,983 |
|
|
$ |
79,218 |
|
|
$ |
49,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
$ |
142,237 |
|
|
$ |
138,713 |
|
|
$ |
119,898 |
|
|
$ |
88,557 |
|
|
$ |
2,203 |
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
$ |
(31,329 |
) |
|
$ |
(51,960 |
) |
|
$ |
(84,076 |
) |
|
$ |
(64,662 |
) |
|
$ |
(72,603 |
) |
|
Financing activities
|
|
|
|
|
|
|
|
|
|
$ |
(112,281 |
) |
|
$ |
(56,894 |
) |
|
$ |
23,254 |
|
|
$ |
44,331 |
|
|
$ |
156,618 |
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
$ |
68,185 |
|
|
$ |
69,936 |
|
|
$ |
73,435 |
|
|
$ |
56,516 |
|
|
$ |
71,997 |
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDAN(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
57,124 |
|
|
$ |
108,765 |
|
|
$ |
127,881 |
|
|
$ |
145,725 |
|
|
$ |
119,062 |
|
|
$ |
118,412 |
|
|
$ |
112,935 |
|
|
Global Theater
|
|
|
12,060 |
|
|
|
36,648 |
|
|
|
41,489 |
|
|
|
35,899 |
|
|
|
35,647 |
|
|
|
23,929 |
|
|
|
14,133 |
|
|
Other
|
|
|
10,422 |
|
|
|
11,751 |
|
|
|
1,242 |
|
|
|
19,643 |
|
|
|
6,126 |
|
|
|
11,753 |
|
|
|
6,889 |
|
|
Corporate
|
|
|
(14,422 |
) |
|
|
(45,343 |
) |
|
|
(24,700 |
) |
|
|
(29,518 |
) |
|
|
(30,302 |
) |
|
|
(19,216 |
) |
|
|
(36,656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OIBDAN(4)
|
|
$ |
65,184 |
|
|
$ |
111,821 |
|
|
$ |
145,912 |
|
|
$ |
171,749 |
|
|
$ |
130,533 |
|
|
$ |
134,878 |
|
|
$ |
97,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of | |
|
|
| |
|
September 30, | |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
(Unaudited) | |
|
|
|
|
|
|
|
(Unaudited) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
5,188,500 |
|
|
$ |
5,391,088 |
|
|
$ |
1,518,644 |
|
|
$ |
1,495,715 |
|
|
$ |
1,478,706 |
|
|
$ |
1,892,233 |
|
Long-term debt, including current maturities
|
|
$ |
829,649 |
|
|
$ |
1,112,842 |
|
|
$ |
622,831 |
|
|
$ |
617,838 |
|
|
$ |
650,675 |
|
|
$ |
768,079 |
|
Owners equity
|
|
$ |
3,768,934 |
|
|
$ |
3,701,975 |
|
|
$ |
230,914 |
|
|
$ |
188,283 |
|
|
$ |
156,976 |
|
|
$ |
234,016 |
|
|
|
(1) |
Represents our operations commencing on August 1, 2000
(when Clear Channel Communications acquired our live
entertainment business) to December 31, 2000. |
|
(2) |
Cumulative effect of change in accounting principle for the year
ended December 31, 2002, related to impairment of goodwill
recognized in accordance with the adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. |
|
(3) |
Basic and diluted income (loss) before cumulative effect of a
change in accounting principle per share is calculated by
dividing income (loss) before cumulative effect of a change in
accounting principle by the weighted average number of common
shares outstanding. The historic basic and diluted income (loss)
before cumulative effect of changes in accounting principles is
based on shares outstanding and the pro forma basic and diluted
income (loss) before cumulative effect of changes in accounting
principles is based on 67,565,491 shares outstanding (based
on the number of outstanding shares of Clear Channel
Communications common stock at November 4, 2005.) |
|
(4) |
We evaluate segment and consolidated performance based on
several factors, one of the primary measures of which is
operating income (loss) before depreciation, amortization, loss
(gain) on sale of operating assets and non-cash compensation
expense, which we refer to as OIBDAN. See
Non-GAAP Financial Measure below,
Unaudited Pro Forma Condensed Combined Financial
Data and Managements Discussion and Analysis
of Financial Condition and Results of Operations
OIBDAN. |
57
Non-GAAP Financial Measure
In addition to operating income, we evaluate segment and
combined performance based on other factors, one primary measure
of which is operating income (loss) before depreciation,
amortization, loss (gain) on sale of operating assets and
non-cash compensation expense, which we refer to as OIBDAN. We
use OIBDAN as a measure of the operational strengths and
performance of our business and not as a measure of liquidity.
However, a limitation of the use of OIBDAN as a performance
measure is that it does not reflect the periodic costs of
certain capitalized tangible and intangible assets used in
generating revenues in our business. Accordingly, OIBDAN should
be considered in addition to, and not as a substitute for,
operating income (loss), net income (loss) and other measures of
financial performance reported in accordance with
U.S. GAAP. Furthermore, this measure may vary among other
companies; thus, OIBDAN as presented below may not be comparable
to similarly titled measures of other companies.
We believe OIBDAN is useful to investors and other external
users of our financial statements in evaluating our operating
performance because it helps investors more meaningfully
evaluate and compare the results of our operations from period
to period and with those of other companies in the entertainment
industry (to the extent the same components of OIBDAN are used),
in each case without regard to items such as non-cash
depreciation and amortization and non-cash compensation expense,
which can vary depending upon the accounting method used and the
book value of assets.
Our management uses OIBDAN (i) as a measure for planning
and forecasting overall and individual expectations and for
evaluating actual results against such expectations,
(ii) as a basis for incentive bonuses paid to certain
employees and (iii) in presentations to our board of
directors to enable them to have the same consistent measurement
basis of operating performance used by management.
The following table presents a reconciliation of OIBDAN to
operating income, which is a GAAP measure of our operating
results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months | |
|
|
|
Nine Months Ended | |
|
|
Ended | |
|
Year Ended December 31, | |
|
September 30, | |
|
|
December 31, | |
|
| |
|
| |
|
|
2000(1) | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
|
|
|
|
|
|
|
(unaudited) | |
Reconciliation of OIBDAN to Operating Income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDAN
|
|
$ |
65,184 |
|
|
$ |
111,821 |
|
|
$ |
145,912 |
|
|
$ |
171,749 |
|
|
$ |
130,533 |
|
|
$ |
134,878 |
|
|
$ |
97,301 |
|
|
Depreciation and amortization
|
|
|
118,040 |
|
|
|
299,343 |
|
|
|
64,836 |
|
|
|
63,436 |
|
|
|
64,095 |
|
|
|
47,499 |
|
|
|
46,392 |
|
|
Loss (gain) on sale of operating assets
|
|
|
(369 |
) |
|
|
(1,278 |
) |
|
|
(15,241 |
) |
|
|
(978 |
) |
|
|
6,371 |
|
|
|
7,400 |
|
|
|
(426 |
) |
|
Non-cash compensation expense*
|
|
|
|
|
|
|
3,951 |
|
|
|
1,401 |
|
|
|
1,302 |
|
|
|
1,084 |
|
|
|
761 |
|
|
|
1,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
(52,487 |
) |
|
$ |
(190,195 |
) |
|
$ |
94,916 |
|
|
$ |
107,989 |
|
|
$ |
58,983 |
|
|
$ |
79,218 |
|
|
$ |
49,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Non-cash compensation expense, which is based on an allocation
from Clear Channel Communications and is related to issuance of
Clear Channel Communications stock awards, is included in
corporate expenses in our statement of operations. |
58
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial
condition and results of operations together with the audited
and unaudited combined financial statements and notes to the
financial statements included elsewhere in this information
statement. This discussion contains forward-looking statements
that involve risks and uncertainties. The forward-looking
statements are not historical facts, but rather are based on
current expectations, estimates, assumptions and projections
about our industry, business and future financial results. Our
actual results could differ materially from the results
contemplated by these forward-looking statements due to a number
of factors, including those discussed in the sections of this
information statement entitled Risk Factors,
Special Note About Forward-Looking Statements
and other sections in this information statement.
Overview
On April 29, 2005, Clear Channel Communications announced
its intention to separate its entertainment business into a
separate publicly-traded company. We were incorporated in
Delaware on August 2, 2005 to effect the separation, and
currently are a wholly owned subsidiary of Clear Channel
Communications. We will have no material assets or activities as
a separate corporate entity until the contribution to us by
Clear Channel Communications, prior to the completion of the
spin-off, of the business described in this information
statement. Clear Channel Communications conducted such business
through various subsidiaries, principally representing the
entertainment segment. Clear Channel Communications will
distribute all of our common stock to the stockholders of Clear
Channel Communications.
Basis of Presentation
The combined financial statements are comprised of entities
included in the consolidated financial statements and accounting
records of Clear Channel Communications, principally
representing the live entertainment segment, using the
historical results of operations and the historical basis of
assets and liabilities of our business. The combined statements
of operations include expense allocations for certain corporate
functions historically provided to us by Clear Channel
Communications, including general corporate expenses, employee
benefits and incentives, and interest expense. These allocations
were made on a specifically identifiable basis or using the
relative percentages, as compared to Clear Channel
Communications other businesses, of net sales, payroll,
fixed assets, inventory and other assets, headcount or other
reasonable methods. We and Clear Channel Communications consider
these allocations to be a reasonable reflection of the
utilization of services provided. We expect that our expenses as
a separate publicly-traded company may be significantly higher
than the amounts reflected in the combined statements of
operations.
We will incur increased costs as a result of becoming an
independent publicly traded company, primarily from audit fees
paid to our independent public accounting firm, Public Company
Accounting Oversight Board fees, the hiring of additional staff
to fulfill reporting requirements of a public company, NYSE
listing fees, legal fees and stockholder communications fees. We
will bear the costs of certain services currently provided to us
by Clear Channel Communications. We believe cash flow from
operations will be sufficient to fund these additional corporate
expenses.
We do not anticipate that increased costs solely from becoming
an independent publicly traded company will have an adverse
effect on our growth rates in the future because we will be
substantially the same entity as the entertainment segment of
Clear Channel Communications. Our success will continue to be
highly dependent on the overall health of the local and national
economies in which we operate and the availability of affordable
and desirable content. We anticipate that being an independent
publicly traded company will (1) provide a stock-based
currency that could potentially be used for incentive programs
to better attract, retain and motivate current and future
employees through the use of equity-based compensation policies
that more directly link employee compensation with our financial
performance, (2) permit our management to focus its
attention and our financial resources on our distinct business
and
59
business challenges and to lead us to adopt strategies and
pursue objectives that are appropriate to our respective
business and (3) allow us to have better access to the
capital markets in connection with acquisitions and financings
after the separation as our investors will not be forced to
understand and make investment decisions with respect to Clear
Channel Communications business.
We believe the assumptions underlying the combined financial
statements are reasonable. However, the combined financial
statements included herein may not necessarily reflect our
results of operations, financial position and cash flows in the
future or what our results of operations, financial position and
cash flows would have been had we been a separate, stand-alone
company during the periods presented.
Introduction
Managements discussion and analysis, or MD&A, of our
results of operations and financial condition is provided as a
supplement to the audited annual financial statements and
unaudited interim financial statements and footnotes thereto
included elsewhere herein to help provide an understanding of
our financial condition, changes in financial condition and
results of our operations. The information included in MD&A
should be read in conjunction with the annual and interim
financial statements. MD&A is organized as follows:
|
|
|
|
|
Business overview. This section provides a general
description of our business, as well as other matters that we
believe are important in understanding our results of operations
and financial condition and in anticipating future trends. |
|
|
|
Combined results of operations. This section provides an
analysis of our results of operations for the nine months ended
September 30, 2005 and 2004, and the years ended
December 31, 2004, 2003 and 2002. Our discussion is
presented on both a combined and segment basis. Our reportable
operating segments are global music, global theater and other.
Approximately 70% of our revenue is derived in North America,
with the remainder being derived internationally, primarily in
the United Kingdom, Sweden and Holland. We manage our operating
segments primarily on their operating income (loss) before
depreciation, amortization, loss (gain) on sale of assets and
non-cash compensation expense, which we refer to as OIBDAN.
Since a significant portion of our business is conducted in
foreign markets, principally Europe, management looks at the
operating results from our foreign operations on a constant
dollar basis, which allows for comparison of operations
independent of foreign exchange movements. Corporate expenses,
interest expense, equity in earnings (loss) of nonconsolidated
affiliates, other income (expense) net, income taxes
and cumulative effect of change in accounting principle are
managed on a total company basis and are, therefore, included
only in our discussion of combined results. |
|
|
|
In addition to operating income, we evaluate segment and
combined performance based on other factors, one primary measure
of which is operating income (loss) before depreciation,
amortization, loss (gain) on sale of assets and non-cash
compensation expense, which we refer to as OIBDAN. While we use
OIBDAN as a measure of the operational strengths and performance
of our business, we do not use it as a measure of liquidity.
However, a limitation of the use of OIBDAN as a performance
measure is that it does not reflect the periodic costs of
certain capitalized tangible and intangible assets used in
generating revenues in our business. Accordingly, OIBDAN should
be considered in addition to, not as a substitute for, operating
income (loss), net income (loss) and other measures of financial
performance reported in accordance with U.S. GAAP.
Furthermore, this measure may vary among other companies; thus,
OIBDAN as presented below may not be comparable to similarly
titled measures of other companies. |
|
|
We believe OIBDAN is useful to an investor in evaluating our
operating performance because it helps investors more
meaningfully evaluate and compare the results of our operations
from period to period without regard to items such as non-cash
depreciation and amortization and non-cash compensation expense,
which can vary depending upon the accounting method used and the
book value of assets. This measure also excludes loss (gain) on
sale of assets, which we exclude when measuring segment
performance. |
60
|
|
|
Our management uses OIBDAN (i) as a measure for planning
and forecasting overall and individual expectations and for
evaluating actual results against such expectations,
(ii) as a basis for incentive bonuses paid to certain
employees and (iii) in presentations to our board of
directors to enable them to have the same consistent measurement
basis of operating performance used by management. |
|
|
|
|
|
Liquidity and capital resources. This section provides a
discussion of our financial condition as of December 31,
2004 and September 30, 2005, as well as an analysis of our
cash flows for the nine months ended September 30, 2005 and
2004 and the years ended December 31, 2004 and 2003. The
discussion of our financial condition and liquidity includes
summaries of (i) our primary sources of liquidity
and (ii) our outstanding debt and commitments (both
firm and contingent) that existed at December 31, 2004 and
on a pro forma basis to reflect the term loans under our new
senior secured credit facility and Holdco #2s issuance of
mandatorily redeemable preferred stock. |
|
|
|
Seasonality. This section discusses the seasonal
performance of our global music, global theater and other
segments. Because of the seasonality of our business, the
results for the nine months ended September 30 are not
necessarily indicative of full-year performance. |
|
|
|
Market risk management. This section discusses how we
manage exposure to potential losses arising from adverse changes
in foreign currency exchange and interest rates. |
|
|
|
Recent accounting pronouncements and critical accounting
policies. This section discusses accounting policies
considered to be important to our financial condition and
results of operations, which require significant judgment and
estimates on the part of management in their application. In
addition, all of our significant accounting policies, including
our critical accounting policies, are summarized in Note A
to our combined financial statements included elsewhere in this
information statement. |
Business Overview
We believe we are one of the worlds largest diversified
promoters and producers of, and venue operators for, live
entertainment events. For the year ended December 31, 2004,
we promoted or produced over 28,500 events, including music
concerts, theatrical performances, specialized motor sports and
other events, with total attendance exceeding 61 million.
In addition, we believe we operate one of the largest networks
of venues used principally for music concerts and theatrical
performances in the United States and Europe. As of
September 30, 2005, we owned or operated 117 venues,
consisting of 75 domestic and 42 international venues.
These venues include 39 amphitheaters, 58 theaters,
14 clubs, four arenas and two festival sites. In addition,
through equity, booking or similar arrangements we have the
right to book events at 33 additional venues. Approximately
90% of our total revenues for 2004 resulted from our promotion
or production of music concerts and theatrical performances and
from revenues related to our owned or operated venues.
We operate in two reportable business segments: global
music and global theater. In addition, we operate in the
specialized motor sports, sport representation and other
businesses, which are included under other.
Global Music. Our global music business principally
involves the promotion or production of live music shows and
tours by music artists in our owned and operated venues and in
rented third-party venues. For the year ended December 31,
2004, our global music business generated approximately
$2.2 billion, or 78%, of our total revenues. We promoted or
produced over 10,000 events in 2004, including tours for artists
such as Madonna, Sting, Dave Matthews Band and Toby Keith. In
addition, we produced several large festivals in Europe,
including Rock Werchter in Belgium and the North Sea Jazz
Festival in Holland. Part of our growth strategy is to expand
our promotion and production of festivals, particularly in
61
Europe. While our global music business operates year-round, we
experience higher revenues during the second and third quarters
due to the seasonal nature of our amphitheaters and
international festivals, which are primarily used during or
occur in May through September.
Global Theater. Our global theater business presents and
produces touring and other theatrical performances. Our touring
theatrical performances consist primarily of revivals of
previous commercial successes and new productions of theatrical
performances playing on Broadway in New York City or the West
End in London. For the year ended December 31, 2004, our
global theater business generated approximately
$314.0 million, or 11%, of our total revenues. In 2004, we
presented or produced over 12,000 theatrical performances
of productions such as The Producers, The Lion King, Mamma
Mia! and Chicago. We pre-sell tickets for our touring
shows through one of the largest subscription series in the
United States and Canada in approximately 45 touring
markets. While our global theater business operates year-round,
we experience higher revenues during September through April,
which coincides with the theatrical touring season.
Other. We believe we are one of the largest promoters and
producers of specialized motor sports events, primarily in North
America. In 2004, we held over 600 events in stadiums,
arenas and other venues, including monster truck shows,
supercross races, motocross races, freestyle motocross events
and motorcycle road racing. In addition, we own numerous
trademarked properties, including monster trucks such as
Grave
Diggertm
and Blue
Thundertm,
which generate additional licensing revenues. While our
specialized motor sports business operates year-round, we
experience higher revenues during January through March, which
is the period when a larger number of specialized motor sports
events occur.
We also provide integrated sports marketing and management
services, primarily for professional athletes. Our marketing and
management services generally involve our negotiation of player
contracts with professional sports teams and of endorsement
contracts with major brands. As of September 30, 2005, we
had approximately 600 clients, including Tracy McGrady
(basketball), David Ortiz (baseball), Tom Lehman (golf), Andy
Roddick (tennis), Roy E. Williams (football) and Steven
Gerrard (soccer).
We also promote and produce other live entertainment events,
including family shows, such as Dora the Explorer and
Blues Clues, as well as museum and other
exhibitions, such as Saint Peter and The Vatican: The Legacy
of the Popes. In addition, we produce and distribute
television shows and DVDs, including programs such as A&E
Biographies: Rod Stewart and HBO Sports The Curse
of the Bambino.
For the year ended December 31, 2004, businesses included
under other generated approximately
$291.1 million, or 11%, of our total revenues.
We principally act in the following capacities, performing one,
some or all of these roles in connection with our events and
tours:
Promotion. As a promoter, we typically book performers,
arrange performances and tours, secure venues, provide for
third-party production services, sell tickets and advertise
events to attract audiences. We earn revenues primarily from the
sale of tickets and pay performers under one of several
formulas, including a fixed guaranteed amount and/or a
percentage of ticket sales. For each event, we either use a
venue we own or operate, or rent a third-party venue. In our
global theater business, we generally refer to promotion as
presentation. Revenues related to promotion activities represent
the majority of our combined revenues. These revenues are
generally related to the volume of ticket sales and ticket
prices. Event costs, included in divisional operating expenses,
such as artist and production service expenses, are typically
substantial in relation to the revenues. As a result,
significant increases or decreases in promotion revenue do not
typically result in comparable changes to operating income.
Production. As a producer, we generally develop event
content, hire directors and artistic talent, develop sets and
costumes, and coordinate the actual performances of the events.
We produce tours on a global, national and regional basis. We
generate revenues from fixed producer fees and by sharing in a
percentage of event or tour profits primarily related to the
sale of tickets, merchandise and event and tour
62
sponsorships. These production revenues are generally related to
the size and profitability of the production. Production costs,
included in divisional operating expenses, are typically
substantial in relation to the revenues. As a result,
significant increases or decreases in production revenue do not
typically result in comparable changes to operating income.
Venue Operation. As a venue operator, we contract with
promoters to rent our venues for events and provide related
services such as concessions, merchandising, parking, security,
ushering and ticket-taking. We generate revenues primarily from
rental income, ticket service charges, premium seating and venue
sponsorships, as well as sharing in percentages of concessions,
merchandise and parking. Our outdoor entertainment venues are
primarily used, and our international festivals occur, during
May through September. As a result, we experience higher
revenues during the second and third quarters. Revenues
generated from venue operations, which are partially driven by
attendance, typically have a significantly higher margin than
promotion or production revenues and therefore typically have a
more direct relationship to operating income.
Sponsorships and Advertising. We actively pursue the sale
of national and local sponsorships and placement of advertising,
including signage, promotional programs, naming of subscription
series and tour sponsorships. Many of our venues also have
name-in-title sponsorship programs. We believe national
sponsorships allow us to maximize our network of venues and to
arrange multi-venue branding opportunities for advertisers. Our
national sponsorship programs have included companies such as
American Express, Anheuser Busch and Coca-Cola. Our local and
venue-focused sponsorships include venue signage, promotional
programs, on-site activation, hospitality and tickets, and are
derived from a variety of companies across various industry
categories. Revenues generated from sponsorships and advertising
typically have a significantly higher margin than promotion or
production revenues and therefore typically have a more direct
relationship to operating income.
63
Combined Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
(In thousands) |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Revenue
|
|
$ |
2,184,588 |
|
|
$ |
2,261,879 |
|
|
$ |
2,806,128 |
|
|
$ |
2,707,902 |
|
|
$ |
2,473,319 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
2,050,631 |
|
|
|
2,107,785 |
|
|
|
2,645,293 |
|
|
|
2,506,635 |
|
|
|
2,302,707 |
|
|
Depreciation and amortization
|
|
|
46,392 |
|
|
|
47,499 |
|
|
|
64,095 |
|
|
|
63,436 |
|
|
|
64,836 |
|
|
Loss (gain) on sale of operating assets
|
|
|
(426 |
) |
|
|
7,400 |
|
|
|
6,371 |
|
|
|
(978 |
) |
|
|
(15,241 |
) |
|
Corporate expenses
|
|
|
38,391 |
|
|
|
19,977 |
|
|
|
31,386 |
|
|
|
30,820 |
|
|
|
26,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
49,600 |
|
|
|
79,218 |
|
|
|
58,983 |
|
|
|
107,989 |
|
|
|
94,916 |
|
Interest expense
|
|
|
2,671 |
|
|
|
2,198 |
|
|
|
3,119 |
|
|
|
2,788 |
|
|
|
3,998 |
|
Intercompany interest expense
|
|
|
35,719 |
|
|
|
32,550 |
|
|
|
42,355 |
|
|
|
41,415 |
|
|
|
58,608 |
|
Equity in earnings (loss) of nonconsolidated affiliates
|
|
|
157 |
|
|
|
3,231 |
|
|
|
2,906 |
|
|
|
1,357 |
|
|
|
(212 |
) |
Other income (expense) net
|
|
|
(4,157 |
) |
|
|
(1,437 |
) |
|
|
(1,690 |
) |
|
|
3,224 |
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and cumulative effect of a change in
accounting principle
|
|
|
7,210 |
|
|
|
46,264 |
|
|
|
14,725 |
|
|
|
68,367 |
|
|
|
32,430 |
|
Income tax (expense) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
11,975 |
|
|
|
42,633 |
|
|
|
55,946 |
|
|
|
68,272 |
|
|
|
(40,102 |
) |
|
Deferred
|
|
|
(14,859 |
) |
|
|
(37,808 |
) |
|
|
(54,411 |
) |
|
|
(79,607 |
) |
|
|
11,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting
principle
|
|
|
4,326 |
|
|
|
51,089 |
|
|
|
16,260 |
|
|
|
57,032 |
|
|
|
3,431 |
|
Cumulative effect of a change in accounting principle, net of
tax of, $198,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,932,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
4,326 |
|
|
$ |
51,089 |
|
|
$ |
16,260 |
|
|
$ |
57,032 |
|
|
$ |
(3,928,576 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
2,203 |
|
|
$ |
88,557 |
|
|
$ |
119,898 |
|
|
$ |
138,713 |
|
|
$ |
142,237 |
|
|
Investing activities
|
|
$ |
(72,603 |
) |
|
$ |
(64,662 |
) |
|
$ |
(84,076 |
) |
|
$ |
(51,960 |
) |
|
$ |
(31,329 |
) |
|
Financing activities
|
|
$ |
156,618 |
|
|
$ |
44,331 |
|
|
$ |
23,254 |
|
|
$ |
(56,894 |
) |
|
$ |
(112,281 |
) |
OIBDAN Reconciliation to Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
(In thousands) |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Operating income
|
|
$ |
49,600 |
|
|
$ |
79,218 |
|
|
$ |
58,983 |
|
|
$ |
107,989 |
|
|
$ |
94,916 |
|
Depreciation and amortization
|
|
|
46,392 |
|
|
|
47,499 |
|
|
|
64,095 |
|
|
|
63,436 |
|
|
|
64,836 |
|
Loss (gain) on sale of operating assets
|
|
|
(426 |
) |
|
|
7,400 |
|
|
|
6,371 |
|
|
|
(978 |
) |
|
|
(15,241 |
) |
Non-cash compensation expense*
|
|
|
1,735 |
|
|
|
761 |
|
|
|
1,084 |
|
|
|
1,302 |
|
|
|
1,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDAN
|
|
$ |
97,301 |
|
|
$ |
134,878 |
|
|
$ |
130,533 |
|
|
$ |
171,749 |
|
|
$ |
145,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Non-cash compensation expense, which is based on an allocation
from Clear Channel Communications and is related to issuance of
Clear Channel Communications stock awards, is included in
corporate expenses in our statement of operations. |
64
Our combined revenue decreased $77.3 million, or 3%, during
the nine months ended September 30, 2005 as compared to the
same period in 2004 primarily due to a decrease in our global
music and other operations of $84.7 million and
$3.0 million, respectively. These decreases were partially
offset by a $10.4 million increase in global theater
revenue. Included in the nine months ended September 30,
2005 is approximately $11.2 million from increases in
foreign exchange rates as compared to the same period of 2004.
Our combined revenue increased $98.2 million, or 4%, in
fiscal year 2004 as compared to fiscal year 2003 due to an
increase in global music revenue of $131.2 million.
Partially offsetting this increase were declines in revenue from
our other operations and global theater of $28.7 million
and $4.2 million, respectively. Included in the fiscal year
2004 results is approximately $74.3 million, or 76% of the
total increase in combined revenues, from increases in foreign
exchange rates as compared to the same period of 2003.
Our combined revenue increased $234.6 million, or 10%,
during fiscal year 2003 as compared to fiscal year 2002 due to
an increase in global music and global theater revenue of
$248.6 million and $21.8 million, respectively. Partially
offsetting these increases was a decline in revenue for other
operations of $35.8 million. Included in the fiscal year
2003 results is approximately $88.9 million, or 38% of the
total increase in combined revenues, from increases in foreign
exchange rates as compared to the same period of 2002.
|
|
|
Divisional Operating Expenses |
Our combined divisional operating expenses decreased
$57.2 million, or 3%, during the nine months ended
September 30, 2005 as compared to the same period in 2004
due to a decrease in our global music segment of
$79.2 million. Partially offsetting this decrease were
increases in global theater and other operations of
$20.2 million and $1.9 million, respectively.
Divisional operating expenses for 2005 include $8.4 million
in expenses related to a reorganization and reductions in
personnel. This reorganization and recording of additional
expenses not yet incurred related to the reorganization are
expected to be complete by year end. Included in the nine months
ended September 30, 2005 results is approximately
$10.9 million from increases in foreign exchange rates as
compared to the same period of 2004.
Our combined divisional operating expenses increased
$138.7 million, or 6%, in fiscal year 2004 as compared to
fiscal year 2003 due to a $157.8 million increase in global
music divisional operating expenses, partially offset by a
decrease in divisional operating expenses from our other
operations and global theater of $15.2 million and
$4.0 million, respectively. Included in the fiscal year
2004 results is approximately $68.0 million from increases
in foreign exchange rates as compared to the same period of 2003.
Our combined divisional operating expenses increased
$203.9 million, or 9%, in fiscal year 2003 as compared to
fiscal year 2002 due to an increase in our global music and
global theater divisional operating expenses of
$230.8 million and $27.3 million, respectively.
Partially offsetting these increases was a $54.2 million
decline in divisional operating expenses for other operations.
Included in the fiscal year 2003 results is approximately
$81.3 million from increases in foreign exchange rates as
compared to the same period of 2002.
|
|
|
Loss (Gain) on sale of operating assets |
Our gain on sale of operating assets increased $7.8 million
during the nine months ended September 30, 2005 as compared
to the same period in 2004 due primarily to the divestiture of
our international leisure center operations during the second
quarter of 2004.
Our loss on sale of operating assets increased $7.3 million
during 2004 as compared to 2003 primarily due to the sale of our
international leisure center operations during the second
quarter of 2004.
65
Our gain on sale of operating assets decreased
$14.3 million during 2003 as compared to 2002 primarily due
to the sale of our international cinema and bingo operations
during 2002.
Corporate expenses increased $18.4 million, or 92%, during
the nine months ended September 30, 2005 as compared to the
nine months ended September 30, 2004 as the result of a
$12.5 million increase in litigation contingencies and expenses
as well as $3.7 million related to severance payments
during 2005. Additional litigation contingencies and expenses
are reflected in divisional operating expenses within our other
operations.
Corporate expenses increased $0.6 million, or 2%, in the
fiscal year ended 2004 as compared to 2003, primarily due to
increases in litigation and rent expenses, partially offset by
declines in performance-based bonus expense for the period.
Corporate expenses increased $4.7 million, or 18%, in
the fiscal year ended 2003 as compared to 2002 primarily due to
a $4.1 million royalty fee that Clear Channel
Communications began charging on January 1, 2003.
Our combined OIBDAN decreased $37.6 million, or 28%, during
the nine months ended September 30, 2005 as compared
to the same period in 2004. Global music OIBDAN decreased
$5.5 million primarily as a result of a reduction in the
number of domestic events, attendance and ticket prices. Global
theater OIBDAN decreased $9.8 million during this period
primarily due to a reduction in the investment value of several
domestic productions. During the nine months ended
September 30, 2005, we experienced an increase of
approximately $37.1 million related to litigation reserves
and expenses, as well as severance and other costs related to
our reorganization, which contributed to the OIBDAN decline as
compared to the same period of 2004. For 2005 we estimate that
we will incur severance expenses of approximately
$14.0 million, approximately $6.1 million of which is
included above, and approximately $7.9 million will be
incurred in the fourth quarter, which we expect to result in
savings of approximately $20.0 million in employee expenses
during 2006. This forecast reflects our judgment as of the date
of the information statement of conditions we believe will exist
and the course of action we expect to take in the fourth quarter
of 2005; however, we can give no assurance that we will be able
to achieve cost savings of $20.0 million in 2006.
Our combined OIBDAN decreased $41.2 million, or 24%, in
fiscal year 2004 as compared to fiscal year 2003 primarily due
to a decrease in global music of $26.7 million. This
decrease resulted primarily from higher talent costs in relation
to related revenues as well as a reduction in the number of
domestic amphitheater events and attendance. In addition, other
operations decreased $13.5 million during the period
principally as a result of a $3.5 million increase in
litigation reserves and expenses, and $2.4 million related
to the divestiture of a television production business during
2003.
Our combined OIBDAN increased $25.8 million, or 18%, in
fiscal year 2003 as compared to fiscal year 2002 due to an
increase in other operations and global music of
$18.4 million and $17.8 million, respectively. The
increase in other operations is largely due to a
$6.9 million increase in television production results and
an $8.3 million increase in sponsorship income. The global
music increase in OIBDAN is primarily due to an increase in
attendance as well as an increase in sponsorship and premium
seat revenues.
|
|
|
Intercompany Interest Expense |
The increases and decreases in intercompany interest expense are
directly related to the respective increase or decrease in
average debt outstanding as the rate charged remained relatively
consistent throughout the periods.
66
Our weighted average cost of debt during all periods was 7.0%.
Our intercompany debt balances owed to Clear Channel
Communications as of September 30, 2005 and
December 31, 2004 and 2003 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
As of |
|
| |
|
|
September 30, 2005 |
|
2004 | |
|
2003 | |
|
|
|
|
| |
|
| |
(In millions) |
|
(unaudited) |
|
|
|
|
|
|
$725.5 |
|
$ |
628.9 |
|
|
$ |
595.2 |
|
|
|
|
Equity in Earnings (Loss) of Nonconsolidated
Affiliates |
Equity in earnings (loss) of nonconsolidated affiliates
decreased $3.1 million during the nine months ended
September 30, 2005 as compared to the nine months ended
September 30, 2004 primarily as a result of impairments and
losses in several of our nonconsolidated other operations
affiliates during 2005.
For the fiscal year ended 2004 as compared to fiscal 2003,
equity in earnings of nonconsolidated affiliates increased
$1.5 million primarily as a result of no impairments and
fewer losses during 2004 in our nonconsolidated other operations
affiliates as compared to the same period of 2003.
For the fiscal year ended 2003 as compared to 2002, equity in
earnings of nonconsolidated affiliates increased
$1.6 million primarily due to an increase in earnings from
our nonconsolidated global theater affiliates.
|
|
|
Other Income (Expense) Net |
The principal components of other income (expense)
net, for the applicable periods, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months | |
|
|
|
|
|
|
|
|
Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
(In millions) |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Interest income
|
|
$ |
1.5 |
|
|
$ |
1.5 |
|
|
$ |
3.2 |
|
|
$ |
6.9 |
|
|
$ |
2.1 |
|
Minority interest expense
|
|
|
(5.5 |
) |
|
|
(2.7 |
) |
|
|
(3.3 |
) |
|
|
(3.3 |
) |
|
|
(3.8 |
) |
Other, net
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(1.6 |
) |
|
|
(0.4 |
) |
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) net
|
|
$ |
(4.2 |
) |
|
$ |
(1.4 |
) |
|
$ |
(1.7 |
) |
|
$ |
3.2 |
|
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax benefit for the nine months ended September 30,
2005 decreased $30.7 million as compared to the nine months
ended September 30, 2004. For the nine months ended
September 30, 2005, the recorded current tax benefit was
reduced due to an increase in litigation reserve and expenses,
which is not deductible for tax purposes until the related
amounts are paid. In addition, the current tax benefit for the
nine months ended September 30, 2004 was increased by
taxable losses associated with the disposition of certain assets
and higher tax depreciation related to favorable bonus
depreciation rules in place during 2004.
Deferred tax expense for the nine months ended
September 30, 2005 decreased $22.9 million as compared
to the nine months ended September 30, 2004. This decrease
is primarily related to the increase in litigation reserve and
expenses recorded during the current period that are not
deductible for tax purposes. As a result, a deferred tax benefit
was recorded for this item. In addition, deferred tax expense
for the nine months ended September 30, 2004 includes
amounts associated with the disposition of certain non-core
business operations.
Current tax benefit decreased $12.3 million in 2004 as
compared to 2003. As a result of the favorable resolution of
certain tax contingencies, current tax benefit for the year
ended December 31, 2004 was reduced approximately
$11.0 million. The decrease in deferred tax expense of
$25.2 million for the year ended December 31, 2004 as
compared to December 31, 2003 was due primarily to
additional depreciation
67
expense deductions taken for tax purposes associated with a
change in our tax lives of certain assets. The additional
depreciation expense resulted in an increase in deferred tax
expense in 2003.
Current tax benefit increased $108.4 million and deferred
tax expense increased $90.7 million in 2003 as compared to
2002. In 2002, approximately $313.0 million of taxable
income was recognized that had been deferred in a prior year. As
such, current tax expense for the year ended December 31,
2002 increased approximately $123.6 million. In addition,
as the deferred tax liability was reversed, a deferred tax
benefit of approximately $123.6 million was recorded for
the year ended December 31, 2002. These amounts were offset
by the utilization of net operating losses of approximately
$59.8 million that decreased current tax expense and
increased deferred tax expense for the year ended
December 31, 2002.
|
|
|
Cumulative Effect of a Change in Accounting
Principle |
The loss recorded as a cumulative effect of a change in
accounting principle during 2002 relates to our adoption of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, on January 1, 2002. Statement
No. 142 required that we test goodwill and indefinite-lived
intangibles for impairment using a fair value approach. As a
result of the goodwill test, we recorded a non-cash impairment
charge, net of tax, of approximately $3.9 billion. The
non-cash impairment of our goodwill was generally caused by
unfavorable economic conditions which persisted in the
entertainment industry throughout 2001. This weakness
contributed to our customers reducing the number of dollars they
spent on live entertainment events. These conditions adversely
impacted the cash flow projections used to determine the fair
value of our goodwill at January 1, 2002, and resulted in
the non-cash impairment charge of a portion of our goodwill.
Global Music Results of Operations
Our global music operating results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
(In thousands) |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Revenue
|
|
$ |
1,708,369 |
|
|
$ |
1,793,072 |
|
|
$ |
2,201,007 |
|
|
$ |
2,069,857 |
|
|
$ |
1,821,215 |
|
Divisional operating expenses
|
|
|
1,595,434 |
|
|
|
1,674,660 |
|
|
|
2,081,945 |
|
|
|
1,924,132 |
|
|
|
1,693,334 |
|
Depreciation and amortization
|
|
|
27,363 |
|
|
|
27,064 |
|
|
|
37,043 |
|
|
|
35,262 |
|
|
|
35,285 |
|
Loss (gain) on sale of operating assets
|
|
|
(32 |
) |
|
|
(2,921 |
) |
|
|
(3,438 |
) |
|
|
(863 |
) |
|
|
(5,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
85,604 |
|
|
$ |
94,269 |
|
|
$ |
85,457 |
|
|
$ |
111,326 |
|
|
$ |
97,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 to Nine Months
Ended September 30, 2004 |
Global music revenue decreased $84.7 million, or 5%, during
the nine months ended September 30, 2005 as compared to the
nine months ended September 30, 2004. Included in the nine
months ended September 30, 2005 results is approximately
$8.7 million of foreign exchange rate increases. These
foreign exchange rate increases were offset by a
$182.2 million decrease in our domestic music operations.
The decline in our domestic music revenue was primarily the
result of a reduction in the number of domestic events, which
reduced attendance, and lower ticket prices. The reduction in
ticket prices was partially a result of a ticket charge
reduction program aimed at improving the value proposition of
our concert tickets to the consumer. Pollstar reported that
through September 2005, total industry sales volume decreased
approximately 11% compared to the same period in 2004. We
believe the decline in events is in part due to a reduction in
the number of artists currently interested in touring, and the
decline in ticket prices is in part the result of efforts being
made by artists and promoters to make the concert experience
more affordable to the customer.
68
Our domestic music revenue decline was partially offset by a
$97.5 million increase in international revenues for the
nine months ended September 30, 2005 as compared to the
same period of 2004. This increase is primarily due to the
acquisition of international promotion companies during the
second half of 2004, the acquisition of a festival promoter and
venue operator in 2005, an increase in promotion revenue related
to shows with higher ticket prices and an increase in the
attendance at our international festivals.
Global music divisional operating expenses decreased
$79.2 million, or 5%, during the nine months ended
September 30, 2005 as compared to the nine months ended
September 30, 2004 primarily due to the decrease in
domestic music events. The decrease in domestic divisional
operating expenses of $164.0 million was partially offset
by a $84.8 million increase in international divisional
expenses related to the acquisition of international promotion
companies during the second half of 2004, the acquisition of a
festival promoter and venue operator in 2005, and an increase in
promotion activity, as well as an increase in foreign exchange
rates of $8.7 million during the period.
|
|
|
Fiscal Year 2004 Compared to Fiscal Year 2003 |
Global music revenue increased $131.2 million, or 6%,
during 2004 as compared to 2003. Approximately
$57.6 million, or 44% of the increase, was attributable to
foreign exchange rate increases. The increase was also driven by
an increased number of events and attendance in our
international operations. Significant acts for 2004 included
Madonna and the Italian tour of Vasco Rossi. In addition,
revenue from global music sponsorships and premium seat sales
increased in 2004 by $15.9 million, or 12%, over 2003. We
had fewer domestic amphitheater events in 2004 as compared to
2003 primarily due to an unusually high number of show
cancellations in 2004 as compared to 2003. Attendance for 2004
in our owned and operated amphitheaters was lower than 2003,
partially due to these cancellations. In general, the domestic
music industry suffered a setback in 2004 and according to
Pollstar experienced a decline of approximately 3%, as compared
to 2003, in the number of tickets sold for the top 100 tours.
Global music divisional operating expenses increased
$157.8 million, or 8%, during 2004 as compared to 2003.
Approximately $53.3 million, or 34% of the increase, was
attributable to foreign exchange rate increases. The increase
also relates to variable promotion, production and venue costs
associated with the number and type of events in 2004 as
compared to 2003. In addition, domestic music experienced higher
talent and production costs primarily due to higher artist
guarantees without a proportional increase in revenue. Domestic
music also completed a restructuring of operations in the fourth
quarter of 2004, resulting in a staff reduction and an increase
in severance costs.
Depreciation and amortization increased by $1.8 million, or
5%, in 2004 as compared to 2003 primarily due to the completion
of new venues placed in service in late 2003 and in 2004.
|
|
|
Fiscal Year 2003 Compared to Fiscal Year 2002 |
Global music revenue increased $248.6 million, or 14%,
during 2003 as compared to 2002. Approximately
$74.6 million, or 30% of the increase, was attributable to
foreign exchange rate increases. The increase was also driven by
an increased number of events and attendance in our
international promotions as well as an increase in the
attendance at our international festivals. Significant acts in
Europe during 2003 included the Rolling Stones and the Italian
tours of Ramazotti and Vasco Rossi. Although domestically we had
fewer amphitheater events in 2003 as compared to 2002, we
experienced an increase in overall attendance, sponsorship and
premium seat revenue. In addition, we had more domestic stadium
events in 2003 as compared to 2002, including Bruce Springsteen
and Bon Jovi.
Global music divisional operating expenses increased
$230.8 million, or 14%, during 2003 as compared to 2002.
Approximately $68.6 million, or 30% of the increase, was
attributable to foreign exchange rate increases. The remaining
increase primarily relates to variable promotion and production
costs associated with the increased number of our international
events in 2003 as compared to 2002.
69
Global Theater Results of Operations
Our global theater operating results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Revenue
|
|
$ |
233,265 |
|
|
$ |
222,871 |
|
|
$ |
313,974 |
|
|
$ |
318,219 |
|
|
$ |
296,460 |
|
Divisional operating expenses
|
|
|
219,132 |
|
|
|
198,942 |
|
|
|
278,327 |
|
|
|
282,320 |
|
|
|
254,971 |
|
Depreciation and amortization
|
|
|
11,389 |
|
|
|
11,014 |
|
|
|
14,709 |
|
|
|
13,161 |
|
|
|
11,133 |
|
Loss (gain) on sale of operating assets
|
|
|
2 |
|
|
|
(58 |
) |
|
|
(58 |
) |
|
|
24 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
2,742 |
|
|
$ |
12,973 |
|
|
$ |
20,996 |
|
|
$ |
22,714 |
|
|
$ |
30,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 to Nine Months
Ended September 30, 2004 |
Global theater revenue increased $10.4 million, or 5%,
during the nine months ended September 30, 2005 as compared
to the nine months ended September 30, 2004. Approximately
$1.3 million, or 13% of the increase, was attributable to
foreign exchange rate increases. Additional domestic event
dates, the opening of our renovated Boston Opera House in the
third quarter of 2004, and a greater number of international
productions, including Starlight Express and
Chicago, were primarily responsible for the increase.
Operationally, global theater expanded its venue network during
the nine months ended September 30, 2005 with the
acquisition of four theaters in Spain.
Global theater divisional operating expenses grew
$20.2 million, or 10%, during the nine months ended
September 30, 2005 as compared to the nine months ended
September 30, 2004. Approximately $1.1 million, or 5%
of the increase, was attributable to foreign exchange rate
increases. The remaining increase primarily relates to
additional domestic event dates, the opening of our renovated
Boston Opera House in the third quarter of 2004, and the greater
number of international productions.
|
|
|
Fiscal Year 2004 Compared to Fiscal Year 2003 |
Global theater revenues decreased $4.2 million, or 1%,
during 2004 as compared to 2003 primarily due to fewer domestic
event dates and the replacement of a number of significant
international production investments in 2003 with smaller
interests in international productions in 2004 where we receive
only investment earnings rather than consolidated production
results. These declines were partially offset by an increase in
foreign exchange rates of approximately $10.4 million in
2004 as compared to 2003, as well as the positive impact to
revenues associated with our opening of the renovated
France-Merrick Center for Performing Arts and the Boston Opera
House during 2004.
Global theater divisional operating expenses declined
$4.0 million, or 1%, during 2004 as compared to 2003
primarily due to a decrease in global theater revenues during
2004 as compared to 2003. Included in this variance are foreign
exchange rate increases of approximately $8.9 million.
Global theater depreciation and amortization expense increased
$1.5 million, or 12%, during 2004 as compared to 2003
primarily due to foreign exchange rate increases of
$1.0 million and the completion and opening of the Boston
Opera House during 2004.
|
|
|
Fiscal Year 2003 Compared to Fiscal Year 2002 |
Global theater revenues increased $21.8 million, or 7%,
during 2003 as compared to 2002. Approximately
$8.6 million, or 39% of the increase, was attributable to
foreign exchange rate increases. The remaining increase
primarily relates to an increase in the number of domestic event
dates, which included tours of The Lion King, The Producers
and Mamma Mia!, as well as Cats in the United
Kingdom, in 2003 as compared to 2002.
70
Global theater divisional operating expenses increased
$27.3 million, or 11%, during 2003 as compared to 2002.
Approximately $7.0 million, or 26% of the increase, was
attributable to foreign exchange rate increases. The remaining
increase primarily relates to an increase in the number of
domestic event dates. Operating expenses increased greater than
revenues principally due to reduced show profitability and a
high number of show cancellations resulting from severe weather
in some areas.
Global theater depreciation and amortization expense increased
$2.0 million, or 18%, during 2003 as compared to 2002
primarily due to foreign exchange rate increases of
$0.7 million and capital improvements to existing venues.
Other Results of Operations
Our other operating results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
(In thousands) |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Revenue
|
|
$ |
242,954 |
|
|
$ |
245,936 |
|
|
$ |
291,147 |
|
|
$ |
319,826 |
|
|
$ |
355,644 |
|
Divisional operating expenses
|
|
|
236,065 |
|
|
|
234,183 |
|
|
|
285,021 |
|
|
|
300,183 |
|
|
|
354,402 |
|
Depreciation and amortization
|
|
|
4,362 |
|
|
|
5,655 |
|
|
|
7,406 |
|
|
|
9,626 |
|
|
|
12,694 |
|
Loss (gain) on sale of operating assets
|
|
|
(396 |
) |
|
|
10,379 |
|
|
|
9,867 |
|
|
|
(139 |
) |
|
|
(10,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
2,923 |
|
|
$ |
(4,281 |
) |
|
$ |
(11,147 |
) |
|
$ |
10,156 |
|
|
$ |
(1,342 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 to
Nine Months Ended September 30, 2004 |
Other revenues decreased $3.0 million, or 1%, during the
nine months ended September 30, 2005 as compared to
the nine months ended September 30, 2004. Foreign exchange
rate increases of approximately $1.2 million were offset by
decreases related to the sale of the international leisure
center business during the second quarter of 2004 as well as the
popular Titanic: The Artifact Exhibit completing its run
during the second quarter of 2004. These revenue decreases were
partially offset by revenue growth from Dora the Explorer
as compared to the same period last year and Blues
Clues, which did not tour in 2004. Growth in the revenue
from our specialized motor sports events resulted from a slight
increase in attendance and ticket prices. Also, our sports
representation business increased during the nine months ended
September 30, 2005 as compared to the same period in 2004
primarily from improved hospitality and sponsorship revenue.
Other divisional operating expenses increased $1.9 million,
or 1%, during the nine months ended September 30,
2005 as compared to the nine months ended
September 30, 2004. Foreign exchange rate increases of
approximately $1.1 million were offset by decreases related
to the sale of the international leisure center business during
the second quarter of 2004 as well as the popular Titanic:
The Artifact Exhibit completing its run during the second
quarter of 2004. These expense decreases were partially offset
by expense increases related to the growth in our specialized
motor sports events, family shows and sports representation
businesses as well as a $12.5 million increase in
litigation contingencies and expenses during the nine months
ended September 30, 2005 as compared to the same period in
2004. Additional litigation contingencies and expenses are
reflected in corporate expenses.
Other divisional depreciation and amortization expense decreased
$1.3 million, or 23%, for the nine months ended
September 30, 2005 as compared to the nine months
ended September 30, 2004 primarily as a result of the sale
of the international leisure center business during the second
quarter of 2004.
71
Other gain on sale of operating assets increased
$10.8 million during the nine months ended
September 30, 2005 as compared to the same period in 2004
due primarily to the divestiture of our international leisure
center operations during the second quarter of 2004.
|
|
|
Fiscal Year 2004 Compared to Fiscal Year 2003 |
Other revenues decreased $28.7 million, or 9%, during 2004
as compared to 2003. Foreign exchange rate increases of
approximately $6.3 million were offset by decreases
relating to the divestiture of certain non-core businesses,
including our international leisure center business, during the
second quarter of 2004 and a television production business
during 2003. In addition, our exhibitions group experienced a
reduction in revenues as the popular Titanic: The Artifact
Exhibit completed its run during the second quarter of 2004
after a full year of operations in 2003. These revenue declines
were partially offset by an increase in the amount of
sponsorship sales during 2004.
Other divisional operating expenses decreased
$15.2 million, or 5%, during 2004 as compared to 2003.
Foreign exchange rate increases of approximately
$5.8 million were offset by decreases relating to the
non-core divestitures and conclusion of Titanic: The Artifact
Exhibit as mentioned above.
Other divisional depreciation and amortization expense decreased
$2.2 million, or 23%, during 2004 as compared to 2003
primarily due to the divestiture of our international leisure
center operations during the second quarter of 2004.
Other loss on sale of operating assets increased
$10.0 million during 2004 as compared to 2003 primarily due
to the sale of our international leisure center operations
during the second quarter of 2004.
|
|
|
Fiscal Year 2003 Compared to Fiscal Year 2002 |
Other revenues decreased $35.8 million, or 10%, during 2003
as compared to 2002. Foreign exchange rate increases of
approximately $5.7 million were offset by decreases
relating to several factors. We saw a reduction in results from
our family shows as 2002 included a strong tour of Dora the
Explorer and there were no similar sized productions in
2003. Also, we divested certain non-core businesses during 2003,
including our international cinema and bingo business, and two
companies involved in television production and music research.
In addition, a reduction in certain creative marketing
operations was partially offset by an increase in the amount of
sponsorship sales during 2003.
Other divisional operating expenses decreased
$54.2 million, or 15%, during 2003 as compared to 2002.
Foreign exchange rate increases of approximately
$5.7 million were offset by decreases relating to family
show results and the divestitures mentioned above.
Other divisional depreciation and amortization expense decreased
$3.1 million, or 24%, during 2003 as compared to 2002
primarily due to divestiture of our international cinema and
bingo operations during 2003 as well as certain other assets
becoming fully depreciated.
Other gain on sale of operating assets decreased
$10.0 million during 2003 as compared to 2002 primarily due
to the sale of our international cinema and bingo operations
during 2002.
72
Reconciliation of Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Global Music
|
|
$ |
85,604 |
|
|
$ |
94,269 |
|
|
$ |
85,457 |
|
|
$ |
111,326 |
|
|
$ |
97,731 |
|
Global Theater
|
|
|
2,742 |
|
|
|
12,973 |
|
|
|
20,996 |
|
|
|
22,714 |
|
|
|
30,352 |
|
Other
|
|
|
2,923 |
|
|
|
(4,281 |
) |
|
|
(11,147 |
) |
|
|
10,156 |
|
|
|
(1,342 |
) |
Corporate
|
|
|
(41,669 |
) |
|
|
(23,743 |
) |
|
|
(36,323 |
) |
|
|
(36,207 |
) |
|
|
(31,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income
|
|
$ |
49,600 |
|
|
$ |
79,218 |
|
|
$ |
58,983 |
|
|
$ |
107,989 |
|
|
$ |
94,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Historically, we have operated with a sweep account that allows
excess operating cash generated by our domestic operations to be
transferred to Clear Channel Communications, generally on a
daily basis. Our excess operating cash generated from our
international business is also transferred to Clear Channel
Communications but not as frequently. Thus, our Cash and
cash equivalents balances maintained on our combined
balance sheets primarily reflects our cash held by our
international businesses and our domestic cash that is not
swept. Repatriation of some of these funds could be subject to
delay and could have potential tax consequences, principally
with respect to withholding taxes paid in foreign jurisdictions
which do not give rise to a tax benefit in the United States due
to our current inability to recognize the related deferred tax
assets.
Our working capital requirements and capital for our general
corporate purposes, including acquisitions and capital
expenditures, have historically been satisfied as part of the
corporate-wide cash management policies of Clear Channel
Communications. Our cash needs have historically been funded
primarily through an intercompany promissory note with Clear
Channel Communications. Subsequent to this distribution, Clear
Channel Communications will not be providing us with funds to
finance our working capital or other cash requirements. Without
the opportunity to obtain financing from Clear Channel
Communications, we may in the future need to obtain additional
financing from banks, or through public offerings or private
placements of debt or equity securities, strategic relationships
or other arrangements. We will have a credit rating that is
lower than Clear Channel Communications credit rating and,
as a result, will incur debt on terms and at interest rates that
will not be as favorable as those generally enjoyed by Clear
Channel Communications. We believe that we will be able to meet
our cash requirements in 2005 and for at least the succeeding
year after the distribution through cash generated from
operations and, to the extent necessary, from borrowings under
our planned senior secured credit facility described below.
Our historical balance sheet reflects cash and cash equivalents
of $179.1 million and short-term and long-term debt of
$650.7 million at December 31, 2004, and cash and cash
equivalents of $116.4 million and debt of
$617.8 million at December 31, 2003. In connection
with this spin-off, Clear Channel Communications will contribute
$508.0 million of intercompany debt to our capital, and we
expect to incur $367.6 million in indebtedness through a
$325.0 million senior secured term loan and we expect
Holdco #2 to issue shares of Series A redeemable
preferred stock having a liquidation preference of
$20 million and Series B redeemable preferred stock
having a liquidation preference of $20 million.
$200.0 million of the proceeds of the term loan and
$20 million of the proceeds from the sale of the
Series A preferred stock will be used to repay the
remaining portion of our intercompany promissory note to Clear
Channel Communications. The Series B preferred stock will
be issued to Clear Channel Communications for no cash and
immediately resold to a third-party purchaser. There will be no
outstanding debt between Clear Channel Communications and us
immediately following the spin-off. We also anticipate entering
into a revolving credit facility under the senior secured bank
facility that will remain available for working capital and
general corporate purposes. We intend to use the remaining
73
$125.0 million of borrowings under the term loan portion of
our senior secured credit facility for general corporate
proposals, including working capital, potential acquisitions and
stock repurchases.
We currently plan to enter into a senior secured credit facility
with lenders as described below. Prior to or concurrently with
the completion of the distribution, one of our operating
subsidiaries, Holdco #3, which owns more than 95% of the
gross value of our assets, will enter into a $575.0 million
senior secured credit facility consisting of:
|
|
|
|
|
a $325.0 million
71/2-year
term loan; and |
|
|
|
a $250.0 million
61/2-year
revolving credit facility, of which up to $200.0 million
will be available for the issuance of letters of credit and up
to $100.0 million will be available for borrowings in
foreign currencies. |
Subject to then market pricing and maturity extending longer
than that of the senior secured credit facility, we will be able
to add additional term and revolving credit facilities in an
aggregate amount not to exceed $250.0 million. We
anticipate that the senior secured credit facility will be
secured by a first priority lien on substantially all of our
domestic assets (other than real property and deposits
maintained by us in connection with promoting or producing live
entertainment events) and a pledge of the capital stock of our
domestic subsidiaries and a portion of the capital stock of
certain of our foreign subsidiaries. Borrowings in foreign
currencies by our foreign subsidiaries will, in addition, be
secured by a first priority lien on substantially all of our
foreign assets (other than real property and deposits maintained
by us in connection with promoting or producing live
entertainment events) and a pledge of the capital stock of all
subsidiaries held by such borrowing subsidiary. We further
anticipate that the senior secured credit facility will place
certain restrictions on the ability to, among other things,
incur debt, create liens, make investments, pay dividends, sell
assets, undertake transactions with affiliates, and enter into
unrelated lines of business.
After giving effect to the term loan, we expect to have
approximately $367.6 million of indebtedness for borrowed
money outstanding, and such prospective indebtedness is
currently rated B1 by Moodys Investors Services, Inc. and
B+ by Standards & Poors Ratings Services, a
division of The McGraw-Hill Companies, Inc., which is currently
below the ratings given to Clear Channel Communications
senior debt by such ratings agencies. We intend to use
$200.0 million of borrowings under the term loan portion of
our senior secured credit facility and the $20 million of
proceeds from the issuance of the Series A redeemable
preferred stock of Holdco #2 to repay a portion of the
indebtedness we owe Clear Channel Communications. We intend to
use the remaining $125.0 million of borrowings under the
term loan portion of our senior secured credit facility for
general corporate purposes, including working capital, potential
acquisitions and stock repurchases. We expect that approximately
$200.0 million of the revolving credit facility will remain
available for working capital and general corporate purposes of
Holdco #3 and its subsidiaries immediately following the
completion of the distribution, and after the transfer of
approximately $50.0 million of letters of credit previously
issued under Clear Channel Communications credit
facilities on behalf of certain Holdco #3 subsidiaries. The
issuance of letters of credit will reduce this availability by
the notional amount of issued letters of credit. However, on or
prior to the distribution date, we may draw advances under the
senior secured credit facility for working capital and other
general corporate purposes.
The agreements governing the senior secured credit facility are
subject to ongoing negotiation. We cannot be certain the terms
described herein will not change or be supplemented. See
Description of Indebtedness.
Following the distribution, we currently anticipate that our
primary sources of liquidity will be the cash flow generated
from our operations, availability under the revolving credit
facility and available cash and cash equivalents. These sources
of liquidity are needed to fund our new debt service
requirements, pay the annual dividend on Holdco #2s
preferred stock, working capital requirements and capital
expenditure requirements. As further described below, our
ability to obtain funds from our subsidiaries may be restricted
by the terms of the senior secured credit facility, the Holdco
#2 preferred stock, and applicable
74
state law. If cash flow generated from our operations is less
than we expect, we may need to incur additional debt.
We may need to incur additional debt or issue equity to make
strategic acquisitions or investments. We can not assure that
such financing will be available to us on acceptable terms or
that such financing will be available at all. Our ability to
issue additional equity may be constrained because our issuance
of additional stock may cause the distribution to be taxable
under section 355(e) of the Code, and, under the tax
matters agreement, we would be required to indemnify Clear
Channel Communications against the tax, if any. We may make
significant acquisitions in the near term, subject to
limitations imposed by our financing documents, market
conditions and the tax matters agreement.
Our intra-year cash fluctuations are impacted by the seasonality
of our various businesses. Examples of seasonal effects include
our global music business, which reports the majority of its
revenues in the second and third quarters, while our global
theater business reports the majority of its revenues in the
first, second and fourth quarters of the year. Cash inflows and
outflows depend on the timing of event-related payments and
generally occur prior to the event. See
Seasonality. We believe that we have
sufficient financial flexibility to fund these fluctuations and
to access the global capital markets on satisfactory terms and
in adequate amounts, although there can be no assurance that
this will be the case. We expect cash flows from operations and
borrowings under our planned senior secured credit facility to
satisfy working capital, capital expenditure and debt service
requirements in 2005, and for at least the succeeding year after
the distribution.
Venue operations is a capital intensive business, requiring
consistent investment in our existing venues in order to address
audience and artist expectations, technological industry
advances and various federal and state regulations.
We categorize capital outlays into maintenance expenditures and
new venue expenditures. Maintenance expenditures are associated
with the upkeep of existing venues and, to a lesser extent,
capital expenditures related to information systems and
administrative offices. New venue expenditures relate to either
the construction of new venues or major renovations to existing
buildings that are being added to our venue network. Capital
expenditures typically increase during periods when venues are
not in operation.
Our capital expenditures have consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months | |
|
|
|
|
|
|
|
|
Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
(In millions) |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Maintenance expenditures
|
|
$ |
44.1 |
|
|
$ |
17.3 |
|
|
$ |
31.4 |
|
|
$ |
34.2 |
|
|
$ |
58.4 |
|
New venue expenditures
|
|
|
27.9 |
|
|
|
39.2 |
|
|
|
42.0 |
|
|
|
35.7 |
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$ |
72.0 |
|
|
$ |
56.5 |
|
|
$ |
73.4 |
|
|
$ |
69.9 |
|
|
$ |
68.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance expenditures for the nine months ended
September 30, 2005 increased $26.8 million over the
same period in 2004 largely due to increased expenditures made
to improve the audience experience at our owned and operated
amphitheaters. We do not expect this higher level of maintenance
expenditures to occur at the same level in future periods.
Our primary short-term liquidity needs are to fund general
working capital requirements and maintenance expenditures while
our long-term liquidity needs are primarily associated with new
venue expenditures. Our primary sources of funds for our
short-term liquidity needs will be cash flows from operations
and borrowings under our credit facility, while our long-term
sources of funds will be from cash from operations, long-term
bank borrowings and other debt or equity financing.
75
Contractual Obligations and Commitments
In addition to the scheduled maturities on our debt, we have
future cash obligations under various types of contracts. We
lease office space, certain equipment and the venues used in our
entertainment operations under long-term operating leases. Some
of our lease agreements contain renewal options and annual
rental escalation clauses (generally tied to the consumer
price index), as well as provisions for our payment of utilities
and maintenance. We also have minimum payments associated with
noncancelable contracts related to our operations such as artist
guarantee contracts, employment contracts and theatrical
production payments. As part of our ongoing capital projects, we
will enter into construction related commitments for future
capital expenditure work. The scheduled maturities discussed
below represent contractual obligations as of December 31,
2004 and thus do not represent all expected expenditures for
those periods.
The scheduled maturities of our long-term debt outstanding,
future minimum rental commitments under noncancelable lease
agreements, minimum payments under other noncancelable contracts
and capital expenditures commitments as of December 31,
2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
(In thousands) |
|
Total | |
|
2005 | |
|
2006 2007 | |
|
2008 2009 | |
|
2010 and thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term debt obligations, including current maturities
|
|
$ |
650,675 |
|
|
$ |
1,214 |
|
|
$ |
2,597 |
|
|
$ |
2,613 |
|
|
$ |
644,251 |
|
Estimated interest payments(1)
|
|
|
296,132 |
|
|
|
44,293 |
|
|
|
98,104 |
|
|
|
112,320 |
|
|
|
41,415 |
|
Non-cancelable operating lease obligations
|
|
|
755,196 |
|
|
|
51,485 |
|
|
|
94,097 |
|
|
|
77,057 |
|
|
|
532,557 |
|
Non-cancelable contracts
|
|
|
251,191 |
|
|
|
171,288 |
|
|
|
46,553 |
|
|
|
18,067 |
|
|
|
15,283 |
|
Capital expenditures
|
|
|
30,601 |
|
|
|
13,601 |
|
|
|
17,000 |
|
|
|
|
|
|
|
|
|
Other long-term liabilities(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,983,795 |
|
|
$ |
281,881 |
|
|
$ |
258,351 |
|
|
$ |
210,057 |
|
|
$ |
1,233,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Based on accrued interest expense calculated on the outstanding
balance of the debt with Clear Channel Communications at
December 31, 2004. |
|
(2) |
Assumes liabilities consist of $70.8 million of tax
contingencies and $18.2 million of various other
obligations. All of our other long-term liabilities do not have
contractual maturities and, therefore, we can not predict when,
or if, they will become due. |
On a pro forma basis, after giving effect to the term loan under
our senior secured credit facility in connection with the
spin-off and the issuance of the preferred stock by
Holdco #2 and the application of the
76
proceeds therefrom to repay certain long-term debt as if such
transactions had occurred at December 31, 2004, our
contractual obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period (Pro Forma) | |
|
|
| |
(In thousands) |
|
Total | |
|
2005 | |
|
2006 2007 | |
|
2008 2009 | |
|
2010 and thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term debt obligations, including current maturities
|
|
$ |
346,778 |
|
|
$ |
4,464 |
|
|
$ |
5,847 |
|
|
$ |
5,863 |
|
|
$ |
330,604 |
|
Preferred stock
|
|
|
40,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000 |
|
Estimated interest payments(1)
|
|
|
145,350 |
|
|
|
20,260 |
|
|
|
40,520 |
|
|
|
40,520 |
|
|
|
44,050 |
|
Non-cancelable operating lease obligations
|
|
|
755,196 |
|
|
|
51,485 |
|
|
|
94,097 |
|
|
|
77,057 |
|
|
|
532,557 |
|
Non-cancelable contracts
|
|
|
251,191 |
|
|
|
171,288 |
|
|
|
46,553 |
|
|
|
18,067 |
|
|
|
15,283 |
|
Capital expenditures
|
|
|
30,601 |
|
|
|
13,601 |
|
|
|
17,000 |
|
|
|
|
|
|
|
|
|
Other long-term liabilities(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,569,116 |
|
|
$ |
261,098 |
|
|
$ |
204,017 |
|
|
$ |
141,507 |
|
|
$ |
962,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes dividends on the Series A and Series B
preferred stock. |
|
(2) |
Assumes liabilities consist of $70.8 million of tax
contingencies and $18.2 million of various other
obligations. All of our other long-term liabilities do not have
contractual maturities and, therefore, we can not predict when,
or if, they will become due. |
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
2,203 |
|
|
$ |
88,557 |
|
|
$ |
119,898 |
|
|
$ |
138,713 |
|
|
$ |
142,237 |
|
Investing activities
|
|
$ |
(72,603 |
) |
|
$ |
(64,662 |
) |
|
$ |
(84,076 |
) |
|
$ |
(51,960 |
) |
|
$ |
(31,329 |
) |
Financing activities
|
|
$ |
156,618 |
|
|
$ |
44,331 |
|
|
$ |
23,254 |
|
|
$ |
(56,894 |
) |
|
$ |
(112,281 |
) |
Operating Activities
|
|
|
Nine Months Ended September 30, 2005 Compared to Nine
Months Ended September 30, 2004 |
Cash provided by operations was $2.2 million for the nine
months ended September 30, 2005, compared to cash provided
by operations of $88.6 million for the nine months ended
September 30, 2004. The $86.4 million decrease in cash
provided by operations resulted from a decrease in net income,
changes in the event related operating accounts which are
dependent on the number and size of events on-going at period
end. We had prepaid more expenses in 2005, including artist
deposits, and accrued more expenses, based on the size and
timing of the upcoming tours.
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003 |
Cash provided by operations was $119.9 million for the year
ended December 31, 2004 as compared to cash provided by
operations of $138.7 million for the year ended
December 31, 2003. The $18.8 million decrease in cash
provided by operations resulted primarily from a decrease in net
income.
77
|
|
|
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002 |
Cash provided by operations was $138.7 million for the year
ended December 31, 2003 as compared to cash provided by
operations of $142.2 million for the year ended
December 31, 2002. The $3.5 million decrease in cash
provided by operations primarily resulted from an increase in
income before the cumulative effect of a change in accounting
principle of $53.6 million offset by changes in working
capital items.
Investing Activities
|
|
|
Nine Months Ended September 30, 2005 Compared to Nine
Months Ended September 30, 2004 |
Cash used in investing activities was $72.6 million for the
nine months ended September 30, 2005, compared to cash used
in investing activities of $64.7 million for the nine
months ended September 30, 2004. The $7.9 million
increase in cash used in investing activities was primarily due
to an increase in capital expenditures of $15.5 million,
partially offset by less acquisition related payments in 2005.
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003 |
Cash used in investing activities was $84.1 million for the
year ended December 31, 2004, compared to cash used in
investing activities of $52.0 million for the year ended
December 31, 2003. The $32.1 million increase in cash
used in investing activities was primarily due to more
acquisition-related payments in 2004 and the collection of a
note receivable in 2003.
|
|
|
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002 |
Cash used in investing activities was $52.0 million for the year
ended December 31, 2003, compared to cash used in investing
activities of $31.3 million for the year ended December 31,
2002. The $20.7 million increase in cash used in investing
activities was primarily due to fewer asset disposal-related
proceeds in 2003.
Financing Activities
Historically, we have funded our cash needs through an
intercompany promissory note with Clear Channel Communications.
The intercompany promissory note functions as part of a sweep
account that allows excess operating cash generated by our
domestic operations to be transferred to Clear Channel
Communications, generally on a daily basis. As we have cash
needs, these are funded from Clear Channel Communications
through this account.
Following the distribution, we expect to fund our cash needs
through cash from operations, borrowings under our revolving
credit facility and available cash and cash equivalents.
|
|
|
Nine Months Ended September 30, 2005 Compared to Nine
Months Ended September 30, 2004 |
Cash provided by financing activities was $156.6 million
for the nine months ended September 30, 2005, compared to
cash provided by financing activities of $44.3 million for
the nine months ended September 30, 2004. The
$112.3 million increase in cash provided by financing
activities is a result of more cash being provided by Clear
Channel Communications for 2005, primarily due to reduced cash
from operations for the same period as discussed above.
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003 |
Cash provided by financing activities was $23.3 million for
the year ended December 31, 2004, compared to cash used in
financing activities of $56.9 million for the year ended
December 31, 2003. The $80.2 million increase in cash
provided by financing activities is a result of more cash being
provided by Clear Channel Communications for 2004, primarily due
to higher cash used in investing activities in 2004 from more
acquisition payments. This is also due to more cash generated
from operations in our
78
international businesses during 2004 which does not sweep to
Clear Channel Communications as often as our domestic operations.
|
|
|
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002 |
Cash used in financing activities was $56.9 million for the
year ended December 31, 2003, compared to cash used in
financing activities of $112.3 million for the year ended
December 31, 2002. The $55.4 million decrease in cash
used in financing activities is a result of fewer payments made
on the debt with Clear Channel Communications for 2003.
Seasonality
For financial statement purposes, our global music segment
typically experiences higher operating income in the second and
third quarters as our outdoor venues and international festivals
are primarily used or occur during May through September. Our
global theater segment typically experiences its higher
operating income during the first, second and fourth quarters of
the calendar year as the theatrical touring season typically
runs from September through April.
Cash flows from global music and global theater typically have a
slightly different seasonality as advance payments are often
made for artist performance fees and theatrical production costs
in advance of the date the related event tickets go on sale.
Once tickets for an event go on sale, we begin to receive
payments from ticket sales, still in advance of when the event
occurs. We record these ticket sales as revenue when the event
occurs.
We expect these trends to continue in the future. See Risk
Factors Our operations are seasonal and our results
of operations vary from quarter to quarter, so our financial
performance in certain financial quarters may not be indicative
of or comparable to our financial performance in subsequent
financial quarters.
Quantitative and Qualitative Disclosure about Market Risk
We are exposed to market risks arising from changes in market
rates and prices, including movements in foreign currency
exchange rates and interest rates.
We have operations in countries throughout the world. The
financial results of our foreign operations are measured in
their local currencies, except in the hyper-inflationary
countries in which we operate. As a result, our financial
results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in the
foreign markets in which we have operations. Our foreign
operations reported operating income of $49.8 million for
the nine months ended September 30, 2005. We estimate that
a 10% change in the value of the United States dollar relative
to foreign currencies would change our net income for the nine
months ended September 30, 2005 by $4.9 million. As of
September 30, 2005, our primary foreign exchange exposure
included the Euro, British Pound, Swedish Kroner and Canadian
Dollar.
This analysis does not consider the implication such currency
fluctuations could have on the overall economic activity that
could exist in such an environment in the United States or the
foreign countries or on the results of operations of these
foreign entities.
Our market risk is also affected by changes in interest rates.
We had $768.1 million total debt outstanding as of
September 30, 2005, of which $0.2 million was variable
rate debt.
Based on the amount of our floating-rate debt as of
September 30, 2005, each 25 basis point increase or
decrease in interest rates would not increase or decrease our
annual interest expense and cash outlay by a significant amount.
This potential increase or decrease is based on the simplified
assumption that the
79
level of floating-rate debt remains constant with an immediate
across-the-board increase or decrease as of September 30,
2005 with no subsequent change in rates for the remainder of the
period.
After our spin-off from Clear Channel Communications, we may use
interest rate swaps and other derivative instruments and an
increased proportion of fixed rate borrowings to reduce our
exposure to market risk from changes in interest rates. The
principal objective of such contracts is to minimize the risks
and/or costs associated with our variable rate debt. We do not
intend to hold or issue interest rate swaps for trading purposes.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued Financial Accounting Standard
No. 153, Exchanges of Nonmonetary Assets, an amendment
of APB Opinion No. 29 (Statement 153).
Statement 153 eliminates the APB Opinion No. 29
exception for nonmonetary exchanges of similar productive assets
and replaces it with an exception for exchanges of nonmonetary
assets that do not have commercial substance. Statement 153
is effective for financial statements for fiscal years beginning
after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in fiscal periods
beginning after the date of issuance. The provisions of
Statement 153 should be applied prospectively. We expect to
adopt Statement 153 for its fiscal year beginning
January 1, 2006 and management does not believe that
adoption will materially impact our financial position or
results of operations.
In December 2004, the FASB issued Staff Position 109-2,
Accounting and Disclosure Guidance for the Foreign
Repatriation Provision within the American Jobs Creation Act of
2004 (FSP 109-2). FSP 109-2 allows an
enterprise additional time beyond the financial reporting period
in which the Act was enacted to evaluate the effects of the Act
on its plans for repatriation of unremitted earnings for
purposes of applying Financial Accounting Standard No. 109,
Accounting for Income Taxes,
(Statement 109). FSP 109-2 clarifies
that an enterprise is required to apply the provisions of
Statement 109 in the period, or periods, it decides on its
plan(s) for reinvestment or repatriation of its unremitted
foreign earnings. FSP 109-2 requires disclosure if an
enterprise is unable to reasonably estimate, at the time of
issuance of its financial statements, the related range of
income tax effects for the potential range of foreign earnings
that it may repatriate and requires an enterprise to recognize
income tax expense (benefit) if an enterprise decides to
repatriate a portion of unremitted earnings under the
repatriation provision while it is continuing to evaluate the
effects of the repatriation provision for the remaining portion
of the unremitted foreign earnings. FSP 109-2 is effective upon
issuance. We currently have the ability and intent to reinvest
any undistributed earnings of its foreign subsidiaries. Any
impact from this legislation has not been reflected in the
amounts shown since we are reinvested for the foreseeable future.
On December 16, 2004, the FASB issued Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (Statement 123(R)),
which is a revision of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation (Statement 123).
Statement 123(R) supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and amends
Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to
the approach described in Statement 123. However,
Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative.
Statement 123(R) is effective for financial statements for
the first interim or annual period beginning after June 15,
2005. Early adoption is permitted in periods in which financial
statements have not yet been issued. In April 2005, the SEC
issued a press release announcing that it would provide for
phased-in implementation guidance for Statement 123(R). The
SEC would require that registrants that are not small business
issuers adopt Statement 123(R)s fair value method of
accounting for share-based payments to employees no later than
the beginning of the first fiscal year beginning after
June 15, 2005. We intend to adopt Statement 123(R) on
January 1, 2006.
As permitted by Statement 123, we currently account for
share-based payments to employees using APB 25 intrinsic
value method and, as such, generally recognize no compensation
cost for employee stock
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options. Accordingly, the adoption of
Statement 123(R)s fair value method will have a
significant impact on our results of operations, although it
will have no impact on our overall financial position. We are
unable to quantify the impact of adoption of
Statement 123(R) at this time because it will depend on
levels of share-based payments granted in the future. However,
had we adopted Statement 123(R) in prior periods, the
impact of that standard would have approximated the impact of
Statement 123 as described in the disclosure of pro forma
net income and earnings per share in Note A of the Notes to
Combined Financial Statements included elsewhere herein.
Statement 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be
reported as a financing cash flow. This requirement will
increase net financing cash flows in periods after adoption. We
cannot estimate what those amounts will be in the future because
they depend on, among other things, when employees exercise
stock options.
In March 2005, the Securities and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 107 Share-Based Payment
(SAB 107). SAB 107 expresses the SEC
staffs views regarding the interaction between
Statement 123(R) and certain SEC rules and regulations and
provides the staffs views regarding the valuation of
share-based payment arrangements for public companies. In
particular, SAB 107 provides guidance related to
share-based payment transactions with nonemployees, the
transition from nonpublic to public entity status, valuation
methods (including assumptions such as expected volatility and
expected term), the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the
classification of compensation expense, non-GAAP financial
measures, first time adoption of Statement 123(R) in an
interim period, capitalization of compensation cost related to
share-based payment arrangements, the accounting for income tax
effects of share-based payment arrangements upon adoption of
Statement 123(R) and the modification of employee share
options prior to adoption of Statement 123(R). The Company
is unable to quantify the impact of adopting SAB 107 and
Statement 123(R) at this time because it will depend on
levels of share-based payments granted in the future.
Additionally, the Company is still evaluating the assumptions it
will use upon adoption.
In April 2005, the SEC issued a press release announcing that it
would provide for phased-in implementation guidance for
Statement 123(R). The SEC would require that registrants
that are not small business issuers adopt
Statement 123(R)s fair value method of accounting for
share-based payments to employees no later than the beginning of
the first fiscal year beginning after June 15, 2005. The
Company intends to adopt Statement 123(R) on
January 1, 2006.
In June 2005, the Emerging Issues Task Force (EITF)
issued EITF 05-6, Determining the Amortization Period of
Leasehold Improvements (EITF 05-6).
EITF 05-6 requires that assets recognized under capital
leases generally be amortized in a manner consistent with the
lessees normal depreciation policy except that the
amortization period is limited to the lease term (which includes
renewal periods that are reasonably assured). EITF 05-6
also addresses the determination of the amortization period for
leasehold improvements that are purchased subsequent to the
inception of the lease. Leasehold improvements acquired in a
business combination or purchased subsequent to the inception of
the lease should be amortized over the lesser of the useful life
of the asset or the lease term that includes reasonably assured
lease renewals as determined on the date of the acquisition of
the leasehold improvement. We adopted EITF 05-6 on
July 1, 2005 which did not materially impact our financial
position or results of operations.
In October 2005, the FASB issued Staff Position 13-1
(FSP 13-1). FSP 13-1 requires rental costs
associated with ground or building operating leases that are
incurred during a construction period be recognized as rental
expense. The guidance in FSP 13-1 shall be applied to the
first reporting period beginning after December 15, 2005.
We will adopt FSP 13-1 January 1, 2006 and do not
anticipate adoption to materially impact our financial position
or results of operations.
Critical Accounting Policies
The preparation of our financial statements in conformity with
Generally Accepted Accounting Principles requires management to
make estimates, judgments and assumptions that affect the
reported
81
amounts of assets and liabilities, 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
Note A, Summary of Significant Accounting Policies, of the
Notes to Combined Financial Statements included elsewhere
herein. 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
managements 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.
Allowance for Doubtful Accounts
We evaluate the collectibility of our accounts receivable based
on a combination of factors. In circumstances where we are aware
of a specific customers inability to meet its financial
obligations, we record a specific reserve to reduce the amounts
recorded to what we believe will be collected. For all other
customers, we recognize reserves for bad debt based on
historical experience of bad debts as a percentage of revenues
for each business unit, adjusted for relative improvements or
deteriorations in the agings and changes in current economic
conditions.
If our agings were to improve or deteriorate resulting in a 10%
change in our allowance, it is estimated that our bad debt
expense for the nine months ended September 30, 2005 would
have changed by $1.1 million and our net income for the
same period would have changed by $0.7 million.
Long-Lived Assets
Long-lived assets, such as property, plant and equipment, are
reviewed for impairment when events and circumstances indicate
that depreciable and amortizable long-lived assets might be
impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of
those assets. When specific assets are determined to be
unrecoverable, the cost basis of the asset is reduced to reflect
the current fair market value.
We use various assumptions in determining the current fair
market value of these assets, including future expected cash
flows and discount rates, as well as future salvage values. Our
impairment loss calculations require management to apply
judgment in estimating future cash flows, including forecasting
useful lives of the assets and selecting the discount rate that
reflects the risk inherent in future cash flows.
If actual results are not consistent with our assumptions and
judgments used in estimating future cash flows and asset fair
values, we may be exposed to future impairment losses that could
be material to our results of operations.
Goodwill
Goodwill represents the excess of the purchase price over the
fair value of identifiable net assets acquired in business
combinations. We review goodwill for potential impairment
annually using the income approach to determine the fair value
of our reporting units. The fair value of our reporting units is
used to apply value to the net assets of each reporting unit. To
the extent that the carrying amount of net assets would exceed
the fair value, an impairment charge may be required to be
recorded.
The income approach we use for valuing goodwill involves
estimating future cash flows expected to be generated from the
related assets, discounted to their present value using a
risk-adjusted discount rate. Terminal values are also estimated
and discounted to their present value.
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As a result of adopting Statement 142 on January 1,
2002, we recorded a non-cash, net of tax, goodwill impairment
charge of approximately $3.9 billion. As required by
Statement 142, a subsequent impairment test was performed
at October 1, 2002, which resulted in no additional
impairment charge. The non-cash impairment of our goodwill was
generally caused by unfavorable economic conditions, which
persisted throughout 2001. These conditions adversely impacted
the cash flow projections used to determine the fair value of
each reporting unit at January 1, 2002, which resulted in
the non-cash impairment charge of a portion of our goodwill. We
may incur impairment charges in future periods under
Statement 142 to the extent we do not achieve our expected
cash flow growth rates, and to the extent that market values
decrease and long-term interest rates increase.
Barter Transactions
Barter transactions represent the exchange of display space or
tickets for advertising, merchandise or services. These
transactions are generally recorded at the fair market value of
the display space or tickets relinquished or the fair value of
the advertising, merchandise or services received. Revenue is
recognized on barter and trade transactions when the
advertisements are displayed or the event occurs for which the
tickets are exchanged. Expenses are recorded when the
advertising, merchandise or service is received or when the
event occurs. Barter and trade revenues for the years ended
December 31, 2004, 2003 and 2002, were approximately
$45.1 million, $33.4 million and $22.5 million,
respectively, and are included in total revenues. Barter and
trade expenses for the years ended December 31, 2004, 2003
and 2002, were approximately $44.5 million,
$32.7 million and $17.7 million, respectively, and are
included in divisional operating expenses. These transactions
relate to each of our segments and generally occur relatively
evenly throughout the year.
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INDUSTRY OVERVIEW
Live Music Industry
The live music industry includes concert promotion and
production, set design, venue operation and concession
operation. Our main competitors in the North American live music
industry include Anschutz Entertainment Group, which operates
under a number of different names, House of Blues Entertainment,
Inc., and SMG Entertainment, Inc. We also compete with numerous
smaller national and regional companies in the United States and
Europe.
According to Pollstar, from 1994 to 2004, gross concert revenues
increased from $1.4 billion to $2.8 billion, a
compounded annual growth rate of approximately 7%. In the 2002
to 2004 period, our global music revenues, comprised of gross
concert revenues, increased from $1.8 billion to
$2.2 billion, a compounded annual growth rate of 10%. We
believe this growth was primarily due to increasing ticket
prices and the continued willingness of top-grossing acts such
as Madonna, The Rolling Stones and U2 to continue touring.
According to Pollstar, while industry revenues increased from
2003 to 2004, ticket sales for the top 100 tours (representing
approximately 70% of total domestic concert ticket revenues)
declined by more than 2%. During the same period, our arena
attendance actually increased approximately 24%. However, the
attendance at our owned and operated amphitheaters declined by
approximately 20% as a result of fewer events. The average
attendance at these amphitheater events was slightly higher in
2004. While we believe the decrease in ticket sales was
partially due to the unexpected cancellations of several
high-profile tours, our surveys also have indicated that
customers reacted to average ticket prices that had increased
more than 28% from 2000 to 2004. Lower recorded music sales by
popular artists may have also influenced this decline.
Typically, to initiate live entertainment events or tours,
booking agents directly contract with performers to represent
them for defined periods. Booking agents then contact promoters,
who will contract with booking agents or directly with
performers to arrange events. Booking agents generally receive
fixed or percentage fees from performers for their services.
Promoters earn revenues primarily from the sale of tickets, as
well as percentages of revenues from concessions, and pay
performers under one of several different formulas, which may
include fixed guarantees, percentages of ticket sales or the
greater of guaranteed amounts or profit sharing payments based
on gross ticket revenues. In addition, promoters may also
reimburse performers for certain costs of production, such as
sound and lights. Under guaranteed payment formulas, promoters
assume the risks of unprofitable events. Promoters may
renegotiate lower guarantees or cancel events because of
insufficient ticket sales in order to lessen their losses.
For musical tours, one to four months typically elapse between
booking performers and the first performances. Promoters, in
conjunction with performers, managers and agents, set ticket
prices and advertise events to cover expenses. Promoters market
events, sell tickets, rent or otherwise provide venues (if not
provided by booking agents) and arrange for local production
services, such as stages and sets.
Venue operators typically contract with promoters to rent their
venues for specific events on specific dates. Venue operators
provide services such as concessions, parking, security,
ushering and ticket-taking, and receive some or all of the
revenues from concessions, merchandise, sponsorships, parking
and premium seats. For the events they host, venue operators
typically receive fixed fees or percentages of ticket sales, as
well as percentages of total concession sales from the vendors
and percentages of total merchandise sales from the
merchandisers.
Industry participants, including ourselves, often perform one or
more of the booking, promotion and venue operation functions.
Theatrical Industry
The theatrical industry includes groups engaged in promoting,
which is generally referred to in the theater industry as
presenting, and producing live theatrical
presentations, as well as operating venues. Our main North
American competitors in the theatrical industry include
Nederlander Producing Company
84
of America, Mirvish Productions, The Shubert Organization, The
Walt Disney Company and Jujamcyn Theaters, as well as smaller
regional players. In Europe, our competitors include Cameron
Mackintosh, Really Useful Theater Group and Ambassadors Theatre
Group, as well as smaller regional players.
According to data based on ticket sales of members of The League
of American Theatres and Producers, Inc., or the League, as
reported by such members to the League and disclosed on the
Leagues website, gross ticket sales for the North American
theatrical industry of touring Broadway theatrical performances
has increased from $705 million during the 1993-1994 season
to $714 million during the 2003-2004 season, a compounded
annual growth rate of 1%, although in some years during this
period ticket sales decreased, with a low of $541 million
in 2000. In the 2002 to 2004 period, our global theater revenues
increased from $296.5 million to $314.0 million, a
compounded annual growth rate of 3%.
Live theater consists mainly of productions of existing musicals
and dramatic works and the development of new works. While
musicals require greater investments of time and capital than
dramatic productions, they are more likely to become touring
theatrical shows. For existing musicals, 12 to 24 months
typically elapse between producers acquisitions of
theatrical stage rights and the first performances. During this
time the producers assemble touring companies and ready the
shows for tours. In comparison, dramatic productions typically
have smaller production budgets, shorter pre-production periods,
lower operating costs and tend to occupy smaller theaters for
shorter runs as compared to musicals.
Producers of touring theatrical shows first acquire the rights
to works from their owners, who typically receive royalty
payments in return. Producers then assemble casts, hire
directors and arrange for the design and construction of sets
and costumes. Producers also arrange transportation and schedule
shows with local presenters. Local presenters, who generally
operate or have relationships with venues, provide all local
services such as selling tickets, hiring local personnel, buying
advertising and paying fixed guarantees to producers. Presenters
then have the right to recover the guarantees plus their local
costs from ticket revenues. Presenters and producers share any
remaining ticket revenues. North American venues often sell
tickets for touring theatrical performances through
subscription series, which are pre-sold season
tickets for a defined number of shows in given venues.
In order to secure exclusive touring rights, investors may take
equity positions in Broadway or West End shows. Touring rights
are generally granted to investors for three to four years.
After investors have received complete return of their
investments, net profits are generally split between the limited
partners and producers.
Other
The specialized motor sports industry includes promoters and
producers of specialized motor sports events as well as venue
operators. Typical events include motorcycle road racing,
supercross racing, monster truck shows, freestyle motocross
events and other similar events. Our main competitors in the
specialized motor sports industry are primarily smaller regional
promoters. On a broader level, we compete against other outdoor
motor sports such as the National Association for Stock Car Auto
Racing, or NASCAR, and the Indy Racing League, or IRL, in the
United States.
In general, most suitable markets where we operate host one to
four motor sports events each year, with larger markets hosting
more performances. Venue operators of stadiums and arenas
typically work with producers and promoters to schedule
individual events or full seasons of events. Corporate
sponsorships and television exposure are important financial
components that contribute to the success of a single event or
seasons of events.
85
Specialized motor sports events make up a growing segment of the
live entertainment industry. This growth has resulted from
additional demand in existing markets and new demand in markets
where arenas and stadiums have been built. The increasing
popularity of specialized motor sports over the last several
years has coincided with the increased popularity of other
professional motor sports events, such as professional auto
racing, including NASCAR and IRL. A number of events are also
broadcast domestically and internationally.
The sports representation industry generally encompasses the
negotiation of player contracts and the creation and evaluation
of endorsement, promotional and other business opportunities for
clients. Sports agents may also provide ancillary services, such
as financial advisory or management services to their clients.
Our primary competition in the sports representation industry
are other sports representation agencies such as International
Management Group, or IMG, Octagon Worldwide, and Gaylord Sports
Management, as well as regional agencies and individual agents.
86
BUSINESS
Our Company
We believe we are one of the worlds largest diversified
promoters and producers of, and venue operators for, live
entertainment events. For the year ended December 31, 2004,
we promoted or produced over 28,500 events, including music
concerts, theatrical performances, specialized motor sports and
other events, with total attendance exceeding 61 million.
In addition, we believe we operate one of the largest networks
of venues used principally for music concerts and theatrical
performances in the United States and Europe. As of
September 30, 2005, we owned or operated 117 venues,
consisting of 75 domestic and 42 international venues. These
venues include 39 amphitheaters, 58 theaters, 14 clubs,
four arenas and two festival sites. In addition, through equity,
booking or similar arrangements we have the right to book events
at 33 additional venues. For the year ended December 31,
2004, we generated revenues of approximately $2.8 billion,
net income of approximately $16.3 million, and operating
income (loss) before depreciation, amortization, loss (gain) on
sale of operating assets and non-cash compensation expense, or
OIBDAN, of approximately $130.5 million. Please read
Selected Combined Financial Data Non-GAAP
Financial Measure for an explanation of OIBDAN and a
reconciliation of OIBDAN to operating income. Approximately 90%
of our total revenues for 2004 resulted from our promotion or
production of music concerts and theatrical performances and
from revenues related to our owned or operated venues.
In addition, we believe we are a leading integrated sports
marketing and management company specializing in the
representation of sports athletes.
Our History
We were formed through acquisitions of various entertainment
businesses and assets by our predecessors, and a number of our
businesses have been operating in the live entertainment
industry for more than 30 years. On August 1, 2000,
Clear Channel Communications acquired our live entertainment
business, which was initially formed in 1997. We were
incorporated in our current form as a Delaware corporation on
August 2, 2005 to own substantially all of the
entertainment business of Clear Channel Communications, Inc.
Our Business
We operate in two reportable business segments: global music and
global theater. In addition, we operate in the specialized motor
sports, sport representation and other businesses, which are
included under other.
Global Music. Our global music business principally
involves the promotion or production of live music shows and
tours by music artists in our owned and operated venues and in
rented third-party venues. For the year ended December 31,
2004, our global music business generated approximately
$2.2 billion, or 78%, of our total revenues. We promoted or
produced over 10,000 events in 2004, including tours for artists
such as Madonna, Sting, Dave Matthews Band and Toby Keith. In
addition, we produced several large festivals in Europe,
including Rock Werchter in Belgium and the North Sea Jazz
Festival in Holland. Part of our growth strategy is to expand
our promotion and production of festivals, particularly in
Europe. While our global music business operates year-round, we
experience higher revenues during the second and third quarters
due to the seasonal nature of our amphitheaters and
international festivals, which are primarily used during or
occur in May through September.
Global Theater. Our global theater business presents and
produces touring and other theatrical performances. Our touring
theatrical performances consist primarily of revivals of
previous commercial successes and new productions of theatrical
performances playing on Broadway in New York City or the West
End in London. For the year ended December 31, 2004, our
global theater business generated approximately
$314.0 million, or 11%, of our total revenues. In 2004, we
presented or produced over 12,000 theatrical performances of
productions such as The Producers, The Lion King, Mamma Mia!
and Chicago. We pre-sell tickets for our touring
shows through one of the largest subscription series in the
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United States and Canada in approximately 45 touring markets.
While our global theater business operates year-round, we
experience higher revenues during September through April, which
coincides with the theatrical touring season.
Other. We believe we are one of the largest promoters and
producers of specialized motor sports events, primarily in North
America. In 2004, we held over 600 events in stadiums, arenas
and other venues including monster truck shows, supercross
races, motocross races, freestyle motocross events, motorcycle
road racing and dirt track motorcycle racing. In addition, we
own numerous trademarked properties, including monster trucks
such as Grave
Diggertm
and Blue
Thundertm,
which generate additional licensing revenues. While our
specialized motor sports business operates year-round, we
experience higher revenues during January through March, which
is the period when a larger number of specialized motor sports
events occur.
We also provide integrated sports marketing and management
services, primarily for professional athletes. Our marketing and
management services generally involve our negotiation of player
contracts with professional sports teams and of endorsement
contracts with major brands. As of September 30, 2005, we
had approximately 600 clients, including Tracy McGrady
(basketball), David Ortiz (baseball), Tom Lehman (golf), Andy
Roddick (tennis), Roy E. Williams (football) and Steven
Gerrard (soccer).
We also promote and produce other live entertainment events,
including family shows, such as Dora the Explorer and
Blues Clues, as well as museum and other
exhibitions, such as Saint Peter and The Vatican: The Legacy
of the Popes. In addition, we produce and distribute
television shows and DVDs, including programs such as A&E
Biographies: Rod Stewart and HBO Sports The Curse
of the Bambino.
For the year ended December 31, 2004, businesses included
under other generated approximately
$291.1 million, or 11%, of our total revenues.
We principally act in the following capacities, performing one,
some or all of these roles in connection with our events and
tours:
Promotion. As a promoter, we typically book performers,
arrange performances and tours, secure venues, provide for
third-party production services, sell tickets and advertise
events to attract audiences. We earn revenues primarily from the
sale of tickets and pay performers under one of several
formulas, including a fixed guaranteed amount and/or a
percentage of ticket sales. For each event, we either use a
venue we own or operate, or rent a third-party venue. In our
global theater business, we generally refer to promotion as
presentation. Revenues related to promotion activities represent
the majority of our combined revenues. These revenues are
generally related to the volume of ticket sales and ticket
prices. Event costs, included in divisional operating expenses,
such as artist and production service expenses are typically
substantial in relation to the revenues. As a result,
significant increases or decreases in promotion revenue do not
typically result in comparable changes to operating income.
Production. As a producer, we generally develop event
content, hire directors and artistic talent, develop sets and
costumes, and coordinate the actual performances of the events.
We produce tours on a global, national and regional basis. We
generate revenues from fixed production fees and by sharing in a
percentage of event or tour profits primarily related to the
sale of tickets, merchandise and event and tour sponsorships.
These production revenues are generally related to the size and
profitability of the production. Production costs, included in
divisional operating expenses, are typically substantial in
relation to the revenues. As a result, significant increases or
decreases in production revenue do not typically result in
comparable changes to operating income.
Venue Operation. As a venue operator, we contract with
promoters to rent our venues for events and provide related
services such as concessions, merchandising, parking, security,
ushering and ticket-taking. We generate revenues primarily from
rental income, ticket service charges, premium seating and venue
sponsorships, as well as sharing in percentages of concessions,
merchandise and parking. Our outdoor entertainment venues are
primarily used, and our international festivals occur, during
May through
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September. As a result, we experience higher revenues during the
second and third quarters. Revenues generated from venue
operations typically have a higher margin than promotion or
production revenues and therefore typically have a more direct
relationship to operating income.
Sponsorships and Advertising. We actively pursue the sale
of national and local sponsorships and placement of advertising,
including signage, promotional programs, naming of subscription
series and tour sponsorships. Many of our venues also have
name-in-title sponsorship programs. We believe national
sponsorships allow us to maximize our network of venues and to
arrange multi-venue branding opportunities for advertisers. Our
national sponsorship programs have included companies such as
American Express, Anheuser Busch and Coca-Cola. Our local and
venue-focused sponsorships include venue signage, promotional
programs, on-site activation, hospitality and tickets, and are
derived from a variety of companies across various industry
categories. Revenues generated from sponsorships and advertising
typically have a higher margin than promotion or production
revenues and therefore typically have a more direct relationship
to operating income.
Global Music
We believe we are one of the largest live music promoters,
producers and venue operators in North America and Europe.
Within our global music segment, we are engaged in promoting and
presenting music events and tours, owning and operating concert
venues, and selling sponsorships and advertising. Our global
music business principally involves the promotion and production
of live music performances and tours by music artists in venues
owned and operated by us and in third-party venues rented by us.
For the year ended December 31, 2004, our global music
business generated approximately $2.2 billion, or 78%, of
our total revenues. We promoted or produced over 10,000 events
in 2004, including tours for artists such as Madonna, Sting,
Dave Matthews Band and Toby Keith. In addition, we produce
several large festivals in Europe, including Rock Werchter in
Belgium and the North Sea Jazz Festival in Holland. We primarily
promote concerts performed by newer performers having widespread
popularity, such as Coldplay and Beyoncé, as well as more
established performers having relatively long-standing and more
stable bases of popularity, such as U2, The Rolling Stones and
Jimmy Buffett. While our global music business operates
year-round, we experience higher revenues during the second and
third quarters due to the seasonal nature of our amphitheaters
and international festivals, which are primarily used during or
occur in May through September.
Below is a ranking of the top 10 tours in 2004 (based on gross
revenues) that we promoted and/or produced:
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1 |
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Madonna |
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2 |
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Bette Midler |
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3 |
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Sting |
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4 |
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Dave Matthews Band |
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5 |
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Toby Keith |
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6 |
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Cher |
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7 |
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Jimmy Buffett |
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8 |
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Josh Groban |
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9 |
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Linkin Park |
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10 |
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Aerosmith |
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The musical venues we operate consist primarily of amphitheaters
and music theaters. We typically receive higher music profits
from events in venues we own due to our ability to share in a
greater percentage of revenues received from concession and
merchandise sales as well as the opportunity to sell
sponsorships for venue naming rights and other display
advertising.
In the live music industry, concert venues generally consist of:
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Stadiums Stadiums are multi-purpose
facilities, often housing local sports teams. Stadiums typically
have 30,000 or more seats. Although they are the largest venues
available for live music, |
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they are not specifically designed for live music. At
September 30, 2005, we did not own or lease any stadiums,
although on occasion we may rent them for certain music events. |
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Amphitheaters Amphitheaters are generally
outdoor venues with between 5,000 and 30,000 seats that are
used primarily in the summer season. We believe they are popular
because they are designed specifically for concert events, with
premium seat packages and better lines of sight and acoustics.
At September 30, 2005, we owned 14 and leased 25
amphitheaters. |
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Arenas Arenas are indoor venues that are used
as multi-purpose facilities, often housing local sports teams.
Arenas typically have between 5,000 and 20,000 seats.
Because they are indoors, they are able to offer amenities other
similar-sized outdoor venues cannot such as luxury suites and
premium club memberships. As a result, we believe they have
become increasingly popular for higher-priced concerts aimed at
audiences willing to pay for these amenities. At
September 30, 2005, we owned one and leased two arenas. |
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Theaters Theaters are indoor venues that are
built specifically for musical and theatrical events, but in
some cases with minimal aesthetic and acoustic consideration.
These venues typically have less than 5,000 seats. Because
of their small size, they do not offer as much economic upside,
but they also represent less risk to concert promoters because
they have lower fixed costs associated with hosting a concert
and also may provide a more appropriately sized venue for
developing artists. At September 30, 2005, we owned six and
leased 17 theaters. |
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Clubs Clubs are indoor venues that are built
specifically for musical events, but in some cases with minimal
aesthetic and acoustic consideration. These venues typically
have less than 1,000 seats and often without full fixed
seating. Because of their small size, they do not offer as much
economic upside, but they also represent less of a risk to a
concert promoter because they have lower fixed costs associated
with hosting a concert and also may provide a more appropriate
size venue for developing artists. At September 30, 2005,
we owned three and leased ten clubs. |
We own or operate the following domestic and international music
venues:
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DMA® | |
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Type of Venue | |
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Amphitheater | |
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Theater | |
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Festival Site | |
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New York, NY
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Monmouth, NJ
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Nassau, NY
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1 |
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Los Angeles, CA
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2 |
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(2) |
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Chicago, IL
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3 |
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(2) |
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Philadelphia, PA
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Boston, MA
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5 |
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(2) |
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San Francisco, CA
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(2) |
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Washington, DC
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8 |
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Atlanta, GA
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Detroit, MI
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Houston, TX
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Seattle, WA
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Tampa, FL
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Phoenix, AZ
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Cleveland, OH
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Denver, CO
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San Jose, CA
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19 |
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Sacramento, CA
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19 |
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DMA® | |
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Type of Venue | |
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Region | |
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City, State |
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Rank* | |
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Amphitheater | |
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Theater | |
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Club | |
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Festival Site | |
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St. Louis, MO
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21 |
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Pittsburgh, PA
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22 |
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(2) |
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Baltimore, MD
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23 |
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Indianapolis, IN
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25 |
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Hartford, CT
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New Haven, CT
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27 |
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Charlotte, NC
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28 |
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Raleigh-Durham, NC
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29 |
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Nashville, TN
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Kansas City, MO
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Milwaukee, WI
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32 |
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Cincinnati, OH
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33 |
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Columbus, OH
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San Antonio, TX
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37 |
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West Palm Beach, FL
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39 |
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Birmingham, AL
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Virginia Beach, VA
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Buffalo, NY
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Albuquerque, NM
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Wilkes-Barre, PA
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53 |
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Albany, NY
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Wheeling, WV
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* |
DMA® region refers to a U.S. designated market area as
of January 1, 2005. At that date, there were
210 DMA®s. DMA® is a registered trademark
of Nielsen Media Research, Inc. |
Bullet represents one venue by type, unless
otherwise noted.
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Type of Venue | |
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City, Country |
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Arena | |
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Theater | |
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Club | |
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Festival Site | |
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Cardiff, Wales
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Dublin, Ireland
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London, England
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(4) |
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Manchester, England
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Reading, England
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Sheffield, England
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Southampton, England
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Stockholm, Sweden
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Bullet represents one venue by type, unless
otherwise noted.
Global Theater
We believe we are one of the largest presenters and producers of
touring theatrical performances in the United States and the
United Kingdom. Within our theater segment, we are engaged in
presentation and the production of touring and other theatrical
performances, owning and operating theatrical venues and selling
sponsorships and advertising.
91
For the year ended December 31, 2004, our global theater
business accounted for approximately $314.0 million, or
approximately 11% of our total revenues. We presented or
produced over 12,000 performances in 2004, including tours of
shows such as The Producers, The Lion King, Mamma Mia!
and Chicago. Touring theatrical performances consist
primarily of revivals of previous commercial successes or new
productions of theatrical performances currently playing on
Broadway in New York City or the West End in London.
We pre-sell tickets for our touring and other theatrical
performances through one of the largest subscription series in
the United States and Canada (with 287,000 subscribers in the
2004-2005 season). We present these subscription series in
approximately 45 touring markets in North America, including
Atlanta, Georgia; Boston, Massachusetts; Chicago, Illinois;
Houston, Texas; Nashville, Tennessee and Seattle, Washington.
We invest in the production of touring and other theatrical
performances. Touring theatrical performances consist primarily
of revivals of previous commercial successes or new productions
of theatrical performances currently playing on Broadway in New
York City or the West End in London. Frequently, we invest in
shows or productions to obtain touring rights and favorable
scheduling to distribute them across our presentation network.
In 2004, productions in which we had investments included The
Producers, Chicago, 700 Sundays (The Comedy of Billy Crystal),
Grease and Fosse.
We derive revenues from our theater and venue operations
primarily from rental income, presenting engagements,
sponsorships, concessions and merchandise. For each theatrical
event we host, we typically receive a fixed fee for use of the
venue, as well as fees representing a percentage of total
concession sales from the vendors and total merchandise sales
from the performer or tour producer. For each non-theatrical
event we host, we may also present or co-present to increase our
product mix and income. As a theater owner, we typically receive
100% of sponsorship revenues and a portion of ticketing
surcharges.
Theaters are generally indoor venues that are built specifically
for musical and theatrical events, with substantial aesthetic
and acoustic consideration. These venues typically have less
than 4,000 seats. Additionally, given their size, they are
able to host events aimed at niche audiences. At
September 30, 2005, we owned 13 and leased 22 theaters
in our theater segment. The theater segment also leases one
club. Of these venues, 12 theatrical venues are in North
America and 24 are international venues used primarily for
theatrical presentations in the United Kingdom.
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North American Theater Venues: |
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DMA® | |
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Region | |
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Number of | |
Location |
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Rank* | |
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Theaters | |
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New York, NY
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1 |
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Chicago, IL
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3 |
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Philadelphia, PA
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4 |
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Boston, MA
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5 |
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(4) |
Washington, DC
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8 |
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Baltimore, MD
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23 |
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Louisville, KY
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50 |
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Toronto, Canada
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n/a |
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(2) |
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* |
DMA® region refers to a U.S. designated market area as of
January 1, 2005. At that date, there were
210 DMA®s. DMA® is a registered trademark of
Nielsen Media Research, Inc. |
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Bullet represents one venue by type, unless otherwise noted. |
92
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International Theater Venues: |
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Number of | |
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Number of | |
Location |
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Theaters | |
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Clubs | |
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Ashton-Under-Lyne, England
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Barcelona, Spain
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Birmingham, England
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Bristol, England
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Edinburgh, Scotland
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Felixtowe, England
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Folkstone, England
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Grimsby, England
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Hastings, England
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Hayes, England
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Liverpool, England
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London, England
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(2) |
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Madrid, Spain
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(3) |
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Manchester, England
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(2) |
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Oxford, England
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Southport, England
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Sunderland, England
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Torbay, England
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York, England
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Bullet represents one venue by type, unless otherwise noted. |
Other
Specialized Motor Sports. We believe we are one of the
largest producers and promoters of specialized motor sports
events in North America, and, in 2004, held our first four
events in Europe. These events are primarily held in stadiums
and arenas and include monster truck shows, supercross races,
motocross races, freestyle motocross events, motorcycle road
racing and dirt track motorcycle racing. Other events included
in this division are thrill acts and other motor sports concepts
and events. Our specialized motor sports activities consist
principally of the promotion and production of specialized motor
sports, which generate revenues primarily from ticket sales and
sponsorships, as well as merchandising and video rights.
Our specialized motor sports division produced and promoted over
600 specialized events in 2004, including supercross events and
the U.S. Hot Rod Association® Monster
Jam® Tour. In 2004, our specialized motor sports
division had over 4 million spectators at its various
events and properties. We own the rights to many specialized
motor sports properties, including Grave
Diggertm
which we believe is one of the most popular monster trucks on
the monster truck circuit, and we generate revenues from
sponsorship, licensing and merchandising related to these
properties. In addition, we provided approximately
200 hours of televised programming related to motor sports
in 2004. While our specialized motor sports business operates
year-round, we experience higher revenues during January through
March, which is the period when a large number of specialized
motor sports events occur.
Sports Representation. We believe we are a leading
full-service talent management and marketing agency that
represents clients in Major League Baseball, the National
Basketball Association, the National Football League, the
Professional Golf Association, the Association of Tennis
Professionals, the Womens Tennis Association, the Premier
League, Major League Soccer and Olympic competitors. We believe
we are able to achieve and maintain our status as one of the
premier sports management companies by combining and drawing
upon the vast experience and expertise of our agents, who are
among the leaders in
93
their respective industries. Within our sports representation
business, we are engaged in talent representation, financial
advisory services, consulting services, marketing and client
endorsements and sponsorship sales.
Our sports representation business specializes in the
negotiation of professional sports contracts and endorsement
contracts for clients. Our clients have endorsed numerous
products, both domestically and internationally, for many high
profile companies. The amount of endorsement and other revenues
that our clients generate is a function of, among other things,
the clients professional performances and public appeal.
The term of client representation agreements vary by sport, but
on average are for a period of three years with automatic
renewal options. In addition, we are generally entitled to the
revenue streams generated during the remaining term of any
contract we negotiate even if our representation agreement
expires or is terminated. The sports representation business
primarily earns revenue ratably over the year or contract life.
As of September 30, 2005, we had approximately 600 clients,
including Tracy McGrady (basketball), David Ortiz (baseball),
Tom Lehman (golf), Andy Roddick (tennis), Roy E. Williams
(football) and Steven Gerrard (soccer).
Other live entertainment events. We also promote and
produce other live entertainment events, including family shows,
such as Dora the Explorer and Blues Clues,
as well as museum and other exhibitions, such as Saint Peter
and The Vatican: The Legacy of the Popes. In addition, we
produce and distribute television shows and DVDs, including
programs such as A&E Biographies: Rod Stewart and HBO
Sports The Curse of the Bambino.
For the year ended December 31, 2004, our businesses
included under Other represented approximately
$291.1 million, or 11%, of our total revenues.
Our Strategy
Our goal is to increase stockholder value by maximizing our cash
flow from operations. To accomplish this goal, we are pursuing
the following key strategies:
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Maximize efficiencies of owning and operating a leading
distribution network of live entertainment venues. We seek
to increase the utilization of our owned or operated venues in
order to increase attendance and revenue streams associated with
live entertainment events. |
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Secure, promote and produce compelling live entertainment
events. We seek to attract large audiences by securing
compelling live entertainment events. We believe we have an
established reputation for high standards of performance and
extensive knowledge of the live entertainment industry. We use
our industry relationships and experience to attract popular
established artists and events, while also using our local
presence to identify and develop new artists and events. We also
make selective investments in content, such as Broadway and West
End theatrical performances, to secure touring or other
distribution rights. |
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Use venues, live events and customers to develop and maintain
relationships with sponsorship and marketing partners. We
seek to use our live events and captive audience to provide
differentiated marketing solutions to advertisers. We believe
our extensive geographic network of events and venues and a wide
range of audience demographics allow us to provide both broad
and targeted advertising opportunities. In addition, we seek to
sell directly to our customers an expanded line of products and
services such as premium seat packages and merchandise related
to live entertainment events. |
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Selectively pursue investment and acquisition
opportunities. We intend to pursue investments and
acquisitions that enhance our business and where the returns and
growth potential are consistent with our long-term goal of
increasing stockholder value. We believe that significant
opportunities exist both in the U.S. and foreign markets, and
that such expansion will create additional outlets |
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and cross-over opportunities for performers and events between
these markets. However, our ability to make acquisitions in the
near term may be constrained by the limitations imposed by our
financing documents, market conditions and the tax matters
agreement. |
Competition
Competition in the live entertainment industry is intense. We
compete primarily on the basis of our ability to deliver quality
entertainment products and enhanced fan experiences from music
concerts, touring theatrical performances and specialized motor
sports events, including:
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quality of service delivered to our clients; |
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track record in promoting and producing live entertainment
events and tours both in the U.S. and internationally; |
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track record in negotiating favorable terms of professional
sports contracts and endorsement contracts for clients; |
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scope and effectiveness of our expertise of marketing and
sponsorship programs; and |
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financial stability. |
Although we believe that our entertainment products and services
currently compete favorably with respect to such factors, we
cannot provide any assurance that we can maintain our
competitive position against current and potential competitors
after the spin-off, especially those with significantly greater
brand recognition, financial, marketing, service, support,
technical and other resources.
Global Music. In the markets in which we promote musical
concerts, we face competition from promoters, as well as from
certain artists that promote their own concerts. We believe that
barriers to entry into the promotion services business are low
and that certain local promoters are increasingly expanding the
geographic scope of their operations. In markets where we own or
operate a venue, we compete with other venues to serve artists
likely to perform in that general region. In markets where we do
not own or operate venues, we compete with other venues for
popular tours. Consequently, touring artists have significant
alternatives to our venues in scheduling tours.
Our main competitors in the North American live music industry
include AEG Live and House of Blues Entertainment, in addition
to numerous smaller regional companies in the U.S. and Europe.
Also, Clear Channel Communications radio business conducts
concert events from time to time and such events may compete
with us. Some of our competitors in the live music industry have
a stronger presence in certain markets, and have access to other
sports and entertainment assets, as well as greater financial
resources and brand recognition, which may enable them to gain a
greater competitive advantage in relation to us following the
spin-off.
Global Theater. We compete with other presenters to
obtain presentation arrangements with venues and performing arts
organizations in various markets, including markets with more
than one venue suitable for presenting a touring or other
theatrical show. We compete with other New York and London-based
production companies for the rights to produce particular shows.
As a producer of Broadway and London shows, we compete with
producers of other theatrical performances for box office sales,
talent and theater space. As the producer of a touring show, we
compete with producers of other touring or other theatrical
performances to book the production in desirable presentation
markets.
Our main competitors in the global theatrical industry include
Nederlander Producing Company of America, Mirvish Productions,
The Shubert Organization, The Walt Disney Company and Jujamcyn
Theaters. Some of our competitors in the theatrical industry
operate more theaters and have more Broadway show interests than
we do in New York City, from which most North American
theatrical touring productions originate. In addition, these
competitors may have significantly greater brand recognition and
greater financial and other resources than we will following the
spin-off, which could enable them to strengthen their
competitive positions against us.
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Other. Our main competitors in the specialized motor
sports industry are primarily smaller regional promoters. On a
broader level, we compete against other outdoor motor sports
such as NASCAR and IRL in the U.S. Some of our competitors
in the specialized motor sports industry, such as NASCAR, enjoy
stronger brand recognition and larger revenues in the motor
sports industry than we do and, following the spin-off, may have
greater financial and other resources enabling them to gain a
greater competitive advantage in relation to us.
Our primary competition in sports representation includes
numerous agencies such as IMG, Octagon and Gaylord, as well as
regional agencies and individual agents. Some of our competitors
in the sports representation industry have stronger
international presence than we do in the sports representation
business, as well as larger television sports programming and
distribution capabilities.
Government Regulations
We are subject to federal, state and local laws both
domestically and internationally governing matters such as
construction, renovation and operation of our venues as well as:
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licensing and permitting; |
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human health, safety and sanitation requirements; |
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the service of food and alcoholic beverages; |
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working conditions, labor, minimum wage and hour, citizenship,
and employment laws; |
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compliance with The Americans with Disabilities Act of 1990; |
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sales and other taxes and withholding of taxes; |
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historic landmark rules; and |
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environmental protection. |
We believe that our venues are in material compliance with these
laws. The regulations relating to our food and support service
in our venues are many and complex. A variety of regulations at
various governmental levels relating to the handling,
preparation and serving of food (including in some cases
requirements relating to the temperature of food), the
cleanliness of food production facilities, and the hygiene of
food-handling personnel are enforced primarily at the local
public health department level.
We also must comply with applicable licensing laws, as well as
state and local service laws, commonly called dram shop
statutes. Dram shop statutes generally prohibit serving
alcoholic beverages to certain persons such as an individual who
is intoxicated or a minor. If we violate dram shop laws, we may
be liable to third parties for the acts of the patron. Although
we generally hire outside vendors to provide these services at
our operated venues and regularly sponsor training programs
designed to minimize the likelihood of such a situation, we
cannot guarantee that intoxicated or minor patrons will not be
served or that liability for their acts will not be imposed on
us.
We are also required to comply with The Americans with
Disabilities Act of 1990, or the ADA, and certain state statutes
and local ordinances, among other things, require that places of
public accommodation, including both existing and newly
constructed theaters, be accessible to customers with
disabilities. The ADA requires that theaters be constructed to
permit persons with disabilities full use of a live
entertainment venue. The ADA may also require that certain
modifications be made to existing theaters in order to make them
accessible to patrons and employees who are disabled. In order
to comply with the ADA, we may face substantial capital
expenditures in the future.
From time to time, state and federal governmental bodies have
proposed legislation that could have an affect on our business.
For example, some legislatures have proposed laws in the past
that would impose strict liability on us and other promoters and
producers of live entertainment events for incidents that occur
at our events.
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In addition, we and our venues are subject to extensive
environmental laws and regulations relating to the use, storage,
disposal, emission and release of hazardous and non-hazardous
substances, as well as zoning and noise level restrictions which
may affect, among other things, the hours of operations of our
venues.
Properties and Facilities
We own or operate or lease 75 venues and 46 facilities
throughout North America and 42 venues and
22 facilities internationally, as of September 30,
2005. We believe our venues and facilities are generally well
maintained and in good operating condition and have adequate
capacity to meet our current business needs. Our corporate
headquarters for our domestic operations is located in Beverly
Hills, California and includes a substantial portion of our
executive and operations management staff; the headquarters of
our international operations is in New York, New York.
Our leases are for varying terms ranging from monthly to yearly.
These leases can be for terms of three to ten years
for our office leases and 15 to 25 years for our venue
leases, and many provide for renewal options. There is no
significant concentration of venues under any one lease or
subject to negotiation with any one landlord. We believe that an
important part of our management activity is to negotiate
suitable lease renewals and extensions.
Employees
At September 30, 2005, we had approximately
3,300 full-time employees, including 2,000 domestic and
1,300 international employees, of which approximately 3,200 were
employed in our operations departments and approximately 100
were employed in our corporate area. We expect to hire
additional employees in our corporate area as we transition to
providing services that were previously provided to us by Clear
Channel Communications. However, due to the current
reorganization, we expect to reduce total head count by
approximately 300 by the end of 2005.
Our staffing needs vary significantly throughout the year.
Therefore, we also, from time to time, employ part-time or
seasonal employees. At September 30, 2005, we employed
approximately 11,300 seasonal part-time employees and during
peak seasonal periods, particularly in the summer months, we
have employed as many 15,900 part-time employees. The
stagehands at some of our venues, and the actors, musicians and
others involved in some of our business operations are subject
to collective bargaining agreements. Our union agreements
typically have a term of three years and thus regularly expire
and require negotiation in the course of our business. We
believe that we enjoy good relations with our employees and
other unionized labor involved in our events, and there have
been no significant work stoppages in the past three years. Upon
the expiration of any of our collective bargaining agreements,
however, we may be unable to negotiate new collective bargaining
agreements on terms favorable to us, and our business operations
at one or more of our facilities may be interrupted as a result
of labor disputes or difficulties and delays in the process of
renegotiating our collective bargaining agreements. A work
stoppage at one or more of our owned or operated venues or at
our produced or presented events could have a material adverse
effect on our business, results of operations and financial
condition. We cannot predict the effect that new collective
bargaining agreements will have on our expenses or that caps on
agents fees will have on the revenues and operating income
of our sports representation business.
Legal Proceedings
At the United States House Judiciary Committee hearing on
July 24, 2003, an Assistant United States Attorney General
announced that the Department of Justice, or DOJ, is pursuing an
antitrust inquiry concerning whether Clear Channel
Communications, or Clear Channel, and its subsidiaries,
including us, have tied radio airplay or the use of certain
concert venues to the use of our concert promotion services, in
violation of antitrust laws. We are cooperating with DOJ
requests.
We initiated a lawsuit in July 2003 in the State Court of Santa
Clara County, California against the City of Mountain View and
Shoreline Regional Park Community, seeking declaratory judgment,
specific
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performance and injunctive relief and remedies for breach of
contract, inverse condemnation and indemnification as a result
of the defendants failure to provide parking lots and
calculate rent payments in accordance with our lease agreement
with the defendants. The defendants in that suit have
counterclaimed against us seeking accounting and declaratory
judgment and alleging theft, conversion, false claims, breach of
contract, and racketeering relating to our payments under the
lease agreement. An accounting firm engaged by the city issued a
report dated August 30, 2005, in which the firm asserted
that we owe the defendants $3,627,658, excluding interest, for
rent payments for the period 1999-2004. On September 2,
2005, the defendants issued a Notice of Default and Demand for
Cure to us, demanding the payment of these amounts and certain
other non-monetary demands. The defendants agreed to accept bond
in lieu of cash for satisfaction of its demand, which bond we
filed with the court on October 11, 2005 as a cure under
protest, pending the outcome of the litigation. Trial has been
set for February 2006.
We are among the defendants in a lawsuit filed September 3,
2002 by JamSports in the United States Federal District Court
for the Northern District of Illinois. The plaintiff alleged
that we violated federal antitrust laws and wrongfully
interfered with plaintiffs business and contractual
rights. On March 21, 2005, the jury rendered its verdict
finding that we had not violated the antitrust laws, but had
tortiously interfered with a contract which the plaintiff had
entered into with co-defendant AMA Pro Racing and with the
plaintiffs prospective economic advantage. In connection
with the findings regarding tortious interference, the jury
awarded to the plaintiff approximately $17.0 million in
lost profits and $73.0 million in punitive damages. In
April, 2005, we filed a Renewed Motion for Judgment as a Matter
of Law and Motion For a New Trial, to seek a judgment
notwithstanding the verdict or a new trial from the
U.S. District Court that tried the case. On August 15,
2005, the District Court granted that motion in part, granting
judgment in favor of the Clear Channel defendants on the
plaintiffs claim for tortious interference with
prospective economic advantage and granting the Clear Channel
defendants a new trial with respect to the issue of damages on
the plaintiffs claim for tortious interference with
contract. The District Court has set a new date for this trial,
on February 6, 2006. We are vigorously defending this
remaining claim.
We are a defendant in a lawsuit filed by Melinda Heerwagen on
June 13, 2002 in the U.S. District Court for the
Southern District of New York. The plaintiff, on behalf of a
putative class consisting of certain concert ticket purchasers,
alleges that anti-competitive practices for concert promotion
services by us nationwide caused artificially high ticket
prices. On August 11, 2003, the Court ruled in our favor,
denying the plaintiffs class certification motion. The
plaintiff has appealed this decision to the U.S. Court of
Appeals for the Second Circuit, and oral argument was held on
November 3, 2004. A decision has not yet been issued.
We are aware of putative class actions filed by different named
plaintiffs in U.S. District Court in Philadelphia, Miami, Los
Angeles and Chicago: Cooperberg v. Clear Channel
Communications, Inc., et al., Civ. No. 2:05-cv-04492 (E.D.
Pa.), Diaz v. Clear Channel Communications, Inc., et al.,
Civ. No. 05-cv-22413 (S.D. Fla.), Thompson v. Clear
Channel Communications, Inc., Civ. No. 2:05-cv-6704
(C.D. Cal.), and Bhatia v. Clear Channel Communications,
Inc., et al., Civ. No. 1:05-cv-05612 (N.D. Ill.). The claims
made in these actions are substantially similar to the claims
made in the Heerwagen action, except that the geographic
markets alleged are local in nature and the members of the
putative classes are limited to individuals who purchased
tickets to concerts in the relevant geographic markets alleged.
Clear Channel has been served in two of these actions. We are
seeking an extension of the answer dates until after the Court
of Appeals rules.
We are among the defendants in a lawsuit by Keith Beccia on
July 10, 2002 and pending in the Morris County Superior
Court in New Jersey. Plaintiff alleges tortious interference
with a contract, plus claims for breach of contract, breach of
covenant of good faith and fair dealing and unfair competition,
and interference with prospective economic advantage. On
November 17, 2003, plaintiff filed a statement of damages
asserting that his estimated compensatory damages are
$3.94 million exclusive of losses for salary increases,
value of benefits, and lost profits associated with the contract
at issue. Plaintiff is also seeking unliquidated punitive
damages. A trial date has been set for February 6, 2006,
and we intend to vigorously defend all claims.
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We are a defendant in an arbitration proceeding brought by Eric
Nederlander and Louis Raizin before the American Arbitration
Association, New York, New York in March 2004 in which the
claimants allege that they are entitled to certain earn-out
payments pursuant to a purchase agreement in connection with the
construction and operation of an amphitheater owned by us.
Claimants have not provided an estimate of the value of their
damages. We have counterclaimed, alleging breach of contract and
bad faith. The parties have conducted settlement negotiations
and such negotiations are expected to continue.
NETworks Presentations, LLC, a joint venture between us and
Gentry & Associates, Inc., is among the defendants in a
lawsuit filed in the U.S. District Court for the Central
District of California on September 22, 2005 by Clifford
Kellas. The plaintiff claims that he was subject to sexual
harassment, gender discrimination and unlawful retaliation in
violation of Title VII of the 1964 Civil Rights Act. He seeks
$5 million in general damages and $5 million in
punitive damages plus legal costs and prejudgment interest. No
trial has yet been set, and we intend to vigorously defend all
claims.
From time to time, we are involved in other legal proceedings
arising in the ordinary course of our business, including
proceedings and claims based upon violations of antitrust laws
and tortious interference, which could cause us to incur
significant expenses. We also have been the subject of personal
injury and wrongful death claims relating to accidents at our
venues in connection with our operations. Under our agreements
with Clear Channel Communications, we have assumed and will
indemnify Clear Channel Communications for liabilities related
to our business.
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MANAGEMENT
Executive Officers, Directors, and Significant Employees
Set forth below are the names and ages and current positions of
our executive officers, current and proposed directors and
significant employees as of the distribution date. Immediately
prior to the distribution, we expect to appoint Henry Cisneros,
Jeffrey T. Hinson, Connie McCombs McNab, John N. Simons, Jr.,
Timothy P. Sullivan and Michael Rapino as additional directors
to our board of directors. Each director will serve for a term
expiring at the annual meeting of stockholders in the year
indicated below. See Composition of the Board
of Directors below.
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Term as | |
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Director | |
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Henry Cisneros
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57 |
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Proposed Director |
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Expires 2009 |
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Jeffrey T. Hinson
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50 |
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Proposed Director |
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Expires 2008 |
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L. Lowry Mays
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70 |
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Director |
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Expires 2007 |
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Mark P. Mays
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42 |
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Vice Chairman of the Board of Directors |
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Expires 2008 |
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Randall T. Mays
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40 |
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Chairman of the Board of Directors |
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Expires 2009 |
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Connie McCombs McNab
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50 |
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Proposed Director |
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Expires 2009 |
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John N. Simons, Jr.
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45 |
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Proposed Director |
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Expires 2007 |
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Timothy P. Sullivan
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42 |
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Proposed Director |
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Expires 2008 |
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Michael Rapino
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40 |
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Chief Executive Officer and Proposed Director |
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Expires 2007 |
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Alan Ridgeway
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38 |
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Chief Financial Officer |
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Bruce Eskowitz
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President Global Venues/ Sponsorship |
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Arthur Fogel
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51 |
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Chairman Global Music |
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Thomas O. Johansson
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57 |
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Chairman International Music |
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David I. Lane
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Chairman Global Theatre and Chief Executive
Officer European Theatre |
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Carl B. Pernow
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President International Music |
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Charles S. Walker
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President North American Live Music |
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Steve K. Winton
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Chief Executive Officer North American Theater |
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In late 2004 and 2005, we reorganized our entertainment
management, and the former chief executive officer, chief
financial officer, general counsel and two co-heads of music are
no longer with the company or have different responsibilities.
Henry Cisneros has been nominated to serve on our board
of directors. Mr. Cisneros has been the Chairman of
American CityVista and City View since August 2000. From January
1997 to August 2000, Mr. Cisneros was the President of
Univision Communications. Prior thereto, Mr. Cisneros
served as the secretary of the U.S. Department of Housing
and Urban Development and was a four-term Mayor of San Antonio,
Texas.
Jeffrey T. Hinson has been nominated to serve on our
board of directors. Since July 2005, he has been a
consultant to Univision Communications Inc., a Spanish language
media company in the United States, which consulting arrangement
is expected to end in December 2005. Mr. Hinson served as
Executive Vice President and Chief Financial Officer of
Univision Communications from March 2004 to June 2005.
He served as Senior Vice President and Chief Financial Officer
of Univision Radio, the radio division of Univision
Communications, from September 2003 to March 2004.
From 1997 to 2003, Mr. Hinson served as Senior Vice
President and Chief Financial Officer of Hispanic Broadcasting
Corporation, which was acquired by Univision Communications in
2003 and became the radio division of Univision Communications.
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L. Lowry Mays has served as a member of our board of
directors since our formation. Mr. Mays is the Chairman of
the Board of Clear Channel Communications, Inc., which he
founded in 1972, and prior to October 2004 he was that
companys Chief Executive Officer. Mr. Mays has been a
member of Clear Channel Communications board of directors
since its inception, and has served on the board of Clear
Channel Outdoor Holdings, Inc. since 1997. Mr. Mays is the
father of Mark P. Mays and Randall T. Mays, both of whom
are members of our board of directors.
Mark P. Mays is Vice Chairman of our board of directors
and has served as a member of the board since our formation.
Mr. Mark Mays is President and Chief Executive Officer of
Clear Channel Communications and has served on the board of
directors of Clear Channel Communications since May 1998. Prior
thereto, he served as the Interim Chief Executive Officer and
President and Chief Operating Officer of Clear Channel
Communications from May 2004 to October 2004 and as the
President and Chief Operating Officer of Clear Channel
Communications for the remainder of the relevant five-year
period. Since 1997, Mr. Mays has served on the board of
Clear Channel Outdoor Holdings, Inc. Mr. Mark Mays is the
son of L. Lowry Mays, Clear Channel Communications
Chairman and one of our board members, and the brother of
Randall T. Mays, Clear Channel Communications
Executive Vice President and Chief Financial Officer and one
member of our board of directors. Mr. Mark Mays is also a member
of the board of directors of Clear Media Limited.
Randall T. Mays is Chairman of our board of directors and
during August 2005 he served as our Interim Chief Executive
Officer. He also serves as the Executive Vice President and
Chief Financial Officer of Clear Channel Communications. He has
served as a member of our board of directors since our
formation, has served on the board of directors of Clear Channel
Communications since April 1999, and has served on the board of
Clear Channel Outdoor Holdings, Inc. since 1997.
Mr. Randall Mays is the son of L. Lowry Mays, Clear
Channel Communications, Inc.s Chairman and one of our
board members, and the brother of Mark P. Mays, Clear
Channel Communications President and Chief Executive
Officer; and Vice Chairman of our board of directors.
Connie McCombs McNab has been nominated to serve on our
board of directors. Mrs. McNab served as Chair of the Board
of Trustees for Saint Lukes Episcopal School from 2000 to
2002 and has served as a Board member for Saint Lukes
Episcopal School since 1997. She has served as a Board member of
Saint Marys Hall since 2001 and has served on the Board of
the McNay Art Institute since 2004. Mrs. McNab is the
daughter of B. J. McCombs, the co-founder of Clear Channel
Communications, and serves as an officer on the McCombs
Foundation.
John N. Simons, Jr. has been nominated to serve on
our board of directors. From 2002 to 2005, he served as
President and Chief Executive Officer of Swift &
Company. Mr. Simons served as President and Chief Operating
Officer of ConAgra Red Meats, Inc. from 1999 to 2002.
Timothy P. Sullivan has been nominated to serve on our
board of directors. Mr. Sullivan has been the Chief
Executive Officer of My Family.com, Inc. since
September 2005 and is the Chief Executive Officer of Group
Publisher, Inc., a company he founded in July 2005. From
February 2001 to September 2004, Mr. Sullivan was the Chief
Executive Officer of Match.com. Prior to joining Match.com,
Sullivan served as vice president of e-commerce for
Ticketmasters predecessor, Ticketmaster Online-Citysearch,
Inc.
Michael Rapino is our Chief Executive Officer and has
served in this capacity with Clear Channel Entertainment since
August 2005. He has also been nominated to serve on our board of
directors. From August 2004 to August 2005, Mr. Rapino was
CEO and President of our Global Music division. From July 2003
to July 2004, Mr. Rapino served as CEO and President of our
International Music division. From July 2001 to 2003,
Mr. Rapino served as CEO of our European Music division.
Prior to July 2001, Mr. Rapino was an executive in our
marketing services group.
Alan Ridgeway is our Chief Financial Officer and has
served in this capacity with Clear Channel Entertainment since
September 2005. Prior to that, Mr. Ridgeway served as
President of our European Music division. From October 2003 to
2004, Mr. Ridgeway was Chief Operating Officer of the
European Music division. Mr. Ridgeway served as Chief
Financial Officer for the European Music division from
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January 2002 to October 2003. For the balance of the relevant
period, he was Finance Director for Hertz Rent-A-Cars
French operation.
Bruce Eskowitz is the President of our Global Venues/
Sponsorship division and has served in this capacity with Clear
Channel Entertainment since 2005. Prior to that, he served as
President and Chief Executive Officer of our Properties division
from 2004 to 2005. Prior to 2004 and for the remainder of the
relevant period, Mr. Eskowitz was President of our National
Sales and Marketing division.
Arthur Fogel is the Chairman of our Global Music division
and has served in this capacity with Clear Channel Entertainment
since 2005. Prior to that, Mr. Fogel served as President of
our Music Touring division since 1999.
Thomas O. Johansson is the Chairman of our International
Music division and has served in this capacity with Clear
Channel Entertainment since September 2004. Prior to that,
Mr. Johansson served as the Chief Executive Officer of our
subsidiary Ema Telstar Group, a company he founded in April 1969
and which we acquired in 1999.
David I. Lane is the Chairman of our Global Theatre
division and Chief Executive Officer of our European Theatre
division and has served in these capacities with Clear Channel
Entertainment since 2005 and 2001, respectively. Prior to 2001,
he served as Managing Director of our UK Theatre division.
Carl B. Pernow is the President of our International
Music division and has served in this capacity with Clear
Channel Entertainment since September 2005. From 2004 to
September 2005 he served as the Chief Financial Officer for our
European Music division. From 1995 to 2004, he served as the
Chief Financial Officer for our EMA Telstar Group, Nordic
division, which the company acquired in 1999.
Charles S. Walker is the President of our North American
Live Music division and has served in this capacity with Clear
Channel Entertainment since 2005. Prior to that, Mr. Walker
served as the Chief Operating Officer for our North American
Live Music division. From 2000 to 2002, 2002 to 2003, and 2003
to 2004 he served as a Senior Vice President of the Southwest,
Northeast and West regions of Clear Channel Entertainments
North American Live Music division, respectively, and in 2000 he
was a General Manager in our North American Live Music division.
For the balance of the relevant period, Mr. Walker served
in various capacities with our PACE Concerts division.
Steven K. Winton is the Chief Executive Officer of our
North American Theater division and has served in this capacity
with Clear Channel Entertainment since May 2005. Prior to that,
from January through March, 2005, Mr. Winton was President
and COO of the Naples Philharmonic Center in Naples Florida. In
2004, Mr. Winton served as the President of our North
American Theater division. Prior to that, Mr. Winton was
the Chief Operating Officer of our European Theater division
from 2002 to 2003. For the balance of the relevant period,
Mr. Winton was an Executive Vice President of our European
Theatre division.
Composition of the Board of Directors
Prior to the completion of the distribution, we intend to
restructure our board of directors. Our board of directors will
consist of nine directors. We intend to appoint
six additional directors immediately prior to the
completion of the distribution, each of whom has consented to so
serve. We anticipate that Henry Cisneros, Jeffrey T. Hinson,
Connie McCombs McNab, John N. Simons, Jr. and Timothy P.
Sullivan will be independent as determined by our board of
directors under the applicable securities law requirements and
listing standards.
Concurrent with the completion of the spin-off, our directors
will be divided into three classes serving staggered three year
terms. At each annual meeting of our stockholders, directors
will be elected to succeed the class of directors whose terms
have expired. Class I directors terms will expire at
the 2007 annual meeting of our stockholders, Class II
directors terms will expire at the 2008 annual meeting of
our stockholders and Class III directors terms will
expire at the 2009 annual meeting of our stockholders, and
L. Lowry Mays, John N. Simons, Jr. and
Michael Rapino initially will be our Class I
directors, Jeffrey T.
102
Hinson, Mark P. Mays and Timothy P. Sullivan initially
will be our Class II directors and Henry Cisneros,
Connie McCombs McNab and Randall T. Mays will
initially be our Class III directors. Our classified board
of directors could have the effect of increasing the length of
time necessary to change the composition of a majority of our
board. Generally, at least two annual meetings of stockholders
will be necessary for stockholders to effect a change in a
majority of the members of the board of directors.
Committees of the Board of Directors after Distribution
The standing committees of our board of directors will be an
audit committee, nominating and governance committee and
compensation committee, each of which is described below.
The three independent (as defined in the NYSE listing standards)
audit committee members will be Jeffrey T. Hinson, who will
serve as the chairman, John N. Simons, Jr. and
Timothy P. Sullivan. We anticipate that Mr. Simons
will be designated by our board of directors as the audit
committee financial expert (as defined in the applicable
regulations of the Securities and Exchange Commission). The
audit committee will operate under a written charter adopted by
the board of directors which reflects standards set forth in SEC
regulations and NYSE rules. The composition and responsibilities
of the audit committee and the attributes of its members, as
reflected in the charter, are intended to be in accordance with
applicable requirements for corporate audit committees. The
charter will be reviewed, and amended if necessary, on an annual
basis. The full text of the audit committees charter can
be found on our website at
www. .com
or may be obtained upon request from our Secretary.
As set forth in more detail in the charter, the audit
committees purpose is to assist the board of directors in
its general oversight of CCE Spincos financial reporting,
internal control and audit functions. Clear Channel
Communications internal audit department will document,
test and evaluate our internal control over financial reporting
in response to the requirements set forth in Section 404 of
the Sarbanes-Oxley Act of 2002 and related regulations. The
responsibilities of the audit committee will include:
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recommending the hiring or termination of the independent
registered public accounting firm and approving any non-audit
work performed by such firm; |
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approving the overall scope of the audit; |
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assisting our board of directors in monitoring the integrity of
our financial statements, the independent registered public
accounting firms qualifications and independence, the
performance of the independent registered public accounting firm
and our internal audit function and our compliance with legal
and regulatory requirements; |
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annually reviewing our independent registered public accounting
firms report describing the independent registered public
accounting firms internal quality control procedures, any
material issues raised by the most recent internal quality
control review, or peer review, of the firm; |
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discussing the annual audited financial and quarterly statements
with our management and the independent registered public
accounting firm; |
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discussing earnings press releases, as well as financial
information and earnings guidance provided to analysts and
rating agencies; |
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discussing policies with respect to risk assessment and risk
management; |
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meeting separately, periodically, with management, internal
auditors and the independent registered public accounting firm; |
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reviewing with the independent registered public accounting firm
any audit problems or difficulties and managements
response; |
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setting clear hiring policies for employees or former employees
of the independent auditors; |
103
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annually reviewing the adequacy of the audit committees
written charter; |
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reviewing with management any legal matters that may have a
material impact on us; and |
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reporting regularly to our full board of directors. |
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Nominating and Governance Committee |
The nominating and governance committee members will be Henry
Cisneros, who will serve as chairman, and Connie McCombs McNab.
The nominating and governance committee will operate under a
written charter adopted by the board of directors. The committee
will be primarily responsible for assembling, reviewing
background information for and recommending candidates for our
board of directors, including those candidates designated by our
stockholders. The committee will also make recommendations to
our board of directors regarding the structure and membership of
the other board committees, annually review director
compensation and benefits and oversee annual self-evaluations of
our board of directors and committees.
The compensation committee members will be John N. Simons, Jr.,
who will serve as chairman, and Timothy P. Sullivan. The
compensation committee will operate under a written charter
adopted by the board of directors. The committee will be
primarily responsible for administering CCE Spincos
incentive stock plan, performance-based annual incentive
compensation plan and other incentive compensation plans. Also,
the committee will determine compensation arrangements for all
of our executive officers and will make recommendations to the
board of directors concerning compensation policies for us and
our subsidiaries.
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Compensation Committee Interlocks and Insider
Participation in Compensation Decisions |
Other than Randall T. Mays, who serves as an executive officer
and member of the board of directors of Clear Channel
Communications, none of our executive officers serve as a member
of the compensation committee or as a member of the board of
directors of any other company of which any member of our
compensation committee or board of directors is an executive
officer.
Code of Business Conduct and Ethics
We adopted a Code of Business Conduct and Ethics applicable to
all of our directors and employees, including our chief
executive officer and chief financial officer, which is a
code of ethics as defined by applicable SEC rules.
This code is publicly available on our website at
www. .com
or may be obtained upon request from our Secretary. If we make
any amendments to this code, other than technical,
administrative or other non-substantive amendments, or grant any
waivers, including implicit waivers, from any provisions of this
code that apply to our chief executive officer and chief
financial officer and relate to an element of the SECs
code of ethics definition, we will disclose the
nature of the amendment or waiver, its effective date and to
whom it applies on our website or in a report on Form 8-K
filed with the SEC.
Director Compensation
We do not currently pay any compensation to any of our
directors. In conjunction with this spin-off, we will be adding
independent directors to our board of directors and plan to pay
our non-employee directors an annual cash retainer of $30,000,
an additional $1,500 for each board meeting attended and an
additional $1,000 for each committee meeting attended. We may
also grant stock options or other stock-based awards to our
non-employee directors, and non-employee directors may elect to
receive their fees in the form of shares of our common stock. We
plan to pay the chairpersons of the audit committee,
compensation committee and nominating and governance committee
an additional annual cash retainer of approximately $10,000,
$5,000 and $5,000, respectively.
104
Executive Compensation
CCE Spinco. Inc. was formed on August 2, 2005. The
following table sets forth compensation information for our
chief executive officer and our other four most highly
compensated executive officers, based on employment with Clear
Channel Communications, as determined by reference to total
annual salary and bonus during 2004, who will become our
executive officers. All of the information included in this
table reflects compensation earned by the individuals for
services with Clear Channel Communications. We refer to these
individuals as our named executive officers
elsewhere in this information statement. Certain of the four
most highly compensated executive officers in 2004 are no longer
with the newly formed company in those capacities.
Summary Compensation Table
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Annual Compensation | |
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Long-Term Compensation | |
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| |
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Awards | |
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Payouts | |
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Restricted | |
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Other Annual | |
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Stock | |
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LTIP | |
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All Other | |
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Salary | |
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Bonus | |
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Compensation | |
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Award(s) | |
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Options | |
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Payouts | |
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Compensation | |
Name and Principal Position |
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($) | |
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($) | |
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($) (1) | |
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($) | |
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(#) | |
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($) | |
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($) | |
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| |
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Michael Rapino
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467,411 |
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200,000 |
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123,793 |
(2) |
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Chief Executive Officer |
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David Ian Lane (3)
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641,480 |
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387,249 |
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6,900 |
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122,798 |
(4) |
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Chairman Global Theatrical |
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Brian Becker*
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516,561 |
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60,000 |
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5,125 |
(5) |
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Former Chief Executive Officer |
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Miles Wilkin*
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482,464 |
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400,000 |
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16,000 |
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5,125 |
(5) |
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Former Chief Operating Officer |
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Dale Head*
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407,037 |
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136,810 |
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13,700 |
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5,125 |
(5) |
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Former Executive Vice-President and General Counsel |
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* |
No longer serves in this capacity with the newly formed company. |
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(1) |
Perquisites that are less than $50,000 in the aggregate for any
named executive officer are not disclosed in the table in
accordance with SEC rules. |
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(2) |
Mr. Rapino received an award of 2,780 shares of restricted
stock on February 19, 2004. The restricted stock had a fair
market value of $93,102 as of December 31, 2004. The
restriction will lapse on 695 shares on February 19,
2007, 695 shares on February 19, 2008, and the remaining
1,390 shares on February 19, 2009. Mr. Rapino will
receive all cash dividends declared and paid during the vesting
period. See CCE Stock Incentive
Plan Forms of Award Restricted Stock and
Deferred Stock Awards. |
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(3) |
Mr. Lane is a citizen of the United Kingdom. The
compensation amounts reported in this table have been converted
from British pounds to U.S. dollars using the average annual
exchange rates for the year. |
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(4) |
Represents $58,650 in contracted payment to Mr. Lane in
lieu of a company automobile. The remaining $64,148 represents
the amount of contributions paid by Clear Channel Communications
to Mr. Lanes pension plan. |
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(5) |
Represents the amount of matching contributions paid by Clear
Channel Communications under its 401(k) Plan. |
105
Stock Options
The following table sets forth certain information regarding
stock options to acquire shares of Clear Channel
Communications common stock granted to our named executive
officers in 2004. The options are subject to the terms of the
Clear Channel Communications 2001 Stock Incentive Plan. At the
time of the distribution, we will have in place our own stock
incentive plan. We expect to make stock option and/or other
stock-based awards under our new stock incentive plan at or
shortly after the time of the spin-off. However, the number of
shares covered by the initial awards and details relating to
individual awards have not yet been determined. The effect of
the spin-off on the Clear Channel Communications stock options
held by our employees who separate from Clear Channel
Communications is described below under the heading
Employee Benefit Plans.
Stock Option Grant Table
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Individual Grants | |
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Percent of | |
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Number of | |
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Total | |
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Securities | |
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Options | |
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Underlying | |
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Granted to | |
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Exercise of | |
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Grant Date | |
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Options | |
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Employees in | |
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Base Price | |
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Expiration | |
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Present | |
Name |
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Granted (#) | |
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Fiscal Year | |
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($/Sh) | |
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Date | |
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Value $ (1) | |
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Michael Rapino
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Chief Executive Officer |
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David Ian Lane
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6,900 |
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* |
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44.53 |
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2/19/09 |
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104,190 |
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Chairman Global Theatrical |
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Brian Becker**
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60,000 |
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1.30% |
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44.53 |
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2/19/09 |
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906,000 |
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Former Chief Executive Officer |
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Miles Wilkin**
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16,000 |
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0.03% |
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44.53 |
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2/19/09 |
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241,600 |
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Former Chief Operating Officer |
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Dale Head**
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13,700 |
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0.03% |
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44.53 |
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2/19/09 |
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206,870 |
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Former Executive Vice-President and General Counsel |
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* |
Percentage of securities granted to such person is less than
0.01%. |
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** |
No longer serves in this capacity with the newly formed company. |
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(1) |
Present value for this option was estimated at the date of grant
using the Black-Scholes option pricing model with the following
assumptions: Risk-free of 2.21%, a dividend yield of .90%, a
volatility factor of the expected market price of Clear Channel
Communications common stock of 50% and the expected life
of 3 years. The present value of stock options granted is
based on a theoretical option-pricing model. In actuality,
because Clear Channel Communications employee stock
options are not traded on an exchange, optionees can receive no
value nor derive any benefit from holding stock options under
these plans without an increase in the market price of Clear
Channel Communications stock. Such an increase in stock price
would benefit all stockholders commensurately. |
106
Exercise of Stock Options
The following table discloses information regarding the exercise
of stock options to acquire shares of Clear Channel
Communications common stock by our named executive
officers in 2004 and the value of unexercised stock options held
by the named executive officers.
Aggregated Option Exercises and Fiscal Year-End Option Value
Table
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Number of Securities | |
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Value of Unexercised | |
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Underlying Unexercised | |
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In-the-Money | |
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Options at | |
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Options at | |
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Shares Acquired | |
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Fiscal Year-End (#) | |
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Fiscal Year-End ($) | |
Name |
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on Exercise (#) | |
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Value Realized ($) | |
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Exercisable/Unexercisable | |
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Exercisable/Unexercisable | |
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Michael Rapino
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0/10,000 |
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0/0 |
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Chief Executive Officer |
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David Ian Lane
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6,900/12,500 |
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0/15,975 |
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Chairman Global Theatrical |
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Brian Becker*
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434,160/352,840 |
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720,968/1,273,725 |
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Former Chief Executive Officer |
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Miles Wilkin*
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71,975/63,375 |
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249,872/0 |
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Former Chief Operating Officer |
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Dale Head*
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16,450/8,250 |
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0/0 |
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Former Executive Vice-President and General Counsel |
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* |
No longer serves in this capacity with the newly formed company. |
Employee Benefit Plans
Upon completion of the distribution, we will have in place an
employee matters agreement with Clear Channel Communications
covering a number of compensation and benefits matters relating
to our employees. See Our Relationship with Clear Channel
Communications After the Distribution Employee
Matters Agreement. The principal features of the employee
matters agreement are summarized in this section. In general, we
will be responsible for all liabilities and expenses relating to
our current and former employees and their covered dependents
and beneficiaries.
Our employees currently participate in various Clear Channel
Communications incentive compensation, welfare and other
employee benefit plans. Our employees participation in the
Clear Channel Communications plans will end at the time of the
spin-off, or, in the case of certain plans, at the end of the
month in which the spin-off occurs. We currently maintain our
own 401(k)plan, which we will continue to maintain after the
spin-off. We will also have in effect at the time of the
spin-off such other incentive and employee benefit plans (some
of which are described below) as we deem necessary or
appropriate in order to maintain continuity or otherwise further
our best interests.
For 2005, certain of our executive officers and other key
employees may be entitled to receive incentive compensation in
accordance with the terms of the performance-based awards
previously made to them under the Clear Channel Communications,
Inc. 2005 Annual Incentive Plan. However, at least as to our
named executive officers, we will be responsible for determining
the amounts, if any, that are payable under those awards,
subject to such adjustments as are deemed appropriate in light
of the corporate restructuring being undertaken by Clear Channel
Communications. The annual incentive bonuses which may be
payable to our named executive officers for 2005 performance
will be based on improvement to OIBDAN over 2004 levels. The
performance goals and bonus opportunities were fixed in early
2005 in accordance with the Clear Channel Communications
Annual Incentive Plan. The bonus opportunities vary by
participant and are not based on a standard formula or other
guidelines. We will not make adjustments to the performance
goals or bonus opportunities to reflect the spin-off. For 2006,
we will have in place our own performance based annual incentive
plan for designated executive officers and other key employees.
Our plan is described below under the heading
Our 2006 Annual Incentive Plan.
107
Some of our employees hold shares of Clear Channel
Communications stock in their 401(k) accounts. Following the
spin-off, these shares will be held as a wasting asset, in the
sense that our employees will be permitted to direct the sale of
Clear Channel Communications stock credited to their accounts,
but not the purchase of such stock. At some point in the future,
it is anticipated that any Clear Channel Communications Stock
still held in our 401(k)plan will be sold and the proceeds
re-invested. We may add our stock to the list of available
investments under our 401(k)plan, but there is no assurance this
will occur or continue.
We will assume sole responsibility for payment of deferred
compensation owed to our employees under the Clear Channel
Communications, Inc. Non-Qualified Deferred Compensation Plan.
Clear Channel Communications will cause assets held for the
payment of such deferred compensation to be transferred to a
trust to be maintained by us, subject to applicable tax law
requirements and the terms of our own deferred compensation plan
(which will be similar to the Clear Channel Communications Plan).
Some of our employees and other personnel hold stock options
and/or shares of Clear Channel Communications restricted stock
under the Clear Channel Communications, Inc. 2001 Stock
Incentive Plan and certain predecessor stock incentive plans. In
connection with the spin-off, adjustments will be made to the
outstanding vested Clear Channel Communications options held by
our employees in order to preserve both the aggregate intrinsic
value of the options (aggregate value of option shares less
aggregate exercise price) and the ratio of the option exercise
price per share to the value per share covered by the options.
However, because the spin-off will result in the termination of
our employees employment with the Clear Channel
Communications group of companies, the non-vested Clear Channel
Communications options held by our employees will be forfeited
at the time of the spin-off, and the vested options (as
adjusted) will be forfeited to the extent they are not exercised
within the applicable post-employment exercise period provided
in their option agreements. Our employees who hold restricted
shares of Clear Channel Communications stock at the time of the
spin-off will participate in the spin-off distribution of shares
of our common stock on the same basis as Clear Channel
Communications stockholders generally. Our employees will be
fully vested in the shares of our stock they receive in the
spin-off distribution with respect to their restricted shares of
Clear Channel Communications stock. The restricted shares of
Clear Channel Communications stock held by our employees will be
forfeited following the spin-off due to the termination of their
employment with the Clear Channel Communications group of
companies.
After the spin-off, our employees will no longer be eligible for
stock awards under the Clear Channel Communications stock
incentive plans. However, upon completion of the spin-off, we
will have in place our own stock incentive plan under which we
will be able to grant options, restricted stock and other awards
for our stock. See CCE Spinco Stock Incentive
Plan below. We expect to make awards under our new
incentive stock plan at the time of or shortly after the
spin-off. However, the number of shares covered by the initial
awards and details relating to individual awards have not yet
been determined.
Our employees who participate in the Clear Channel
Communications, Inc. Employee Stock Purchase Plan will be
permitted to continue to participate until the spin-off. The
plan custodian will distribute to our employees any shares of
Clear Channel Communications stock and shares of our stock that
remain in their plan accounts more than 90 days after the
spin-off. During that 90-day period, our employees will be
permitted to direct the sale of the stock credited to their plan
accounts (both Clear Channel Communications stock and our stock)
and the distribution of the proceeds.
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CCE Spinco Stock Incentive Plan
Our board of directors adopted and Clear Channel Communications,
as our sole stockholder, approved the CCE Spinco 2005 Stock
Incentive Plan. The purpose of the plan is to help us attract,
motivate and retain qualified executives and other key
personnel. In furtherance of this purpose, the plan authorizes
us to grant various forms of incentive awards, including stock
options, stock appreciation rights, restricted stock, deferred
stock awards and performance-based cash and stock awards. See
Forms of Award below.
The plan and certain tax aspects of awards made under the plan
are summarized below.
The plan will be administered by the compensation committee of
our board of directors; however, the full board of directors
will have sole responsibility and authority for making and
administering awards to any of our non-employee directors.
Subject to the terms of the plan, the committee has broad
authority to select the persons to whom awards will be made, fix
the terms and conditions of each award, and construe, interpret
and apply the provisions of the plan and of any award made under
the plan. The committee may delegate any of its responsibilities
and authority to other persons, subject to applicable law.
Subject to certain limitations, we will indemnify the members of
the committee against claims made and liabilities and expenses
incurred in connection with their service under the plan.
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Securities Covered by the Plan |
We can issue a total of 9,000,000 shares of our common
stock under the plan. The following shares are not taken into
account in applying these limitations: (a) shares covered
by awards that expire or are forfeited, canceled or settled in
cash, (b) shares withheld by us for the payment of taxes
associated with an award, (c) shares withheld by us for the
payment of the exercise price under an award, and
(d) previously-owned shares received by us in payment of
the exercise price under an award.
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Individual Award Limitations |
No participant may receive awards in any calendar year covering
more than one million shares plus the amount of the
participants unused annual limit as of the close of the
preceding calendar year. No participant may receive
performance-based cash awards under the plan in any calendar
year covering more than $5 million plus the amount of the
participants unused annual limit as of the close of the
preceding calendar year.
Awards may be made under the plan to any of our present or
future directors, officers, employees, consultants or advisers.
Stock Options and Stock Appreciation Rights. We may grant
stock options that qualify as incentive stock
options under Section 422 of the Code
(ISOs), as well as stock options that do not qualify
as ISOs. ISOs may not be granted more than ten years after the
date the plan is adopted. We may also grant stock appreciation
rights (SARs). In general, an SAR gives the holder
the right to receive the appreciation in value of the shares of
Company stock covered by the SAR from the date the SAR is
granted to the date the SAR is exercised. The per share exercise
price of a stock option and the per share base value of an SAR
may not be less than the fair market value per share of common
stock on the date the option or SAR is granted. The maximum term
of a stock option is ten years. (Different limitations apply to
ISOs granted to ten-percent stockholders: the term may not be
greater than five years and the exercise price may not be less
than 110% of the value of our common stock on the date the
option is granted.) The committee may impose such exercise,
forfeiture and other conditions and limitations as it
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deems appropriate with respect to stock options and SARs. The
exercise price under a stock option may be paid in cash or in
any other form or manner permitted by the committee, including,
without limitation, payment of previously-owned shares of common
stock, or payment pursuant to broker-assisted cashless exercise
procedures. Methods of exercise and settlement and other terms
of SARs will be determined by the committee.
Restricted Stock and Deferred Stock Awards. The plan
authorizes the committee to make restricted stock awards,
pursuant to which shares of common stock are issued to
designated participants subject to transfer restrictions and
vesting conditions. In general, if the recipient of a restricted
stock award terminates employment before the end of the
specified vesting period or if the recipient fails to meet
performance or other specified vesting conditions, the
restricted shares will be forfeited by the recipient and will
revert to us. Subject to such conditions as the committee may
impose, the recipient of a restricted stock award may be given
the rights to vote and receive dividends on shares covered by
the award pending the vesting or forfeiture of the shares.
Deferred stock awards generally consist of the right to receive
shares of common stock in the future, subject to such conditions
as the committee may impose including, for example, continuing
employment or service for a specified period of time or
satisfaction of specified performance criteria. Deferred stock
awards may be made in a number of different forms, including
stock units and restricted stock units.
Prior to settlement, deferred stock awards do not carry voting,
dividend or other rights associated with stock ownership;
however, dividend equivalents may be payable or accrue if the
committee so determines.
Other Stock-Based Awards. The plan gives the committee
broad discretion to grant other types of equity-based awards,
including, for example, dividend equivalent rights, phantom
shares and bonus shares, and to provide for settlement in cash
and/or shares. The plan also allows non-employee directors to
elect to receive their director fees in the form of shares of
our common stock in lieu of cash.
Performance-Based Awards. The committee may also grant
performance-based awards under the plan. In general, performance
awards would provide for the payment of cash and/or shares of
common stock upon the achievement of performance objectives
established by the committee for a fiscal year or other
designated performance period. Performance objectives may be
based upon any one or more of the following business criteria:
(i) earnings per share, (ii) share price or total
shareholder return, (iii) pre-tax profits, (iv) net
earnings, (v) return on equity or assets,
(vi) revenues, (vii) operating income (loss) before
depreciation, amortization, loss (gain) on sale of operating
assets, and non-cash compensation expense, or OIBDAN,
(viii) market share or market penetration, or (ix) any
combination of the foregoing. Performance objectives may be
based upon the performance of such person or persons as the
committee may determine, including an individual or group of
individuals, our company on a combined basis, one or more
subsidiaries or other affiliates, and one or more divisions or
business units. Performance objectives may be expressed in fixed
or relative quantitative terms or in other ways, including, for
example, targets relative to past performance, or targets
compared to the performance of other companies, such as a
published or special index or a group of companies selected by
the committee for comparison.
Capital Changes. In the event of material changes to our
capital structure, including, for example, a recapitalization,
stock split or spin-off, appropriate adjustments will be made to
the maximum number of shares and the class of shares or other
securities which may be issued under the plan, the maximum
number and class of shares which may be covered by awards made
to an individual in any calendar year, the number and class of
shares or other securities subject to outstanding awards and,
where applicable, the exercise price, base value or purchase
price under outstanding awards.
Merger and other Transactions. If we enter into a merger
or other transaction involving the sale of the company,
outstanding options and SARs will either become fully vested and
exercisable, or assumed by and converted into options or SARs
for shares of the acquiring company. Our board of directors may
make similar adjustments to other outstanding awards under the
plan and may direct a cashout of any or all outstanding awards
based upon the value of the consideration paid for our shares in
the merger or other
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transaction giving rise to the adjustment of plan awards.
Additional or different types of adjustments may be permitted or
required under the terms of individual plan awards, as the
committee may determine.
No Repricing of Stock Options. Subject to the provisions
of the plan regarding adjustments due to a change in capital
structure, the committee will have no authority to reprice
outstanding options, whether through amendment, cancellation or
replacement grants, without approval of our stockholders.
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Amendment and Termination of the Plan; Term |
Except as may otherwise be required by law or the requirements
of any stock exchange or market upon which the common stock may
then be listed, our board of directors, acting in its sole
discretion and without further action on the part of our
stockholders, may amend the plan at any time and from time to
time and may terminate the plan at any time.
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United States Income Tax Considerations |
The grant of a stock option or SAR under the plan is not a
taxable event for federal income tax purposes. In general,
ordinary income is realized upon the exercise of a stock option
(other than an ISO) in an amount equal to the excess of the fair
market value on the exercise date of the shares acquired
pursuant to the exercise over the option exercise price paid for
the shares. The amount of ordinary income realized upon the
exercise of an SAR is equal to the excess of the fair market
value of the shares covered by the exercise over the SAR base
price. We are entitled to a deduction equal to the amount of
ordinary income realized by a plan participant upon the exercise
of an option or SAR. The tax basis of shares acquired upon the
exercise of a stock option (other than an ISO) or SAR is equal
to the value of the shares on the date of exercise. Upon a
subsequent sale of the shares, capital gain or loss will be
realized in an amount equal to the difference between the
selling price and the basis of the shares.
No income is realized upon the exercise of an ISO other than for
purposes of the alternative minimum tax. Income or loss is
realized upon a disposition of shares acquired pursuant to the
exercise of an ISO. If the disposition occurs more than one year
after the ISO exercise date and more than two years after the
ISO grant date, then gain or loss on the disposition, measured
by the difference between the selling price and the option
exercise price for the shares, will be long-term capital gain or
loss. If the disposition occurs within one year of the exercise
date or within two years of the grant date, then the gain
realized on the disposition will be taxable as ordinary income
to the extent such gain is not more than the difference between
the value of the shares on the date of exercise and the exercise
price, and the balance of the gain, if any, will be capital
gain. We are not entitled to a deduction with respect to the
exercise of an ISO; however, we are entitled to a deduction
corresponding to the ordinary income realized by a participant
upon a disposition of shares acquired pursuant to the exercise
of an ISO before the satisfaction of the applicable one- and
two-year holding period requirements described above.
In general, a participant will realize ordinary income with
respect to common stock received pursuant to restricted stock,
deferred stock and other non-stock option and non-SAR forms of
award at the time the shares become vested in accordance with
the terms of the award in an amount equal to the fair market
value of the shares at the time they become vested, and we are
entitled to a corresponding deduction. A participant may make an
early income election with respect to the receipt of
restricted shares of common stock, in which case the Participant
will realize ordinary income on the date the restricted shares
are received equal to the difference between the value of the
shares on that date and the amount, if any, paid for the shares.
In such event, any appreciation in the value of the shares after
the date of the award will be taxable as capital gain upon a
subsequent disposition of the shares. Our deduction is limited
to the amount of ordinary income realized by the participant as
a result of the early income election.
Compensation that qualifies as performance-based is
exempt from the $1 million deductibility limitation imposed
by Section 162(m) of the Code. It is contemplated that
stock options and SARs granted under the plan with an exercise
price or base price at least equal to 100% of fair market value
of the underlying stock at the date of grant and certain other
plan awards which are conditioned upon achievement of
performance goals will be able to qualify for the
performance-based compensation
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exemption, assuming the applicable requirements are satisfied.
It is anticipated that the plan will be re-submitted for
stockholder approval at or before the next annual meeting of our
stockholders following the spin-off. Such approval would enable
us to continue to qualify for an exception to the annual
$1.0 million executive compensation deduction limitation of
Section 162(m) of the Code with respect to certain awards
made under the plan.
The above summary pertains solely to certain U.S. federal
income tax consequences associated with awards made under the
plan. The summary does not address all federal income tax
consequences and it does not address state, local and
non-U.S. tax considerations.
Our 2006 Annual Incentive Plan
For 2006, our executive officers and other designated key
employees will participate in our own 2006 Annual Incentive
Plan, which has been adopted by our board of directors and
approved by Clear Channel Communications, in its capacity as our
sole stockholder. In general, the plan provides for the payment
of annual bonuses tied to the achievement of pre-established
performance objectives fixed by the committee. We intend that
bonuses under our plan will qualify for the
performance-based-compensation exemption from the executive
compensation deduction limitations of Section 162(m) of the
Code. Toward that end, in order to satisfy regulations issued
under section 162(m), we expect to submit our plan for
approval at the first annual meeting of our stockholders
occurring after the spin-off.
Our annual incentive plan will be administered by the
compensation committee of our board of directors. The committee
will have the authority to select the executive officers and
other key employees to whom awards will be made, to prescribe
the performance objectives which must be satisfied pursuant to
such awards, and to make the determinations necessary with
respect to the administration and payment of such awards. The
performance objectives that may be established for awards made
under the plan may be based upon any one or more of the
following business criteria: revenue growth, operating income
(loss) before depreciation, amortization, loss (gain) on sale of
operating assets and non-cash compensation expense
(OIBDAN), OIBDAN growth, funds from operations,
funds from operations per share and per share growth, operating
income and operating income growth, net earnings, earnings per
share and per share growth, return on equity, return on assets,
share price performance on an absolute basis and relative to an
index, improvements in attainment of expense levels,
implementing or completing critical projects, or improvement in
cash-flow (before or after tax). Performance objectives may be
based upon the performance of such person or persons as the
committee may determine, including an individual or group of
individuals, our company on a combined basis, one or more
subsidiaries or other affiliates, and one or more divisions or
business units. Performance objectives may be expressed in fixed
or relative quantitative terms or in other ways, including, for
example, targets relative to past performance, or targets
compared to the performance of other companies, such as a
published or special index or a group of companies selected by
the committee for comparison. The committee may provide that the
amount, if any, of a participants annual bonus will be
higher or lower, depending upon the extent to which the
applicable performance objective is achieved. Performance
objectives applicable to a performance period must be
established by the committee prior to, or reasonably soon after
the beginning of a performance period, but no later than the
90 days from the beginning of the period or, if earlier,
the date 25% of the period has elapsed.
Upon certification of the achievement of performance objectives
by the committee which entitle a participant to the payment of a
performance award, subject to deferral arrangements that may be
permitted or required by the committee, the award shall be
settled in cash or other property. The maximum performance bonus
that may be earned by any participant in any calendar year is
limited to $15 million.
The committee is authorized to reduce or eliminate the
performance award of any participant, for any reason, including
changes in the participants position or duties, whether
due to termination of employment (including death, disability,
retirement, voluntary termination or termination with or without
cause) or otherwise. To the extent necessary to preserve the
intended economic effects of the plan or an award under the
plan, the committee is authorized to adjust pre-established
performance objectives and/or performance
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awards to take into account certain material events, such as a
change in corporate capitalization, a corporate transaction, a
partial or complete liquidation of our company or any
subsidiary, or certain changes in accounting rules; provided
that no such adjustment may cause a performance award to fail to
be non-deductible under Section 162(m) of the Internal
Revenue Code.
Our board of directors or the committee may, at any time or from
time to time, amend the plan. Any such amendment may be made
without stockholder approval unless such approval is required to
maintain the status of the plan under Section 162(m) of the
Code. Our board of directors may terminate the plan at any time.
Employment Agreements
Michael Rapino. On August 17, 2005, we entered into
an Employment Agreement with Michael Rapino. The initial term of
the agreement ends on August 31, 2007; the term
automatically extends one day at a time beginning on
August 31, 2007, until one party gives the other one
years notice of termination. The contract calls for
Mr. Rapino to receive a base salary of $550,000 per year.
Mr. Rapino is also eligible to receive a performance bonus
as decided at the sole discretion of the compensation committee
of our board of directors. Contingent on the closing of the
spin-off, we will grant Mr. Rapino options to purchase
120,000 shares of our common stock at an exercise price equal to
the fair market value of our common stock on the third day after
the closing of the spin off. We may terminate
Mr. Rapinos employment at any time after
August 31, 2007, without Cause by giving him
one years written notice. We may also terminate
Mr. Rapinos employment at any time with
Cause, as defined in the agreement. If
Mr. Rapino is terminated without Cause, he is
entitled to receive a lump sum payment of accrued and unpaid
base salary and prorated bonus, if any, and any payments to
which he may be entitled under any applicable employee benefit
plan. In addition, he would have the option to elect to become a
part-time consultant to us for one year, and agree not to
compete with us during that time, in exchange for severance pay
equal to his base salary and acceleration of certain stock
options. Mr. Rapino may also terminate his employment
agreement if neither the spin off nor a Change of
Control of us occurs prior to December 31, 2006, in
which case he will be entitled to receive a payment of
$1 million in addition to the severance pay described
above. In the event that we experience a Change of
Control (other than in connection with the spin off), all
of Mr. Rapinos outstanding stock options will become
fully exercisable and any restricted stock will no longer be
restricted. If a Change of Control occurs prior to
the spin off and prior to December 31, 2006, and the
successor does not offer Mr. Rapino comparable employment
terms, or Mr. Rapino declines to be employed by the
successor, Mr. Rapino will be entitled to a payment of
$1 million within 30 days of the Change of
Control transaction, subject to certain conditions.
Mr. Rapino is prohibited by his employment agreement from
soliciting our employees for employment for 12 months after
termination regardless of the reason for termination of
employment.
Alan Ridgeway. On November 28, 2005, we entered into
an employment agreement with Alan Ridgeway. Mr. Ridgeway
receives a base salary of $400,000 per year, which is subject to
an annual increases in accordance with company policy.
Mr. Ridgeway is also eligible to receive a base salary
bonus for 2006 and 2007 aggregating approximately $80,000, and
performance bonuses for each calendar year during the term of
the contract. We may terminate the contract without cause at any
time after December 31, 2006. The contract allows us to
summarily terminate the contract for cause. The agreement
provides that Mr. Ridgeway may not compete with us in
during the term of the agreement where we operate or plan to
operate, including a 50 mile radius of such location.
Arthur Fogel. On December 3, 2002, we entered into a
Personal Services Agreement with Arthur Fogel, which was amended
on January 20, 2005. The term of the agreement ends on
December 31, 2007. The contract calls for Mr. Fogel to
receive a base salary of $600,000 per year, subject to cost of
living increases. Mr. Fogel is also entitled to certain
additional payments aggregating approximately $150,000 during
the term of the contract as well as being eligible for
performance bonuses based on the signing of certain key and
non-key touring performance acts. We advanced $1.5 million
of bonus payments to Mr. Fogel when the contract was signed
and at a time when he was not an executive officer of Clear
Channel Communications and these amounts were fully repaid as
the bonuses were earned. We may
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terminate Mr. Fogels employment for Cause
or Justification at any time prior to a Change
of Control. If we terminate Mr. Fogels
employment for Cause or he terminates his employment
with us without Good Reason, Mr. Fogel is
required to repay the unpaid portion of the bonus advances; if
we terminate his employment for Justification, a pro
rata portion of the advances must be repaid. If we terminate
Mr. Fogels employment without Cause or
Justification or he terminates his employment with
us for Good Reason, he is entitled to receive his
base salary for an additional 18 months or, if less, until
December 31, 2007, provided that he complies with
non-solicitation, non-disparagement and non-competition
restrictions during the 12 months following termination.
Mr. Fogel is prohibited by his employment agreement from
soliciting our employees for employment for 12 months after
termination regardless of the reason for termination of
employment. If Mr. Fogel is terminated by us without
Cause or Justification or he terminates
his employment for Good Reason, then Mr. Fogel
is not subject to non-competition restrictions for
12 months after termination.
Thomas O. Johansson. On October 1, 2004, we entered
into an Executive Agreement with Thomas Johansson. The contract
calls for Mr. Johansson to receive a base salary of SEK
2,900,000 (Swedish kroner) per year and a pension contribution
of SEK 400,000 per year (equivalent to approximately $374,500
and $51,654, respectively, based on the exchange rate in effect
on September 30, 2005), each of which is subject to an
annual 5% increase. Mr. Johansson was also entitled to a
sign-on fee of $200,000 and certain performance bonuses based on
the EBITDA and growth rates of certain of our European
operations. The initial term of the agreement continues until
December 31, 2007, and the term will automatically continue
after that date until terminated. The agreement may be
terminated by either party by giving 12 months written
notice. If we terminate the agreement effective prior to
December 31, 2007, we must pay Mr. Johansson severance
equal to his annual base salary and bonuses subject to offset
for other compensation he receives from alternative employment.
Mr. Johansson is subject to non-competition and
non-solicitation restrictions for two years following the
termination of his employment and we must compensate him for
these restrictions by paying him 80% of his annual base salary
and pension, subject to offset for other compensation he
receives from alternative employment and for severance payments.
These restrictions on Mr. Johansson will lapse if we or
certain of our European operations are sold.
David Ian Lane. On October 5, 2000, we entered into
a Service Agreement with David Ian Lane, which was amended in
2005. The agreement expires on December 31, 2010. The
contract calls for Mr. Lane to receive a base salary of
£350,000 per year (equivalent to approximately $616,850
based on the exchange rate in effect on September 30,
2005). Mr. Lane is also eligible to receive a performance
bonus based on EBITDA growth rate and the success of certain
productions. We may terminate the contract at any time, without
cause, by giving twelve (12) months written notice and we
may terminate the contract immediately for cause. The agreement
provides that Mr. Lane will not compete with us within the
United Kingdom for a period of six (6) months following the
termination and that he will not solicit our customers or
employees for a period of twelve (12) months following the
termination. If Mr. Lane terminates the agreement prior to
its expiration, he must repay a pro rata portion of the
£500,000 retention bonus previously paid to him (equivalent
to approximately $881,213 based on the exchange rate in effect
on September 30, 2005). If we terminate the agreement prior
to its expiration, Mr. Lane will not be required to repay
any portion of this retention bonus. If Mr. Lane terminates
the agreement in certain circumstances, we must waive the
non-competition provisions of the agreement.
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OUR RELATIONSHIP WITH CLEAR CHANNEL COMMUNICATIONS
AFTER THE DISTRIBUTION
We have provided below a summary description of the master
separation and distribution agreement between Clear Channel
Communications and us and the other key agreements that relate
to our separation from Clear Channel Communications. This
description, which summarizes the material terms of these
agreements, is not complete. You should read the full text of
these agreements, which have been included as exhibits to the
registration statement of which this information statement is a
part.
Overview
The master separation and distribution agreement contains many
of the key provisions related to our separation from Clear
Channel Communications and the distribution of our shares to
Clear Channel Communications common stockholders. The
other agreements referenced in the master separation and
distribution agreement govern certain aspects relating to the
separation and various interim and ongoing relationships between
Clear Channel Communications and us following the distribution.
These agreements are:
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the tax matters agreement; |
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the employee matters agreement; |
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the trademark and copyright license agreement; and |
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the transition services agreement. |
Master Separation and Distribution Agreement
We will enter into a master separation and distribution
agreement with Clear Channel Communications prior to the
completion of this offering. In this information statement, we
refer to this agreement as the Master Agreement. The Master
Agreement will set forth our agreements with Clear Channel
Communications regarding the principal transactions required to
effect the transfer of assets and the assumption of liabilities
necessary to separate our company from Clear Channel
Communications. It also will set forth other agreements
governing our relationship after the separation.
To effect the separation, Clear Channel Communications will, and
will cause its affiliates to, transfer to us the assets related
to our businesses not currently owned by us. We or our
subsidiaries will assume and agree to perform, discharge and
fulfill the liabilities related to our businesses (which, in the
case of tax liabilities, will be governed by the tax matters
agreement described below). If any governmental approval or
other consent required to transfer any assets to us or for us to
assume any liabilities is not obtained prior to the completion
of this offering, we will agree with Clear Channel
Communications that such transfer or assumption will be deferred
until the necessary approvals or consents are obtained. Clear
Channel Communications will continue to hold the assets and be
responsible for the liabilities for our benefit and at our
expense until the necessary approvals or consents are obtained.
Similarly, we will, and will cause our subsidiaries to, transfer
to Clear Channel Communications the assets related to its
business currently owned by us. Clear Channel Communications
will assume from us, and agree to perform, discharge and fulfill
the liabilities related to its business.
Except as expressly set forth in the Master Agreement or in any
other transaction document, neither we nor Clear Channel
Communications will make any representation or warranty as to:
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the assets, businesses or liabilities transferred or assumed as
part of the separation; |
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any consents or approvals required in connection with the
transfers; |
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the value, or freedom from any security interests, of, or any
other matter concerning, any assets transferred; |
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the absence of any defenses or right of set-off or freedom from
counterclaim with respect to any claim or other asset of either
us or Clear Channel Communications; or |
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the legal sufficiency of any document or instrument delivered to
convey title to any asset transferred. |
Except as expressly set forth in any transaction document, all
assets will be transferred on an as is, where
is basis, and we and our subsidiaries will agree to bear
the economic and legal risks that any conveyance was
insufficient to vest in us good title, free and clear of any
security interest, and that any necessary consents or approvals
are not obtained or that any requirements of laws or judgments
are not complied with.
Overview. The Master Agreement also governs the rights
and obligations of Clear Channel Communications and our company
regarding the proposed distribution by Clear Channel
Communications to its common stockholders of the shares of our
common stock held by Clear Channel Communications, which is also
referred to in this information statement as the
distribution.
Pre-Distribution Transactions and Conditions to the
Distribution. The Master Agreement provides that the
distribution is subject to several pre-distribution transactions
and conditions that must be satisfied or waived by Clear Channel
Communications, in its sole discretion, including, among others
discussed in this information statement:
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the SEC has declared effective our registration statement on
Form 10, of which this information statement is a part,
under the Securities Exchange Act of 1934, as amended, and no
stop order relating to the registration statement is in effect; |
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we and Clear Channel Communications have received all permits,
registrations and consents required under the securities or blue
sky laws of states or other political subdivisions of the United
States or of foreign jurisdictions in connection with the
distribution; |
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Clear Channel Communications has received a private letter
ruling from the IRS and the opinion of Skadden, Arps, Slate,
Meagher & Flom LLP, in each case, to the effect that
the spin-off will qualify as a tax-free distribution for
U.S. federal income tax purposes under Sections 355
and 368(a)(1)(D) of the Code; |
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Clear Channel Communications has contributed $508.0 million
of our outstanding intercompany note to Clear Channel
Communications to our capital and we have repaid the remaining
portion of the intercompany note to Clear Channel
Communications, prior to or concurrently with the distribution
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no order, injunction or decree issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing
consummation of the distribution or any of the transactions
related thereto, including the transfers of assets and
liabilities contemplated by the Master Agreement, is in effect; |
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we and Clear Channel Communications have received an opinion
that we will be solvent following the distribution and the
concurrent transactions described herein; |
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the Series A redeemable preferred stock and the
Series B redeemable preferred stock described under
The Distribution Preferred Stock
Issuance have been issued; |
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we have entered into the credit agreement in connection with the
senior secured credit facility described under Description
of Indebtedness; and |
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we have received any material government approvals and other
consents necessary to consummate the distribution. |
The fulfillment of the foregoing transactions and conditions
will not create any obligations on Clear Channel
Communications part to effect the distribution, and Clear
Channel Communications board of directors has reserved the
right to amend, modify or abandon the distribution and the
related transactions
116
at any time prior to the distribution date. Clear Channel
Communications board of directors may, in its sole
discretion, also waive any of these conditions.
In addition, Clear Channel Communications has the right not to
complete the distribution if, at any time, Clear Channel
Communications board of directors determines, in its sole
discretion, that the distribution is not in the best interest of
Clear Channel Communications or its stockholders.
If Clear Channel Communications board of directors decides
not to complete the distribution or waives a material condition
to the distribution after the date of this information
statement, we intend to issue a press release and file a report
on Form 8-K with the Securities and Exchange Commission
disclosing this waiver.
Pursuant to the Master Agreement, we are required to cooperate
with Clear Channel Communications to accomplish the distribution
and, at Clear Channel Communications discretion, to
promptly take any and all actions necessary or desirable to
effect the distribution.
Intercompany Debt. Prior to the completion of the
distribution, Clear Channel Communications will contribute to
our capital $508.0 million of the intercompany indebtedness
owed by us. Prior to or concurrently with the completion of the
distribution, we intend to use $200 million of borrowings from
our term loan under our senior secured credit facility and the
$20 million of proceeds from the issuance of the
Series A preferred stock of Holdco #2, one of our
subsidiaries, to repay the remaining portion of the intercompany
note.
Credit Support Releases. We will also agree to use
commercially reasonable efforts to cause Clear Channel
Communications to be released unconditionally from all credit
support obligations that Clear Channel Communications issued for
our benefit. If we do not obtain releases for all credit support
obligations, in the event that Clear Channel Communications is
required to indemnify a third-party for certain liabilities,
Clear Channel Communications will have the right to offset any
amounts paid by Clear Channel Communications with respect to the
credit support obligations against any obligations Clear Channel
Communications may have to us. Additionally, we will agree to
indemnify Clear Channel Communications from all liabilities
relating to these credit support obligations and Clear Channel
Communications will have the right to obtain, at our expense,
insurance coverage to cover any such liabilities.
Termination and Amendment. Clear Channel Communications,
in its sole discretion, will determine the terms of the
distribution, including the form, structure and terms of any
transactions or offerings to effect the distribution and the
timing and the conditions to the distribution. Clear Channel
Communications may at any time until the completion of the
distribution decide to abandon the distribution or modify or
change its terms, including accelerating or delaying the timing
of the distribution. In addition, Clear Channel Communications
has the right not to complete the distribution if, at any time,
Clear Channel Communications board of directors
determines, in its sole discretion, that the distribution is not
in the best interest of Clear Channel Communications or its
stockholders, or that market conditions are such that it is not
advisable to spin-off the entertainment business. Neither we nor
Clear Channel Communications may amend the Master Agreement
unless the other agrees.
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Auditors and Audits; Annual Financial Statements and
Accounting |
We will agree that for our 2005 fiscal year and for all fiscal
years thereafter for so long as Clear Channel Communications is
required to consolidate our results of operations and financial
position with its results of operations and financial position:
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not to select an independent registered public accounting firm
different from Clear Channel Communications; |
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to use reasonable commercial efforts to cause our independent
registered public accounting firm to date their opinion on our
audited annual financial statements on the same date that Clear
Channel Communications independent registered public
accounting firm date their opinion on Clear Channel
Communications consolidated financial statements and to
enable Clear Channel |
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Communications to meet its timetable for the printing, filing
and the dissemination to the public of any of its annual
financial statements; |
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to provide Clear Channel Communications with all relevant
information that Clear Channel Communications reasonably
requires to enable Clear Channel Communications to prepare its
quarterly and annual financial statements for quarters or years
that include any financial reporting period for which our
financial results are consolidated with Clear Channel
Communications financial statements. |
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to make our auditors available to Clear Channel
Communications auditors so that the Clear Channel
Communications auditors are able to perform any procedures
necessary to take responsibility for our auditors work as
it relates to Clear Channel Communications financial
statements; |
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to provide Clear Channel Communications internal auditors
with access to our books and records to enable Clear Channel
Communications to conduct reasonable audits of our financial
statements provided by us to Clear Channel Communications, as
well as our internal accounting controls and procedures; and |
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to provide prior notice to Clear Channel Communications of any
proposed determination of, or significant changes in, our
accounting estimates or accounting principles. |
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Exchange of Other Information |
The Master Agreement will also provide for other arrangements
with respect to the mutual sharing of information between us and
Clear Channel Communications in order to comply with reporting,
filing, audit or tax requirements, for use in judicial
proceedings and in order to comply with our respective
obligations after the completion of the separation. We will also
agree to provide mutual access to historical records relating to
the others businesses that may be in our possession.
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Releases and Indemnification |
Except for each partys obligations under the Master
Agreement, the other transaction documents and certain other
specified liabilities, we and Clear Channel Communications will
release and discharge each other and each of our affiliates from
all liabilities existing or arising between us on or before the
separation, including in connection with the separation, the
distribution, the preferred stock offering by Holdco #2 and
the senior secured credit facility. The releases will not extend
to obligations or liabilities under any agreements between us
and Clear Channel Communications that remain in effect following
the separation.
We will indemnify, hold harmless and defend Clear Channel
Communications, each of its affiliates and each of their
respective directors, officers and employees, on an after-tax
basis, from and against all liabilities relating to, arising out
of or resulting from:
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the failure by us or any of our affiliates or any other person
or entity to pay, perform or otherwise promptly discharge any
liabilities or contractual obligations associated with our
businesses, whether arising before or after the separation; |
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the operations, liabilities and contractual obligations of our
business, whether arising before or after the separation; |
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any guarantee, indemnification obligation, surety bond or other
credit support arrangement by Clear Channel Communications or
any of its affiliates for our benefit; |
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any breach by us or any of our affiliates of the Master
Agreement, the other transaction documents or our amended and
restated certificate of incorporation or amended and restated
bylaws; |
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any untrue statement of, or omission to state, a material fact
in Clear Channel Communications public filings to the
extent the statement or omission was as a result of information
that we furnished to Clear Channel Communications or that Clear
Channel Communications incorporated |
118
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by reference from our public filings, if the statement or
omission was made or occurred after the distribution; and |
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any untrue statement of, or omission to state, a material fact
in the registration statement of which this information
statement is a part, any offering memorandum, registration
statement or information statement related to the senior secured
credit facility, or otherwise related to the distribution or
related transactions, except to the extent the statement was
made or omitted in reliance upon information provided to us by
Clear Channel Communications expressly for use in any such
offering memorandum, registration statement or information
statement. |
Clear Channel Communications will indemnify, hold harmless and
defend us, each of our affiliates and each of our and their
respective directors, officers and employees, on an after-tax
basis, from and against all liabilities relating to, arising out
of or resulting from:
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the failure of Clear Channel Communications or any of its
affiliates or any other person or entity to pay, perform or
otherwise promptly discharge any liabilities of Clear Channel
Communications or its affiliates, other than liabilities
associated with our businesses, whether arising before or after
the separation; |
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the liabilities of Clear Channel Communications and its
affiliates businesses, other than liabilities associated
with our businesses; |
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any breach by Clear Channel Communications or any of its
affiliates of the Master Agreement or the other transaction
documents; |
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any untrue statement of, or omission to state, a material fact
in our public filings, other than any registration statement or
information statement related to the distribution, our debt
offerings or associated exchange offer, to the extent the
statement or omission was as a result of information that Clear
Channel Communications furnished to us or that we incorporated
by reference from Clear Channel Communications public
filings, if the statement or omission was made or occurred after
the distribution; and |
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any untrue statement of, or omission to state, a material fact
contained in the registration statement of which this
information statement is a part, in any offering memorandum,
registration statement or information statement or related to
the senior secured credit facility, or otherwise related to the
distribution or related transactions, but only to the extent the
statement was made or omitted in reliance upon information
provided by Clear Channel Communications expressly for use in
any such offering memorandum, registration statement or
information statement. |
The Master Agreement will also specify procedures with respect
to claims subject to indemnification and related matters and
will provide for contribution in the event that indemnification
is not available to an indemnified party.
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Expenses of the Separation and Debt Offering |
Clear Channel Communications will pay or reimburse us for all
out-of-pocket fees, costs and expenses (including all legal,
accounting and printing expenses) incurred prior to the
completion of the distribution in connection with our separation
from Clear Channel Communications, other than our out-of-pocket
fees and expenses related to the senior secured credit facility
and the issuance of preferred stock by Holdco #2.
Until the distribution, Clear Channel Communications will
maintain in full force its existing insurance policies that
apply to us, our assets and our business. Following the
distribution, Clear Channel Communications will continue to own
its insurance policies and we will be responsible for
establishing and maintaining separate property damage, business
interruption and liability insurance policies and programs. The
Master Agreement contains provisions regarding the handling
after the distribution of claims relating to our business that
were initiated or arise from occurrences before the distribution.
119
As of the distribution date, generally we will assume all
actions, claims, demands, disputes, lawsuits, arbitrations,
inquiries, proceedings or investigations (referred to as
Actions) relating in any material respect to our
business in which Clear Channel Communications or any of its
subsidiaries is a defendant or the party against whom the Action
is directed. We will conduct the defense of all of the Actions
we assume at our sole cost and expense and we will be
responsible for all liabilities resulting from the Actions we
assume. We will continue to be liable for Actions in which we
are named as a defendant or we are the party against whom the
Action is directed. As of the distribution date, Clear Channel
Communications will transfer to us specified Actions relating
primarily to our business in which Clear Channel Communications
is a claimant or plaintiff. Clear Channel Communications may
participate in any Action we assume at its cost and expense and
we will cooperate with Clear Channel Communications in any
settlement of an Action we assume. If an Action is commenced
after the distribution naming both Clear Channel Communications
and us as defendants and one party is a nominal defendant, the
other party will use commercially reasonable efforts to have the
nominal defendant removed from the Action.
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Dispute Resolution Procedures |
We will agree with Clear Channel Communications that neither
party will commence any court action to resolve any dispute or
claim arising out of or relating to the Master Agreement,
subject to certain exceptions. Instead, any dispute that is not
resolved in the normal course of business will be submitted to
senior executives of each business entity involved in the
dispute for resolution. If the dispute is not resolved by
negotiation within 45 days after submission to the
executives, either party may submit the dispute to mediation. If
the dispute is not resolved by mediation within 30 days
after the selection of a mediator, either party may submit the
dispute to binding arbitration before a panel of three
arbitrators. The arbitrators will determine the dispute in
accordance with Texas law. Most of the other agreements between
us and Clear Channel Communications have similar dispute
resolution provisions.
The Master Agreement also will contain covenants between us and
Clear Channel Communications with respect to other matters,
including processing the confidentiality of our and Clear
Channel Communications information.
Transition Services Agreement
We will enter into a transition services agreement with Clear
Channel Communications or one of its affiliates prior to the
completion of the distribution to provide us certain
transitional administrative and support services and other
assistance. In this information statement, we refer to this
agreement as the Transition Services Agreement.
Clear Channel Communications will provide services to us,
including, but not limited to, the following:
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treasury, payroll and other financial related services; |
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human resources and employee benefits; |
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legal and related services; |
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information systems, network and related services; |
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investment services; and |
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corporate services. |
The agreement also will provide for the lease or sublease of
certain facilities used in the operation of our respective
businesses.
The charges for the transition services generally are intended
to allow Clear Channel Communications to fully recover the
allocated direct costs of providing the services, plus all
out-of-pocket costs and
120
expenses, generally without profit. The allocation of costs will
be based on various measures depending on the service provided,
including relative revenue, employee headcount or number of
users of a service.
The services provided under the Transition Services Agreement
will terminate at various times specified in the agreement
(generally ranging from three months to one year after the
completion of the distribution), but we may terminate any
service, other than certain information technology and tax
services, by giving at least 90 days prior written
notice to Clear Channel Communications, and we may terminate tax
services with 120 days prior written notice. Under
the terms of the Transition Services Agreement, Clear Channel
Communications will not be liable to us for or in connection
with any services rendered pursuant to the agreement or for any
actions or inactions taken by Clear Channel Communications in
connection with the provision of services. However, Clear
Channel Communications will be liable for, and will indemnify us
for, liabilities resulting from its gross negligence, willful
misconduct, improper use or disclosure of customer information
or violations of law, subject to a cap on Clear Channel
Communications liability of an amount equal to payments
made by us to Clear Channel Communications pursuant thereto
during the twelve months preceding such event. Additionally, we
will indemnify Clear Channel Communications for any losses
arising from the provision of services, except to the extent the
liabilities are caused by Clear Channel Communications
gross negligence or material breach of the Transition Services
Agreement.
Tax Matters Agreement
We currently are included in the U.S. federal consolidated
income tax return filed by Clear Channel Communications.
Additionally, we (and/or one or more of our subsidiaries), on
the one hand, and Clear Channel Communications (and/or one or
more of its subsidiaries), on the other hand, file tax returns
on a consolidated, combined or unitary basis for certain
foreign, state and local tax purposes. We and Clear Channel
Communications will continue to file tax returns on a
consolidated, combined or unitary basis for federal, foreign,
state and local tax purposes until the time of the spin-off
(each, a Combined Tax Return).
We and Clear Channel Communication have entered into a tax
matters agreement that will become effective at the time of the
spin-off, to govern the respective rights, responsibilities and
obligations of Clear Channel Communications and us with respect
to tax liabilities and benefits, tax attributes, tax contests
and other matters regarding income taxes, non-income taxes and
preparing and filing Combined Tax Returns for taxable periods
(or portions thereof) ending on or before the date of the
spin-off, which period we refer to as a pre-spin-off period, as
well as with respect to any additional taxes incurred by Clear
Channel Communications attributable to actions, events or
transactions relating to our stock, assets or business following
the spin-off, including taxes imposed if the spin-off fails to
qualify for tax-free treatment under Section 355 of the Code or
if Clear Channel Communications is not able to recognize the
Holdco #3 Loss (as defined below).
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Preparing and Filing Combined Tax Returns |
Under the tax matters agreement, Clear Channel Communications
will have the right and obligation to prepare and file all
Combined Tax Returns. We will be required to provide information
and to cooperate with Clear Channel Communications in the
preparation and filing of these Combined Tax Returns.
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Allocation of Tax Liability |
For pre-spin-off periods, Clear Channel Communications generally
is responsible for all federal, foreign, state and local taxes
attributable to our business and assets to the extent the amount
of these taxes exceeds the amount we have paid or will pay to
Clear Channel Communications prior to the spin-off in connection
with the filing of relevant tax returns. Clear Channel
Communications is not required to pay us for its utilization of
our tax attributes (or benefits) to reduce federal, foreign,
state and local taxes for pre-spin-off periods, whether such
utilization occurs upon the filing of a relevant tax return or
upon an adjustment to such taxes and whether the tax being
reduced is attributable to its or our business and assets.
121
In some circumstances, including those discussed below, we will
be responsible, and we will indemnify Clear Channel
Communications, for any additional federal, foreign, state and
local taxes that are imposed for pre-spin-off periods to the
extent such additional taxes are imposed as a result of actions,
events or transactions relating to our stock, assets or business
following the spin-off, or a breach of the relevant
representations or covenants made by us in the tax matters
agreement. We will also be responsible for all federal, foreign,
state and local taxes attributable to our business and assets
for taxable periods (or portions thereof) beginning after the
date of the spin-off, which period we refer to as a
post-spin-off period.
We and Clear Channel Communications intend that the spin-off
qualify as a reorganization under Sections 355 and
368(a)(1)(D) of the Code. However, if the failure of the
spin-off to qualify as a tax-free transaction under
Section 355 of the Code (including as a result of
Section 355(e) of the Code) is attributable to actions,
events or transactions relating to our stock, assets or
business, or a breach of the relevant representations or
covenants made by us in the tax matters agreement, we have
agreed in the tax matters agreement to indemnify Clear Channel
Communications and its affiliates against any and all
tax-related liabilities. If the failure of the spin-off to
qualify under Section 355 of the Code is for any reason for
which neither we nor Clear Channel Communications is
responsible, we and Clear Channel Communications have agreed in
the tax matters agreement that we will each be responsible for
50% of the tax-related liabilities arising from the failure to
so qualify.
Clear Channel Communications will generally have the right to
control all administrative, regulatory and judicial proceedings
relating to federal, foreign, state and local taxes attributable
to pre-spin-off periods and all proceedings relating to taxes
resulting from the failure of the spin-off, or transactions
relating to the internal reorganization prior to the spin-off,
to qualify as tax-free.
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Post-Spin-Off Tax Attributes |
Generally, we may not carry back a loss, credit or other tax
attribute from a post-spin-off period to a pre-spin-off period,
unless we obtain the consent of Clear Channel Communications and
then only to the extent permitted by applicable law.
Prior to the spin-off, Clear Channel Communications will
transfer (the Holdco #3 Exchange) all of the
outstanding stock of Holdco #3 to Holdco #2 in exchange for
Holdco #2 common stock and all of Holdco #2s Series B
non-voting preferred stock. Pursuant to a pre-existing binding
commitment to be entered into prior to the Holdco #3 Exchange,
Clear Channel Communications will immediately sell the
Series B preferred stock to a third-party investor. As a
result of these transactions, Clear Channel Communications
expects to recognize the Holdco #3 Loss.
Prior to the spin-off, Clear Channel Communications will
contribute the common stock of Holdco #2 to us, which we
will then contribute to one of our wholly-owned subsidiaries. If
Clear Channel Communications is unable to deduct the Holdco #3
Loss for U.S. federal income tax purposes as a result of
any action we take following the spin-off or our breach of a
relevant representation or covenant made by us in the tax
matters agreement, we have agreed in the tax matters agreement
to indemnify Clear Channel Communications for the lost tax
benefits that Clear Channel Communications would have otherwise
realized if it were able to deduct the Holdco #3 Loss.
Employee Matters Agreement
Upon completion of the distribution, we will have in place an
employee matters agreement with Clear Channel Communications
covering a number of compensation and employee benefit matters
relating to our employees. In general, the employee matters
agreement provides that we will be solely responsible for all
liabilities and expenses relating to our current and former
employees and their covered dependents and beneficiaries,
regardless of when incurred. In addition, for a period of one
year following the distribution
122
date, neither we nor Clear Channel Communications may, nor will
they permit any of their respective subsidiaries, affiliates or
agents to, solicit or recruit for employment any employees at
the level of vice president and above currently and then in the
employ of the other company or its subsidiaries or affiliates,
without the prior written consent of the other company.
Our employees participation in the Clear Channel
Communications employee plans will end at the time of the
spin-off or, in the case of certain plans (including group
health), at the end of the month in which the spin-off occurs.
We will adopt our own group health plan and certain other
welfare benefit plans in order to avoid coverage gaps following
the date(s) our employees cease to be covered by the Clear
Channel Communications plans. We will continue to maintain
our 401(k) plan and we will adopt such other incentive
compensation and employee plans as we deem necessary or
appropriate. Our plans will recognize and give full credit to
our current employees for their service with the Clear Channel
Communications group before the spin-off.
Other matters addressed by the employee matters agreement,
including the effect of the spin-off on Clear Channel
Communications stock options and restricted stock held by our
employees, are described in more detail at
Management Employee Benefit Plans above.
Use of Clear Channel Communications Name and Mark
After the distribution date, Clear Channel Communications will
continue to own all rights in the Clear Channel name
and logo. We will be required to remove the Clear
Channel name from the names of our subsidiaries and stop
using the Clear Channel name and logo shortly after
the distribution date.
Products and Services Provided between Clear Channel
Communications and Us
We have provided to, and received from, Clear Channel
Communications various products and services on terms comparable
to those we provide to third parties. We expect to continue to
provide and receive these services following completion of the
distribution.
123
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Clear Channel Communications beneficially and of record holds,
and will hold before the spin-off, all of the outstanding shares
of our common stock. Holders of Clear Channel Communications
common stock, including our directors and executive officers
will receive shares of our common stock for shares of Clear
Channel Communications common stock held by them.
The following table provides information with respect to the
anticipated beneficial ownership of our common stock by
(1) each of our stockholders who we believe will be a
beneficial owner of more than 5% of our outstanding common
stock, (2) each of our directors and those persons
nominated to serve as our directors, (3) each officer named
in the Summary Compensation Table, and (4) all of our
executive officers and directors as a group. We base the share
amounts on each persons beneficial ownership of Clear
Channel Communications common stock as of November 4, 2005,
unless we indicate some other basis for the share amounts.
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Shares to Be Owned | |
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Percent | |
Name of Beneficial Owner |
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(1) | |
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(2) | |
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Henry Cisneros
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* |
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Jeffrey T. Hinson
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* |
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L. Lowry Mays (3)
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3,559,024 |
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5.2 |
% |
Mark P. Mays (4)
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181,406 |
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* |
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Randall T. Mays (5)
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133,263 |
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* |
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Connie McCombs McNab (6)
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260,072 |
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* |
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John N. Simons, Jr.
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188 |
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* |
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Timothy P. Sullivan
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* |
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Michael Rapino
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1,239 |
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* |
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David Ian Lane
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* |
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FMR Corp. (7)
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10,749,769 |
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15.8 |
% |
Capital Research and Management Company (8)
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7,858,865 |
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11.6 |
% |
All directors and executive officers as a group (13 persons) (9)
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4,129,565 |
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6.1 |
% |
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(1) |
The amounts included in this column represent the shares of our
common stock which will be beneficially owned by the listed
individuals based on the distribution ratio of one share of
common stock to be received for every eight shares of Clear
Channel Communications common stock beneficially owned by such
individuals on November 4, 2005 (unless otherwise
specified). |
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(2) |
Represents the percentage of our common stock which we expect to
be outstanding (based on the expected number of our shares to be
distributed based on the number of Clear Channel Communications
shares outstanding on November 4, 2005). An asterisk
indicates that the percentage of common stock projected to be
beneficially owned by the named individual does not exceed 1% of
our common stock. |
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(3) |
Includes 6,057 shares held by trusts of which Mr. L.
Mays is the trustee, but not a beneficiary,
3,334,663 shares held by the LLM Partners Ltd of which
Mr. L. Mays shares control of the sole general partner,
194,640 shares held by the Mays Family Foundation and
12,859 shares held by the Clear Channel Foundation over
which Mr. L. Mays has either sole or shared investment or
voting authority. |
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(4) |
Includes 19,532 shares held by trusts of which Mr. M.
Mays is the trustee, but not a beneficiary, and
127,787 shares held by the MPM Partners, Ltd. Mr. M.
Mays controls the sole general partner of MPM Partners, Ltd. |
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(5) |
Includes 21,029 shares held by trusts of which Mr. R.
Mays is the trustee, but not a beneficiary, and
77,822 shares held by RTM Partners, Ltd.
Mr. R. Mays controls the sole general partner of RTM
Partners, Ltd. |
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(6) |
Represents shares held by McCombs Family Ltd. over which
Mrs. McNab has shared investment or voting authority. |
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(7) |
Address: 82 Devonshire Street, Boston, Massachusetts 02109.
Based on a Schedule 13G/A filed by FMR Corp., Edward C.
Johnson III and Abigail Johnson with the SEC on
February 14, 2005. The Schedule 13G/A states that the
filers have sole voting power with respect to
720,107 shares and sole dispositive power with respect to
all shares. |
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(8) |
Address: 333 South Hope Street, Los Angeles, California
90071. Based on a Schedule 13G/A filed by Capital Research and
Management Company with the SEC on July 8, 2005. The
Schedule 13G/A states that Capital Research, as an investment
adviser, is deemed to be the beneficial owner of Clear Channel
Communications shares as a result of acting as investment
adviser to various investment companies registered under the
Investment Company Act of 1940. Capital Research has sole voting
power with respect to 2,315,028 shares and sole dispositive
power with respect to all shares. |
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(9) |
Includes 40,992 shares held by trusts of which such persons
are trustees, but not beneficiaries, 3,334,663 shares held
by the LLM Partners, Ltd., 127,787 shares held by the MPM
Partners, Ltd., 21,029 shares held by the RTM partners,
Ltd., 194,640 shares held by the Mays Family Foundation,
12,859 shares held by the Clear Channel Foundation and
260,072 shares held by McCombs Family Ltd. |
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125
DESCRIPTION OF OUR CAPITAL STOCK
Below we have provided a summary description of our capital
stock. This description is not complete. You should read the
full text of our amended and restated certificate of
incorporation and amended and restated bylaws, which will be
included as exhibits to the registration statement of which this
information statement is a part, as well as the provisions of
applicable Delaware law.
General
Our authorized capital stock consists of 450,000,000 shares
of common stock, par value $0.01 per share, and
50,000,000 shares of preferred stock, par value
$0.01 per share. Immediately following the distribution,
there will be approximately 67,565,591 shares of common
stock outstanding (based on the number of outstanding shares of
Clear Channel Communications common stock at
November 4, 2005) and no shares of preferred stock
outstanding, other than shares of our preferred stock that may
become issuable pursuant to our rights plan described below.
Common Stock
Each share of our common stock entitles its holder to one vote
on all matters on which holders are permitted to vote. Subject
to preferences that may be applicable to any outstanding
preferred stock, the holders of our common stock are entitled to
receive dividends when, as and if declared by our board of
directors out of funds legally available for that purpose. Upon
liquidation, subject to preferences that may be applicable to
any outstanding preferred stock, the holders of our common stock
will be entitled to a pro rata share in any distribution to
stockholders. The holders of our common stock are not entitled
to any preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions
applicable to our common stock. All outstanding shares of our
common stock are fully paid and nonassessable.
Preferred Stock
Our board of directors has the authority, without action by our
stockholders, to designate and issue our preferred stock in one
or more series and to designate the rights, preferences and
privileges of each series, which may be greater than the rights
of our common stock. It is not possible to state the actual
effect of the issuance of any shares of our preferred stock upon
the rights of holders of our common stock until our board of
directors determines the specific rights of the holders of our
preferred stock. However, the effects might include, among other
things:
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restricting dividends on our common stock; |
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diluting the voting power of our common stock; |
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impairing the liquidation rights of our common stock; or |
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delaying or preventing a change in control of our company
without further action by our stockholders. |
At the closing of the distribution, no shares of our preferred
stock will be outstanding, other than shares of our preferred
stock that may become issuable pursuant to our rights plan
described below. We have no present plans to issue any
additional shares of our preferred stock.
As of the completion of the distribution,
20 million shares of our junior participating
preferred stock will be reserved for issuance upon exercise of
our preferred share purchase rights. See The
Rights Agreement.
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Provisions of Our Amended and Restated Certificate of
Incorporation Relating to Related-Party Transactions and
Corporate Opportunities
In order to address potential conflicts of interest between us
and Clear Channel Communications, our amended and restated
certificate of incorporation contains provisions regulating and
defining the conduct of our affairs as they may involve Clear
Channel Communications and its officers and directors, and our
powers, rights, duties and liabilities and those of our
officers, directors and stockholders in connection with our
relationship with Clear Channel Communications. In general,
these provisions recognize that we and Clear Channel
Communications may engage in the same or similar business
activities and lines of business, have an interest in the same
areas of corporate opportunities and will continue to have
contractual and business relations with each other, including
officers and directors or both of Clear Channel Communications
serving as our officers or directors or both.
Our amended and restated certificate of incorporation provides
that, subject to any written agreement to the contrary, Clear
Channel Communications will have no duty to refrain from
engaging in the same or similar business activities or lines of
business as us or doing business with any of our clients,
customers or vendors or employing or otherwise engaging or
soliciting any of our officers, directors or employees.
If one of our directors or officers who is also a director or
officer of Clear Channel Communications learns of a potential
transaction or matter that may be a corporate opportunity for
both us and Clear Channel Communications, our amended and
restated certificate of incorporation provides that we will have
renounced our interest in the corporate opportunity unless that
opportunity is expressly offered to that person in writing
solely in his or her capacity as our director or officer.
If one of our officers or directors, who also serves as a
director or officer of Clear Channel Communications, learns of a
potential transaction or matter that may be a corporate
opportunity for both us and Clear Channel Communications, our
amended and restated certificate of incorporation provides that
the director or officer will have no duty to communicate or
present that corporate opportunity to us and will not be liable
to us or our stockholders for breach of fiduciary duty by reason
of Clear Channel Communications actions with respect to
that corporate opportunity.
Clear Channel Communications radio business conducts
concert events from time to time. In the event Clear Channel
Communications expands its operations in this area, it may
compete with us.
For purposes of our amended and restated certificate of
incorporation, corporate opportunities include, but
are not limited to, business opportunities that we are
financially able to undertake, that are, from their nature, in
our line of business, are of practical advantage to us and are
ones in which we would have an interest or a reasonable
expectancy.
The corporate opportunity provisions in the restated certificate
will expire on the date that no person who is a director or
officer of us is also a director or officer of Clear Channel
Communications.
By becoming a stockholder in our company, you will be deemed to
have notice of and have consented to the provisions of our
amended and restated certificate of incorporation related to
corporate opportunities that are described above.
Anti-Takeover Effects of Our Amended and Restated Certificate
of Incorporation and Amended and Restated Bylaws and Delaware
Law
Some provisions of Delaware law and our amended and restated
certificate of incorporation and amended and restated bylaws
could make the following more difficult:
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acquisition of us by means of a tender offer or merger; |
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acquisition of us by means of a proxy contest or
otherwise; or |
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removal of our incumbent officers and directors. |
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These provisions, summarized below, are expected to discourage
coercive takeover practices and inadequate takeover bids. These
provisions also are designed to encourage persons seeking to
acquire control of us to first negotiate with our board of
directors. We believe that the benefits of the potential ability
to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure our company outweigh the
disadvantages of discouraging those proposals because
negotiation of them could result in an improvement of their
terms.
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Election and Removal of Directors |
Our amended and restated certificate of incorporation provides
that our board of directors is divided into three classes. The
term of the first class of directors expires at our 2007 annual
meeting of stockholders, the term of the second class of
directors expires at our 2008 annual meeting of stockholders and
the term of the third class of directors expires at our 2009
annual meeting of stockholders. At each of our annual meetings
of stockholders, the successors of the class of directors whose
term expires at that meeting of stockholders will be elected for
a three-year term, one class being elected each year by our
stockholders. This system of electing and removing directors may
discourage a third-party from making a tender offer or otherwise
attempting to obtain control of us because it generally makes it
more difficult for stockholders to replace a majority of our
directors.
Our amended and restated certificate of incorporation requires
that directors may only be removed for cause and only by the
affirmative vote of not less than 80% of votes entitled to be
cast by the outstanding capital stock in the election of our
board of directors.
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Size of Board and Vacancies |
Our amended and restated certificate of incorporation provides
that the number of directors on our board of directors will be
fixed exclusively by our board of directors. Newly created
directorships resulting from any increase in our authorized
number of directors will be filled solely by the vote of our
remaining directors in office. Any vacancies in our board of
directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause will be
filled solely by the vote of our remaining directors in office.
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Stockholder Action by Written Consent; Calling of Special
Meeting |
Our amended and restated certificate of incorporation provides
that except as otherwise provided by the resolution or
resolutions adopted by our board of directors designating the
rights, powers and preferences of any preferred stock, any
action required or permitted to be taken by stockholders may be
effected only at a duly called annual or special meeting of
stockholders and may not be effected by a written consent or
consents by stockholders in lieu of such a meeting. Except as
otherwise required by law or provided by the resolution or
resolutions adopted by our board of directors designating the
rights, powers and preferences of any preferred stock, special
meetings of our stockholders may be called only by the chairman
of our board of directors or our board of directors pursuant to
a resolution approved by a majority of our entire board of
directors and any other power of stockholders to call a special
meeting is specifically denied. No business other than that
stated in the notice of the special meeting shall be transacted
at any special meeting.
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Amendments to our Amended and Restated Bylaws |
Our amended and restated certificate of incorporation and
amended and restated bylaws provide that the provisions of our
amended and restated bylaws relating to the calling of meetings
of stockholders, notice of meetings of stockholders, quorum and
adjournment, conduct of business at meetings of stockholders,
procedure for election of directors, stockholder action by
written consent, advance notice of stockholder business or
director nominations, the authorized number of directors, the
classified board structure, the filling of director vacancies or
the removal of directors and indemnification of directors and
officers (and any provision relating to the amendment of any of
these provisions) may only be amended by
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the vote of a majority of our entire board of directors or by
the vote of at least 80% of the voting power of the outstanding
capital stock entitled to vote generally in the election of our
board of directors. Our amended and restated certificate of
incorporation and amended and restated bylaws provide that any
other provision of our amended and restated bylaws may only be
amended by the vote of a majority of our entire board of
directors or by the vote of holders of a majority of the voting
power of the outstanding capital stock entitled to vote
generally in the election of our board of directors.
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Amendment of Certain Amended and Restated Certificate of
Incorporation Provisions |
Our amended and restated certificate of incorporation provides
that the provisions of our amended and restated certificate of
incorporation relating to corporate opportunities and conflicts
of interest, board of directors, bylaws, limitations on
liability and indemnification of directors and officers,
stockholder action (and any provision relating to the amendment
of any of these provisions) may only be amended by at least 80%
of the voting power of the outstanding capital stock entitled to
vote generally in the election of our board of directors. Our
amended and restated certificate of incorporation provides that
any other provision of our amended and restated certificate of
incorporation may only be amended by the vote of a majority of
the voting power of the outstanding capital stock entitled to
vote generally in the election of our board of directors.
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Requirements for Advance Notification of Stockholder
Nominations and Proposals |
Our amended and restated bylaws establish advance notice
procedures with respect to stockholder proposals and nomination
of candidates for election as directors other than nominations
made by or at the direction of our board of directors or a
committee of our board of directors.
In general, for nominations or other business to be properly
brought before an annual meeting by a stockholder, the
stockholder must give notice in writing to our secretary 90 to
120 days before the first anniversary of the preceding
years annual meeting, and the business must be a proper
matter for stockholder action. The stockholders notice
must include for each proposed nominee and business, as
applicable, (i) all required information under the
Securities Exchange Act of 1934, as amended, (ii) the
proposed nominees written consent to serve as a director
if elected, (iii) a brief description of the proposed
business, (iv) the reasons for conducting the business at
the meeting, (v) the stockholders material interest
in the business, (vi) the stockholders name and
address and (vii) the class and number of our shares which
the stockholder owns.
In general, only such business shall be conducted at a special
meeting of stockholders as shall have been brought before the
meeting pursuant to our notice of meeting. At a special meeting
of stockholders at which directors are to be elected pursuant to
our notice of meeting, a stockholder who is a stockholder of
record at the time of giving notice, who is entitled to vote at
the meeting and who complies with the notice procedures, may
nominate proposed nominees. In the event we call a special
meeting of stockholders to elect one or more directors, a
stockholder may nominate a person or persons if the
stockholders notice is delivered to our secretary 90 to
120 days before the such special meeting, or, if later,
within 10 days of public announcement of the special
meeting.
Only such persons who are nominated in accordance with the
procedures set forth in our amended and restated bylaws shall be
eligible to serve as directors and only such business shall be
conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set
forth in our amended and restated bylaws. The chairman of the
meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the
meeting was made or proposed in accordance with the procedures
set forth in our amended and restated bylaws and, if any
proposed nomination or business is not in compliance with our
amended and restated bylaws, to declare that such defective
proposal or nomination shall be disregarded.
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Delaware Anti-Takeover Law |
Our amended and restated certificate of incorporation and the
Delaware General Corporation Law (the DGCL) contain
provisions that may delay or prevent an attempt by a third-party
to acquire control of us. The requirements of Section 203
of the DGCL will be applicable to us. In general,
Section 203 prohibits, for a period of three years,
designated types of business combinations, including mergers,
between us and any third-party that owns 15% or more of our
common stock. This provision does not apply if:
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our board of directors approves of the transaction before the
third-party acquires 15% of our stock; |
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the third-party acquires at least 85% of our stock at the time
its ownership goes past the 15% level; or |
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our board of directors and two-thirds of the shares of our
common stock not held by the third-party vote in favor of the
transaction. |
In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a business combination with an
interested stockholder for a period of three years following the
date the person became an interested stockholder, unless the
business combination or the transaction in which the person
became an interested stockholder is approved in a prescribed
manner. Generally, a business combination includes a
merger, asset or stock sale, or other transaction resulting in a
financial benefit to the interested stockholder. Generally, an
interested stockholder is a person that, together
with affiliates and associates, owns, or within three years
prior to the determination of interested stockholder status, did
own, 15% or more of a corporations voting stock. This may
have an anti-takeover effect with respect to transactions not
approved in advance by our board of directors, including
discouraging attempts that might result in a premium over the
market price for the shares of our common stock.
Our amended and restated certificate of incorporation and
amended and restated bylaws do not provide for cumulative voting
in the election of directors.
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Undesignated Preferred Stock |
The authorization of our undesignated preferred stock makes it
possible for our board of directors to issue our preferred stock
with voting or other rights or preferences that could impede the
success of any attempt to change control of us. These and other
provisions may have the effect of deterring hostile takeovers or
delaying changes of control of our management.
The Rights Agreement
Our board of directors will adopt a rights agreement prior to
the distribution. Pursuant to our rights agreement, one
preferred share purchase right will be issued for each
outstanding share of our common stock (a right).
Each right being issued will be subject to the terms of our
rights agreement.
Our board of directors will adopt our rights agreement to
protect our stockholders from coercive or otherwise unfair
takeover tactics. In general terms, our rights agreement works
by imposing a significant penalty upon any person or group that
acquires 15% or more of our outstanding common stock, and in the
case of certain Schedule 13G filers, 20% or more of our
outstanding common stock, without the approval of our board of
directors.
We provide the following summary description below. Please note,
however, that this description is only a summary, is not
complete, and should be read together with our entire rights
agreement, which has been publicly filed with the Securities and
Exchange Commission as an exhibit to the registration statement
of which this information statement is a part.
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Our board of directors will authorize the issuance of one right
for each share of our common stock outstanding on the date the
distribution is completed.
Our rights will initially trade with, and will be inseparable
from, our common stock. Our rights will be evidenced only by
certificates that represent shares of our common stock. New
rights will accompany any new shares of common stock we issue
after the date the distribution is completed until the date on
which the rights are distributed as described below.
Each right will allow its holder to purchase from us one
one-hundredth of a share of our Series A junior
participating preferred stock for $80.00, once the rights become
exercisable. Prior to exercise, our right does not give its
holder any dividend, voting or liquidation rights.
Each right will not be exercisable until:
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ten days after the public announcement that a person or group
has become an acquiring person by obtaining
beneficial ownership of 15% or more of our outstanding common
stock or, in the case of certain Schedule 13G filers, 20% or
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ten business days (or a later date determined by our board of
directors before any person or group becomes an acquiring
person) after a person or group begins a tender or exchange
offer that, if completed, would result in that person or group
becoming an acquiring person. |
Until the date our rights become exercisable, our common stock
certificates also evidence our rights, and any transfer of
shares of our common stock constitutes a transfer of our rights.
After that date, our rights will separate from our common stock
and be evidenced by book-entry credits or by rights certificates
that we will mail to all eligible holders of our common stock.
Any of our rights held by an acquiring person are void and may
not be exercised.
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Consequences of a Person or Group Becoming an Acquiring
Person |
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Flip In. If a person or group becomes an acquiring
person, all holders of our rights except the acquiring person
may, for the then applicable exercise price, purchase shares of
our common stock with a market value of twice the then
applicable exercise price, based on the market price of our
common stock prior to such acquisition. |
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Flip Over. If we are later acquired in a merger or
similar transaction after the date our rights become
exercisable, all holders of our rights except the acquiring
person may, for the then applicable exercise price, purchase
shares of the acquiring corporation with a market value of twice
the then applicable exercise price, based on the market price of
the acquiring corporations stock prior to such merger. |
Our rights will expire on the tenth anniversary of the
distribution date.
Our board of directors may redeem our rights for $0.01 per
right at any time before the rights separate from our common
stock and rights certificates are mailed to eligible holders of
our common stock. If our board of directors redeems any of our
rights, it must redeem all of our rights. Once our rights are
redeemed, the only right of the holders of our rights will be to
receive the redemption price of
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$0.01 per right. The redemption price will be adjusted if
we have a stock split or stock dividends of our common stock.
After a person or group becomes an acquiring person, but before
an acquiring person owns 50% or more of our outstanding common
stock, our board of directors may extinguish our rights by
exchanging one share of our common stock or an equivalent
security for each right, other than rights held by the acquiring
person.
Our board of directors may adjust the purchase price of our
preferred stock, the number of shares of our preferred stock
issuable and the number of our outstanding rights to prevent
dilution that may occur from a stock dividend, a stock split or
a reclassification of our preferred stock or common stock. No
adjustments to the purchase price of our preferred stock of less
than 1% will be made.
The terms of our rights agreement may be amended by our board of
directors without the consent of the holders of our rights.
After a person or group becomes an acquiring person, our board
of directors may not amend the agreement in a way that adversely
affects holders of our rights.
Pre-Distribution Transactions with Clear Channel
Communications
Our amended and restated certificate of incorporation provides
that neither any agreement nor any transaction entered into
between us or any of our affiliated companies and Clear Channel
Communications and any of its affiliated companies prior to the
distribution nor the subsequent performance of any such
agreement will be considered void or voidable or unfair to us
because Clear Channel Communications or any of its affiliated
companies is a party or because directors or officers of Clear
Channel Communications were on our board of directors when those
agreements or transactions were approved. In addition, those
agreements and transactions and their performance will not be
contrary to any fiduciary duty of any directors or officers of
our company or any affiliated company.
Limitation on Liability of Directors and Indemnification of
our Directors and Officers
Section 145 of the DGCL provides that a corporation may
indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement in connection
with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative, in which such person is made a party by reason of
the fact that the person is or was a director, officer, employee
of or agent to the corporation (other than an action by or in
the right of the corporation a derivative
action), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe their
conduct was unlawful. A similar standard is applicable in the
case of derivative actions, except that indemnification only
extends to expenses (including attorneys fees) incurred in
connection with the defense or settlement of such action, and
the statute requires court approval before there can be any
indemnification where the person seeking indemnification has
been found liable to the corporation. The statute provides that
it is not exclusive of other indemnification that may be granted
by a corporations certificate of incorporation, bylaws,
disinterested director vote, stockholder vote, agreement, or
otherwise.
Our amended and restated certificate of incorporation provides
that no director shall be liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director,
except as required by
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law, as in effect from time to time. Currently, Section
102(b)(7) of the DGCL requires that liability be imposed for the
following:
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any breach of the directors duty of loyalty to our company
or our stockholders; |
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any act or omission not in good faith or which involved
intentional misconduct or a knowing violation of law; |
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unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL; and |
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any transaction from which the director derived an improper
personal benefit. |
Our amended and restated bylaws and our amended and restated
certificate of incorporation provide that, to the fullest extent
permitted by the DGCL, as now in effect or as amended, we will
indemnify and hold harmless any person made or threatened to be
made a party to any action by reason of the fact that he or she,
or a person of whom he or she is the legal representative, is or
was our director or officer, or while our director or officer is
or was serving, at our request, as a director, officer, employee
or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with
respect to employee benefit plans maintained or sponsored by us,
whether the basis of such proceeding is an alleged action in an
official capacity as a director, officer, employee or agent or
in any other capacity while serving as a director or officer,
employee or agent. We will reimburse the expenses, including
attorneys fees, incurred by a person indemnified by this
provision when we receive an undertaking by or on behalf of such
person to repay such amounts if it is ultimately determined that
the person is not entitled to be indemnified by us. Any
amendment of this provision will not reduce our indemnification
obligations relating to actions taken before an amendment.
We intend to obtain policies insuring our directors and officers
and those of our subsidiaries against certain liabilities they
may incur in their capacity as directors and officers. Under
these policies, the insurer, on our behalf, may also pay amounts
for which we have granted indemnification to the directors or
officers.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is The
Bank of New York.
New York Stock Exchange Listing
Our common stock has been approved for listing on the New York
Stock Exchange under the symbol LYV.
DESCRIPTION OF INDEBTEDNESS
The following is a description of some of the anticipated
material terms of the senior secured credit facility. This
summary is qualified in its entirety by the specific terms and
provisions reflected in the form of this agreement, a copy of
which will be filed as an exhibit to the registration statement
of which this information statement is a part. We encourage you
to read the forms of this agreement. Negotiation of this
agreement is ongoing and subject to the completion of definitive
documentation. We cannot be certain that the terms described
below will not change or be supplemented.
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Senior Secured Credit Facility
Prior to or concurrently with the completion of the
distribution, one of our operating subsidiaries, Holdco #3,
which owns more than 95% of the gross value of our assets, will
enter into a $575.0 million senior secured credit facility
consisting of:
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a $325.0 million
71/2-year
term loan; and |
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a $250.0 million
61/2-year
revolving credit facility, of which up to $200.0 million
will be available for the issuance of letters of credit and up
to $100.0 million will be available for borrowings in
foreign currencies. |
The
61/2-year
revolving credit facility will provide for up to
$200.0 million to be available for the issuance of letters
of credit, drawings under which reduce the amount available
under the revolving credit facility. Availability under the
senior secured credit facility will be subject to various
conditions precedent typical of syndicated loans.
Subject to then market pricing and maturity extending longer
than that of the senior secured credit facility, we will be able
to add additional term and revolving credit facilities in an
aggregate amount not to exceed $250.0 million.
The terms and provisions governing the senior secured credit
facility are under ongoing negotiations, and we currently
anticipate that the significant agreements of that facility will
consist of the following:
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the senior secured credit facility will be secured by a first
priority lien on substantially all of our domestic assets (other
than real property and deposits maintained by us in connection
with promoting or producing live entertainment events) and a
pledge of the capital stock of our domestic subsidiaries and a
portion of the capital stock of certain of our foreign
subsidiaries; |
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borrowings in foreign currencies by our foreign subsidiaries
will, in addition, be secured by a first priority lien on
substantially all of our foreign assets (other than real
property and deposits maintained by us in connection with
promoting or producing live entertainment events) and a pledge
of the capital stock of all subsidiaries held by such borrowing
subsidiary; |
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borrowings under the
71/2-year
term loan facility and U.S. Dollar-denominated borrowings under
the
61/2-year
revolving facility will bear interest at floating rates equal,
at our option, to either (1) the base rate (which is the
greater of the prime rate offered by the administrative agent or
the federal funds rate plus 0.50%) plus 0.75% or
(2) Adjusted LIBOR plus 1.75%; |
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Sterling and Euro-denominated borrowings under the
61/2-year
revolving facility will bear interest at floating rates equal to
either Adjusted LIBOR or Adjusted EURIBOR, respectively, plus
1.75; |
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borrowings in other foreign currency denominations under the
61/2-year
revolving facility will bear interest at rates to be agreed upon; |
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following delivery of our December 31, 2005 audited
financial statements to our lenders, the interest rates
applicable to U.S. Dollar, Sterling or Euro-denominated
borrowings under the
61/2-year
revolving facility will, from time to time, be determined and
adjusted based on our total leverage; |
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interest rates will be increased by 2.00% on past-due amounts; |
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interest on base rate loans will be payable quarterly on the
last day of each March, June, September and December; |
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interest on Adjusted LIBOR and Adjusted EURIBOR loans will
generally be payable as of the last day of an interest period
but in any event, no less frequently than every
three months on interest periods of greater than
three months; |
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we will pay a commitment fee based on the undrawn balance of the
61/2-year
revolving credit facility and we will pay letter of credit fees
on letter of credit amounts that are available for drawing; |
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scheduled installments of principal reductions on the
71/2-year
term loan will commence three months after its funding and will
be payable quarterly and in amounts to be determined; |
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we will be permitted to prepay the term loan and to permanently
reduce revolving credit commitments, in whole or in part, at any
time without penalty; however, if a prepayment of principal is
made with respect to an Adjusted LIBOR or Adjusted EURIBOR loan
on a date other than the last day of the applicable interest
period, we will be required to compensate the lenders for losses
and expenses incurred as a result of the prepayment; |
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amounts prepaid at our option will be applied, at our
discretion, to prepay the term loans or revolving loans; |
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we will be required to prepay the
71/2-year
term loan from certain asset sale proceeds that we do not
reinvest within a 365-day period or from debt issuance proceeds
if our leverage condition then exceeds a prescribed ratio, with
all such proceeds being applied pro ratably to scheduled
installments of principal reductions; |
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|
the senior secured credit facility will require us to meet
minimum financial requirements, and in addition, the senior
secured credit facility may include restrictive covenants that,
among other things, restrict our ability to: |
|
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|
|
incur additional debt; |
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|
pay dividends and make distributions; |
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make certain investments and acquisitions; |
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|
repurchase our stock and prepay certain indebtedness; |
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|
|
create liens; |
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|
enter into agreements with affiliates; |
|
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|
modify our nature of business; |
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|
|
enter into sale and leaseback transactions; |
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|
|
transfer and sell material assets; and |
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|
|
merge or consolidate; and |
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|
the senior secured credit facility may contain customary events
of default, including without limitation payment defaults,
material breaches of representations and warranties, covenant
defaults, cross defaults to certain material indebtedness in
excess of specified amounts, certain events of bankruptcy and
insolvency, imposition of final judgments in excess of specified
amounts, certain ERISA defaults, failure of any guaranty or
security documents materially supporting the senior secured
credit facility to be in full force and effect and a change of
control. |
Our failure to comply with the terms and covenants in our
indebtedness could lead to a default under the terms of those
documents, which would entitle the lenders to accelerate the
indebtedness and declare all amounts owed due and payable. We
cannot be certain the terms described herein will not change or
be supplemented.
After giving effect to the borrowings under our senior secured
credit facility, we expect to have approximately
$367.6 million of indebtedness for borrowed money
outstanding, and such prospective indebtedness is currently
rated B1 by Moodys Investors Services, Inc. and B+ by
Standards & Poors Ratings Services, a division of
The McGraw-Hill Companies, Inc., which is currently below the
ratings given to Clear Channel Communications senior debt
by such ratings agencies. We expect that approximately
$200.0 million of the revolving credit facility will remain
available for working capital and general corporate purposes of
Holdco #3 and its subsidiaries immediately following the
completion of the distribution and the transfer of approximately
$50.0 million of letters of credit previously issued under
135
Clear Channel Communications credit facilities on behalf
of certain Holdco #3 subsidiaries. The issuance of letters of
credit will reduce this availability by the notional amount of
issued letters of credit. However, on or prior to the
distribution date, we may draw advances under the senior secured
credit facility for working capital and other general corporate
purposes.
DESCRIPTION OF SUBSIDIARY PREFERRED STOCK
Prior to the completion of the distribution, third-party
investors unrelated to Clear Channel Communications will acquire
all of the shares of mandatorily redeemable Series A
(voting) and Series B (non-voting) preferred stock of
Holdco #2, one of our subsidiaries. The terms of the
preferred stock are subject to ongoing negotiation. We cannot be
certain the terms described below will not be changed or
supplemented.
This preferred stock will consist of 200,000 shares of
Series A redeemable preferred stock having an aggregate
liquidation preference of $20 million and
200,000 shares of Series B redeemable preferred stock
having an aggregate liquidation preference of $20 million.
We expect the holders of the Series A redeemable preferred
stock will have the right to appoint one out of four members to
Holdco #2s board of directors and to otherwise
control 25% of the voting power of all outstanding shares of
Holdco #2. We anticipate the Series B redeemable
preferred stock will have no voting rights other than the right
to vote as a class with the Series A redeemable preferred
stock to elect one additional member to the board of directors
of Holdco #2 in the event Holdco #2 breaches certain
terms of the designations of the preferred stock. Each of the
Series A and Series B redeemable preferred stock is
expected to pay an annual cash dividend of approximately 10% and
will be mandatorily redeemable upon the six year anniversary of
the date of issuance. Holdco #2 will be required to make an
offer to purchase the Series A and Series B redeemable
preferred stock at 101% of each series liquidation preference in
the event of a change of control. The Series A and
Series B redeemable preferred stock will rank pari passu to
each other and will be senior to all other classes or series of
capital stock of Holdco #2 with respect to dividends and
with respect to liquidation or dissolution of Holdco #2. In
addition, Holdco #2 is prohibited from issuing any capital
stock ranking senior to the Series A and Series B
redeemable preferred stock without the prior consent of the
holders of a majority of the Series A redeemable preferred
stock and the holders of a majority of the Series B
redeemable preferred stock.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission
(SEC) a registration statement on Form 10 under the
Securities Exchange Act of 1934 (Exchange Act) with respect to
the common stock being distributed. This information statement,
which forms a part of the registration statement, does not
contain all of the information set forth in the registration
statement. For further information with respect to us and the
shares of our common stock, reference is made to the
registration statement. Statements contained in this information
statement as to the contents of any contract or other document
are not necessarily complete. We are not currently subject to
the informational requirements of the Exchange Act. As a result
of the distribution of the shares of our common stock, we will
become subject to the informational requirements of the Exchange
Act and, in accordance therewith, will file reports and other
information with the SEC. The registration statement, such
reports and other information can be inspected and copied at the
Public Reference Room of the SEC located at 100 F Street,
N.E., Washington, D.C. 20549. Copies of such materials,
including copies of all or any portion of the registration
statement, can be obtained from the Public Reference Room of the
SEC at prescribed rates. You can call the SEC at 1-800-SEC-0330
to obtain information on the operation of the Public Reference
Room. Such materials may also be accessed electronically by
means of the SECs home page on the Internet at
http://www.sec.gov.
136
As a result of the distribution, we will become subject to the
information and reporting requirements of the Securities
Exchange Act of 1934 and, in accordance with the Exchange Act,
we will file periodic reports, proxy statements and other
information with the SEC.
We intend to furnish holders of our common stock with annual
reports containing consolidated financial statements prepared in
accordance with U.S. generally accepted accounting
principles and audited and reported on, with an opinion
expressed, by an independent registered public accounting firm.
No person is authorized to give any information or to make any
representations with respect to the matters described in this
information statement other than those contained in this
information statement or in the documents incorporated by
reference in this information statement and, if given or made,
such information or representation must not be relied upon as
having been authorized by us or Clear Channel Communications.
Neither the delivery of this information statement nor
consummation of the spin-off contemplated hereby shall, under
any circumstances, create any implication that there has been no
change in our affairs or those of Clear Channel Communications
since the date of this information statement, or that the
information in this information statement is correct as of any
time after its date.
137
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE
CCE SPINCO, INC.
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Page | |
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F-2 |
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Audited Financial Statements:
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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Unaudited Financial Statements
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F-27 |
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F-28 |
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F-29 |
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F-30 |
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F-31 |
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F-38 |
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F-39 |
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F-1
Report of Independent Registered Public Accounting Firm
Board of Directors
Clear Channel Communications, Inc., owner of Clear Channel
Entertainment
We have audited the accompanying combined balance sheets of
Clear Channel Entertainment (a division of Clear Channel
Communications, Inc. as defined in Note A) (the Company) as
of December 31, 2004 and 2003, and the related combined
statements of operations, changes in owners equity, and
cash flows for each of the three years in the period ended
December 31, 2004. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the combined financial
position of Clear Channel Entertainment at December 31,
2004 and 2003, and the combined results of its operations and
its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note B to the combined financial
statements, in 2002 the Company changed its method of accounting
for goodwill.
Ernst & Young LLP
San Antonio, Texas
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|
|
July 29, 2005, except for the second and third paragraphs
of
Note M, as to which the
dates are August 10, 2005, and November 7, 2005,
respectively |
F-2
COMBINED BALANCE SHEETS
|
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|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
ASSETS |
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
179,137 |
|
|
$ |
116,360 |
|
Accounts receivable, less allowance of $10,174 in 2004 and
$11,595 in 2003
|
|
|
167,868 |
|
|
|
180,387 |
|
Prepaid expenses
|
|
|
83,546 |
|
|
|
88,657 |
|
Other current assets
|
|
|
42,006 |
|
|
|
38,213 |
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
472,557 |
|
|
|
423,617 |
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Land, buildings and improvements
|
|
|
880,881 |
|
|
|
804,722 |
|
Furniture and other equipment
|
|
|
155,563 |
|
|
|
137,579 |
|
Construction in progress
|
|
|
14,917 |
|
|
|
42,319 |
|
|
|
|
|
|
|
|
|
|
|
1,051,361 |
|
|
|
984,620 |
|
Less accumulated depreciation
|
|
|
258,045 |
|
|
|
202,466 |
|
|
|
|
|
|
|
|
|
|
|
793,316 |
|
|
|
782,154 |
|
INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
Definite-lived intangibles, net
|
|
|
14,838 |
|
|
|
15,633 |
|
Goodwill
|
|
|
44,813 |
|
|
|
127,076 |
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
7,110 |
|
|
|
9,198 |
|
Investments in, and advances to, nonconsolidated affiliates
|
|
|
27,002 |
|
|
|
19,717 |
|
Deferred tax asset
|
|
|
97,317 |
|
|
|
92,274 |
|
Other assets
|
|
|
21,753 |
|
|
|
26,046 |
|
|
|
|
|
|
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|
Total Assets
|
|
$ |
1,478,706 |
|
|
$ |
1,495,715 |
|
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|
|
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|
LIABILITIES AND OWNERS EQUITY |
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
31,440 |
|
|
$ |
41,298 |
|
Deferred income
|
|
|
184,413 |
|
|
|
169,370 |
|
Accrued expenses
|
|
|
362,278 |
|
|
|
335,800 |
|
Current portion of long-term debt
|
|
|
1,214 |
|
|
|
1,283 |
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
579,345 |
|
|
|
547,751 |
|
Long-term debt
|
|
|
20,564 |
|
|
|
21,344 |
|
Debt with Clear Channel Communications
|
|
|
628,897 |
|
|
|
595,211 |
|
Other long-term liabilities
|
|
|
88,997 |
|
|
|
139,403 |
|
Minority interest
|
|
|
3,927 |
|
|
|
3,723 |
|
Commitment and contingent liabilities (Note F)
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|
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|
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OWNERS EQUITY
|
|
|
|
|
|
|
|
|
Owners net investment
|
|
|
4,358,352 |
|
|
|
4,387,447 |
|
Retained deficit
|
|
|
(4,187,855 |
) |
|
|
(4,204,115 |
) |
Accumulated other comprehensive income (loss)
|
|
|
(13,521 |
) |
|
|
4,951 |
|
|
|
|
|
|
|
|
|
Total Owners Equity
|
|
|
156,976 |
|
|
|
188,283 |
|
|
|
|
|
|
|
|
|
Total Liabilities and Owners Equity
|
|
$ |
1,478,706 |
|
|
$ |
1,495,715 |
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-3
COMBINED STATEMENTS OF OPERATIONS
|
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|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Revenue
|
|
$ |
2,806,128 |
|
|
$ |
2,707,902 |
|
|
$ |
2,473,319 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
2,645,293 |
|
|
|
2,506,635 |
|
|
|
2,302,707 |
|
|
|
|
Depreciation and amortization
|
|
|
64,095 |
|
|
|
63,436 |
|
|
|
64,836 |
|
|
|
|
Loss (gain) on sale of operating assets
|
|
|
6,371 |
|
|
|
(978 |
) |
|
|
(15,241 |
) |
|
|
|
Corporate expenses
|
|
|
31,386 |
|
|
|
30,820 |
|
|
|
26,101 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
58,983 |
|
|
|
107,989 |
|
|
|
94,916 |
|
|
Interest expense
|
|
|
3,119 |
|
|
|
2,788 |
|
|
|
3,998 |
|
|
Intercompany interest expense
|
|
|
42,355 |
|
|
|
41,415 |
|
|
|
58,608 |
|
|
Equity in earnings (loss) of nonconsolidated affiliates
|
|
|
2,906 |
|
|
|
1,357 |
|
|
|
(212 |
) |
|
Other income (expense) net
|
|
|
(1,690 |
) |
|
|
3,224 |
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and cumulative effect of a change in
accounting principle
|
|
|
14,725 |
|
|
|
68,367 |
|
|
|
32,430 |
|
|
Income tax (expense) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
55,946 |
|
|
|
68,272 |
|
|
|
(40,102 |
) |
|
|
|
Deferred
|
|
|
(54,411 |
) |
|
|
(79,607 |
) |
|
|
11,103 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting
principle
|
|
|
16,260 |
|
|
|
57,032 |
|
|
|
3,431 |
|
|
Cumulative effect of a change in accounting principle, net of
tax of, $198,640
|
|
|
|
|
|
|
|
|
|
|
(3,932,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
16,260 |
|
|
|
57,032 |
|
|
|
(3,928,576 |
) |
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(18,472 |
) |
|
|
(22,163 |
) |
|
|
30,545 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$ |
(2,212 |
) |
|
$ |
34,869 |
|
|
$ |
(3,898,031 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted pro forma income before cumulative effect of a
change in accounting principle per common share (unaudited)
|
|
$ |
0.24 |
|
|
$ |
0.84 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted pro forma common shares outstanding (unaudited)
|
|
|
67,565 |
|
|
|
67,565 |
|
|
|
67,565 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-4
COMBINED STATEMENTS OF CHANGES IN OWNERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
|
|
Comprehensive | |
|
|
|
|
Owners Net | |
|
Retained | |
|
Income | |
|
|
|
|
Investment | |
|
Deficit | |
|
(Loss) | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balances at December 31, 2001
|
|
$ |
4,037,976 |
|
|
$ |
(332,571 |
) |
|
$ |
(3,431 |
) |
|
$ |
3,701,974 |
|
Net loss
|
|
|
|
|
|
|
(3,928,576 |
) |
|
|
|
|
|
|
(3,928,576 |
) |
Contributions from Owner
|
|
|
426,971 |
|
|
|
|
|
|
|
|
|
|
|
426,971 |
|
Dividends to Owner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
30,545 |
|
|
|
30,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2002
|
|
|
4,464,947 |
|
|
|
(4,261,147 |
) |
|
|
27,114 |
|
|
|
230,914 |
|
Net income
|
|
|
|
|
|
|
57,032 |
|
|
|
|
|
|
|
57,032 |
|
Contributions from Owner
|
|
|
15,050 |
|
|
|
|
|
|
|
|
|
|
|
15,050 |
|
Dividends to Owner
|
|
|
(92,550 |
) |
|
|
|
|
|
|
|
|
|
|
(92,550 |
) |
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(22,163 |
) |
|
|
(22,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003
|
|
|
4,387,447 |
|
|
|
(4,204,115 |
) |
|
|
4,951 |
|
|
|
188,283 |
|
Net income
|
|
|
|
|
|
|
16,260 |
|
|
|
|
|
|
|
16,260 |
|
Contributions from Owner
|
|
|
34,968 |
|
|
|
|
|
|
|
|
|
|
|
34,968 |
|
Dividends to Owner
|
|
|
(64,063 |
) |
|
|
|
|
|
|
|
|
|
|
(64,063 |
) |
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(18,472 |
) |
|
|
(18,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
$ |
4,358,352 |
|
|
$ |
(4,187,855 |
) |
|
$ |
(13,521 |
) |
|
$ |
156,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-5
COMBINED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
16,260 |
|
|
$ |
57,032 |
|
|
$ |
(3,928,576 |
) |
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in accounting principle, net of tax
|
|
|
|
|
|
|
|
|
|
|
3,932,007 |
|
|
Depreciation
|
|
|
60,918 |
|
|
|
60,421 |
|
|
|
61,548 |
|
|
Amortization of intangibles
|
|
|
3,177 |
|
|
|
3,015 |
|
|
|
3,288 |
|
|
Deferred income tax expense (benefit)
|
|
|
54,411 |
|
|
|
79,607 |
|
|
|
(11,103 |
) |
|
Current tax expense (benefit) contributed by (dividends to) owner
|
|
|
(64,063 |
) |
|
|
(92,550 |
) |
|
|
9,332 |
|
|
Non-cash compensation expense
|
|
|
1,084 |
|
|
|
1,302 |
|
|
|
1,401 |
|
|
Loss (gain) on sale of operating and fixed assets
|
|
|
10,687 |
|
|
|
(978 |
) |
|
|
(15,241 |
) |
|
Equity in (earnings) loss of nonconsolidated affiliates
|
|
|
(2,906 |
) |
|
|
(1,357 |
) |
|
|
212 |
|
|
Minority interest expense
|
|
|
3,300 |
|
|
|
3,280 |
|
|
|
3,794 |
|
|
Increase (decrease) other, net
|
|
|
(462 |
) |
|
|
(266 |
) |
|
|
(311 |
) |
Changes in operating assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
11,100 |
|
|
|
(28,061 |
) |
|
|
28,507 |
|
|
Decrease (increase) in prepaid expenses
|
|
|
5,527 |
|
|
|
9,053 |
|
|
|
(23,038 |
) |
|
Decrease (increase) in other assets
|
|
|
1,178 |
|
|
|
2,646 |
|
|
|
(10,334 |
) |
|
Increase (decrease) in accounts payable, accrued expenses and
other liabilities
|
|
|
6,195 |
|
|
|
55,172 |
|
|
|
64,238 |
|
|
Increase (decrease) in deferred income
|
|
|
16,047 |
|
|
|
(7,328 |
) |
|
|
30,822 |
|
|
Increase (decrease) in minority interest liability
|
|
|
(2,555 |
) |
|
|
(2,275 |
) |
|
|
(4,309 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
119,898 |
|
|
|
138,713 |
|
|
|
142,237 |
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in notes receivable, net
|
|
|
1,943 |
|
|
|
14,795 |
|
|
|
1,311 |
|
Decrease (increase) in investments in, and advances to,
nonconsolidated affiliates net
|
|
|
(1,413 |
) |
|
|
8,437 |
|
|
|
1,667 |
|
Purchases of property, plant and equipment
|
|
|
(73,435 |
) |
|
|
(69,936 |
) |
|
|
(68,185 |
) |
Proceeds from disposal of assets
|
|
|
3,581 |
|
|
|
584 |
|
|
|
47,518 |
|
Acquisition of operating assets
|
|
|
(13,727 |
) |
|
|
(5,284 |
) |
|
|
(12,785 |
) |
Decrease (increase) in other net
|
|
|
(1,025 |
) |
|
|
(556 |
) |
|
|
(855 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(84,076 |
) |
|
|
(51,960 |
) |
|
|
(31,329 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (payments on) debt with Clear Channel
Communications
|
|
|
24,079 |
|
|
|
(53,859 |
) |
|
|
(104,829 |
) |
Proceeds from long-term debt
|
|
|
6,725 |
|
|
|
|
|
|
|
1,500 |
|
Payments on long-term debt
|
|
|
(7,550 |
) |
|
|
(3,035 |
) |
|
|
(8,952 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
23,254 |
|
|
|
(56,894 |
) |
|
|
(112,281 |
) |
Effect of exchange rate changes on cash
|
|
|
3,701 |
|
|
|
(18,396 |
) |
|
|
8,366 |
|
Net increase in cash and cash equivalents
|
|
|
62,777 |
|
|
|
11,463 |
|
|
|
6,993 |
|
Cash and cash equivalents at beginning of year
|
|
|
116,360 |
|
|
|
104,897 |
|
|
|
97,904 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
179,137 |
|
|
$ |
116,360 |
|
|
$ |
104,897 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
3,048 |
|
|
|
2,564 |
|
|
|
4,424 |
|
See Notes to Combined Financial Statements
F-6
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The combined financial statements of Clear Channel Entertainment
(the Company), a division of Clear Channel
Communications, Inc. (Clear Channel Communications),
a diversified media company with operations in radio
broadcasting, outdoor advertising and live entertainment,
present the stand alone financial position, results of
operations, and cash flows of the live entertainment segment and
sports representation business of Clear Channel Communications.
It is the intention of Clear Channel Communications to
distribute its ownership interest in the Company to its common
shareholders. Clear Channel Communications expects the
distribution to take the form of a spin-off by means of a
special dividend to the common shareholders of Clear Channel
Communications.
The Company has two principal business segments: global music
and global theater. Global music operations include the
promotion and production of live music performances and tours by
music artists in venues owned and operated by the Company and in
third-party venues rented by the Company. Global theater
operations present and produce touring and other theatrical
performances in venues owned and operated by the Company and in
third-party venues rented by the Company. In addition, the
Company has operations in the specialized motor sports, sport
representation and other businesses.
|
|
|
Principles of Combination |
The combined financial statements are comprised of businesses
included in the consolidated financial statements and accounting
records of Clear Channel Communications, using the historical
basis of assets and liabilities of the entertainment business.
The international assets of the Company were contributed by
Clear Channel Communications through a non-cash capital
contribution to the Company of $383.1 million in 2002.
Significant intercompany accounts among the combined businesses
have been eliminated in consolidation. Investments in
nonconsolidated affiliates are accounted for using the equity
method of accounting.
|
|
|
Cash and Cash Equivalents |
Cash and cash equivalents include all highly liquid investments
with an original maturity of three months or less.
|
|
|
Allowance for Doubtful Accounts |
The Company evaluates the collectibility of its accounts
receivable based on a combination of factors. In circumstances
where it is aware of a specific customers inability to
meet its financial obligations, it records a specific reserve to
reduce the amounts recorded to what it believes will be
collected. For all other customers, it recognizes reserves for
bad debt based on historical experience of bad debts as a
percent of revenues for each business unit, adjusted for
relative improvements or deteriorations in the agings and
changes in current economic conditions. When accounts receivable
are determined to be uncollectible, the amount of the receivable
is written off against the allowance for doubtful accounts.
The majority of the Companys prepaid expenses relate to
event expenses including show advances and deposits and other
costs directly related to future entertainment events. Such
costs are charged to operations upon completion of the related
events.
F-7
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
The Company accounts for its business acquisitions under the
purchase method of accounting. The total cost of acquisitions is
allocated to the underlying identifiable net assets based on
their respective estimated fair values. The excess of the
purchase price over the estimated fair values of the assets
acquired is recorded as goodwill. Determining the fair value of
assets acquired and liabilities assumed requires
managements judgment and often involves the use of
significant estimates and assumptions, including assumptions
with respect to future cash inflows and outflows, discount
rates, asset lives and market multiples, among other items. In
addition, reserves have been established on the Companys
balance sheet related to acquired liabilities and qualifying
restructuring costs and contingencies based on assumptions made
at the time of acquisition. The Company evaluates these reserves
on a regular basis to determine the adequacies of the amounts.
|
|
|
Property, Plant and Equipment |
Property, plant and equipment are stated at cost or fair value
at date of acquisition. Depreciation is computed using the
straight-line method at rates that, in the opinion of
management, are adequate to allocate the cost of such assets
over their estimated useful lives, which are as follows:
|
|
|
Buildings and improvements 10 to 50 years |
Furniture and other equipment 3 to 10 years
Leasehold improvements shorter of economic life or
lease term assuming renewal periods, if appropriate
Expenditures for maintenance and repairs are charged to
operations as incurred, whereas expenditures for renewal and
betterments are capitalized.
The Company tests for possible impairment of property, plant,
and equipment whenever events or changes in circumstances, such
as a reduction in operating cash flow or a dramatic change in
the manner that the asset is intended to be used indicate that
the carrying amount of the asset may not be recoverable. If
indicators exist, the Company compares the estimated
undiscounted future cash flows related to the asset to the
carrying value of the asset. If the carrying value is greater
than the estimated undiscounted future cash flow amount, an
impairment charge is recorded in depreciation and amortization
expense in the statement of operations for amounts necessary to
reduce the carrying value of the asset to fair value. The
impairment loss calculations require management to apply
judgment in estimating future cash flows and the discount rates
that reflect the risk inherent in future cash flows.
The Company classifies intangible assets as definite-lived or
goodwill. Definite-lived intangibles include primarily
non-compete and building or naming rights, all of which are
amortized over the respective lives of the agreements, typically
four to twenty years. The Company periodically reviews the
appropriateness of the amortization periods related to its
definite-lived assets. These assets are stated at cost. The
excess cost over fair value of net assets acquired is classified
as goodwill. The goodwill is not subject to amortization, but is
tested for impairment at least annually.
The Company tests for possible impairment of definite-lived
intangible assets whenever events or changes in circumstances,
such as a reduction in operating cash flow or a dramatic change
in the manner that the asset is intended to be used indicate
that the carrying amount of the asset may not be recoverable. If
indicators exist, the Company compares the estimated
undiscounted future cash flows related to the asset to the
carrying value of the asset. If the carrying value is greater
than the estimated undiscounted future cash flow amount, an
impairment charge is recorded in depreciation and amortization
expense in the statement of operations for amounts necessary to
reduce the carrying value of the asset to fair value.
F-8
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
The impairment loss calculations require management to apply
judgment in estimating future cash flows and the discount rates
that reflect the risk inherent in future cash flows.
At least annually, the Company performs its impairment test for
each reporting units goodwill using a discounted cash flow
model to determine if the carrying value of the reporting unit,
including goodwill, is less than the fair value of the reporting
unit. Certain assumptions are used in determining the fair
value, including assumptions about cash flow rates, discount
rates, and terminal values. If the fair value of the
Companys reporting unit is less than the carrying value of
the reporting unit, the Company reduces the carrying amount of
goodwill. Impairment charges, other than the charge taken under
the transitional rules of Statement 142, Goodwill and
Other Intangible Assets, are recorded in depreciation and
amortization expense in the statement of operations.
The loss recorded as a cumulative effect of a change in
accounting principle during 2002 relates to our adoption of
Statement 142 on January 1, 2002. Statement 142
required that we test goodwill for impairment using a fair value
approach. As a result of the goodwill test, we recorded a
non-cash, net of tax, impairment charge of approximately
$3.9 billion.
|
|
|
Nonconsolidated Affiliates |
In general, investments in which the Company owns
20 percent to 50 percent of the common stock or
otherwise exercises significant influence over the company are
accounted for under the equity method. The Company does not
recognize gains or losses upon the issuance of securities by any
of its equity method investees. The Company reviews the value of
equity method investments and records impairment charges in the
statement of operations for any decline in value that is
determined to be other-than-temporary.
As part of our operations, the Company will invest in certain
assets or rights to use assets, generally in theatrical
productions or exhibitions. The Company reviews the value of
these assets and records impairment charges in the statement of
operations for any decline in value that is determined to be
other-than-temporary.
Due to their short maturity, the carrying amounts of accounts
receivable, accounts payable and accrued expenses approximated
their fair values at December 31, 2004 and 2003.
Additionally, as none of the Companys debt is
publicly-traded, the carrying amounts of long-term debt
approximated their fair value at December 31, 2004 and 2003.
The Company accounts for income taxes using the liability
method. Under this method, deferred tax assets and liabilities
are determined based on differences between financial reporting
bases and tax bases of assets and liabilities and are measured
using the enacted tax rates expected to apply to taxable income
in the periods in which the deferred tax asset or liability is
expected to be realized or settled. Deferred tax assets are
reduced by valuation allowances if the Company believes it is
more likely than not that some portion or the entire asset will
not be realized. As all earnings from the Companys foreign
operations are permanently reinvested and not distributed, the
Companys income tax provision does not include additional
U.S. taxes on foreign operations. It is not practical to
determine the amount of federal income taxes, if any, that might
become due in the event that the earnings were distributed.
The operations of the Company are included in a consolidated
federal income tax return filed by Clear Channel Communications.
The Companys provision for income taxes has been computed
on the basis that the Company files separate consolidated income
tax returns with its subsidiaries. Certain tax
F-9
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
liabilities owed by the Company are remitted to the appropriate
taxing authority by Clear Channel Communications and are
accounted for as non-cash capital contributions by Clear Channel
Communications to the Company. Tax benefits recognized on
employee stock options exercises are retained by Clear Channel
Communications.
The Company computes its deferred income tax provision using the
liability method in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income
Taxes, as if the Company was a separate taxpayer. The
Companys provision for income taxes is further disclosed
in Note H.
Revenue from the presentation and production of an event is
recognized on the date of the performance. Revenue collected in
advance of the event is recorded as deferred income until the
event occurs. Revenue collected from sponsorships and other
revenue, which is not related to any single event, is classified
as deferred income and generally amortized over the operating
season or the term of the contract.
The Company believes that the credit risk with respect to trade
receivables is limited due to the large number and the
geographic diversification of its customers.
Barter transactions represent the exchange of display space or
tickets for advertising, merchandise or services. These
transactions are generally recorded at the fair market value of
the display space or tickets relinquished or the fair value of
the advertising, merchandise or services received. Revenue is
recognized on barter and trade transactions when the
advertisements are displayed or the event occurs for which the
tickets are exchanged. Expenses are recorded when the
advertising, merchandise or service is received or when the
event occurs. Barter and trade revenues for the years ended
December 31, 2004, 2003 and 2002, were approximately
$45.1 million, $33.4 million and $22.5 million,
respectively, and are included in total revenues. Barter and
trade expenses for the years ended December 31, 2004, 2003
and 2002, were approximately $44.5 million,
$32.7 million and $17.7 million, respectively, and are
included in divisional operating expenses.
Results of operations for foreign subsidiaries and foreign
equity investees are translated into U.S. dollars using the
average exchange rates during the year. The assets and
liabilities of those subsidiaries and investees, other than
those of operations in highly inflationary countries, are
translated into U.S. dollars using the exchange rates at
the balance sheet date. The related translation adjustments are
recorded in a separate component of owners equity,
Accumulated other comprehensive income (loss).
Foreign currency transaction gains and losses, as well as gains
and losses from translation of financial statements of
subsidiaries and investees in highly inflationary countries, are
included in operations.
The Company records advertising expense as it is incurred.
Advertising expenses of $194.2 million, $172.7 million
and $152.4 million were recorded during the year ended
December 31, 2004, 2003 and 2002, respectively.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates, judgments, and assumptions that affect the
amounts reported in
F-10
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
the financial statements and accompanying notes including, but
not limited to, legal, tax and insurance accruals. The Company
bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from those estimates.
|
|
|
New Accounting Pronouncements |
In December 2004, the Financial Accounting Standards Board
(FASB) issued Financial Accounting Standard
No. 153, Exchanges of Nonmonetary Assets, an amendment
of APB Opinion No. 29 (Statement 153).
Statement 153 eliminates the APB Opinion No. 29
exception for nonmonetary exchanges of similar productive assets
and replaces it with an exception for exchanges of nonmonetary
assets that do not have commercial substance. Statement 153
is effective for financial statements for fiscal years beginning
after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in fiscal periods
beginning after the date of issuance. The provisions of
Statement 153 should be applied prospectively. The Company
expects to adopt Statement 153 for its fiscal year
beginning January 1, 2006 and management does not believe
that adoption will materially impact the Companys
financial position or results of operations.
In December 2004, the FASB issued Staff Position 109-2,
Accounting and Disclosure Guidance for the Foreign Repatriation
Provision within the American Jobs Creation Act of 2004
(FSP 109-2). FSP 109-2 allows an enterprise
additional time beyond the financial reporting period in which
the Act was enacted to evaluate the effects of the Act on its
plans for repatriation of unremitted earnings for purposes of
applying Financial Accounting Standard No. 109,
Accounting for Income Taxes
(Statement 109). FSP 109-2 clarifies that
an enterprise is required to apply the provisions of
Statement 109 in the period, or periods, it decides on its
plan(s) for reinvestment or repatriation of its unremitted
foreign earnings. FSP 109-2 requires disclosure if an
enterprise is unable to reasonably estimate, at the time of
issuance of its financial statements, the related range of
income tax effects for the potential range of foreign earnings
that it may repatriate and requires an enterprise to recognize
income tax expense (benefit) if an enterprise decides to
repatriate a portion of unremitted earnings under the
repatriation provision while it is continuing to evaluate the
effects of the repatriation provision for the remaining portion
of the unremitted foreign earnings. FSP 109-2 is effective upon
issuance. The Company currently has the ability and intent to
reinvest any undistributed earnings of its foreign subsidiaries.
Any impact from this legislation has not been reflected in the
amounts shown since the Company is reinvested for the
foreseeable future.
On December 16, 2004, the FASB issued Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (Statement 123(R))
which is a revision of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation (Statement 123).
Statement 123(R) supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and amends
Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to
the approach described in Statement 123. However,
Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative.
Statement 123(R) is effective for financial statements for
the first interim or annual period beginning after June 15,
2005. Early adoption is permitted in periods in which financial
statements have not yet been issued. In April 2005, the SEC
issued a press release announcing that it would provide for
phased-in implementation guidance for Statement 123(R). The
SEC would require that registrants that are not small business
issuers adopt Statement 123(R)s fair value method of
accounting for share-based payments to employees no later than
the beginning of the first fiscal year beginning after
June 15, 2005. The Company intends to adopt
Statement 123(R) on January 1, 2006.
As permitted by Statement 123, the Company currently
accounts for share-based payments to employees using APB 25
intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the
adoption of Statement 123(R)s fair value method will
have a significant impact on the Companys result of
operations, although it will have no impact on its overall
F-11
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
financial position. The Company is unable to quantify the impact
of adoption of Statement 123(R) at this time because it
will depend on levels of share-based payments granted in the
future. However, had the Company adopted Statement 123(R)
in prior periods, the impact of that standard would have
approximated the impact of Statement 123 as described in
the disclosure of pro forma net income and earnings per share
below. Statement 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be
reported as a financing cash flow. This requirement will
increase net financing cash flows in periods after adoption. The
Company cannot estimate what those amounts will be in the future
because they depend on, among other things, when employees
exercise stock options.
The Company does not have any compensation plans under which it
grants stock awards to employees. On behalf of the Company,
Clear Channel Communications grants the Companys officers
and other key employees stock options to purchase shares of
Clear Channel Communications common stock. Clear Channel
Communications accounts for its stock-based award plans in
accordance with APB 25, and related interpretations, under
which compensation expense is recorded to the extent that the
current market price of the underlying stock exceeds the
exercise price. Clear Channel Communications calculates the pro
forma stock compensation expense as if the stock-based awards
had been accounted for using the provisions of
Statement 123, Accounting for Stock-Based
Compensation. The stock compensation expense is then
allocated to the Company based on the percentage of options
outstanding to employees of the Company. The required pro forma
disclosures, based on this allocated expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, | |
|
|
except per share data) | |
Income before cumulative effect of a change in accounting
principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
$ |
16,260 |
|
|
$ |
57,032 |
|
|
$ |
3,431 |
|
|
Pro forma stock compensation expense, net of tax
|
|
|
(11,368 |
) |
|
|
(6,499 |
) |
|
|
(7,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
$ |
4,892 |
|
|
$ |
50,533 |
|
|
$ |
(4,378 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted income (loss) before cumulative
effect of a change in accounting principle per common share
(unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.24 |
|
|
$ |
0.84 |
|
|
$ |
0.05 |
|
|
Pro forma
|
|
$ |
0.07 |
|
|
$ |
0.75 |
|
|
$ |
(0.06 |
) |
Clear Channel Communications calculated the fair value for these
options at the date of grant using a Black-Scholes
option-pricing model with the following assumptions for 2004,
2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
2.21% 4.51% |
|
|
|
2.91% 4.03% |
|
|
|
2.85% 5.33% |
|
Dividend yield
|
|
|
.90% 1.65% |
|
|
|
0% 1.01% |
|
|
|
0% |
|
Volatility factors
|
|
|
42% 50% |
|
|
|
43% 47% |
|
|
|
36% 49% |
|
Weighted average expected life
|
|
|
3 7.5 |
|
|
|
5 7.5 |
|
|
|
3.5 7.5 |
|
NOTE B LONG-LIVED ASSETS
|
|
|
Definite-lived Intangibles |
The Company has definite-lived intangible assets which consist
primarily of non-compete and building or naming 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 to the Companys future cash
flows. These definite-lived intangibles had a gross carrying
amount and accumulated amortization of
F-12
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
$26.9 million and $12.1 million, respectively, as of
December 31, 2004, and $26.4 million and
$10.8 million, respectively, as of December 31, 2003.
Total amortization expense from definite-lived intangible assets
for the years ended December 31, 2004, 2003 and 2002 was
$3.2 million, $3.0 million and $3.3 million,
respectively. The following table presents the Companys
estimate of amortization expense for each of the five succeeding
fiscal years for definite-lived intangible assets that exist at
December 31, 2004:
|
|
|
|
|
|
|
(In thousands) | |
2005
|
|
$ |
2,540 |
|
2006
|
|
|
1,823 |
|
2007
|
|
|
1,240 |
|
2008
|
|
|
1,240 |
|
2009
|
|
|
1,240 |
|
As acquisitions and dispositions occur in the future
amortization expense may vary.
The Company tests goodwill for impairment using a two-step
process. The first step, used to screen for potential
impairment, compares the fair value of the reporting unit with
its carrying amount, including goodwill. The second step, used
to measure the amount of the impairment loss, compares the
implied fair value of the reporting unit goodwill with the
carrying amount of that goodwill. The following table presents
the changes in the carrying amount of goodwill in each of the
Companys reportable segments for the years ended
December 31, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global | |
|
Global | |
|
|
|
|
Music | |
|
Theater | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance as of December 31, 2002
|
|
$ |
109,495 |
|
|
$ |
32,706 |
|
|
$ |
142,201 |
|
Acquisitions
|
|
|
2,677 |
|
|
|
799 |
|
|
|
3,476 |
|
Dispositions
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
1,095 |
|
|
|
327 |
|
|
|
1,422 |
|
Adjustments
|
|
|
(15,418 |
) |
|
|
(4,605 |
) |
|
|
(20,023 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
97,849 |
|
|
|
29,227 |
|
|
|
127,076 |
|
Acquisitions
|
|
|
13,199 |
|
|
|
3,942 |
|
|
|
17,141 |
|
Dispositions
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
(2,266 |
) |
|
|
(677 |
) |
|
|
(2,943 |
) |
Adjustments
|
|
|
(74,275 |
) |
|
|
(22,186 |
) |
|
|
(96,461 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
$ |
34,507 |
|
|
$ |
10,306 |
|
|
$ |
44,813 |
|
|
|
|
|
|
|
|
|
|
|
During 2000, Clear Channel Communications acquired the Company
and determined during its due diligence that taxing authorities
may disagree with tax positions taken on certain preacquisition
tax filings, including the amortizable tax basis of certain
intangible assets, which would negatively affect the amount of
taxes previously paid by the Company. Clear Channel
Communications determined that these pre-acquisition
contingencies should be accrued in accordance with Statement of
Financial Accounting Standards No. 5, Accounting for
Contingencies, and a valuation allowance established against
the related deferred tax assets. Clear Channel Communications
recorded these liabilities and valuation allowance as part of
the purchase accounting for the acquisition of the Company
resulting in a corresponding increase to goodwill of
approximately $96.5 million. During 2004, certain Internal
Revenue Service audits were settled for certain pre-acquisition
periods of the Company to which the above items related. The
associated tax
F-13
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
reserve liabilities and valuation allowance recorded as part of
the purchase accounting entries were then reversed, resulting in
a corresponding $96.5 million decrease to goodwill in
accordance with the provisions of EITF 93-7,
Uncertainties Related to Income Taxes in a Purchase Business
Combination, and paragraph 30 of Statement of Financial
Accounting Standards No. 109, Accounting for Income
Taxes. The Company made adjustments to goodwill for
$20.0 million for the year ended December 31, 2003
primarily related to the favorable outcome of certain
contingencies recorded at the time of acquisition.
Upon adopting Statement of Financial Accounting Standards
No. 142 (Statement 142), the Company
completed the two-step impairment test during the first quarter
of 2002. As a result of this test, the Company recognized an
impairment of approximately $3.9 billion, net of deferred
taxes of $198.6 million related to tax deductible goodwill,
as a component of the cumulative effect of a change in
accounting principle during the first quarter of 2002.
The Company makes investments in various operating assets,
including investments in assets and rights related to assets for
museum exhibitions. These assets are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. For the
year ended December 31, 2004, the Company recorded an
impairment write-down related to these exhibitions, included in
the Companys other operations, of $1.1 million. This
write-down was recorded as Divisional operating
expenses. There were no similar write-offs in 2003 or 2002.
NOTE C BUSINESS ACQUISITIONS
The Company made cash payments of $13.8 million,
$5.3 million and $12.8 million during the years ended
December 31, 2004, 2003 and 2002, respectively, primarily
related to acquisitions of music promoters and venue operators
and exhibition related assets as well as various earn-outs and
deferred purchase price consideration on prior year
acquisitions. In addition, Clear Channel Communications made
cash payments of $16.2 million, $2.8 million and
$18.5 million during the years ended December 31,
2004, 2003 and 2002, respectively, related to these
acquisitions. These payments by Clear Channel Communications
were recorded as non-cash capital contributions to the Company.
The following is a summary of the assets and liabilities
acquired and the consideration given for all acquisitions made
during 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Accounts receivable
|
|
$ |
24 |
|
|
$ |
|
|
Property, plant and equipment
|
|
|
31 |
|
|
|
245 |
|
Goodwill
|
|
|
17,141 |
|
|
|
3,476 |
|
Other assets
|
|
|
473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,669 |
|
|
|
3,721 |
|
Other liabilities
|
|
|
(504 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
(504 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
Cash paid for acquisitions
|
|
$ |
17,165 |
|
|
$ |
3,697 |
|
|
|
|
|
|
|
|
The Company has entered into certain agreements relating to
acquisitions that provide for purchase price adjustments and
other future contingent payments based on the financial
performance of the acquired company. During the years ended
December 31, 2004, 2003 and 2002, the cash payments
F-14
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
discussed above include payments related to earn-outs and
deferred purchase price consideration of $12.8 million,
$4.4 million and $9.2 million, respectively, that were
recorded to goodwill. The Company will continue to accrue
additional amounts related to such contingent payments if and
when it is determinable that the applicable financial
performance targets will be met. The aggregate of these
contingent payments, if performance targets were met, would not
significantly impact the Companys financial position or
results of operations.
The Company restructured its operations in connection with its
merger with Clear Channel Communications in August of 2000. A
portion of the Companys international corporate office in
New York was closed on June 30, 2001. As of
December 31, 2004, the accrual balance for the
restructuring was $2.6 million. All restructuring has
resulted in the actual termination of approximately 150
employees. The Company recorded a liability in purchase
accounting primarily related to severance for terminated
employees and lease terminations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Severance and lease termination costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at January 1
|
|
$ |
2,648 |
|
|
$ |
5,312 |
|
|
$ |
8,521 |
|
|
Payments charged against restructuring accrual
|
|
|
(69 |
) |
|
|
(2,664 |
) |
|
|
(3,209 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining accrual at December 31
|
|
$ |
2,579 |
|
|
$ |
2,648 |
|
|
$ |
5,312 |
|
|
|
|
|
|
|
|
|
|
|
The remaining severance and lease accrual is comprised of
$1.3 million of severance and $1.3 million of lease
termination. The severance accrual includes amounts that will be
paid over the next several years related to deferred payments to
former employees as well as other compensation. The lease
termination accrual will be paid over the next nine years.
During 2004, $0.2 million was paid and charged to the
restructuring reserve related to severance. In addition, Clear
Channel Communications made payments related to acquisition
contingencies of $1.1 million, $9.6 million and
$12.9 million for the years ended December 31, 2004,
2003 and 2002, respectively, on behalf of the Company. These
payments were accounted for as non-cash capital contributions by
Clear Channel Communications to the Company.
In 2004, the Company recorded additional restructuring accruals
related to the sale of a United Kingdom business included in
other operations and a reduction in operating personnel in the
global music segment. Total expense related to these
restructurings was $6.4 million recorded in
Divisional operating expenses and resulted in the
actual termination of approximately 90 employees. During 2004,
$3.5 million was paid and charged to this restructuring
reserve related to severance. As of December 31, 2004, the
remaining accrual related to this 2004 restructuring was
$2.9 million, primarily related to lease termination.
NOTE D INVESTMENTS
The Companys most significant investments in
nonconsolidated affiliates are listed below:
The Company owns a 33% interest in the Dominion Theatre, a
United Kingdom theatrical company involved in venue operations.
The Company owns a 20% interest in MLK, a German music company
involved in promotion of, and venue operations for, live
entertainment events.
F-15
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
The Company owns a 32.5% interest in a joint venture with House
of Blues. This is a United States music company involved in
promotion of, and venue operations for, live entertainment
events.
The Company owns a 50% interest in Broadway in Chicago, a United
States theatrical company involved in promotion, presentation
and venue operations for live entertainment events.
|
|
|
Summarized Financial Information |
The following table summarizes the Companys investments in
these nonconsolidated affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOB/PACE | |
|
Broadway in | |
|
All | |
|
|
|
|
Dominion | |
|
MLK | |
|
JV | |
|
Chicago | |
|
Others | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
At December 31, 2003
|
|
$ |
5,198 |
|
|
$ |
|
|
|
$ |
4,576 |
|
|
$ |
4,083 |
|
|
$ |
5,860 |
|
|
$ |
19,717 |
|
Acquisition (disposition) of investments
|
|
|
|
|
|
|
4,425 |
|
|
|
|
|
|
|
|
|
|
|
(522 |
) |
|
|
3,903 |
|
Additional investment, net
|
|
|
(738 |
) |
|
|
|
|
|
|
(424 |
) |
|
|
(2,289 |
) |
|
|
3,067 |
|
|
|
(384 |
) |
Equity in net earnings (loss)
|
|
|
831 |
|
|
|
1,518 |
|
|
|
414 |
|
|
|
1,801 |
|
|
|
(1,658 |
) |
|
|
2,906 |
|
Foreign currency translation adjustment
|
|
|
253 |
|
|
|
721 |
|
|
|
|
|
|
|
|
|
|
|
(114 |
) |
|
|
860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004
|
|
$ |
5,544 |
|
|
$ |
6,664 |
|
|
$ |
4,566 |
|
|
$ |
3,595 |
|
|
$ |
6,633 |
|
|
$ |
27,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above investments are not consolidated, but are primarily
accounted for under the equity method of accounting, whereby the
Company records its investments in these entities in the balance
sheet as Investments in, and advances to, nonconsolidated
affiliates. The Companys interests in their
operations are recorded in the statement of operations as
Equity in earnings (loss) of nonconsolidated
affiliates. There were no accumulated undistributed
earnings included in retained deficit for these investments for
any of the three years ended December 31, 2004. Investments
for which the Company owns less than a 20% interest are
accounted for under the cost method.
These assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. For the year ended
December 31, 2004 and 2003, the Company recorded an
impairment write-down related to these investments in
nonconsolidated affiliates of $0.6 million and
$2.8 million, respectively. These write-downs were recorded
as Equity in earnings (loss) of nonconsolidated
affiliates. The 2004 amount related to the global music
segment. Of the 2003 amount, $1.1 million related to the
global music segment and the remaining $1.7 million related
to the Companys other operations.
The Company conducts business with certain of its equity method
investees in the ordinary course of business. Transactions
relate to venue rentals, management fees, sponsorship revenue,
and reimbursement of certain costs. Expenses of
$2.6 million and $2.8 million were incurred in 2004
and 2003, respectively, and revenues of $1.2 million and
$1.4 million were earned in 2004 and 2003, respectively,
from these equity investees for services rendered for these
business ventures. It is the Companys opinion that these
transactions were recorded at fair value.
F-16
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
NOTE E LONG-TERM DEBT
Long-term debt, which includes capital leases, at
December 31, 2004 and 2003, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Debt with Clear Channel Communications
|
|
$ |
628,897 |
|
|
$ |
595,211 |
|
Other long-term debt
|
|
|
21,778 |
|
|
|
22,627 |
|
|
|
|
|
|
|
|
|
|
|
650,675 |
|
|
|
617,838 |
|
Less: current portion
|
|
|
1,214 |
|
|
|
1,283 |
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$ |
649,461 |
|
|
$ |
616,555 |
|
|
|
|
|
|
|
|
|
|
|
Debt with Clear Channel Communications |
The Company currently has a revolving line of credit with Clear
Channel Communications that is payable upon demand by Clear
Channel Communications or on August 1, 2010, whichever is
earlier, allows for prepayment at any time, and accrues interest
at a fixed per annum rate of 7.0%. Clear Channel Communications
promises that it will not call the outstanding balance of this
revolving line of credit prior to its maturity date.
Other long-term debt is comprised of capital leases of
$10.8 million and notes payable of $10.9 million. The
notes payable primarily consists of two notes with interest
rates ranging from 6.25% to 8.75% and maturities ranging from 8
to 15 years.
Future maturities of long-term debt at December 31, 2004
are as follows:
|
|
|
|
|
|
|
(In thousands) | |
2005
|
|
$ |
1,214 |
|
2006
|
|
|
1,366 |
|
2007
|
|
|
1,231 |
|
2008
|
|
|
1,262 |
|
2009
|
|
|
1,351 |
|
Thereafter
|
|
|
644,251 |
|
|
|
|
|
Total
|
|
$ |
650,675 |
|
|
|
|
|
NOTE F COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment. Some of the lease
agreements contain renewal options and annual rental escalation
clauses (generally tied to the consumer price index), as
well as provisions for the payment of utilities and maintenance
by the Company. The Company also has non-cancelable contracts
related to minimum performance payments with various artists and
other event related costs and employment contracts. In addition,
the Company has commitments relating to required purchases of
property, plant, and equipment under certain construction
commitments for facilities and venues.
F-17
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2004, the Companys future minimum
rental commitments under non-cancelable operating lease
agreements with terms in excess of one year, minimum payments
under non-cancelable contracts in excess of one year, and
capital expenditure commitments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cancelable | |
|
Non-Cancelable | |
|
Capital | |
|
|
Operating Leases | |
|
Contracts | |
|
Expenditures | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
2005
|
|
$ |
51,485 |
|
|
$ |
171,288 |
|
|
$ |
13,601 |
|
2006
|
|
|
49,446 |
|
|
|
37,010 |
|
|
|
17,000 |
|
2007
|
|
|
44,651 |
|
|
|
9,543 |
|
|
|
|
|
2008
|
|
|
40,170 |
|
|
|
9,229 |
|
|
|
|
|
2009
|
|
|
36,887 |
|
|
|
8,838 |
|
|
|
|
|
Thereafter
|
|
|
532,557 |
|
|
|
15,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
755,196 |
|
|
$ |
251,191 |
|
|
$ |
30,601 |
|
|
|
|
|
|
|
|
|
|
|
Rent expense charged to operations for 2004, 2003 and 2002 was
$175.7 million, $160.3 million and
$141.8 million, respectively.
The Company is currently involved in certain legal proceedings
and, as required, has accrued its best estimate of the probable
costs for the resolution of these claims. 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 Companys
assumptions or the effectiveness of its strategies related to
these proceedings.
Various acquisition agreements include deferred consideration
payments including future contingent payments based on the
financial performance of the acquired companies, generally over
a one to five year period. Contingent payments involving the
financial performance of the acquired companies are typically
based on the acquired company meeting certain financial
performance targets as defined in the agreement. The contingent
payment amounts are generally calculated based on predetermined
multiples of the achieved financial performance not to exceed a
predetermined maximum payment. At December 31, 2004, the
Company believes its maximum aggregate contingency, which is
subject to the financial performance of the acquired companies,
is approximately $6.4 million. As the contingencies have
not been met or resolved as of December 31, 2004, these
amounts are not recorded. If future payments are made, amounts
will be recorded as additional purchase price.
The Company has various investments in nonconsolidated
affiliates that are subject to agreements that contain
provisions that may result in future additional investments to
be made by the Company. The put values are contingent upon
financial performance of the investee and are typically based on
the investee meeting certain financial performance targets, as
defined in the agreements. The contingent payment amounts are
generally calculated based on predetermined multiples of the
achieved financial performance not to exceed a predetermined
maximum amount.
NOTE G RELATED PARTY TRANSACTIONS
The Company currently has a revolving line of credit with Clear
Channel Communications. See further disclosure in Note E.
Clear Channel Communications has provided funding for certain of
the Companys acquisitions of net assets. These amounts
funded by Clear Channel Communications for these acquisitions
are recorded in Owners net investment as a
component of owners equity. Also, certain tax related
receivables and payables, which are considered non-cash capital
contributions or dividends, are recorded in Owners
net investment. During 2004, Clear Channel Communications
made an additional non-cash capital
F-18
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
contribution of $17.6 million to the Company. As of
December 31, 2004 and 2003, the balance recorded in
Owners net investment is $4.4 billion.
The Company purchases advertising from Clear Channel
Communications and its subsidiaries. For the years ended
December 31, 2004, 2003 and 2002, the Company recorded
$16.7 million, $15.7 million and $16.4 million,
respectively, in expense for these advertisements. It is the
Companys opinion that these transactions were recorded at
fair value.
Clear Channel Communications provides management services to the
Company, which include, among other things: (i) treasury,
payroll and other financial related services; (ii) human
resources and employee benefits services; (iii) legal and
related services; and (iv) information systems, network and
related services. These services are allocated to the Company
based on actual direct costs incurred or on the Companys
share of Clear Channel Communications estimate of expenses
relative to a seasonally adjusted headcount. Management believes
this allocation method to be reasonable and the expenses
allocated to be materially the same as the amount that would
have been incurred on a stand-alone basis. For the years ended
December 31, 2004, 2003 and 2002, the Company recorded
$9.8 million, $9.2 million and $8.5 million,
respectively, as a component of corporate expenses for these
services.
The Company anticipates executing a transitional services
agreement with Clear Channel Communications that will provide
services similar to the management services discussed above.
These services will be provided for a finite period of time
subsequent to the spin-off and will be charged to the Company
based upon Clear Channel Communications direct costs
incurred to provide these services, which it estimates to be the
fair market value for such services.
Clear Channel Communications owns the trademark and trade names
used by the Company. Beginning January 1, 2003, Clear
Channel Communications charges the Company a royalty fee based
upon a percentage of annual revenue. Clear Channel
Communications used a third party valuation firm to assist in
the determination of the royalty fee. For the years ended
December 31, 2004 and 2003, the Company recorded
$3.1 million and $4.1 million, respectively, of
royalty fees in Corporate expenses.
The operations of the Company are included in a consolidated
federal income tax return filed by Clear Channel Communications.
The Companys provision for income taxes has been computed
on the basis that the Company files separate consolidated income
tax returns with its subsidiaries. Tax payments are made to
Clear Channel Communications on the basis of the Companys
separate taxable income. Tax benefits recognized on employee
stock options exercises are retained by Clear Channel
Communications.
The Companys domestic employees participate in Clear
Channel Communications employee benefit plans, including
employee medical insurance and a 401(k) retirement benefit plan.
These costs are recorded primarily as a component of
Divisional operating expenses and were approximately
$9.0 million, $7.6 million and $7.2 million for
the years ended December 31, 2004, 2003 and 2002,
respectively.
NOTE H INCOME TAXES
The operations of the Company are included in a consolidated
federal income tax return filed by Clear Channel Communications.
However, for financial reporting purposes, the Companys
provision for income taxes has been computed on the basis that
the Company files separate consolidated income tax returns with
its subsidiaries.
F-19
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
Significant components of the provision for income tax expense
(benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Current federal
|
|
$ |
(68,192 |
) |
|
$ |
(71,966 |
) |
|
$ |
23,559 |
|
Current foreign
|
|
|
13,870 |
|
|
|
2,809 |
|
|
|
12,771 |
|
Current state
|
|
|
(1,624 |
) |
|
|
885 |
|
|
|
3,772 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(55,946 |
) |
|
|
(68,272 |
) |
|
|
40,102 |
|
Deferred federal
|
|
|
50,162 |
|
|
|
73,575 |
|
|
|
(11,367 |
) |
Deferred foreign
|
|
|
(2,201 |
) |
|
|
(3,428 |
) |
|
|
1,725 |
|
Deferred state
|
|
|
6,450 |
|
|
|
9,460 |
|
|
|
(1,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
54,411 |
|
|
|
79,607 |
|
|
|
(11,103 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$ |
(1,535 |
) |
|
$ |
11,335 |
|
|
$ |
28,999 |
|
|
|
|
|
|
|
|
|
|
|
Current tax benefit decreased $12.3 million in 2004 as
compared to 2003. As a result of the favorable resolution of
certain tax contingencies, current tax expense (benefit) for the
year ended December 31, 2004 was reduced approximately
$11.0 million. In 2004, certain of the Companys IRS
audits were settled and certain tax contingencies, which had
previously been recorded in purchase accounting with an offset
to goodwill, were resolved. Thus, the Company reversed
$11.0 million of interest that had been accrued as tax
expense associated with these items during prior years as a
benefit to current tax expense. The $11.0 million was
partially offset by approximately $4.9 million of
additional current tax expense related to interest expense on
other tax contingencies associated with various tax planning
items. The decrease in deferred tax expense of
$25.2 million for the year ended December 31, 2004 as
compared to December 31, 2003 was due primarily to
additional depreciation expense deductions taken for tax
purposes associated with a change in our tax lives of certain
assets. The additional depreciation expense resulted in an
increase in deferred tax expense in 2003.
In 2002, approximately $313.0 million of taxable income was
recognized that had been deferred in a prior year. As such,
current tax expense for the year ended December 31, 2002
increased approximately $123.6 million. In addition, as the
deferred tax liability was reversed, a deferred tax benefit of
approximately $123.6 million was recorded for the year
ended December 31, 2002. These amounts were offset by the
utilization of net operating losses of approximately
$59.8 million that decreased current tax expense and
increased deferred tax expense for the year ended
December 31, 2002.
F-20
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
Significant components of the Companys deferred tax
liabilities and assets as of December 31, 2004 and 2003 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$ |
2,078 |
|
|
$ |
|
|
|
Foreign
|
|
|
|
|
|
|
978 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
2,078 |
|
|
|
978 |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Intangibles and fixed assets
|
|
|
72,081 |
|
|
|
113,857 |
|
|
Accrued expenses
|
|
|
1,226 |
|
|
|
4,599 |
|
|
Foreign
|
|
|
1,488 |
|
|
|
|
|
|
Investments
|
|
|
11,013 |
|
|
|
10,309 |
|
|
Net operating loss carryforwards
|
|
|
|
|
|
|
3,761 |
|
|
Bad debt reserves
|
|
|
3,391 |
|
|
|
3,298 |
|
|
Deferred income
|
|
|
1,449 |
|
|
|
369 |
|
|
Prepaid expense
|
|
|
199 |
|
|
|
6,557 |
|
|
Other
|
|
|
8,548 |
|
|
|
8,307 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
99,395 |
|
|
|
151,057 |
|
Valuation allowance
|
|
|
|
|
|
|
57,805 |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
99,395 |
|
|
|
93,252 |
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
97,317 |
|
|
$ |
92,274 |
|
|
|
|
|
|
|
|
The deferred tax asset related to intangibles and fixed assets
primarily relates to the difference in book and tax basis of tax
deductible goodwill created from the Companys various
stock acquisitions. In accordance with Statement No. 142,
the Company no longer amortizes goodwill. Thus, a deferred tax
benefit for the difference between book and tax amortization for
the Companys tax-deductible goodwill is no longer
recognized, as these assets are no longer amortized for book
purposes. As the Company continues to amortize its tax basis in
its tax deductible goodwill, the deferred tax asset will
decrease over time.
The reduction in the valuation allowance during 2004 was a
result of the resolution of certain tax contingencies associated
with prior acquisitions. This reduction was recorded as an
adjustment to the original purchase price allocation and did not
impact income tax expense.
The reconciliation of income tax computed at the
U.S. federal statutory tax rates to income tax expense
(benefit) is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Income tax expense (benefit) at statutory rates
|
|
$ |
5,154 |
|
|
$ |
23,928 |
|
|
$ |
11,351 |
|
State income taxes, net of federal tax benefit
|
|
|
4,825 |
|
|
|
10,345 |
|
|
|
2,310 |
|
Foreign taxes
|
|
|
(7,084 |
) |
|
|
(15,610 |
) |
|
|
3,225 |
|
Nondeductible items
|
|
|
1,105 |
|
|
|
1,101 |
|
|
|
2,120 |
|
Tax contingencies
|
|
|
(6,064 |
) |
|
|
22,305 |
|
|
|
8,808 |
|
Minority interest
|
|
|
522 |
|
|
|
433 |
|
|
|
834 |
|
Loss on sale of subsidiary
|
|
|
|
|
|
|
(31,621 |
) |
|
|
|
|
Other, net
|
|
|
7 |
|
|
|
454 |
|
|
|
351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,535 |
) |
|
$ |
11,335 |
|
|
$ |
28,999 |
|
|
|
|
|
|
|
|
|
|
|
F-21
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
During 2004, the Company recorded a tax benefit of approximately
$1.5 million on income before income taxes of
$14.7 million. Foreign income before income taxes was
approximately $53.6 million for 2004. As a result of the
favorable resolution of certain tax contingencies, current tax
expense (benefit) for the year ended December 31, 2004 was
reduced approximately $11.0 million. In 2004, certain of
the Companys IRS audits were settled and certain tax
contingencies, which had previously been recorded in purchase
accounting with an offset to goodwill, were resolved. Thus, the
Company reversed $11.0 million of interest associated with
these items that had been accrued as tax expense in prior years
as a benefit to current tax expense. The $11.0 million was
partially offset by approximately $4.9 million of
additional current tax expense related to interest expense on
other tax contingencies associated with various tax planning
items.
During 2003, the Company recorded tax expense of approximately
$11.3 million on income before income taxes of
$68.4 million. Foreign income before income taxes was
approximately $42.8 million. The Company recorded
additional current tax expense related to interest on certain
tax contingencies of approximately $22.3 million in 2003.
In addition, the Company recorded a tax benefit of
$31.6 million related to the loss on the disposition of
certain subsidiaries.
During 2002, the Company recorded tax expense of approximately
$29.0 million on income before income taxes of
$32.4 million. Foreign income before income taxes was
approximately $2.6 million. The Company recorded additional
current tax expense related to interest on certain tax
contingencies of approximately $8.8 million in 2002. In
addition, the Company did not record a tax benefit on certain
tax losses in our foreign operations due to the uncertainty of
the ability to utilize those tax losses in the future.
Certain tax liabilities owed by the Company are remitted to the
appropriate taxing authority by Clear Channel Communications and
are accounted for as non-cash capital contributions by Clear
Channel Communications to the Company. To the extent tax
benefits of the Company are utilized by Clear Channel
Communications, they are accounted for as non-cash dividends
from the Company to Clear Channel Communications. For the years
ended December 31, 2004 and 2003, Clear Channel
Communications utilized $64.1 million and
$92.6 million, respectively, of the Companys tax
benefit. For the year ended December 31, 2002, Clear
Channel Communications paid $9.3 million in taxes on behalf
of the Company.
NOTE I OWNERS EQUITY
Clear Channel Communications has granted options to purchase
Clear Channel Communications common stock to employees of the
Company and its affiliates under various stock option plans at
no less than the fair market value of the underlying stock on
the date of grant. These options are granted for a term not
exceeding ten years and are forfeited in the event the employee
or director terminates his or her employment or relationship
with the Company or one of its affiliates. All option plans
contain anti-dilutive provisions that require the adjustment of
the number of shares of the Clear Channel Communications common
stock represented by each option for any stock splits or
dividends.
On behalf of the Company, Clear Channel Communications began
granting restricted stock awards to the Companys employees
in 2004. These Clear Channel Communications common shares bear a
legend which restricts their transferability for a term of from
three to five years and are forfeited in the event the employee
terminates his or her employment or relationship with the
Company prior to the lapse of the restriction. The restricted
stock awards were granted out of the Clear Channel
Communications stock option plans. All option plans
contain anti-dilutive provisions that require the adjustment of
the number of shares of the Clear Channel Communications common
stock represented by each option for any stock splits or
dividends. Additionally, recipients of the restricted stock
awards are entitled to all cash dividends
F-22
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
as of the date the award was granted. The Company had 6,610
restricted stock awards outstanding at December 31, 2004 at
a weighted average share price at the date of grant of $43.88.
The expense related to these restricted stock awards is included
in Corporate expenses.
NOTE J EMPLOYEE STOCK AND SAVINGS PLANS
The Companys employees are eligible to participate in
various 401(k) savings and other plans provided by Clear Channel
Communications for the purpose of providing retirement benefits
for substantially all employees. Both the employees and the
Company make contributions to the plan. The Company matches a
portion of an employees contribution. Beginning
January 1, 2003, the Company match was increased from 35%
to 50% of the employees first 5% of pay contributed to the
plan. Company matched contributions vest to the employees based
upon their years of service to the Company. Contributions to
these plans of $2.1 million, $1.6 million and
$1.3 million were charged to expense for 2004, 2003 and
2002, respectively.
The Companys employees are also eligible to participate in
a non-qualified employee stock purchase plan provided by Clear
Channel Communications. Under the plan, shares of Clear Channel
Communications common stock may be purchased at 85% of the
market value on the day of purchase. Employees may purchase
shares having a value not exceeding 10% of their annual gross
compensation or $25,000, whichever is lower. During 2004, 2003
and 2002, all Clear Channel Communications employees purchased
262,163, 266,978 and 319,817 shares at weighted average
share prices of $32.05, $34.01 and $33.85, respectively. The
Companys employees represent approximately 6% of the total
participation in this plan.
Certain highly compensated executives of the Company are
eligible to participate in a non-qualified deferred compensation
plan provided by Clear Channel Communications, which allows
deferrals up to 50% of their annual salary and up to 80% of
their bonus before taxes. The Company does not match any
deferral amounts. Clear Channel Communications retains ownership
of all assets until distributed and records the liability under
this deferred compensation plan.
NOTE K OTHER INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
The following details the components of Other income
(expense) net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
3,221 |
|
|
$ |
6,870 |
|
|
$ |
2,102 |
|
|
Minority interest expense
|
|
|
(3,300 |
) |
|
|
(3,280 |
) |
|
|
(3,794 |
) |
|
Other, net
|
|
|
(1,611 |
) |
|
|
(366 |
) |
|
|
2,024 |
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) net
|
|
$ |
(1,690 |
) |
|
$ |
3,224 |
|
|
$ |
332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
The following details the components of Other current
assets:
|
|
|
|
|
|
|
|
|
|
Investments in theatrical productions
|
|
$ |
13,275 |
|
|
$ |
11,099 |
|
|
Inventory
|
|
|
4,600 |
|
|
|
4,701 |
|
|
Assets held in escrow
|
|
|
22,109 |
|
|
|
19,965 |
|
|
Other
|
|
|
2,022 |
|
|
|
2,448 |
|
|
|
|
|
|
|
|
F-23
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Total other current assets
|
|
$ |
42,006 |
|
|
$ |
38,213 |
|
|
|
|
|
|
|
|
The following details the components of Other assets:
|
|
|
|
|
|
|
|
|
|
Prepaid management and booking fees
|
|
$ |
10,300 |
|
|
$ |
12,997 |
|
|
Prepaid rent
|
|
|
4,791 |
|
|
|
6,084 |
|
|
Other
|
|
|
6,662 |
|
|
|
6,965 |
|
|
|
|
|
|
|
|
Total other assets
|
|
$ |
21,753 |
|
|
$ |
26,046 |
|
|
|
|
|
|
|
|
The following details the components of Accrued
expenses:
|
|
|
|
|
|
|
|
|
|
Accrued event expenses
|
|
$ |
77,402 |
|
|
$ |
58,054 |
|
|
Collections on behalf of others
|
|
|
85,129 |
|
|
|
37,719 |
|
|
Accrued expenses other
|
|
|
199,747 |
|
|
|
240,027 |
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$ |
362,278 |
|
|
$ |
335,800 |
|
|
|
|
|
|
|
|
The following details the components of Other long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
Tax contingencies
|
|
$ |
70,804 |
|
|
$ |
116,157 |
|
|
Deferred income
|
|
|
5,557 |
|
|
|
2,471 |
|
|
Other
|
|
|
12,636 |
|
|
|
20,775 |
|
|
|
|
|
|
|
|
Total other long-term liabilities
|
|
$ |
88,997 |
|
|
$ |
139,403 |
|
|
|
|
|
|
|
|
NOTE L SEGMENT DATA
The Company has two reportable operating segments
global music and global theater. Revenue and expenses earned and
charged between segments are recorded at fair value and
eliminated in consolidation. There are no customers that
individually account for more than ten percent of the combined
revenues in any year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global | |
|
Global | |
|
|
|
|
|
|
|
|
Music | |
|
Theater | |
|
Other | |
|
Corporate | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
2,201,007 |
|
|
$ |
313,974 |
|
|
$ |
291,147 |
|
|
$ |
|
|
|
$ |
2,806,128 |
|
Divisional operating expenses
|
|
|
2,081,945 |
|
|
|
278,327 |
|
|
|
285,021 |
|
|
|
|
|
|
|
2,645,293 |
|
Depreciation and amortization
|
|
|
37,043 |
|
|
|
14,709 |
|
|
|
7,406 |
|
|
|
4,937 |
|
|
|
64,095 |
|
Loss (gain) on sale of operating assets
|
|
|
(3,438 |
) |
|
|
(58 |
) |
|
|
9,867 |
|
|
|
|
|
|
|
6,371 |
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,386 |
|
|
|
31,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
85,457 |
|
|
$ |
20,996 |
|
|
$ |
(11,147 |
) |
|
$ |
(36,323 |
) |
|
$ |
58,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$ |
807,212 |
|
|
$ |
391,523 |
|
|
$ |
138,907 |
|
|
$ |
141,064 |
|
|
$ |
1,478,706 |
|
Capital expenditures
|
|
$ |
33,581 |
|
|
$ |
32,698 |
|
|
$ |
3,085 |
|
|
$ |
4,071 |
|
|
$ |
73,435 |
|
F-24
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global | |
|
Global | |
|
|
|
|
|
|
|
|
Music | |
|
Theater | |
|
Other | |
|
Corporate | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
2,069,857 |
|
|
$ |
318,219 |
|
|
$ |
319,826 |
|
|
$ |
|
|
|
$ |
2,707,902 |
|
Divisional operating expenses
|
|
|
1,924,132 |
|
|
|
282,320 |
|
|
|
300,183 |
|
|
|
|
|
|
|
2,506,635 |
|
Depreciation and amortization
|
|
|
35,262 |
|
|
|
13,161 |
|
|
|
9,626 |
|
|
|
5,387 |
|
|
|
63,436 |
|
Loss (gain) on sale of operating assets
|
|
|
(863 |
) |
|
|
24 |
|
|
|
(139 |
) |
|
|
|
|
|
|
(978 |
) |
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,820 |
|
|
|
30,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
111,326 |
|
|
$ |
22,714 |
|
|
$ |
10,156 |
|
|
$ |
(36,207 |
) |
|
$ |
107,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$ |
825,212 |
|
|
$ |
401,615 |
|
|
$ |
135,999 |
|
|
$ |
132,889 |
|
|
$ |
1,495,715 |
|
Capital expenditures
|
|
$ |
33,494 |
|
|
$ |
30,209 |
|
|
$ |
4,571 |
|
|
$ |
1,662 |
|
|
$ |
69,936 |
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,821,215 |
|
|
$ |
296,460 |
|
|
$ |
355,644 |
|
|
$ |
|
|
|
$ |
2,473,319 |
|
Divisional operating expenses
|
|
|
1,693,334 |
|
|
|
254,971 |
|
|
|
354,402 |
|
|
|
|
|
|
|
2,302,707 |
|
Depreciation and amortization
|
|
|
35,285 |
|
|
|
11,133 |
|
|
|
12,694 |
|
|
|
5,724 |
|
|
|
64,836 |
|
Loss (gain) on sale of operating assets
|
|
|
(5,135 |
) |
|
|
4 |
|
|
|
(10,110 |
) |
|
|
|
|
|
|
(15,241 |
) |
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,101 |
|
|
|
26,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
97,731 |
|
|
$ |
30,352 |
|
|
$ |
(1,342 |
) |
|
$ |
(31,825 |
) |
|
$ |
94,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$ |
798,901 |
|
|
$ |
355,575 |
|
|
$ |
195,252 |
|
|
$ |
168,916 |
|
|
$ |
1,518,644 |
|
Capital expenditures
|
|
$ |
38,190 |
|
|
$ |
15,307 |
|
|
$ |
7,928 |
|
|
$ |
6,760 |
|
|
$ |
68,185 |
|
Revenue of $776.1 million, $680.0 million and
$481.4 million were derived from the Companys foreign
operations, of which $353.7 million, $313.0 million
and $252.3 million were derived from the Companys
operations in the United Kingdom for the years ended
December 31, 2004, 2003 and 2002, respectively.
Identifiable assets of $424.4 million, $348.7 million
and $395.2 million were derived from the Companys
foreign operations of which $174.9 million,
$160.6 million and $168.1 million were derived from
the Companys operations in the United Kingdom for the
years ended December 31, 2004, 2003 and 2002, respectively.
NOTE M SUBSEQUENT EVENTS
On April 29, 2005, Clear Channel Communications announced a
plan to strategically realign the Clear Channel Communication
businesses. The plan includes a 100% spin-off of the Company.
Following the spin-off, the Company will be a separate,
publicly-traded company in which Clear Channel Communications
will not retain any ownership interest. Clear Channel
Communications has submitted a request to the Internal Revenue
Service (IRS) seeking a letter ruling regarding the
tax-free nature of the spin-off. This realignment, which Clear
Channel Communications expects to complete in the second half of
2005, is subject to receipt of a tax opinion of counsel and
letter ruling from the IRS relating to the spin-off of the
Company, favorable market conditions, the filing and
effectiveness of a registration statement with the Securities
and Exchange Commission and other customary conditions. The
transactions do not require approval by Clear Channel
Communications shareholders.
On August 10, 2005, the Company filed an information
statement on Form 10 with the Securities and Exchange Commission
to distribute shares of its common stock to the holders of Clear
Channel Communications common stock. Prior to or upon
consummation of the distribution, the assets and liabilities
that comprise the Company will be contributed into CCE Spinco,
Inc.
The Company, along with Clear Channel Communications, is among
the defendants in a lawsuit filed September 3, 2002 by
JamSports in the United States Federal District Court for the
Northern District of
F-25
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
Illinois. The plaintiff alleged that the Company violated
Section One and Section Two of the Sherman Antitrust
Act and wrongfully interfered in the plaintiffs
contractual rights. Plaintiff sought in excess of
$30 million in alleged actual damages, as well as attorneys
fees and costs. On March 21, 2005, the jury rendered its
verdict finding that the Company had not violated the antitrust
laws, but had tortiously interfered with the contract which the
plaintiff had entered into with AMA Pro Racing and with the
plaintiffs prospective economic advantage. In connection
with the findings regarding tortious interference, the jury
awarded to the plaintiffs approximately $17 million in lost
profits and $73 million in punitive damages. The Company is
vigorously seeking to overturn or nullify the adverse verdict
and damage award regarding tortious interference, and, in April,
2005 filed a Renewed Motion for Judgment as a Matter of Law and
Motion For a New Trial, to seek a judgment notwithstanding the
verdict or a new trial from the U.S. District Court that
tried the case. On August 15, 2005, the District Court
granted that motion in part, granting judgment in favor of the
Clear Channel defendants on the plaintiffs claim for
tortious interference with prospective economic advantage and
granting the Clear Channel defendants a new trial with respect
to the issue of damages on the plaintiffs claim for
tortious interference with contract. The District Court has set
a new date for this trial, on February 6, 2006. The Company
is vigorously defending this remaining claim. The Company has
accrued its estimate of the probable costs for the resolution of
these claims. 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 Companys assumptions
or the effectiveness of its strategies related to these
proceedings.
During July 2005, the Company purchased a controlling majority
interest in Mean Fiddler Music Group, PLC (Mean
Fiddler) in the United Kingdom for approximately
$43.6 million. This company will be a consolidated
subsidiary that is part of the Companys global music
segment. Mean Fiddler is involved in the promotion and
production of live music events, including festivals, and is
involved in venue operations. As part of the acquisition, the
Company recorded approximately $5.4 million in
restructuring costs primarily related to lease terminations,
which it expects to pay over the next several years.
F-26
COMBINED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
(In thousands) | |
ASSETS |
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
273,474 |
|
|
$ |
179,137 |
|
Accounts receivable, less allowance of $10,850 at
September 30, 2005 and $10,174 at December 31, 2004
|
|
|
241,936 |
|
|
|
167,868 |
|
Prepaid expenses
|
|
|
218,293 |
|
|
|
83,546 |
|
Other current assets
|
|
|
48,617 |
|
|
|
42,006 |
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
782,320 |
|
|
|
472,557 |
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Land, buildings and improvements
|
|
|
904,813 |
|
|
|
880,881 |
|
Furniture and other equipment
|
|
|
164,962 |
|
|
|
155,563 |
|
Construction in progress
|
|
|
40,479 |
|
|
|
14,917 |
|
|
|
|
|
|
|
|
|
|
|
1,110,254 |
|
|
|
1,051,361 |
|
Less accumulated depreciation
|
|
|
294,984 |
|
|
|
258,045 |
|
|
|
|
|
|
|
|
|
|
|
815,270 |
|
|
|
793,316 |
|
INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
Definite-lived intangibles, net
|
|
|
12,787 |
|
|
|
14,838 |
|
Goodwill
|
|
|
143,170 |
|
|
|
44,813 |
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
6,436 |
|
|
|
7,110 |
|
Investments in, and advances to, nonconsolidated affiliates
|
|
|
25,281 |
|
|
|
27,002 |
|
Deferred tax asset
|
|
|
87,069 |
|
|
|
97,317 |
|
Other assets
|
|
|
19,900 |
|
|
|
21,753 |
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
1,892,233 |
|
|
$ |
1,478,706 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND OWNERS EQUITY |
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
67,125 |
|
|
$ |
31,440 |
|
Deferred income
|
|
|
240,753 |
|
|
|
184,413 |
|
Accrued expenses
|
|
|
469,354 |
|
|
|
362,278 |
|
Current portion of long-term debt
|
|
|
22,546 |
|
|
|
1,214 |
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
799,778 |
|
|
|
579,345 |
|
Long-term debt
|
|
|
20,038 |
|
|
|
20,564 |
|
Debt with Clear Channel Communications
|
|
|
725,495 |
|
|
|
628,897 |
|
Other long-term liabilities
|
|
|
84,399 |
|
|
|
88,997 |
|
Minority interest
|
|
|
28,507 |
|
|
|
3,927 |
|
Commitment and contingent liabilities (Note 4)
|
|
|
|
|
|
|
|
|
OWNERS EQUITY
|
|
|
|
|
|
|
|
|
Owners net investment
|
|
|
4,409,303 |
|
|
|
4,358,352 |
|
Retained deficit
|
|
|
(4,183,529 |
) |
|
|
(4,187,855 |
) |
Accumulated other comprehensive income (loss)
|
|
|
8,242 |
|
|
|
(13,521 |
) |
|
|
|
|
|
|
|
|
Total Owners Equity
|
|
|
234,016 |
|
|
|
156,976 |
|
|
|
|
|
|
|
|
|
Total Liabilities and Owners Equity
|
|
$ |
1,892,233 |
|
|
$ |
1,478,706 |
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-27
UNAUDITED INTERIM COMBINED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousand) | |
Revenue
|
|
$ |
2,184,588 |
|
|
$ |
2,261,879 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
2,050,631 |
|
|
|
2,107,785 |
|
|
|
|
Depreciation and amortization
|
|
|
46,392 |
|
|
|
47,499 |
|
|
|
|
Loss (gain) on sale of operating assets
|
|
|
(426 |
) |
|
|
7,400 |
|
|
|
|
Corporate expenses
|
|
|
38,391 |
|
|
|
19,977 |
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
49,600 |
|
|
|
79,218 |
|
|
Interest expense
|
|
|
2,671 |
|
|
|
2,198 |
|
|
Intercompany interest expense
|
|
|
35,719 |
|
|
|
32,550 |
|
|
Equity in earnings of nonconsolidated affiliates
|
|
|
157 |
|
|
|
3,231 |
|
|
Other income (expense) net
|
|
|
(4,157 |
) |
|
|
(1,437 |
) |
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7,210 |
|
|
|
46,264 |
|
|
Income tax (expense) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
11,975 |
|
|
|
42,633 |
|
|
|
|
Deferred
|
|
|
(14,859 |
) |
|
|
(37,808 |
) |
|
|
|
|
|
|
|
|
Net income
|
|
|
4,326 |
|
|
|
51,089 |
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
21,763 |
|
|
|
3,629 |
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
26,089 |
|
|
$ |
54,718 |
|
|
|
|
|
|
|
|
Basic and diluted pro forma net income per common share
|
|
$ |
0.06 |
|
|
$ |
0.76 |
|
|
|
|
|
|
|
|
Basic and diluted pro forma common shares outstanding
|
|
|
67,565 |
|
|
|
67,565 |
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-28
UNAUDITED COMBINED STATEMENTS OF CHANGES IN OWNERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
Retained | |
|
Comprehensive | |
|
|
|
|
Owners Net | |
|
Earnings | |
|
Income | |
|
|
|
|
Investment | |
|
(Deficit) | |
|
(Loss) | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balances at December 31, 2004
|
|
$ |
4,358,352 |
|
|
$ |
(4,187,855 |
) |
|
$ |
(13,521 |
) |
|
$ |
156,976 |
|
Net income
|
|
|
|
|
|
|
4,326 |
|
|
|
|
|
|
|
4,326 |
|
Contributions from Owner
|
|
|
81,885 |
|
|
|
|
|
|
|
|
|
|
|
81,885 |
|
Dividends to Owner
|
|
|
(30,934 |
) |
|
|
|
|
|
|
|
|
|
|
(30,934 |
) |
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
21,763 |
|
|
|
21,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2005
|
|
$ |
4,409,303 |
|
|
$ |
(4,183,529 |
) |
|
$ |
8,242 |
|
|
$ |
234,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-29
UNAUDITED INTERIM COMBINED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
4,326 |
|
|
$ |
51,089 |
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
44,536 |
|
|
|
45,297 |
|
|
Amortization of intangibles
|
|
|
1,856 |
|
|
|
2,202 |
|
|
Deferred income tax expense (benefit)
|
|
|
14,859 |
|
|
|
37,808 |
|
|
Current tax expense (benefit) contributed by owner
|
|
|
(30,934 |
) |
|
|
(58,894 |
) |
|
Non-cash compensation expense
|
|
|
1,735 |
|
|
|
761 |
|
|
Loss (gain) on sale of operating and fixed assets
|
|
|
(426 |
) |
|
|
7,400 |
|
|
Equity in (earnings) loss of nonconsolidated affiliates
|
|
|
(157 |
) |
|
|
(3,231 |
) |
|
Minority interest expense
|
|
|
5,530 |
|
|
|
2,715 |
|
|
Increase (decrease) other, net
|
|
|
(111 |
) |
|
|
(230 |
) |
Changes in operating assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
(68,469 |
) |
|
|
(57,917 |
) |
|
Decrease (increase) in prepaid expenses
|
|
|
(136,409 |
) |
|
|
(25,099 |
) |
|
Decrease (increase) in other assets
|
|
|
4,575 |
|
|
|
1,661 |
|
|
Increase (decrease) in accounts payable, accrued expenses and
other liabilities
|
|
|
121,536 |
|
|
|
56,070 |
|
|
Increase (decrease) in deferred income
|
|
|
20,451 |
|
|
|
30,244 |
|
|
Increase (decrease) in minority interest liability
|
|
|
19,305 |
|
|
|
(1,319 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,203 |
|
|
|
88,557 |
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Decrease (increase) in notes receivable, net
|
|
|
674 |
|
|
|
1,916 |
|
Decrease (increase) in investments in, and advances to,
nonconsolidated affiliates net
|
|
|
610 |
|
|
|
643 |
|
Purchases of property, plant and equipment
|
|
|
(71,997 |
) |
|
|
(56,516 |
) |
Proceeds from disposal of assets
|
|
|
591 |
|
|
|
2,630 |
|
Acquisition of operating assets
|
|
|
(2,530 |
) |
|
|
(13,442 |
) |
Decrease (increase) in other net
|
|
|
49 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(72,603 |
) |
|
|
(64,662 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from (payments on) debt with Clear Channel
Communications
|
|
|
135,656 |
|
|
|
44,846 |
|
Proceeds from long-term debt
|
|
|
21,643 |
|
|
|
6,725 |
|
Payments on long-term debt
|
|
|
(681 |
) |
|
|
(7,240 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
156,618 |
|
|
|
44,331 |
|
Effect of exchange rate changes on cash
|
|
|
8,119 |
|
|
|
6,483 |
|
Net increase in cash and cash equivalents
|
|
|
94,337 |
|
|
|
74,709 |
|
Cash and cash equivalents at beginning of year
|
|
|
179,137 |
|
|
|
116,360 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
273,474 |
|
|
$ |
191,069 |
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-30
NOTES TO UNAUDITED INTERIM COMBINED FINANCIAL STATEMENTS
|
|
NOTE 1: |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
|
|
Preparation of Interim Financial Statements |
The combined financial statements of Clear Channel Entertainment
(the Company), a division of Clear Channel
Communications, Inc. (Clear Channel Communications),
a diversified media company with operations in radio
broadcasting, outdoor advertising and live entertainment,
present the stand alone financial position, results of
operations, and cash flows of the live entertainment segment and
sports representation business of Clear Channel Communications.
The combined financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC) and, in the opinion of
management, include all adjustments (consisting of normal
recurring accruals and adjustments necessary for adoption of new
accounting standards) necessary to present fairly the results of
the interim periods shown. Certain information and footnote
disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles in
the United States have been condensed or omitted pursuant to
such SEC rules and regulations. Management believes that the
disclosures made are adequate to make the information presented
not misleading. Due to seasonality and other factors, the
results for the interim periods are not necessarily indicative
of results for the full year.
The combined financial statements are comprised of businesses
included in the consolidated financial statements and accounting
records of Clear Channel Communications, using the historical
results of operations, and the historical basis of assets and
liabilities of the entertainment business. Investments in
companies in which the Company owns 20 percent to
50 percent of the voting common stock or otherwise
exercises significant influence over operating and financial
policies of the company are accounted for under the equity
method. All significant intercompany transactions among the
combined businesses are eliminated in the consolidation process.
The Company does not have any compensation plans under which it
grants stock awards to employees. On behalf of the Company,
Clear Channel Communications grants the Companys officers
and other key employees stock options to purchase shares of
Clear Channel Communications common stock. Clear Channel
Communications accounts for its stock-based award plans in
accordance with APB 25, and related interpretations, under
which compensation expense is recorded to the extent that the
current market price of the underlying stock exceeds the
exercise price. Clear Channel Communications calculates the pro
forma stock compensation expense as if the stock-based awards
had been accounted for using the provisions of
Statement 123, Accounting for Stock-Based
Compensation. The stock compensation expense is then
allocated to the Company based on the percentage of options
outstanding to employees of the Company. The required pro forma
disclosures, based on this allocated expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Net income:
|
|
|
|
|
|
|
|
|
|
Reported
|
|
$ |
4,326 |
|
|
$ |
51,089 |
|
|
Pro forma stock compensation expense, net of tax
|
|
|
(2,802 |
) |
|
|
(8,640 |
) |
|
|
|
|
|
|
|
|
Pro Forma
|
|
$ |
1,524 |
|
|
$ |
42,449 |
|
|
|
|
|
|
|
|
Pro forma basic and diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.06 |
|
|
$ |
0.76 |
|
|
Pro forma
|
|
$ |
0.02 |
|
|
$ |
0.63 |
|
F-31
NOTES TO UNAUDITED INTERIM COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
Recent Accounting Pronouncements |
In March 2005, the Securities and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 107 Share-Based Payment
(SAB 107). SAB 107 expresses the SEC
staffs views regarding the interaction between Statement
of Financial Accounting Standards No. 123(R) Share-Based
Payment (Statement 123(R)) and certain SEC
rules and regulations and provides the staffs views
regarding the valuation of share-based payment arrangements for
public companies. In particular, SAB 107 provides guidance
related to share-based payment transactions with nonemployees,
the transition from nonpublic to public entity status, valuation
methods (including assumptions such as expected volatility and
expected term), the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the
classification of compensation expense, non-GAAP financial
measures, first time adoption of Statement 123(R) in an
interim period, capitalization of compensation cost related to
share-based payment arrangements, the accounting for income tax
effects of share-based payment arrangements upon adoption of
Statement 123(R) and the modification of employee share
options prior to adoption of Statement 123(R). The Company
is unable to quantify the impact of adopting SAB 107 and
Statement 123(R) at this time because it will depend on
levels of share-based payments granted in the future.
Additionally, the Company is still evaluating the assumptions it
will use upon adoption.
In April 2005, the SEC issued a press release announcing that it
would provide for phased-in implementation guidance for
Statement 123(R). The SEC would require that registrants
that are not small business issuers adopt
Statement 123(R)s fair value method of accounting for
share-based payments to employees no later than the beginning of
the first fiscal year beginning after June 15, 2005. The
Company intends to adopt Statement 123(R) on
January 1, 2006.
In June 2005, the Emerging Issues Task Force (EITF)
issued EITF 05-6, Determining the Amortization Period of
Leasehold Improvements (EITF 05-6).
EITF 05-6 requires that assets recognized under capital
leases generally be amortized in a manner consistent with the
lessees normal depreciation policy except that the
amortization period is limited to the lease term (which includes
renewal periods that are reasonably assured). EITF 05-6
also addresses the determination of the amortization period for
leasehold improvements that are purchased subsequent to the
inception of the lease. Leasehold improvements acquired in a
business combination or purchased subsequent to the inception of
the lease should be amortized over the lesser of the useful life
of the asset or the lease term that includes reasonably assured
lease renewals as determined on the date of the acquisition of
the leasehold improvement. The Company has adopted
EITF 05-6 on July 1, 2005 which did not materially
impact the Companys financial position or results of
operations.
In October 2005, the FASB issued Staff Position 13-1
(FSP 13-1). FSP 13-1 requires rental costs
associated with ground or building operating leases that are
incurred during a construction period be recognized as rental
expense. The guidance in FSP 13-1 shall be applied to the
first reporting period beginning after December 15, 2005.
The Company will adopt FSP 13-1 January 1, 2006 and
does not anticipate adoption to materially impact its financial
position or results of operations.
|
|
NOTE 2: |
LONG-LIVED ASSETS |
|
|
|
Definite-lived Intangibles |
The Company has definite-lived intangible assets which consist
primarily of non-compete and building or naming 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 to the Companys future cash
flows. These definite-lived intangibles had a gross carrying
amount and accumulated amortization of $24.4 million and
$11.6 million, respectively, as of September 30, 2005,
and $26.9 million and $12.1 million, respectively, as
of December 31, 2004.
F-32
NOTES TO UNAUDITED INTERIM COMBINED FINANCIAL
STATEMENTS (Continued)
Total amortization expense from definite-lived intangible assets
for the nine months ended September 30, 2005, the nine
months ended September 30, 2004 and for the year ended
December 31, 2004 was $1.9 million, $2.2 million
and $3.2 million, respectively. The following table
presents the Companys estimate of amortization expense for
each of the five succeeding fiscal years for definite-lived
intangible assets:
|
|
|
|
|
|
|
(In thousands) | |
2006
|
|
$ |
1,823 |
|
2007
|
|
|
1,240 |
|
2008
|
|
|
1,240 |
|
2009
|
|
|
1,240 |
|
2010
|
|
|
1,463 |
|
As acquisitions and dispositions occur in the future
amortization expense may vary.
The Company tests goodwill for impairment using a two-step
process. The first step, used to screen for potential
impairment, compares the fair value of the reporting unit with
its carrying amount, including goodwill. The second step, used
to measure the amount of the impairment loss, compares the
implied fair value of the reporting unit goodwill with the
carrying amount of that goodwill. The following table presents
the changes in the carrying amount of goodwill in each of the
Companys reportable segments for the nine-month period
ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global | |
|
Global | |
|
|
|
|
Music | |
|
Theater | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance as of December 31, 2004
|
|
$ |
34,507 |
|
|
$ |
10,306 |
|
|
$ |
44,813 |
|
Acquisitions
|
|
|
96,767 |
|
|
|
7,067 |
|
|
|
103,834 |
|
Foreign currency
|
|
|
(657 |
) |
|
|
(195 |
) |
|
|
(852 |
) |
Adjustments
|
|
|
(3,561 |
) |
|
|
(1,064 |
) |
|
|
(4,625 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2005
|
|
$ |
127,056 |
|
|
$ |
16,114 |
|
|
$ |
143,170 |
|
|
|
|
|
|
|
|
|
|
|
During July, 2005, the Company purchased a 50.1% controlling
majority interest in Mean Fiddler Music Group, PLC (Mean
Fiddler) in the United Kingdom for approximately
$43.6 million. Total assets were valued at approximately
$118.3 million, which includes $91.4 million of
goodwill, and total liabilities and minority interest of
approximately $74.7 million were recorded. Mean Fiddler is
a consolidated subsidiary that is part of the Companys
global music segment. Mean Fiddler is involved in the promotion
and production of live music events, including festivals, and
venue operations.
The Company recorded approximately $91.4 million of
goodwill primarily as a result of efficiencies that the Company
expects Mean Fiddler to make in its promotion business as well
as giving the Company control of key festivals in the United
Kingdom that it can replicate in other markets as a source of
future growth. The Company paid $43.6 million for these
operations, which exceeded the fair value of the net assets
acquired, resulting in the recognition of goodwill.
F-33
NOTES TO UNAUDITED INTERIM COMBINED FINANCIAL
STATEMENTS (Continued)
The results of operations for the nine months ended
September 30, 2005 include the operations of Mean Fiddler
from July 5, 2005. Unaudited pro forma combined results of
operations, assuming the Mean Fiddler acquisition had occurred
on January 1, 2004 would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, except | |
|
|
per-share amounts) | |
Revenue
|
|
$ |
2,205,266 |
|
|
$ |
2,336,862 |
|
Net income (loss)
|
|
$ |
(256 |
) |
|
$ |
52,867 |
|
Net income (loss) per common share
|
|
$ |
0.00 |
|
|
$ |
0.78 |
|
The Company makes investments in various operating assets,
including investments in assets and rights related to assets for
museum exhibitions. These assets are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. For the
nine-month period ended September 30, 2005 and the year
ended December 31, 2004, the Company recorded an impairment
write-down related to these exhibitions, included in the
Companys other operations, of $.9 million and
$1.1 million, respectively. These write-downs were recorded
as Divisional operating expenses.
The Company restructured its operations in connection with its
merger with Clear Channel Communications in August of 2000. A
portion of the Companys international corporate office in
New York was closed on June 30, 2001. All
restructuring has resulted in the actual termination of
approximately 150 employees.
In July 2005, the Company acquired a controlling majority
interest in Mean Fiddler. As part of the acquisition, the
Company recorded $5.4 million in restructuring costs
primarily related to lease terminations, which it expects to pay
over the next several years.
The Company recorded a liability in purchase accounting
primarily related to severance for terminated employees and
lease terminations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
Year Ended | |
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Severance and lease termination costs:
|
|
|
|
|
|
|
|
|
|
Accrual at January 1
|
|
$ |
2,579 |
|
|
$ |
2,648 |
|
|
Estimated restructuring accruals
|
|
$ |
5,390 |
|
|
|
|
|
|
Payments charged against restructuring accrual
|
|
|
(866 |
) |
|
|
(69 |
) |
|
|
|
|
|
|
|
Remaining accrual at September 30 or December 31
|
|
$ |
7,103 |
|
|
$ |
2,579 |
|
|
|
|
|
|
|
|
The remaining severance and lease accrual is comprised of
$0.6 million of severance and $1.1 million of lease
termination. The severance accrual includes amounts that will be
paid over the next several years related to deferred payments to
former employees as well as other compensation. The lease
termination accrual will be paid over the next nine years.
During the nine months ended September 30, 2005,
$0.7 million was paid and charged to the restructuring
reserve related to severance. In addition, Clear Channel
Communications made payments related to acquisition
contingencies of $0.3 million and $1.1 million for the
nine months ended September 30, 2005 and the year ended
December 31, 2004, respectively, on behalf of the Company.
These payments were accounted for as non-cash capital
contributions by Clear Channel Communications to the Company.
F-34
NOTES TO UNAUDITED INTERIM COMBINED FINANCIAL
STATEMENTS (Continued)
The Company recorded additional restructuring expense in 2004
primarily related to the sale of a United Kingdom business
included in other operations. As of September 30, 2005, the
accrual balance of the restructuring was $2.0 million. All
of this restructuring has resulted in the actual termination of
approximately 90 employees. During the nine months ended
September 30, 2005, there were no payments made and charged
to this restructuring reserve related to severance.
|
|
NOTE 4: |
COMMITMENTS AND CONTINGENCIES |
Certain agreements relating to acquisitions provide for purchase
price adjustments and other future contingent payments based on
the financial performance of the acquired companies. The Company
will continue to accrue additional amounts related to such
contingent payments if and when it is determinable that the
applicable financial performance targets will be met. The
aggregate of these contingent payments, if performance targets
are met, would not significantly impact the financial position
or results of operations of the Company.
The Company is among the defendants in a lawsuit filed
September 3, 2002 by JamSports in United States Federal
District Court for the Northern District of Illinois. The
plaintiff alleged that the Company violated federal antitrust
laws and wrongfully interfered with plaintiffs business
and contractual rights. On March 21, 2005, the jury
rendered its verdict finding that the Company had not violated
the antitrust laws, but had tortiously interfered with a
contract which the plaintiff had entered into with co-defendant
AMA Pro Racing and with the plaintiffs prospective
economic advantage. In connection with the findings regarding
tortious interference, the jury awarded to the plaintiffs
approximately $17.0 million in lost profits and
$73.0 million in punitive damages. In April, 2005, the
Company filed a Renewed Motion for Judgment as a Matter of Law
and Motion For a New Trial, to seek a judgment notwithstanding
the verdict or a new trial from the U.S. District Court that
tried the case. On August 15, 2005, the District Court
granted that motion in part, granting judgment in favor of the
Clear Channel defendants on the plaintiffs claim for
tortious interference with prospective economic advantage and
granting the Clear Channel defendants a new trial with respect
to the issue of damages on the plaintiffs claim for
tortious interference with contract. The District Court has set
a new date for this trial, on February 6, 2006. The Company
is vigorously defending this remaining claim. The company has
accrued its estimate of the probable costs for the resolution of
this claim. This estimate has been developed in consultation
with counsel and is 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 Companys assumptions or the effectiveness of its
strategies related to this proceeding.
The Company is currently involved in certain other legal
proceedings and, as required, has accrued an estimate of the
probable costs for the resolution of these claims. 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
Companys assumptions or the effectiveness of its
strategies related to these proceedings.
|
|
NOTE 5: |
RELATED PARTY TRANSACTIONS |
The Company currently has a revolving line of credit with Clear
Channel Communications that is payable upon demand by Clear
Channel Communications or on August 1, 2010, whichever is
earlier, allows for prepayment at any time, and accrues interest
at a fixed per annum rate of 7.0%. Clear Channel Communications
promises that it will not call the outstanding balance of this
revolving line of credit prior to its maturity date.
Clear Channel Communications has provided funding for certain of
the Companys acquisitions of net assets. These amounts
funded by Clear Channel Communications for these acquisitions
are recorded in Owners net investment as a
component of owners equity. Also, certain tax related
receivables and payables, which are considered non-cash capital
contributions or dividends, are recorded in Owners
net
F-35
NOTES TO UNAUDITED INTERIM COMBINED FINANCIAL
STATEMENTS (Continued)
investment. During the nine months ended
September 30, 2005 and the year ended December 31,
2004, Clear Channel Communications made additional non-cash
capital contributions of $1.5 million and
$17.6 million, respectively. As of September 30, 2005
and December 31, 2004, the balance recorded in
Owners net investment is $4.4 billion and
$4.4 billion, respectively.
The Company purchases advertising from Clear Channel
Communications and its subsidiaries. For the nine months ended
September 30, 2005 and 2004, the Company recorded
$10.0 million and $13.5 million, respectively, in
expense for these advertisements. It is the Companys
opinion that these transactions were recorded at fair value.
Clear Channel Communications provides management services to the
Company, which include, among other things: (i) treasury,
payroll and other financial related services; (ii) human
resources and employee benefits services; (iii) legal and
related services; and (iv) information systems, network and
related services. These services are allocated to the Company
based on actual direct costs incurred or on the Companys
share of Clear Channel Communications estimate of expenses
relative to a seasonally adjusted headcount. Management believes
this allocation method to be reasonable and the expenses
allocated to be materially the same as the amount that would
have been incurred on a stand-alone basis. For the nine months
ended September 30, 2005 and 2004, the Company recorded
$6.9 million and $5.7 million, respectively, as a
component of Corporate expenses for these services.
The Company anticipates executing a transitional services
agreement with Clear Channel Communications that will provide
services similar to the management services discussed above.
These services will be provided for a finite period of time
subsequent to the spin-off and will be charged to the Company
based upon Clear Channel Communications direct costs
incurred to provide these services, which it estimates to be the
fair market value for such services.
Clear Channel Communications owns the trademark and trade names
used by the Company. Beginning January 1, 2003, Clear
Channel Communications charges the Company a royalty fee based
upon a percentage of annual revenue. Clear Channel
Communications used a third party valuation firm to assist in
the determination of the royalty fee. For the nine months ended
September 30, 2005 and 2004, the Company recorded
$0.5 million and $1.3 million, respectively, of
royalty fees in Corporate expenses.
The operations of the Company are included in a consolidated
federal income tax return filed by Clear Channel Communications.
The Companys provision for income taxes has been computed
on the basis that the Company files separate consolidated income
tax returns with its subsidiaries. Tax payments are made to
Clear Channel Communications on the basis of the Companys
separate taxable income. Tax benefits recognized on employee
stock options exercises are retained by Clear Channel
Communications.
F-36
NOTES TO UNAUDITED INTERIM COMBINED FINANCIAL
STATEMENTS (Continued)
The Company has two reportable operating segments
global music and global theater. Revenue and expenses earned and
charged between segments are recorded at fair value and
eliminated in consolidation. There are no customers that
individually account for more than ten percent of the combined
revenues in any year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music | |
|
Global Theater | |
|
Other | |
|
Corporate | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Nine months ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,708,369 |
|
|
$ |
233,265 |
|
|
$ |
242,954 |
|
|
$ |
|
|
|
$ |
2,184,588 |
|
Divisional operating expenses
|
|
|
1,595,434 |
|
|
|
219,132 |
|
|
|
236,065 |
|
|
|
|
|
|
|
2,050,631 |
|
Depreciation and amortization
|
|
|
27,363 |
|
|
|
11,389 |
|
|
|
4,362 |
|
|
|
3,278 |
|
|
|
46,392 |
|
Loss (gain) on sale of operating assets
|
|
|
(32 |
) |
|
|
2 |
|
|
|
(396 |
) |
|
|
|
|
|
|
(426 |
) |
Corporate expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,391 |
|
|
|
38,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
85,604 |
|
|
$ |
2,742 |
|
|
$ |
2,923 |
|
|
$ |
(41,669 |
) |
|
$ |
49,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$ |
1,180,912 |
|
|
$ |
408,540 |
|
|
$ |
219,699 |
|
|
$ |
83,082 |
|
|
$ |
1,892,233 |
|
Capital expenditures
|
|
$ |
31,032 |
|
|
$ |
29,429 |
|
|
$ |
8,204 |
|
|
$ |
3,332 |
|
|
$ |
71,997 |
|
Nine months ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,793,072 |
|
|
$ |
222,871 |
|
|
$ |
245,936 |
|
|
$ |
|
|
|
$ |
2,261,879 |
|
Divisional operating expenses
|
|
|
1,674,660 |
|
|
|
198,942 |
|
|
|
234,183 |
|
|
|
|
|
|
|
2,107,785 |
|
Depreciation and amortization
|
|
|
27,064 |
|
|
|
11,014 |
|
|
|
5,655 |
|
|
|
3,766 |
|
|
|
47,499 |
|
Loss (gain) on sale of operating assets
|
|
|
(2,921 |
) |
|
|
(58 |
) |
|
|
10,379 |
|
|
|
|
|
|
|
7,400 |
|
Corporate expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,977 |
|
|
|
19,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
94,269 |
|
|
$ |
12,973 |
|
|
$ |
(4,281 |
) |
|
$ |
(23,743 |
) |
|
$ |
79,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$ |
952,484 |
|
|
$ |
422,195 |
|
|
$ |
139,947 |
|
|
$ |
106,318 |
|
|
$ |
1,620,944 |
|
Capital expenditures
|
|
$ |
28,175 |
|
|
$ |
23,750 |
|
|
$ |
2,708 |
|
|
$ |
1,883 |
|
|
$ |
56,516 |
|
Revenue of $677.6 million and $574.1 million were
derived from the Companys foreign operations, of which
$313.1 million and $249.9 million were derived from
the Companys operations in the United Kingdom for the nine
months ended September 30, 2005 and 2004, respectively.
Identifiable assets of $593.8 million and
$409.4 million were derived from the Companys foreign
operations, of which $302.8 million and $173.0 million
were derived from the Companys operations in the United
Kingdom as of September 30, 2005 and 2004, respectively.
|
|
NOTE 7: |
SUBSEQUENT EVENTS |
On August 10, 2005, the Company filed an information
statement on Form 10 with the Securities and Exchange
Commission to distribute shares of its common stock to the
holders of Clear Channel Communications common stock. Prior to
or upon consummation of the distribution, the assets and
liabilities that comprise the Company will be contributed into
CCE Spinco, Inc.
F-37
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedules
Board of Directors
Clear Channel Communications, Inc., owner of Clear Channel
Entertainment
We have audited the combined balance sheets of Clear Channel
Entertainment (a division of Clear Channel Communications, Inc.
as defined in Note A) as of December 31, 2004 and
2003, and the related combined statements of operations, changes
in owners equity, and cash flows for each of the three
years in the period ended December 31, 2004, and have
issued our report thereon dated July 29, 2005, except for
the second and third paragraphs of Note M, as to which the
dates are August 10, 2005, and November 7, 2005,
respectively (included elsewhere in this Registration
Statement). Our audits also included the Schedule II
Allowance for Doubtful Accounts and Schedule II Deferred
Tax Asset Valuation Allowance in this Registration Statement.
These schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion based on
our audits.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material
respects the information set forth therein.
San Antonio, Texas
July 29, 2005
F-38
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges | |
|
|
|
|
|
|
|
|
Balance at | |
|
to Costs, | |
|
Write-off | |
|
|
|
Balance | |
|
|
Beginning | |
|
Expenses | |
|
of Accounts | |
|
|
|
at end of | |
Description |
|
of period | |
|
and other | |
|
Receivable | |
|
Other | |
|
Period | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Year ended December 31, 2002
|
|
$ |
15,803 |
|
|
$ |
1,757 |
|
|
$ |
(3,135 |
) |
|
$ |
363(1) |
|
|
$ |
14,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
|
|
$ |
14,788 |
|
|
$ |
3,417 |
|
|
$ |
(6,994 |
) |
|
$ |
384(1) |
|
|
$ |
11,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
$ |
11,595 |
|
|
$ |
2,017 |
|
|
$ |
(3,546 |
) |
|
$ |
108(1) |
|
|
$ |
10,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Foreign currency adjustments. |
F-39
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Deferred Tax Asset Valuation Allowance
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges |
|
|
|
|
|
|
|
|
Balance at | |
|
to Costs, |
|
|
|
|
|
Balance at | |
|
|
Beginning | |
|
Expenses |
|
|
|
|
|
end of | |
Description |
|
of period | |
|
and other |
|
Deletions(1) | |
|
Other |
|
Period | |
|
|
| |
|
|
|
| |
|
|
|
| |
Year ended December 31, 2002
|
|
$ |
79,000 |
|
|
$ |
|
|
|
$ |
14,965 |
|
|
$ |
|
|
|
$ |
64,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
|
|
$ |
64,035 |
|
|
$ |
|
|
|
$ |
6,230 |
|
|
$ |
|
|
|
$ |
57,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
$ |
57,805 |
|
|
$ |
|
|
|
$ |
57,805 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
In 2002, 2003 and 2004, the Company utilized net operating loss
carryforwards and certain deferred tax assets, which resulted in
the reduction of the allowance for those net operating loss
carryforwards and other assets. |
F-40
* See inside front cover for a map of our North American venues.