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 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. We intend
to apply to have CCE Spincos common stock listed on the
NYSE under the symbol
.
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.
2000 West Loop South, Suite 1300
Houston, Texas 77027
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 June 30, 2005, we owned or operated 109
venues, consisting of 77 domestic and 32 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.
We intend to apply to have our common stock listed on the New
York Stock Exchange under the symbol
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 and Interim Chief Executive Officer |
EXHIBIT 99.1
Subject to Completion, dated August 10, 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
receive one share of our common stock for
every 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. We intend to apply to have our common stock listed on
the New York Stock Exchange under the symbol
.
In reviewing this information statement, you should carefully
consider the matters described under the caption Risk
Factors beginning on page 19.
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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125 |
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Index to Combined Financial Statements and Schedule
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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. 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. Although we
believe that these sources are reliable, we have not
independently verified such forecasts and research and cannot
guarantee their accuracy or completeness. 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 19 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) 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
June 30, 2005, we owned or operated 109 venues, consisting
of 77 domestic and 32 international venues. These venues include
39 amphitheaters, 58 theaters, eight clubs, three arenas
and one festival site. In addition, through equity, booking or
similar arrangements we have the right to book events at 32
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
before depreciation, amortization and non-cash compensation
expense, or OIBDAN, of approximately $137.9 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 venues. For the year ended December 31,
2004, our global music business generated approximately
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$2.2 billion, or 79%, 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
$309.9 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 June 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 10%, 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. 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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Maximize efficiencies of owning and operating a leading
integrated live entertainment network. We seek to maximize
cash flow from operations by taking advantage of the
efficiencies associated with owning and operating a leading
integrated live entertainment network. In particular, we believe
our ability to provide integrated services enables us to: |
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attract leading performers, theatrical performances and other
events by offering all aspects of the promotion and production
of events and tours from a single provider; |
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increase the utilization of our owned or operated venues; |
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attract and maintain sponsorship relationships with leading
advertisers; |
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negotiate more favorable deals with vendors and
suppliers; and |
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capture a larger percentage of overall revenues from our events
and tours. |
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Secure, develop and provide compelling live content. 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 |
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investments in content, such as Broadway and West End theatrical
performances, to secure touring or other distribution rights. |
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Provide advertising opportunities that reach our large,
in-person audience. 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. |
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Selectively pursue investment and acquisition
opportunities. We intend to pursue selected investments and
acquisitions that enhance our business where the returns and
growth potential of such expansion are consistent with our goal
of increasing stockholder value. In particular, we believe that
significant opportunities exist internationally, and that such
expansion will create additional outlets and cross-over
opportunities for performers and events between the U.S. and
foreign markets. |
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, CCE Spinco and Clear Channel
Communications stockholders because: |
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it will enhance the success of both Clear Channel
Communications and us by enabling Clear Channel Communications
and us to resolve management and systemic problems that arise by
the operation of our businesses within a single affiliated group; |
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it will improve the competitiveness of our business
by resolving inherent conflicts and the appearance of such
conflicts with artists and promoters; |
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it will simplify and reduce Clear Channel
Communications and our regulatory compliance burdens and
risks by separating our business from Clear Channel
Communications; |
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it will enhance the ability of each of Clear Channel
Communications and us to issue equity efficiently and
effectively for acquisitions and financings; and |
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it will enhance the efficiency and effectiveness of
each of Clear Channel Communications and our equity-based
compensation. |
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See The Distribution. |
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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 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 |
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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 the distribution is not in the best
interest of Clear Channel Communications or its stockholders. |
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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,
the indenture governing our senior unsecured notes and
certificate of 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. One of our
officers and three of our directors will also be an officer and
directors, respectively, of Clear Channel Communications. In
addition, in connection with the distribution, we and Clear
Channel Communications are entering into a number of agreements
that will govern our spin-off from Clear Channel Communications
and our future relationship. See Our Relationship with
Clear Channel Communications After the Distribution. |
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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. We
intend to apply to list our common stock on the NYSE under the
symbol
.
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
Communications 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 business, our leverage, 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 |
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statement beginning on page 19. 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: |
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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 |
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After the distribution, if you have any questions relating to
our common stock, you should contact: |
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CCE Spinco, Inc.
Investor Relations
2000 West Loop South, Suite 1300
Houston, Texas 77027
Tel: (713) 693-8600
Fax: (713) 693-2665 |
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Who will be the distribution agent, transfer agent and
registrar for our common stock? |
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8
Summary of the Transactions
The following is a brief summary of the terms of the
distribution and other concurrent transactions:
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Distributing company |
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Clear Channel Communications, Inc. After the spin-off, Clear
Channel Communications will not own any shares of our capital
stock. |
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Distributed company |
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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 and interim chief executive
officer 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. |
|
Distribution ratio |
|
Each holder of Clear Channel Communications common stock will
receive a dividend of one share of our common stock for
every 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 Communication 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. 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 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. |
|
Incurrence of debt |
|
Prior to or concurrently with the completion of the
distribution, we will offer
$ million
aggregate principal amount
of -year
senior unsecured notes and enter into a senior secured credit
facility consisting of: |
|
|
|
a
$ million -year
term loan; and |
|
|
|
a
$ million -year
revolving credit facility, including a
$ million
subfacility for letters of credit. |
9
|
|
|
|
|
We anticipate that the senior secured credit facility will be
secured by a first priority lien on substantially all of our
assets other than the assets of our foreign subsidiaries and a
pledge of the capital stock of our domestic subsidiaries and a
portion of the capital stock of certain of our foreign
subsidiaries. |
|
|
|
After giving effect to the senior unsecured notes offering and
the borrowings under the senior secured credit facility, we
expect to have approximately
$ million
of indebtedness for borrowed money outstanding. We expect that
approximately
$ of
the revolving credit facility will remain available for working
capital and general corporate purposes at the completion of the
distribution, although 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 such working capital and general corporate
purposes. See Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources and Description of
Indebtedness. |
|
|
|
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 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. 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. 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 of the Series B redeemable preferred stock sold by
Clear Channel Communications. 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 certificate of designations of the
preferred stock. The holders of Holdco #2 preferred stock
will not have the right to appoint or |
10
|
|
|
|
|
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. See Description of Subsidiary Preferred
Stock and Corporate Information and
Structure below. |
|
Payment of intercompany note |
|
Prior to or concurrently with the completion of the
distribution, we will pay
$ on
our intercompany note payable to Clear Channel Communications
and any remaining portion of our indebtedness under such
intercompany note will be contributed to us as capital by Clear
Channel Communications. We intend to use all proceeds from the
senior unsecured notes offering, advances from our term loan 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. |
|
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. |
11
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 have been, and will be, entered
into with Clear Channel Communications in the context of our
relationship with Clear Channel Communications as a wholly-owned
subsidiary. 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 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, three of our directors will
serve as directors of Clear Channel Communications, and our
chairman and interim chief executive officer 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.
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 2000 West Loop South,
Suite 1300, Houston, Texas 77027, and our telephone number
is (713) 693-8600. 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.
12
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 certificate of 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
certificate of designations of the preferred stock. |
|
(5) |
Holdco #3, together with its subsidiaries, represent more
than 95% of the gross value of our assets. |
13
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 six months ended June 30, 2004
and June 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 six months ended
June 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 an aggregate of
$ million
of debt, and related debt issuance costs, comprised of a
$ million
senior secured term loan under the
$ million
senior secured credit facility to be entered into prior to or
concurrently with the completion of the distribution; |
|
|
|
the issuance of senior unsecured notes prior to or concurrently
with the completion of the distribution in an aggregate
principal amount of
$ million
and related debt issuance costs; |
|
|
|
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 use of proceeds from the senior secured credit facility, the
senior unsecured notes and the Series A preferred stock
offering to repay
$ million
of the intercompany debt owed to Clear Channel
Communications; and |
|
|
|
the contribution to our capital by Clear Channel Communications
of any remaining portion of intercompany debt owed to Clear
Channel Communications. |
The unaudited pro forma financial data presented as of the year
ended December 31, 2004 and for the six months ended
June 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 June 30,
2005. The unaudited pro forma income statement data for the year
ended December 31, 2004, and the six months ended
June 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 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.
14
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 June 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 June 30, 2005, Clear
Channel Communications allocated to us $4.7 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
$ million
to
$ 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.
15
The following table presents two non-GAAP financial measures,
OIBDAN and OIBN, which we use to evaluate segment and combined
performance of our business. OIBDAN and OIBN are not calculated
or presented in accordance with U.S. generally accepted
accounting principles, or GAAP. In Note 3 and
Non-GAAP Financial Measures below, we
explain OIBDAN and OIBN and reconcile them to operating income
(loss), their most directly comparable financial measure
calculated and presented in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
2002 | |
|
2003 | |
|
2004 | |
|
Pro Forma |
|
2004 | |
|
2005 | |
|
Pro Forma |
(In thousands, except per share amounts) |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
(unaudited) | |
|
(unaudited) |
Results of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
2,469,681 |
|
|
$ |
2,704,369 |
|
|
$ |
2,802,022 |
|
|
$ |
|
|
|
$ |
1,271,705 |
|
|
$ |
1,180,210 |
|
|
$ |
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
2,299,069 |
|
|
|
2,503,101 |
|
|
|
2,636,871 |
|
|
|
|
|
|
|
1,206,878 |
|
|
|
1,135,246 |
|
|
|
|
|
|
Depreciation and amortization
|
|
|
64,836 |
|
|
|
63,436 |
|
|
|
64,095 |
|
|
|
|
|
|
|
31,727 |
|
|
|
30,759 |
|
|
|
|
|
|
Corporate expenses
|
|
|
26,101 |
|
|
|
26,747 |
|
|
|
28,307 |
|
|
|
|
|
|
|
12,675 |
|
|
|
26,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
79,675 |
|
|
|
111,085 |
|
|
|
72,749 |
|
|
|
|
|
|
|
20,425 |
|
|
|
(12,435 |
) |
|
|
|
|
Interest expense
|
|
|
3,998 |
|
|
|
2,788 |
|
|
|
3,119 |
|
|
|
|
|
|
|
1,389 |
|
|
|
1,494 |
|
|
|
|
|
Intercompany interest expense
|
|
|
58,608 |
|
|
|
41,415 |
|
|
|
42,355 |
|
|
|
|
|
|
|
19,449 |
|
|
|
22,014 |
|
|
|
|
|
Equity in earnings (loss) of nonconsolidated affiliates
|
|
|
(212 |
) |
|
|
1,357 |
|
|
|
2,906 |
|
|
|
|
|
|
|
2,674 |
|
|
|
(1,619 |
) |
|
|
|
|
Other income (expense) net
|
|
|
15,573 |
|
|
|
128 |
|
|
|
(15,456 |
) |
|
|
|
|
|
|
(13,131 |
) |
|
|
1,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative effect of a
change in accounting principle
|
|
|
32,430 |
|
|
|
68,367 |
|
|
|
14,725 |
|
|
|
|
|
|
|
(10,870 |
) |
|
|
(36,262 |
) |
|
|
|
|
Income tax benefit (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(40,102 |
) |
|
|
68,272 |
|
|
|
55,946 |
|
|
|
|
|
|
|
18,730 |
|
|
|
17,521 |
|
|
|
|
|
|
Deferred
|
|
|
11,103 |
|
|
|
(79,607 |
) |
|
|
(54,411 |
) |
|
|
|
|
|
|
(19,863 |
) |
|
|
(3,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of a change in accounting
principle
|
|
|
3,431 |
|
|
|
57,032 |
|
|
|
16,260 |
|
|
|
|
|
|
|
(12,003 |
) |
|
|
(21,757 |
) |
|
|
|
|
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 |
|
|
$ |
|
|
|
$ |
(12,003 |
) |
|
$ |
(21,757 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) before cumulative effect of a
change in accounting principle per common share based
on shares outstanding
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
1,821,215 |
|
|
$ |
2,069,857 |
|
|
$ |
2,201,007 |
|
|
|
|
|
|
$ |
912,644 |
|
|
$ |
828,238 |
|
|
|
|
|
|
Global Theater
|
|
|
292,822 |
|
|
|
314,686 |
|
|
|
309,868 |
|
|
|
|
|
|
|
174,069 |
|
|
|
180,087 |
|
|
|
|
|
|
Other
|
|
|
355,644 |
|
|
|
319,826 |
|
|
|
291,147 |
|
|
|
|
|
|
|
184,992 |
|
|
|
171,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$ |
2,469,681 |
|
|
$ |
2,704,369 |
|
|
$ |
2,802,022 |
|
|
|
|
|
|
$ |
1,271,705 |
|
|
$ |
1,180,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
92,596 |
|
|
$ |
110,463 |
|
|
$ |
82,019 |
|
|
|
|
|
|
$ |
9,070 |
|
|
$ |
(718 |
) |
|
|
|
|
|
Global Theater
|
|
|
30,356 |
|
|
|
22,739 |
|
|
|
20,939 |
|
|
|
|
|
|
|
15,115 |
|
|
|
7,839 |
|
|
|
|
|
|
Other
|
|
|
(11,452 |
) |
|
|
10,017 |
|
|
|
3,035 |
|
|
|
|
|
|
|
11,457 |
|
|
|
9,461 |
|
|
|
|
|
|
Corporate
|
|
|
(31,825 |
) |
|
|
(32,134 |
) |
|
|
(33,244 |
) |
|
|
|
|
|
|
(15,217 |
) |
|
|
(29,017 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
$ |
79,675 |
|
|
$ |
111,085 |
|
|
$ |
72,749 |
|
|
|
|
|
|
$ |
20,425 |
|
|
$ |
(12,435 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
Six Months Ended June 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
Pro Forma | |
|
2004 | |
|
2005 | |
|
Pro Forma | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by
(used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
142,237 |
|
|
$ |
138,713 |
|
|
$ |
119,898 |
|
|
|
|
|
|
$ |
210,116 |
|
|
$ |
75,346 |
|
|
|
|
|
|
Investing activities
|
|
$ |
(31,329 |
) |
|
$ |
(51,960 |
) |
|
$ |
(84,076 |
) |
|
|
|
|
|
$ |
(53,899 |
) |
|
$ |
(29,883 |
) |
|
|
|
|
|
Financing activities
|
|
$ |
(112,281 |
) |
|
$ |
(56,894 |
) |
|
$ |
23,254 |
|
|
|
|
|
|
$ |
(68,027 |
) |
|
$ |
42,655 |
|
|
|
|
|
Capital expenditures
|
|
$ |
68,185 |
|
|
$ |
69,936 |
|
|
$ |
73,435 |
|
|
|
|
|
|
$ |
44,179 |
|
|
$ |
49,891 |
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDAN:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
127,881 |
|
|
$ |
145,725 |
|
|
$ |
119,062 |
|
|
|
|
|
|
$ |
26,905 |
|
|
$ |
17,367 |
|
|
|
|
|
|
Global Theater
|
|
|
41,489 |
|
|
|
35,900 |
|
|
|
35,648 |
|
|
|
|
|
|
|
22,469 |
|
|
|
15,299 |
|
|
|
|
|
|
Other
|
|
|
1,242 |
|
|
|
19,643 |
|
|
|
10,441 |
|
|
|
|
|
|
|
15,453 |
|
|
|
12,298 |
|
|
|
|
|
|
Corporate
|
|
|
(24,700 |
) |
|
|
(25,445 |
) |
|
|
(27,223 |
) |
|
|
|
|
|
|
(12,170 |
) |
|
|
(25,937 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OIBDAN(2)
|
|
$ |
145,912 |
|
|
$ |
175,823 |
|
|
$ |
137,928 |
|
|
|
|
|
|
$ |
52,657 |
|
|
$ |
19,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBN:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
92,596 |
|
|
$ |
110,463 |
|
|
$ |
82,019 |
|
|
|
|
|
|
$ |
9,070 |
|
|
$ |
(718 |
) |
|
|
|
|
|
Global Theater
|
|
|
30,356 |
|
|
|
22,739 |
|
|
|
20,939 |
|
|
|
|
|
|
|
15,115 |
|
|
|
7,839 |
|
|
|
|
|
|
Other
|
|
|
(11,452 |
) |
|
|
10,017 |
|
|
|
3,035 |
|
|
|
|
|
|
|
11,457 |
|
|
|
9,461 |
|
|
|
|
|
|
Corporate
|
|
|
(30,424 |
) |
|
|
(30,832 |
) |
|
|
(32,160 |
) |
|
|
|
|
|
|
(14,712 |
) |
|
|
(28,314 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OIBN(2)
|
|
$ |
81,076 |
|
|
$ |
112,387 |
|
|
$ |
73,833 |
|
|
|
|
|
|
$ |
20,930 |
|
|
$ |
(11,732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of June 30, 2005 | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
Historical | |
|
Pro Forma | |
(in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
104,897 |
|
|
$ |
116,360 |
|
|
$ |
179,137 |
|
|
$ |
251,949 |
|
|
$ |
|
|
Current assets
|
|
|
396,687 |
|
|
|
423,617 |
|
|
|
472,557 |
|
|
|
886,127 |
|
|
|
|
|
Property, plant and equipment net
|
|
|
745,239 |
|
|
|
782,154 |
|
|
|
793,316 |
|
|
|
800,986 |
|
|
|
|
|
Total assets
|
|
|
1,518,644 |
|
|
|
1,495,715 |
|
|
|
1,478,706 |
|
|
|
1,894,839 |
|
|
|
|
|
Current liabilities
|
|
|
528,437 |
|
|
|
547,751 |
|
|
|
579,345 |
|
|
|
1,009,741 |
|
|
|
|
|
Long-term debt, including current maturities
|
|
|
624,708 |
|
|
|
617,838 |
|
|
|
650,675 |
|
|
|
660,895 |
|
|
|
|
|
Total liabilities
|
|
|
1,287,730 |
|
|
|
1,307,432 |
|
|
|
1,321,730 |
|
|
|
1,757,517 |
|
|
|
|
|
Owners equity
|
|
|
230,914 |
|
|
|
188,283 |
|
|
|
156,976 |
|
|
|
137,322 |
|
|
|
|
|
Total liabilities and owners equity
|
|
|
1,518,644 |
|
|
|
1,495,715 |
|
|
|
1,478,706 |
|
|
|
1,894,839 |
|
|
|
|
|
|
|
(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) |
We evaluate segment and combined performance based on several
factors, two of the primary measures of which are: |
|
|
|
|
|
operating income (loss) before depreciation, amortization and
non-cash compensation expense, which we refer to as
OIBDAN; and |
|
|
|
operating income (loss) before non-cash compensation expense,
which we refer to as OIBN. |
|
|
|
See Non-GAAP Financial Measures below,
Unaudited Pro Forma Condensed Combined Financial
Data and Managements Discussion and Analysis
of Financial Condition and Results of Operations Use
of OIBDAN and OIBN elsewhere herein. |
17
Non-GAAP Financial Measures
We evaluate our operating performance based on several factors,
two of the primary measures of which are OIBDAN and OIBN. OIBDAN
and OIBN are used as a supplemental financial measure by
management and by external users of our financial statements,
such as investors and banks, to assess:
|
|
|
|
|
the financial performance of our assets without regard to
financing methods, capital structures or, in the case of OIBDAN,
historical cost bases; |
|
|
|
the ability of our assets to generate cash sufficient to pay
interest on our indebtedness; |
|
|
|
our operating performance and return on invested capital as
compared to those of other companies in the live entertainment
industry, without regard to financing methods and capital
structure; and |
|
|
|
our compliance with certain financial covenants included in our
debt agreements. |
OIBDAN and OIBN should not be considered an alternative to
operating income, cash flow from operating activities or any
other measure of financial performance or liquidity presented in
accordance with GAAP. OIBDAN and OIBN exclude some, but not all,
items that affect operating income, such as periodic costs of
certain capitalized tangible and intangible assets used in
generating revenues in our business, and these measures may vary
among other companies. Thus, OIBDAN and OIBN as presented below
may not be comparable to similarly titled measures of other
companies. The following is a reconciliation of OIBDAN and OIBN
to operating income, which is a GAAP measure of our operating
results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
Year Ended December 31, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Actual | |
|
Actual | |
|
|
| |
|
| |
|
|
|
|
(unaudited) | |
Reconciliation of OIBDAN and OIBN
to Operating Income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDAN
|
|
$ |
145,912 |
|
|
$ |
175,823 |
|
|
$ |
137,928 |
|
|
$ |
52,657 |
|
|
$ |
19,027 |
|
|
Depreciation and amortization
|
|
|
64,836 |
|
|
|
63,436 |
|
|
|
64,095 |
|
|
|
31,727 |
|
|
|
30,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBN
|
|
|
81,076 |
|
|
|
112,387 |
|
|
|
73,833 |
|
|
|
20,930 |
|
|
|
(11,732 |
) |
|
Non-cash compensation expense*
|
|
|
1,401 |
|
|
|
1,302 |
|
|
|
1,084 |
|
|
|
505 |
|
|
|
703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
79,675 |
|
|
$ |
111,085 |
|
|
$ |
72,749 |
|
|
$ |
20,425 |
|
|
$ |
(12,435 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
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. |
18
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
business, our leverage, 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.
Risk Factors Relating to Our Business
We have incurred net losses and may experience future net
losses.
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 incurred a net loss of approximately
$21.8 million and $12.0 million for the six months
ended June 30, 2005 and 2004, respectively, generated 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 loss would
have been
$ for
2004 and
$ for
the six months ended June 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 $92.6 million to
$82.0 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 $292.8 million to
$309.9 million while our operating income decreased from
$30.4 million to $20.9 million. Our operating income
decreased 35% from 2003 to 2004 due primarily to a decline in
attendance and the number of our events, as well as other
economic and geopolitical factors. In 2005, we instituted a
ticket price and service charge reduction program. For the six
months ended June 30, 2005 and 2004, our global music
revenues were $828.2 million and $912.6 million,
respectively, and our operating income (loss) was
$(0.7) million and $9.1 million, respectively. For the
six months ended June 30, 2005 and 2004, our global theater
revenues were $180.1 million and $174.1 million,
respectively, and our operating income was $7.8 million and
$15.1 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:
|
|
|
|
|
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. |
19
|
|
|
|
|
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 will 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. |
|
|
|
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-off could have an adverse effect on our
business, results of operations and financial condition
following the spin-off. |
|
|
|
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, including interim
executive officer services; |
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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
20
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 live entertainment business is highly sensitive to public
tastes and dependent on our ability to secure popular artists
and other live entertainment events. 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 in part 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.
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 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.
21
The following table sets forth our operating income for the last
six fiscal quarters:
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Operating | |
Fiscal Quarter |
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Income | |
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March 31, 2004
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$ |
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June 30, 2004
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$ |
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September 30, 2004
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$ |
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December 31, 2004
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$ |
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March 31, 2005
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$ |
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June 30, 2005
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$ |
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We may be adversely affected by a general deterioration in
economic conditions, and consumer and corporate spending can
significantly impact 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 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
six months ended June 30, 2005, and the year ended
December 31, 2004, our international operations accounted
for approximately 33% 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; |
22
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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.
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. For the
six months ended June 30, 2005 and 2004, foreign
exchange rate gains had a significant positive effect on our
results of operations. We cannot predict the effect of exchange
rate fluctuations upon future operating results. For the six
months ended June 30, 2005, and the year ended
December 31, 2004, our international operations accounted
for approximately 33% and 28%, respectively, of our revenues
during those periods. 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, onetime
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,
23
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, credit agreement and senior notes indenture 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 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 and London.
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 June 30, 2005, we had property and equipment with a net
book value of approximately $801.0 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.
24
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. |
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
25
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 affect 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.
We face intense competition in the live entertainment
industry.
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; |
26
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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.
Our success depends on our ability to retain our senior
management and key personnel.
Our success depends, in part, upon the continuing 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.
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. 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 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.
We are dependent upon our ability to lease, acquire and
develop live entertainment venues.
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
27
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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strong capital base and financial strength; and |
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established relationships with U.S. federal and state and
non-U.S. regulators. |
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. 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.
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 six months ended June 30,
2005 and June 30, 2004, we spent approximately 5.5% and
6.7%, respectively, of our revenues on marketing, including
advertising. There can be no assurance that such advertising,
promotional and other marketing campaigns will be successful or
will generate revenues or profits.
28
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.
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.
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, may also cause
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.
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 the senior unsecured notes offering and the 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
$ million.
We expect that available borrowing capacity will be
approximately
$ million
under the senior secured credit facility, with
$ of
such amount being available for
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letters of credit; outstanding letters of credit will reduce
borrowing availability under the senior secured credit facility.
We may also incur additional substantial indebtedness in the
future.
Our substantial indebtedness could have adverse consequences,
including:
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increasing our vulnerability to adverse economic, regulatory and
industry conditions; |
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limiting our ability to compete and our flexibility in planning
for, or reacting to, changes in our business and the industry; |
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limiting our ability to borrow additional funds; and |
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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 June 30, 2005, we had approximately
$727.5 million in operating lease agreements, of which
approximately $50.5 million is due in 2006 and
$45.8 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 instrument, 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 the senior unsecured notes and 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, including the
notes, or to fund our other liquidity needs. 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, including the notes, on a timely basis or on
satisfactory terms, if at all. In addition, the terms of our
existing debt, including the notes and 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.
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Our senior secured credit facility and the indenture
governing the senior unsecured notes may restrict our ability to
finance operations and capital needs and our operating
flexibility.
We anticipate that the senior secured credit facility and the
indenture governing the senior unsecured notes may generally
include shared 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 material transactions with affiliates; |
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modify our nature of 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 entitle the lenders to accelerate the indebtedness and
declare all amounts owed due and payable. The agreements
governing these debts 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 June 30, 2005, a substantial
portion of the total liabilities reflected on our balance sheet
were owed by our subsidiaries, with a substantial amount thereof
owed by subsidiaries of Holdco #3. Future acquisitions may
be made through present or future subsidiaries; therefore, our
cash flow from operations and consequent ability to service our
debt, including the senior unsecured notes, 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 June 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
six months ended June 30, 2005, substantially all of our
revenues came from the operations of our subsidiaries. We
anticipate that under the terms of instruments governing the
debt of Holdco #3, certain of its subsidiaries will be
restricted in their ability to incur debt in the future. See
Description of Indebtedness.
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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 as favorable as those
that Clear Channel Communications could obtain.
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 and interim chief
executive officer 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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disagreement over 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, 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 |
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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 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 between our company, on the one
hand, and Clear Channel Communications and its officers and
directors who are officers or directors of our company, on the
other hand. 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.
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 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
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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. 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 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 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 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, if Clear Channel
Communications is unable to deduct the Holdco #3 Loss (as
defined below) 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, we intend to apply to list our common
stock on the NYSE. 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.
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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.
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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.
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.
In connection with our spin-off from Clear Channel
Communications, third party investors 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 certificate of
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. 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,
indenture governing our senior unsecured notes and certificate
of 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 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
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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. 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.
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 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 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.
37
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 19
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.
38
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, CCE Spinco and Clear
Channel Communications stockholders because:
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it will enhance the success of both Clear Channel Communications
and us by enabling Clear Channel Communications and us to
resolve management and systemic problems that arise by the
operation of our businesses within a single affiliated group; |
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it will improve the competitiveness of our business by resolving
inherent conflicts and the appearance of such conflicts with
artists and promoters; |
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it will simplify and reduce Clear Channel Communications
and our regulatory compliance burdens and risks by separating
our business from Clear Channel Communications; |
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it will enhance the ability of each of Clear Channel
Communications and us to issue equity efficiently and
effectively for acquisitions and financings; and |
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it will enhance the efficiency and effectiveness of each of
Clear Channel Communications and our equity-based
compensation. |
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 have assumed
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 for
every 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 for
every 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.
39
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 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 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 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. See
Material U.S. Federal Income Tax
Consequences of the Distribution. 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. 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.
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.
40
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 ,
2005, and
approximately 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, please 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
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
$ million
senior secured credit facility consisting of:
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a
$ million -year
term loan; and |
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a
$ million -year
revolving credit facility, including a
$ million
subfacility for letters of credit. |
We anticipate that the senior secured credit facility will be
secured by a first priority lien on substantially all of our
assets other than the assets of our foreign subsidiaries and a
pledge of the capital stock of our domestic subsidiaries and a
portion of the capital stock of certain of our foreign
subsidiaries. We expect that all of the revolving credit
facility, except approximately
$ million
of outstanding letters of credit, will remain undrawn at the
completion of the distribution and will be available for working
capital and 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.
Senior Unsecured Notes. 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 offer
$ million
aggregate principal amount
of -year
senior unsecured notes. Interest on the senior unsecured notes
will accrue at a fixed rate and will be payable semi-annually in
arrears. The senior unsecured notes will be unsecured
obligations and will rank equally with all of
Holdco #3s existing and future unsecured senior
indebtedness and senior to all of its future subordinated
indebtedness. The senior unsecured notes will effectively rank
junior to Holdco #3s secured indebtedness, including
debt it incurs under the senior secured credit facility, to the
extent of the value of the assets securing such indebtedness. We
anticipate the terms of the indenture governing the senior
unsecured notes will restrict Holdco #3 and its
subsidiaries from incurring additional indebtedness and will
impose other restrictions on their operations. See
Description of Indebtedness for more information.
Preferred Stock Issuance
Prior to the completion of the distribution, third party
investors 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. The Series A redeemable preferred stock
will have a liquidation preference of $20 million and will
be issued to
41
a third party investor for $20 million. 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
Agreement Holdco #3 Loss. We will not
receive any of the proceeds of the Series B redeemable
preferred stock sold by Clear Channel Communications. 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 certificate of 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.
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.
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 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
42
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 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.
43
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. We
intend to apply to list our common stock on the New York Stock
Exchange under the symbol
.
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.
Distribution Conditions and Termination
We expect that the distribution will be effective on the
distribution
date, ,
2005, provided that, among other things:
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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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we have repaid a portion of our outstanding intercompany note to
Clear Channel Communications, prior to or concurrently with the
distribution date, in an amount aggregating
$ ,
and Clear Channel Communications has contributed the remainder
of the intercompany note to our capital; |
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we have paid Clear Channel Communications approximately
$ million
in exchange for certain entertainment assets held by Clear
Channel Communications; |
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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 separation and
distribution agreement, is in effect; |
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we 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
Preferred Stock Issuance have been issued; |
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we have entered into the bank credit agreement in connection
with the senior secured credit facility and the purchase
agreement in connection with the senior unsecured notes
described under Description of Indebtedness; and |
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we have received any government approvals and material consents
necessary to consummate the distribution. |
The fulfillment of the foregoing 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.
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 the credit agreement governing our senior
secured credit facility, the indenture governing our senior
unsecured notes and certificate of designations covering
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.
45
CAPITALIZATION
The following table sets forth our capitalization (1) on an
actual basis as of June 30, 2005 and (2) on pro forma
basis as of June 30, 2005 as adjusted to give effect to:
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the distribution of our common stock to the stockholders of
Clear Channel Communications; |
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the incurrence of an aggregate of
$ million
of debt, and related debt issuance costs, comprised of a
$ million
senior secured term loan under the
$ million
senior secured credit facility to be entered into prior to or
concurrently with the completion of the distribution; |
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the issuance of senior unsecured notes prior to or concurrently
with the completion of the distribution in an aggregate
principal amount of
$ million
and related debt issuance costs; |
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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; |
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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; |
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the use of proceeds from the senior secured credit facility, the
senior unsecured notes and the Series A preferred stock
offering to repay
$ million
of the intercompany debt owed to Clear Channel
Communications; and |
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the contribution by Clear Channel Communications of any
remaining portion of intercompany debt owed to Clear Channel
Communications to our capital. |
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.
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As of June 30, 2005 | |
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Actual | |
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As Adjusted | |
(In thousands) |
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(unaudited) | |
Cash and cash equivalents
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$ |
251,949 |
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$ |
251,949 |
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Current portion of long-term debt
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$ |
1,250 |
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$ |
1,250 |
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Long-term debt, net of current portion:
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Debt with Clear Channel Communications
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639,413 |
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Senior secured credit facility
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% senior unsecured notes due
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Other long-term debt
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20,232 |
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20,232 |
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Total long-term debt
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659,645 |
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Redeemable preferred stock:
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Holdco #2 Series A preferred stock
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20,000 |
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Holdco #2 Series B preferred stock
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|
|
20,000 |
|
Total owners equity
|
|
|
137,322 |
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
798,217 |
|
|
$ |
|
|
|
|
|
|
|
|
|
46
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 six
months ended June 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 six months
ended June 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 an aggregate of
$ million
of debt, and related debt issuance costs, comprised of a
$ million
senior secured term loan under the
$ million
senior secured credit facility to be entered into prior to or
concurrently with the completion of the distribution; |
|
|
|
the issuance of senior unsecured notes prior to or concurrently
with the completion of the distribution in an aggregate
principal amount of
$ million
and related debt issuance costs; |
|
|
|
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 use of proceeds from the senior secured credit facility, the
senior unsecured notes and the Series A preferred stock
offering to repay
$ million
of the intercompany debt owed to Clear Channel
Communications; and |
|
|
|
the contribution by Clear Channel Communications of any
remaining portion of intercompany debt owed to Clear Channel
Communications to our capital. |
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
June 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 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 June 30, 2005, as the case may be.
The unaudited pro forma
47
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 June 30, 2005, Clear Channel
Communications allocated to us $4.7 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
$ million
to
$ 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 | |
|
Six Months Ended June 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
|
|
$ |
2,802,022 |
|
|
$ |
|
|
|
$ |
2,802,022 |
|
|
$ |
1,180,210 |
|
|
$ |
|
|
|
$ |
1,180,210 |
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
2,636,871 |
|
|
|
|
|
|
|
2,636,871 |
|
|
|
1,135,246 |
|
|
|
|
|
|
|
1,135,246 |
|
|
Depreciation and amortization
|
|
|
64,095 |
|
|
|
|
|
|
|
64,095 |
|
|
|
30,759 |
|
|
|
|
|
|
|
30,759 |
|
|
Corporate expenses
|
|
|
28,307 |
|
|
|
|
|
|
|
28,307 |
|
|
|
26,640 |
|
|
|
|
|
|
|
26,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
72,749 |
|
|
|
|
|
|
|
72,749 |
|
|
|
(12,435 |
) |
|
|
|
|
|
|
(12,435 |
) |
Interest expense
|
|
|
3,119 |
|
|
|
|
(b) |
|
|
|
|
|
|
1,494 |
|
|
|
|
|
|
|
|
|
Intercompany interest expense
|
|
|
42,355 |
|
|
|
|
(b) |
|
|
|
|
|
|
22,014 |
|
|
|
|
(b) |
|
|
|
|
Equity in earnings (loss) of nonconsolidated affiliates
|
|
|
2,906 |
|
|
|
|
|
|
|
2,906 |
|
|
|
(1,619 |
) |
|
|
|
|
|
|
(1,619 |
) |
Other income (expense) net
|
|
|
(15,456 |
) |
|
|
|
|
|
|
(15,456 |
) |
|
|
1,300 |
|
|
|
|
|
|
|
1,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
14,725 |
|
|
|
|
|
|
|
|
|
|
|
(36,262 |
) |
|
|
|
|
|
|
|
|
Income tax benefit (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
55,946 |
|
|
|
|
(c) |
|
|
|
|
|
|
17,521 |
|
|
|
|
(c) |
|
|
|
|
|
Deferred
|
|
|
(54,411 |
) |
|
|
|
|
|
|
(54,411 |
) |
|
|
(3,016 |
) |
|
|
|
|
|
|
(3,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
16,260 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(21,757 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per common share(a)
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Unaudited Pro Forma Condensed Combined Statements of
Income
|
|
|
(a) |
|
Basic and diluted net income (loss) per share is calculated by
dividing net income (loss)
by shares
of common stock which are anticipated to be outstanding after
the distribution. |
|
(b) |
|
Includes estimated annual interest expense of
$ million
related to
$ million
of indebtedness that we expect to incur prior to or concurrently
with the completion of the distribution, at an estimated
weighted average annual interest rate
of %. Several factors could change
the weighted average 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 weighted average annual
interest rate would change our annual interest expense by
$ million.
We may incur additional interest expense if we draw down under
the
$ million
revolving credit that we expect to enter into prior to or
concurrently with the completion of the distribution. |
48
|
|
|
(c) |
|
Represents estimated tax (expense) benefit related to the
estimated interest expense adjustment discussed in note (b)
above at our combined statutory tax rate of 40% for the year
ended December 31, 2004 and for the six months ended
June 30, 2005. |
Unaudited Pro Forma Condensed Combined Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 | |
|
|
| |
|
|
Historical | |
|
Adjustments | |
|
Pro Forma | |
(In thousands) |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
Assets |
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
251,949 |
|
|
$ |
|
|
|
$ |
251,949 |
|
|
Accounts receivable, net
|
|
|
236,219 |
|
|
|
|
|
|
|
236,219 |
|
|
Prepaid expenses
|
|
|
282,395 |
|
|
|
|
|
|
|
282,395 |
|
|
Other current assets
|
|
|
115,564 |
|
|
|
|
|
|
|
115,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
886,127 |
|
|
|
|
|
|
|
886,127 |
|
Property, plant & equipment, net
|
|
|
800,986 |
|
|
|
|
|
|
|
800,986 |
|
Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangibles, net
|
|
|
13,283 |
|
|
|
|
|
|
|
13,283 |
|
|
Goodwill
|
|
|
48,781 |
|
|
|
|
|
|
|
48,781 |
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
5,312 |
|
|
|
|
|
|
|
5,312 |
|
|
Investments in, and advances to, nonconsolidated affiliates
|
|
|
24,317 |
|
|
|
|
|
|
|
24,317 |
|
|
Deferred tax asset
|
|
|
94,504 |
|
|
|
|
|
|
|
94,504 |
|
|
Other assets
|
|
|
21,529 |
|
|
|
|
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
1,894,839 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 | |
|
|
| |
(In thousands) |
|
Historical | |
|
Adjustments | |
|
Pro Forma | |
|
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
|
Liabilities and Owners Equity |
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
68,021 |
|
|
$ |
|
|
|
$ |
68,021 |
|
|
Deferred income
|
|
|
513,416 |
|
|
|
|
|
|
|
513,416 |
|
|
Accrued expenses
|
|
|
427,054 |
|
|
|
|
|
|
|
427,054 |
|
|
Current portion of long-term debt
|
|
|
1,250 |
|
|
|
|
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,009,741 |
|
|
|
|
|
|
|
1,009,741 |
|
Long-term debt
|
|
|
20,232 |
|
|
|
|
(b) |
|
|
|
|
Debt with Clear Channel Communications
|
|
|
639,413 |
|
|
|
(639,413 |
)(c) |
|
|
|
|
Other long-term liabilities
|
|
|
84,443 |
|
|
|
|
|
|
|
84,443 |
|
Minority interest
|
|
|
3,688 |
|
|
|
|
|
|
|
3,688 |
|
Owners Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdco #2 Series A and Series B Preferred Stock
|
|
|
|
|
|
|
|
(d) |
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
(e) |
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
(c)(f) |
|
|
|
|
|
Owners net investment
|
|
|
4,340,552 |
|
|
|
|
(g) |
|
|
|
|
|
Retained deficit
|
|
|
(4,209,612 |
) |
|
|
|
|
|
|
(4,209,612 |
) |
|
Accumulated other comprehensive income
|
|
|
6,382 |
|
|
|
|
|
|
|
6,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Owners Equity
|
|
|
137,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Owners Equity
|
|
$ |
1,894,839 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
as of June 30, 2005
|
|
|
(a) |
|
We expect to record approximately
$ million
in debt issuance costs in connection with the incurrence of the
debt described in note (b) below. |
|
(b) |
|
Prior to or concurrently with the completion of the
distribution, we intend to incur
$ million
in long-term indebtedness, of which
$ million
represents the current portion. We may incur additional
indebtedness if we draw down under the
$ million
revolving credit facility that we expect to enter into prior to
or concurrently with the completion of the distribution. |
|
(c) |
|
Our debt with Clear Channel Communications will be paid or
otherwise contributed to our capital concurrently with or prior
to the distribution. |
|
(d) |
|
Represents the par value
of million
shares of Series A and Series B preferred stock issued
by Holdco #2. |
|
(e) |
|
Represents the par value
of million
shares of our common stock. |
|
(f) |
|
Represents (i) the reclassification of owners
net investment into Additional paid-in capital
and (ii) the receipt of approximately
$ in
the Series A preferred stock offering of Holdco #2 net
of the par value of the Series A and Series B
preferred stock of Holdco #2. |
|
(g) |
|
Represents a reclassification into additional paid-in capital. |
50
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 income and cash flow data 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 income 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 income and cash
flow data set forth below for the six months ended June 30,
2005 and 2004, and the consolidated balance sheet data for the
six months ended June 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.
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.
The following table presents two non-GAAP financial measures,
OIBDAN and OIBN, which we use to evaluate segment and
consolidated performance of our business. OIBDAN and OIBN are
not calculated or presented in accordance with
U.S. generally accepted accounting principles, or GAAP. In
Note 4 and Non-GAAP Financial
Measures below, we explain OIBDAN and OIBN and reconcile
them to operating income (loss), their most directly comparable
financial measure calculated and presented in accordance with
GAAP.
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months | |
|
|
|
|
|
|
Ended | |
|
Year Ended December 31, | |
|
Six Months Ended June 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 |
|
|
$ |
2,469,681 |
|
|
$ |
2,704,369 |
|
|
$ |
2,802,022 |
|
|
$ |
1,271,705 |
|
|
$ |
1,180,210 |
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
904,442 |
|
|
|
2,386,504 |
|
|
|
2,299,069 |
|
|
|
2,503,101 |
|
|
|
2,636,871 |
|
|
|
1,206,878 |
|
|
|
1,135,246 |
|
|
Depreciation and amortization
|
|
|
118,040 |
|
|
|
299,343 |
|
|
|
64,836 |
|
|
|
63,436 |
|
|
|
64,095 |
|
|
|
31,727 |
|
|
|
30,759 |
|
|
Corporate expenses
|
|
|
14,422 |
|
|
|
49,294 |
|
|
|
26,101 |
|
|
|
26,747 |
|
|
|
28,307 |
|
|
|
12,675 |
|
|
|
26,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(52,856 |
) |
|
|
(191,473 |
) |
|
|
79,675 |
|
|
|
111,085 |
|
|
|
72,749 |
|
|
|
20,425 |
|
|
|
(12,435 |
) |
Interest expense
|
|
|
17,758 |
|
|
|
9,476 |
|
|
|
3,998 |
|
|
|
2,788 |
|
|
|
3,119 |
|
|
|
1,389 |
|
|
|
1,494 |
|
Intercompany interest expense
|
|
|
17,643 |
|
|
|
65,501 |
|
|
|
58,608 |
|
|
|
41,415 |
|
|
|
42,355 |
|
|
|
19,449 |
|
|
|
22,014 |
|
Equity in earnings (loss) of nonconsolidated affiliates
|
|
|
1,958 |
|
|
|
6,690 |
|
|
|
(212 |
) |
|
|
1,357 |
|
|
|
2,906 |
|
|
|
2,674 |
|
|
|
(1,619 |
) |
Other income (expense) net
|
|
|
2,354 |
|
|
|
4,491 |
|
|
|
15,573 |
|
|
|
128 |
|
|
|
(15,456 |
) |
|
|
(13,131 |
) |
|
|
1,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative effect of a
change in accounting principle
|
|
|
(83,945 |
) |
|
|
(255,269 |
) |
|
|
32,430 |
|
|
|
68,367 |
|
|
|
14,725 |
|
|
|
(10,870 |
) |
|
|
(36,262 |
) |
Income tax benefit (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
213,056 |
|
|
|
44,112 |
|
|
|
(40,102 |
) |
|
|
68,272 |
|
|
|
55,946 |
|
|
|
18,730 |
|
|
|
17,521 |
|
|
Deferred
|
|
|
(206,942 |
) |
|
|
(43,581 |
) |
|
|
11,103 |
|
|
|
(79,607 |
) |
|
|
(54,411 |
) |
|
|
(19,863 |
) |
|
|
(3,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of a change in accounting
principle
|
|
|
(77,831 |
) |
|
|
(254,738 |
) |
|
|
3,431 |
|
|
|
57,032 |
|
|
|
16,260 |
|
|
|
(12,003 |
) |
|
|
(21,757 |
) |
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 |
|
|
$ |
(12,003 |
) |
|
$ |
(21,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) before cumulative effect of a
change in accounting principle per common share based
on shares outstanding
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
695,162 |
|
|
$ |
1,847,731 |
|
|
$ |
1,821,215 |
|
|
$ |
2,069,857 |
|
|
$ |
2,201,007 |
|
|
$ |
912,644 |
|
|
$ |
828,238 |
|
|
Global Theater
|
|
|
137,547 |
|
|
|
316,159 |
|
|
|
292,822 |
|
|
|
314,686 |
|
|
|
309,868 |
|
|
|
174,069 |
|
|
|
180,087 |
|
|
Other
|
|
|
151,339 |
|
|
|
379,778 |
|
|
|
355,644 |
|
|
|
319,826 |
|
|
|
291,147 |
|
|
|
184,992 |
|
|
|
171,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$ |
984,048 |
|
|
$ |
2,543,668 |
|
|
$ |
2,469,681 |
|
|
$ |
2,704,369 |
|
|
$ |
2,802,022 |
|
|
$ |
1,271,705 |
|
|
$ |
1,180,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
(26,900 |
) |
|
$ |
(103,048 |
) |
|
$ |
92,596 |
|
|
$ |
110,463 |
|
|
$ |
82,019 |
|
|
$ |
9,070 |
|
|
$ |
(718 |
) |
|
Global Theater
|
|
|
(11,880 |
) |
|
|
(26,456 |
) |
|
|
30,356 |
|
|
|
22,739 |
|
|
|
20,939 |
|
|
|
15,115 |
|
|
|
7,839 |
|
|
Other
|
|
|
3,929 |
|
|
|
(4,783 |
) |
|
|
(11,452 |
) |
|
|
10,017 |
|
|
|
3,035 |
|
|
|
11,457 |
|
|
|
9,461 |
|
|
Corporate
|
|
|
(18,005 |
) |
|
|
(57,186 |
) |
|
|
(31,825 |
) |
|
|
(32,134 |
) |
|
|
(33,244 |
) |
|
|
(15,217 |
) |
|
|
(29,017 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
$ |
(52,856 |
) |
|
$ |
(191,473 |
) |
|
$ |
79,675 |
|
|
$ |
111,085 |
|
|
$ |
72,749 |
|
|
$ |
20,425 |
|
|
$ |
(12,435 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months | |
|
|
|
|
|
|
Ended | |
|
Year Ended December 31, | |
|
Six Months Ended June 30, | |
|
|
December 31, | |
|
| |
|
| |
|
|
2000(1) | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
|
|
|
|
|
|
|
(unaudited) | |
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
$ |
142,237 |
|
|
$ |
138,713 |
|
|
$ |
119,898 |
|
|
$ |
210,116 |
|
|
$ |
75,346 |
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
$ |
(31,329 |
) |
|
$ |
(51,960 |
) |
|
$ |
(84,076 |
) |
|
$ |
(53,899 |
) |
|
$ |
(29,883 |
) |
|
Financing activities
|
|
|
|
|
|
|
|
|
|
$ |
(112,281 |
) |
|
$ |
(56,894 |
) |
|
$ |
23,254 |
|
|
$ |
(68,027 |
) |
|
$ |
42,655 |
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
$ |
68,185 |
|
|
$ |
69,936 |
|
|
$ |
73,435 |
|
|
$ |
44,179 |
|
|
$ |
49,891 |
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDAN(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
57,124 |
|
|
$ |
108,765 |
|
|
$ |
127,881 |
|
|
$ |
145,725 |
|
|
$ |
119,062 |
|
|
$ |
26,905 |
|
|
$ |
17,367 |
|
|
Global Theater
|
|
|
12,060 |
|
|
|
36,648 |
|
|
|
41,489 |
|
|
|
35,900 |
|
|
|
35,648 |
|
|
|
22,469 |
|
|
|
15,299 |
|
|
Other
|
|
|
10,422 |
|
|
|
11,751 |
|
|
|
1,242 |
|
|
|
19,643 |
|
|
|
10,441 |
|
|
|
15,453 |
|
|
|
12,298 |
|
|
Corporate
|
|
|
(14,422 |
) |
|
|
(45,343 |
) |
|
|
(24,700 |
) |
|
|
(25,445 |
) |
|
|
(27,223 |
) |
|
|
(12,170 |
) |
|
|
(25,937 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OIBDAN(3)
|
|
$ |
65,184 |
|
|
$ |
111,821 |
|
|
$ |
145,912 |
|
|
$ |
175,823 |
|
|
$ |
137,928 |
|
|
$ |
52,657 |
|
|
$ |
19,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBN(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Music
|
|
$ |
(26,900 |
) |
|
$ |
(103,048 |
) |
|
$ |
92,596 |
|
|
$ |
110,463 |
|
|
$ |
82,019 |
|
|
$ |
9,070 |
|
|
$ |
(718 |
) |
|
Global Theater
|
|
|
(11,880 |
) |
|
|
(26,456 |
) |
|
|
30,356 |
|
|
|
22,739 |
|
|
|
20,939 |
|
|
|
15,115 |
|
|
|
7,839 |
|
|
Other
|
|
|
3,929 |
|
|
|
(4,783 |
) |
|
|
(11,452 |
) |
|
|
10,017 |
|
|
|
3,035 |
|
|
|
11,457 |
|
|
|
9,461 |
|
|
Corporate
|
|
|
(18,005 |
) |
|
|
(53,235 |
) |
|
|
(30,424 |
) |
|
|
(30,832 |
) |
|
|
(32,160 |
) |
|
|
(14,712 |
) |
|
|
(28,314 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OIBN(3)
|
|
$ |
(52,856 |
) |
|
$ |
(187,522 |
) |
|
$ |
81,076 |
|
|
$ |
112,387 |
|
|
$ |
73,833 |
|
|
$ |
20,930 |
|
|
$ |
(11,732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of | |
|
|
| |
|
June 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 |
|
|
$ |
1,894,839 |
|
Long-term debt, including current maturities
|
|
$ |
829,649 |
|
|
$ |
1,112,842 |
|
|
$ |
624,708 |
|
|
$ |
617,838 |
|
|
$ |
650,675 |
|
|
$ |
660,895 |
|
Owners equity
|
|
$ |
3,768,934 |
|
|
$ |
3,701,975 |
|
|
$ |
230,914 |
|
|
$ |
188,283 |
|
|
$ |
156,976 |
|
|
$ |
137,322 |
|
|
|
(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) |
We evaluate segment and consolidated performance based on
several factors, two of the primary measures of which are: |
|
|
|
|
|
operating income (loss) before depreciation, amortization and
non-cash compensation expense, which we refer to as
OIBDAN; and |
|
|
|
operating income (loss) before non-cash compensation expense,
which we refer to as OIBN. |
|
|
|
See Non-GAAP Financial Measures below,
Unaudited Pro Forma Condensed Combined Financial
Data and Managements Discussion and Analysis
of Financial Condition and Results of Operations Use
of OIBDAN and OIBN elsewhere herein. |
53
Non-GAAP Financial Measures
We evaluate our operating performance based on several factors,
two of the primary measures of which are OIBDAN and OIBN. OIBDAN
and OIBN are used as a supplemental financial measure by
management and by external users of our financial statements,
such as investors and banks, to assess:
|
|
|
|
|
the financial performance of our assets without regard to
financing methods, capital structures or historical cost basis; |
|
|
|
the ability of our assets to generate cash sufficient to pay
interest on our indebtedness; |
|
|
|
our operating performance and return on invested capital as
compared to those of other companies in the live entertainment
industry, without regard to financing methods and capital
structure; and |
|
|
|
our compliance with certain financial covenants included in our
debt agreements. |
OIBDAN and OIBN should not be considered an alternative to
operating income, cash flow from operating activities or any
other measure of financial performance or liquidity presented in
accordance with GAAP. OIBDAN and OIBN exclude some, but not all,
items that affect operating income, such as periodic costs of
certain capitalized tangible and intangible assets used in
generating revenues in our business, and these measures may vary
among other companies. Thus, OIBDAN and OIBN as presented below
may not be comparable to similarly titled measures of other
companies. The following is a reconciliation of OIBDAN and OIBN
to operating income, which is a GAAP measure of our operating
results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months | |
|
|
|
Six Months Ended | |
|
|
Ended | |
|
Year Ended December 31, | |
|
June 30, | |
|
|
December 31, | |
|
| |
|
| |
|
|
2000(1) | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
|
|
|
|
|
|
|
(unaudited) | |
Reconciliation of OIBDAN and OIBN to Operating Income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDAN
|
|
$ |
65,184 |
|
|
$ |
111,821 |
|
|
$ |
145,912 |
|
|
$ |
175,823 |
|
|
$ |
137,928 |
|
|
$ |
52,657 |
|
|
$ |
19,027 |
|
|
Depreciation and amortization
|
|
|
118,040 |
|
|
|
299,343 |
|
|
|
64,836 |
|
|
|
63,436 |
|
|
|
64,095 |
|
|
|
31,727 |
|
|
|
30,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBN
|
|
|
(52,856 |
) |
|
|
(187,522 |
) |
|
|
81,076 |
|
|
|
112,387 |
|
|
|
73,833 |
|
|
|
20,930 |
|
|
|
(11,732 |
) |
|
Non-cash compensation expense*
|
|
|
|
|
|
|
3,951 |
|
|
|
1,401 |
|
|
|
1,302 |
|
|
|
1,084 |
|
|
|
505 |
|
|
|
703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
(52,856 |
) |
|
$ |
(191,473 |
) |
|
$ |
79,675 |
|
|
$ |
111,085 |
|
|
$ |
72,749 |
|
|
$ |
20,425 |
|
|
$ |
(12,435 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
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. |
54
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 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 period 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. |
55
|
|
|
|
|
Combined results of operations. This section provides an
analysis of our results of operations for the six months ended
June 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 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. |
We evaluate segment and combined performance based on several
factors, two of the primary measures of which are:
(i) OIBDAN and (ii) operating income (loss) before
non-cash compensation expense, which we refer to as OIBN. We
consider OIBDAN and OIBN to be important indicators of the
operational strength and performance of our businesses,
including our ability to generate relatively high levels of cash
flow from operations. However, the use of OIBDAN as a
performance measure does not reflect the periodic costs of
certain capitalized tangible and intangible assets used in
generating revenues in our businesses. Accordingly, OIBDAN and
OIBN should be used as supplemental financial measures, and not
as substitutes for, cash flow from operations, operating income
(loss), net income (loss) and other measures of financial
performance or liquidity reported in accordance with GAAP.
|
|
|
|
|
Liquidity and capital resources. This section provides a
discussion of our financial condition as of December 31,
2004 and June 30, 2005, as well as an analysis of our cash
flows for the six months ended June 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 issuance of our senior unsecured notes, the term
loans under our new senior secured credit facility and Holdco
#2s issuance of mandatorily redeemable preferred stock. |
|
|
|
Seasonality. This section discusses seasonal performance
of our global music, global theater and other segments. Because
of the seasonality of our business, the results for the six
months ended June 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
56
and Europe. As of June 30, 2005, we owned or operated
109 venues, consisting of 77 domestic and
32 international venues. These venues include
39 amphitheaters, 58 theaters, eight clubs, three
arenas and one festival site. In addition, through equity,
booking or similar arrangements we have the right to book events
at 32 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 79%, 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
$309.9 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 June 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 10%, of our total revenues.
57
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 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.
58
Combined Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
(In thousands) |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Revenue
|
|
$ |
1,180,210 |
|
|
$ |
1,271,705 |
|
|
$ |
2,802,022 |
|
|
$ |
2,704,369 |
|
|
$ |
2,469,681 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
1,135,246 |
|
|
|
1,206,878 |
|
|
|
2,636,871 |
|
|
|
2,503,101 |
|
|
|
2,299,069 |
|
Depreciation and amortization
|
|
|
30,759 |
|
|
|
31,727 |
|
|
|
64,095 |
|
|
|
63,436 |
|
|
|
64,836 |
|
Corporate expenses
|
|
|
26,640 |
|
|
|
12,675 |
|
|
|
28,307 |
|
|
|
26,747 |
|
|
|
26,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(12,435 |
) |
|
|
20,425 |
|
|
|
72,749 |
|
|
|
111,085 |
|
|
|
79,675 |
|
Interest expense
|
|
|
1,494 |
|
|
|
1,389 |
|
|
|
3,119 |
|
|
|
2,788 |
|
|
|
3,998 |
|
Intercompany interest expense
|
|
|
22,014 |
|
|
|
19,449 |
|
|
|
42,355 |
|
|
|
41,415 |
|
|
|
58,608 |
|
Equity in earnings (loss) of nonconsolidated affiliates
|
|
|
(1,619 |
) |
|
|
2,674 |
|
|
|
2,906 |
|
|
|
1,357 |
|
|
|
(212 |
) |
Other income (expense), net
|
|
|
1,300 |
|
|
|
(13,131 |
) |
|
|
(15,456 |
) |
|
|
128 |
|
|
|
15,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative effect of a
change in accounting principle
|
|
|
(36,262 |
) |
|
|
(10,870 |
) |
|
|
14,725 |
|
|
|
68,367 |
|
|
|
32,430 |
|
Income tax (expense) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
17,521 |
|
|
|
18,730 |
|
|
|
55,946 |
|
|
|
68,272 |
|
|
|
(40,102 |
) |
|
Deferred
|
|
|
(3,016 |
) |
|
|
(19,863 |
) |
|
|
(54,411 |
) |
|
|
(79,607 |
) |
|
|
11,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of a change in accounting
principle
|
|
|
(21,757 |
) |
|
|
(12,003 |
) |
|
|
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)
|
|
$ |
(21,757 |
) |
|
$ |
(12,003 |
) |
|
$ |
16,260 |
|
|
$ |
57,032 |
|
|
$ |
(3,928,576 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
75,346 |
|
|
$ |
210,116 |
|
|
$ |
119,898 |
|
|
$ |
138,713 |
|
|
$ |
142,237 |
|
|
Investing activities
|
|
$ |
(29,883 |
) |
|
$ |
(53,899 |
) |
|
$ |
(84,076 |
) |
|
$ |
(51,960 |
) |
|
$ |
(31,329 |
) |
|
Financing activities
|
|
$ |
42,655 |
|
|
$ |
(68,027 |
) |
|
$ |
23,254 |
|
|
$ |
(56,894 |
) |
|
$ |
(112,281 |
) |
OIBDAN and OIBN Reconciliation to Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
|
|
June 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
(In thousands) |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
(12,435 |
) |
|
$ |
20,425 |
|
|
$ |
72,749 |
|
|
$ |
111,085 |
|
|
$ |
79,675 |
|
Non-cash compensation expense*
|
|
|
703 |
|
|
|
505 |
|
|
|
1,084 |
|
|
|
1,302 |
|
|
|
1,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBN
|
|
|
(11,732 |
) |
|
|
20,930 |
|
|
|
73,833 |
|
|
|
112,387 |
|
|
|
81,076 |
|
Depreciation and amortization
|
|
|
30,759 |
|
|
|
31,727 |
|
|
|
64,095 |
|
|
|
63,436 |
|
|
|
64,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDAN
|
|
$ |
19,027 |
|
|
$ |
52,657 |
|
|
$ |
137,928 |
|
|
$ |
175,823 |
|
|
$ |
145,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
* |
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. |
Our combined revenue decreased $91.5 million, or 7%, during
the six months ended June 30, 2005 as compared to the same
period in 2004 primarily due to a decrease in our global music
and other operations of $84.4 million and
$13.1 million, respectively. These decreases were partially
offset by a $6.0 million increase in global theater
revenue. Included in the six months ended June 30, 2005 is
approximately $12.9 million from increases in foreign
exchange rates as compared to the same period of 2004.
Our combined revenue increased $97.7 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 $4.8 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 $234.7 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 $21.9 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
$71.6 million, or 6%, during the six months ended
June 30, 2005 as compared to the same period in 2004 due to
a decrease in our global music and other operations of
$74.9 million and $10.0 million, respectively.
Partially offsetting these decreases was an increase in global
theater of $13.2 million. Included in the six months ended
June 30, 2005 results is approximately $12.2 million
from increases in foreign exchange rates as compared to the same
period of 2004.
Our combined divisional operating expenses increased
$133.8 million, or 5%, 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 $19.5 million and
$4.6 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
$204.0 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 $27.5 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.
Corporate expenses increased $14.0 million, or 110%, during
the six months ended June 30, 2005 as compared to the six
months ended June 30, 2004 as the result of a $12.5 million
increase in litigation contingencies and expenses during 2005.
Additional litigation contingencies and expenses are reflected
in divisional operating expenses within our other operations.
60
Corporate expenses increased $1.6 million, or 6%, 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 $0.6 million, or 2%, in
the fiscal year ended 2003 as compared to 2002 primarily due to
an increase in performance-based bonus expense for the period.
Our combined OIBDAN decreased $33.6 million, or 64%, during
the six months ended June 30, 2005 as compared to the
same period in 2004 primarily as a result of an increase in
litigation reserves and expenses. In addition, global music
OIBDAN decreased $9.5 million primarily as a result of a
reduction in the number of domestic events, attendance and
ticket prices. Global theater OIBDAN decreased $7.2 million
during this period primarily due to a reduction in the
investment value of several domestic productions.
Our combined OIBDAN decreased $37.9 million, or 22%, 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 $9.2 million during the period
principally as a result of an increase in litigation reserves
and expenses, and the divestiture of a television production
business during 2003.
Our combined OIBDAN increased $29.9 million, or 20%, 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 improved
television production results and increased 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.
Our weighted average cost of debt during all periods was 7.0%.
Our intercompany debt balances owed to Clear Channel
Communications as of June 30, 2005 and December 31,
2004 and 2003 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
As of |
|
| |
|
|
June 30, 2005 |
|
2004 | |
|
2003 | |
|
|
|
|
| |
|
| |
(In millions) |
|
(unaudited) |
|
|
|
|
|
|
$639.4 |
|
$ |
628.9 |
|
|
$ |
595.2 |
|
|
|
|
Equity in Earnings (Loss) of Nonconsolidated
Affiliates |
Equity in earnings (loss) of nonconsolidated affiliates
decreased $4.3 million during the six months ended
June 30, 2005 as compared to the six months ended
June 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.
61
|
|
|
Other Income (Expense) Net |
The principal components of other income (expense)
net, for the applicable periods, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months | |
|
|
|
|
Ended June 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
(In millions) |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Interest income
|
|
$ |
0.9 |
|
|
$ |
0.8 |
|
|
$ |
3.2 |
|
|
$ |
6.9 |
|
|
$ |
2.1 |
|
Gain (loss) on sale of operating and fixed assets
|
|
|
0.6 |
|
|
|
(11.4 |
) |
|
|
(10.7 |
) |
|
|
1.0 |
|
|
|
15.2 |
|
Minority interest expense
|
|
|
(0.6 |
) |
|
|
(1.8 |
) |
|
|
(3.3 |
) |
|
|
(3.3 |
) |
|
|
(3.8 |
) |
Royalty fee to Clear Channel Communications
|
|
|
(0.5 |
) |
|
|
(0.6 |
) |
|
|
(3.1 |
) |
|
|
(4.1 |
) |
|
|
|
|
Other, net
|
|
|
0.9 |
|
|
|
(0.1 |
) |
|
|
(1.6 |
) |
|
|
(0.4 |
) |
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) net
|
|
$ |
1.3 |
|
|
$ |
(13.1 |
) |
|
$ |
(15.5 |
) |
|
$ |
0.1 |
|
|
$ |
15.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loss on sale of operating and fixed assets of
$11.4 million and $10.7 million for the six months
ended June 30, 2004 and the year ended December 31,
2004, respectively, relates primarily to the loss on the
divestiture of our international leisure center business. The
$15.2 million gain on sale of operating and fixed assets
for the year ended December 31, 2002 is primarily related
to the gain on the divestiture of our international cinema and
bingo business.
Current tax benefit for the six months ended June 30, 2005
decreased $1.2 million as compared to the six months ended
June 30, 2004. For the six months ended June 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. This amount is
offset by a higher current tax benefit recorded during the six
months ended June 30, 2005 as compared to the six months
ended June 30, 2004 related to a higher recorded loss
before income taxes.
Deferred tax expense for the six months ended June 30, 2005
decreased $16.8 million as compared to the six months ended
June 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 six months ended
June 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 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.
|
|
|
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
62
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
|
|
June 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
(In thousands) |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Revenue
|
|
$ |
828,238 |
|
|
$ |
912,644 |
|
|
$ |
2,201,007 |
|
|
$ |
2,069,857 |
|
|
$ |
1,821,215 |
|
Divisional operating expenses
|
|
|
810,871 |
|
|
|
885,739 |
|
|
|
2,081,945 |
|
|
|
1,924,132 |
|
|
|
1,693,334 |
|
Depreciation and amortization
|
|
|
18,085 |
|
|
|
17,835 |
|
|
|
37,043 |
|
|
|
35,262 |
|
|
|
35,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
(718 |
) |
|
$ |
9,070 |
|
|
$ |
82,019 |
|
|
$ |
110,463 |
|
|
$ |
92,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2005 to Six Months Ended
June 30, 2004 |
Global music revenue decreased $84.4 million, or 9%, during
the six months ended June 30, 2005 as compared to the six
months ended June 30, 2004. Included in the six months
ended June 30, 2005 results is approximately
$10.4 million of foreign exchange rate increases. These
foreign exchange rate increases were offset by decreases 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. For the
industry, Pollstar reported that the top 100 domestic tours
experienced a 12% reduction in attendance and a 6% drop in the
average ticket price during the first six months of 2005 as
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.
Our domestic music revenue decline was partially offset by an
increase in international revenues for the six months ended
June 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, 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
$74.9 million, or 8%, during the six months ended
June 30, 2005 as compared to the six months ended
June 30, 2004 primarily due to the decrease in domestic
music events. The decrease in domestic divisional operating
expenses was partially offset by an increase in international
divisional expenses related to the acquisition of international
promotion companies during the second half of 2004 and an
increase in promotion activity, as well as an increase in
foreign exchange rates of $10.0 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
63
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 2% decline, 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.
Global Theater Results of Operations
Our global theater operating results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
|
|
June 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Revenue
|
|
$ |
180,087 |
|
|
$ |
174,069 |
|
|
$ |
309,868 |
|
|
$ |
314,686 |
|
|
$ |
292,822 |
|
Divisional operating expenses
|
|
|
164,788 |
|
|
|
151,600 |
|
|
|
274,220 |
|
|
|
278,786 |
|
|
|
251,333 |
|
Depreciation and amortization
|
|
|
7,460 |
|
|
|
7,354 |
|
|
|
14,709 |
|
|
|
13,161 |
|
|
|
11,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
7,839 |
|
|
$ |
15,115 |
|
|
$ |
20,939 |
|
|
$ |
22,739 |
|
|
$ |
30,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2005 to Six Months Ended
June 30, 2004 |
Global theater revenue increased $6.0 million, or 3%,
during the six months ended June 30, 2005 as compared to
the six months ended June 30, 2004. Approximately
$2.1 million, or 35% 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 Guys and Dolls and The
Producers, were primarily responsible for the increase. The
increase in domestic theater revenue was partially offset by a
reduction in the investment value of several domestic
productions. Operationally, global theater expanded its venue
network during the six months ended June 30, 2005 with the
acquisition of four theaters in Spain.
64
Global theater divisional operating expenses grew
$13.2 million, or 9%, during the six months ended
June 30, 2005 as compared to the six months ended
June 30, 2004. Approximately $1.9 million, or 14% 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 $4.8 million, or 2%,
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
$4.6 million, or 2%, 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 $21.9 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 strong tours of The Lion King, The
Producers and Mamma Mia!, as well as Cats in
the United Kingdom, in 2003 as compared to 2002.
Global theater divisional operating expenses increased
$27.5 million, or 11%, during 2003 as compared to 2002.
Approximately $7.0 million, or 25% 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
|
|
June 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
(In thousands) |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Revenue
|
|
$ |
171,885 |
|
|
$ |
184,992 |
|
|
$ |
291,147 |
|
|
$ |
319,826 |
|
|
$ |
355,644 |
|
Divisional operating expenses
|
|
|
159,587 |
|
|
|
169,539 |
|
|
|
280,706 |
|
|
|
300,183 |
|
|
|
354,402 |
|
Depreciation and amortization
|
|
|
2,837 |
|
|
|
3,996 |
|
|
|
7,406 |
|
|
|
9,626 |
|
|
|
12,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
9,461 |
|
|
$ |
11,457 |
|
|
$ |
3,035 |
|
|
$ |
10,017 |
|
|
$ |
(11,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
Six Months Ended June 30, 2005 to Six Months
Ended June 30, 2004 |
Other revenues decreased $13.1 million, or 7%, during the
six months ended June 30, 2005 as compared to the six
months ended June 30, 2004. Foreign exchange rate increases
of approximately $0.4 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 six months ended
June 30, 2005 as compared to the same period in 2004
primarily from improved hospitality and sponsorship revenue.
Other divisional operating expenses decreased
$10.0 million, or 6%, during the six months ended
June 30, 2005 as compared to the six months ended
June 30, 2004. Foreign exchange rate increases of
approximately $0.3 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 six months
ended June 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
$1.2 million, or 29%, for the six months ended
June 30, 2005 as compared to the six months ended
June 30, 2004 primarily as a result of the sale of the
international leisure center business 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
$19.5 million, or 6%, 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 business 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.
66
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 business during 2003 as well as certain other assets
becoming fully depreciated.
Reconciliation of Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
|
|
June 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Global Music
|
|
$ |
(718 |
) |
|
$ |
9,070 |
|
|
$ |
82,019 |
|
|
$ |
110,463 |
|
|
$ |
92,596 |
|
Global Theater
|
|
|
7,839 |
|
|
|
15,115 |
|
|
|
20,939 |
|
|
|
22,739 |
|
|
|
30,356 |
|
Other
|
|
|
9,461 |
|
|
|
11,457 |
|
|
|
3,035 |
|
|
|
10,017 |
|
|
|
(11,452 |
) |
Corporate
|
|
|
(29,017 |
) |
|
|
(15,217 |
) |
|
|
(33,244 |
) |
|
|
(32,134 |
) |
|
|
(31,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined operating income (loss)
|
|
$ |
(12,435 |
) |
|
$ |
20,425 |
|
|
$ |
72,749 |
|
|
$ |
111,085 |
|
|
$ |
79,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Historically, we have operated with a sweep account that allows
unrestricted 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
contractually restricted. 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 will 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.
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, we expect to incur
$ in
indebtedness through a
$ million
senior secured bank facility,
$ from
the sale of senior unsecured notes and $20.0 million from
the issuance of Holdco #2 Series A preferred stock,
all proceeds of which will be used to repay our intercompany
promissory note to Clear Channel Communications. Clear Channel
Communications will contribute any remaining portion of
intercompany debt to our capital.
We are currently evaluating our capital structure and have not
yet determined the amount of financing we will have in the
future. However, we currently plan to enter into a senior
secured credit facility with lenders and issue senior unsecured
notes to investors as described below. Prior to or concurrently
with the completion of the distribution, one of our operating
subsidiaries, Holdco #3, which
67
owns more than 95% of the gross value of our assets, will offer
$ million aggregate principal
amount
of -year
senior unsecured notes and enter into a senior secured credit
facility consisting of:
|
|
|
|
|
a
$ million -
year senior secured term loan; and |
|
|
|
a
$ million -
year secured revolving credit facility, including a
$ million subfacility for letters of credit. |
We anticipate that the senior secured credit facility will be
secured by a first priority lien on substantially all of our
assets other than the assets of our foreign subsidiaries and a
pledge of the capital stock of our domestic subsidiaries and a
portion of the capital stock of certain of our foreign
subsidiaries.
After giving effect to the notes offering and the term loan, we
expect to have approximately
$ million of indebtedness for
borrowed money outstanding. We expect that approximately
$ of
the revolving credit facility will remain available for working
capital and general corporate purposes of Holdco #3 and its
subsidiaries at the completion of the distribution, although 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 such working capital and
general corporate purposes.
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 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 revolving credit facility, the Holdco #2 preferred stock,
the indenture for the senior unsecured notes and applicable
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.
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 for operating results. 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 to satisfy future working capital, capital
expenditure and debt service requirements for at least the next
year.
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
68
our venue network. Capital expenditures typically increase
during periods when venues are not in operation.
Our capital expenditures have consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months | |
|
|
|
|
Ended June 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
(In millions) |
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Maintenance expenditures
|
|
$ |
28.6 |
|
|
$ |
15.0 |
|
|
$ |
31.4 |
|
|
$ |
34.2 |
|
|
$ |
58.4 |
|
New venue expenditures
|
|
|
21.3 |
|
|
|
29.2 |
|
|
|
42.0 |
|
|
|
35.7 |
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$ |
49.9 |
|
|
$ |
44.2 |
|
|
$ |
73.4 |
|
|
$ |
69.9 |
|
|
$ |
68.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance expenditures for the six months ended June 30,
2005 increased $13.6 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.
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 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,687,663 |
|
|
$ |
237,588 |
|
|
$ |
160,247 |
|
|
$ |
97,737 |
|
|
$ |
1,192,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a pro forma basis, after giving effect to the senior
unsecured notes offering and the term loan under our senior
secured credit facility in connection with the spin-off and the
issuance of the preferred stock by
69
Holdco #2 and the application of the 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
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Non-cancelable operating lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
|
|
June 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
75,346 |
|
|
$ |
210,116 |
|
|
$ |
119,898 |
|
|
$ |
138,713 |
|
|
$ |
142,237 |
|
Investing activities
|
|
$ |
(29,883 |
) |
|
$ |
(53,899 |
) |
|
$ |
(84,076 |
) |
|
$ |
(51,960 |
) |
|
$ |
(31,329 |
) |
Financing activities
|
|
$ |
42,655 |
|
|
$ |
(68,027 |
) |
|
$ |
23,254 |
|
|
$ |
(56,894 |
) |
|
$ |
(112,281 |
) |
Operating Activities
|
|
|
Six Months Ended June 30, 2005 Compared to Six Months
Ended June 30, 2004 |
Cash provided by operations was $75.3 million for the six
months ended June 30, 2005, compared to cash provided by
operations of $210.1 million for the six months ended
June 30, 2004. The $134.8 million decrease in cash
provided by operations resulted from 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, based on the size
of the upcoming tours. Partially offsetting this increase was
more cash received and recorded as deferred income in 2005,
based on advanced ticket sales from these same 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.
|
|
|
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
current tax payments contributed by owner for the period.
Investing Activities
|
|
|
Six Months Ended June 30, 2005 Compared to Six Months
Ended June 30, 2004 |
Cash used in investing activities was $29.9 million for the
six months ended June 30, 2005, compared to cash used in
investing activities of $53.9 million for the six months
ended June 30, 2004. The
70
$24.0 million decrease in cash used in investing activities
was primarily due to 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 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.
|
|
|
Six Months Ended June 30, 2005 Compared to Six Months
Ended June 30, 2004 |
Cash provided by financing activities was $42.7 million for
the six months ended June 30, 2005, compared to cash used
in financing activities of $68.0 million for the six months
ended June 30, 2004. The $110.7 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 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
71
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 $21.1 million for
the six months ended June 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 six
months ended June 30, 2005 by $2.1 million. As of
June 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 $660.9 million total debt outstanding as of
June 30, 2005, of which $0.2 million was variable rate
debt.
Based on the amount of our floating-rate debt as of
June 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 level of floating-rate debt remains constant
with an immediate across-the-board increase or decrease as of
June 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
72
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 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. 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
73
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 will adopt EITF 05-6 on
July 1, 2005 and do not expect 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 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. 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.
74
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 six months ended June 30, 2005 would have
changed by $1.0 million and our net income for the same
period would have changed by $0.6 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.
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.
75
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 7%. 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%.
While we believe this decrease 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 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 a trade
organization, gross ticket sales for the North American
theatrical industry of touring Broadway theatrical performances
has increased from
76
$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.
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 defined numbers 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.
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.
77
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
June 30, 2005, we owned or operated 109 venues, consisting
of 77 domestic and 32 international venues. These venues include
39 amphitheaters, 58 theaters, eight clubs, three arenas
and one festival site. In addition, through equity, booking or
similar arrangements we have the right to book events at 32
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
before depreciation, amortization and non-cash compensation
expense, or OIBDAN, of approximately $137.9 million. Please
read Selected Combined Financial 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.
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 79%, 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
$309.9 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
78
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 June 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 10%, 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
79
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 79%, 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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Rank |
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Artist |
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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, |
80
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they are not specifically designed for live music. At
June 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 June 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 June 30,
2005, we owned one and leased one arena. |
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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 June 30, 2005, we owned seven and
leased 15 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 June 30, 2005, we
owned three and leased four 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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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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New York, NY
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1 |
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Monmouth, NJ
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1 |
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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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4 |
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(2) |
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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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6 |
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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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9 |
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Detroit, MI
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10 |
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(2 |
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Houston, TX
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11 |
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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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81
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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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27 |
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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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31 |
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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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47 |
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Wilkes-Barre, PA
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53 |
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Albany, NY
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55 |
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Wheeling, WV
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152 |
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* |
DMA® region refers to a U.S. designated market area.
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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Cardiff, Wales
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Dublin, Ireland
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London, England
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Manchester, England
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Sheffield, England
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Southhampton, 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.
82
For the year ended December 31, 2004, our global theater
business accounted for approximately $309.9 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 June 30,
2005, we owned 13 and leased 23 theaters in our theater
segment. The theater segment also leases one club. Of these
venues, 13 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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New Orleans, LA
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43 |
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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.
DMA® is a registered trademark of Nielsen Media Research,
Inc. |
|
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|
Bullet represents one venue by type, unless otherwise noted. |
83
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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 approximately 600 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,
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who are among the leaders in 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 June 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 10%, 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
integrated live entertainment network. We seek to maximize
cash flow from operations by taking advantage of the
efficiencies associated with owning and operating a leading
integrated live entertainment network. In particular, we believe
our ability to provide integrated services enables us to: |
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attract leading performers, theatrical performances and other
events by offering all aspects of the promotion and production
of events and tours from a single provider; |
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increase the utilization of our owned or operated venues; |
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attract and maintain sponsorship relationships with leading
advertisers; |
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negotiate more favorable deals with vendors and
suppliers; and |
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capture a larger percentage of overall revenues from our events
and tours. |
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Secure, develop and provide compelling live content. 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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Provide advertising opportunities that reach our large,
in-person audience. 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. |
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Selectively pursue investment and acquisition
opportunities. We intend to pursue selected investments and
acquisitions that enhance our business and where the returns and
growth potential of such expansion are consistent with our
long-term goal of increasing stockholder value. In particular,
we believe that significant opportunities exist internationally,
and that such expansion will create additional outlets and
cross-over opportunities for performers and events between the
U.S. and foreign markets. |
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. |
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.
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.
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. Our primary competition
in sports representation includes numerous agencies such as IMG,
Octagon and Gaylord, as well as regional agencies and individual
agents.
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.
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 77 venues and 46 facilities
throughout North America and 32 venues and
22 facilities internationally, as of June 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 Houston, Texas and
includes the majority of our executive, financial, legal and
client support 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.
87
Employees
At June 30, 2005, we had approximately 3,200 full-time
employees, including 2,000 domestic and 1,200 international
employees, of which approximately 3,100 were employed in our
operations departments and approximately 100 were employed in
our corporate area. We expect the number of employees in our
corporate area to increase as we transition to providing the
services that were previously provided to us by Clear Channel
Communications.
Our staffing needs vary significantly throughout the year.
Therefore, we also, from time to time, employ part-time or
seasonal employees. At June 30, 2005, we employed
approximately 10,600 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, 3003, an Assistant United States Attorney General
announced that the Department of Justice, or DOJ, is pursuing an
antitrust inquiry concerning whether Clear Channel
Communications 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 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 plaintiffs approximately $17 million in lost
profits and $73 million in punitive damages. We are
vigorously seeking to overturn or nullify the adverse verdict
and damage award regarding tortious interference including, if
necessary, pursuing appropriate appeals. 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, which motion is pending before the District
Court.
We are a defendant in a lawsuit filed by James Bryant, Inc. on
May 11, 2001, which is currently pending in the District of
Garfield County, Oklahoma. The plaintiff alleges violation of a
licensing agreement for the exclusive use of a business name,
unjust enrichment, fraud and tortious breach of contract. The
matter is currently set for trial in October 2005, and we intend
to vigorously defend all claims.
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
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of Appeal for the Second Circuit, and oral argument was held on
November 3, 2004. A decision has not yet been issued.
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 and interference with prospective economic
advantage. A trial date has been set for December 6, 2005,
and we intend to vigorously defend all claims.
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 payments in
connection with the construction and operation of an
amphitheater owned by us. We have counterclaimed, alleging
breach of contract and bad faith. The parties have conducted
settlement negotiations and such negotiations are expected to
continue.
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.
89
MANAGEMENT
Executive Officers and Directors
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 intend to appoint 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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Name |
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Position |
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Term as Director | |
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Randall T. Mays
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40 |
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Chairman of the Board of Directors & Interim Chief
Executive Officer |
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Expires |
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Mark P. Mays
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42 |
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Director |
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Expires |
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L. Lowry Mays
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70 |
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Director |
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Expires |
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Miles Wilkin
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57 |
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Chief Operating Officer |
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Kathy Willard
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39 |
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Chief Financial Officer |
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Michael Rapino
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40 |
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President and Chief Executive Officer of Global Music |
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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.
Randall T. Mays is our Interim Chief Executive Officer
and Chairman of the Board. 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 one of our board members.
Mark P. Mays has served as a member of our board of
directors 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 Chairman of our board of directors.
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 the
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.
Miles Wilkin is our Chief Operating Officer and has
served in this same capacity with the entertainment business of
Clear Channel Communications (Clear Channel Entertainment) since
September 2004. From October 2003 to September 2004, he served
as Executive Vice President of Clear Channel Entertainment.
Mr. Wilkin was Chief Executive Officer of Clear Channel
Entertainment Europe and Chairman of Clear Channel Entertainment
Global Theatre from 1999 to 2003. From 1986 to 1999, he served
as Chairman of PACE Theatrical.
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Kathy Willard is our Chief Financial Officer and has
served in this same capacity with Clear Channel Entertainment
since December 2004. Ms. Willard joined SFX Entertainment,
Inc., which we acquired effective August 1, 2000, in
September 1998. In 2000, she was promoted to Vice President and
Controller for Clear Channel Entertainment. In January 2001,
Ms. Willard was then promoted to Senior Vice President and
Chief Accounting Officer for Clear Channel Entertainment until
her promotion in December 2004 to Chief Financial Officer.
Michael Rapino is our Chief Executive Officer and
President of Global Music and has served in this same capacity
with Clear Channel Entertainment since August 2004. From July
2003 to July 2004, Mr. Rapino served as Chief Executive
Officer and President of International Music of Clear Channel
Entertainment. From July 2001 to 2003, Mr. Rapino served as
Chief Executive Officer of Europe Music of Clear Channel
Entertainment. Prior to July 2001, Mr. Rapino was an
executive in our marketing services group.
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 directors.
We intend to
appoint additional
directors immediately prior to the completion of the
distribution, each of whom has consented to so serve. We
anticipate
that , and 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 and initially
will be our Class I
directors, and initially
will be our Class II directors
and and 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 ,
who will serve as the
chairman, and .
We anticipate
that 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
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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; |
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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 ,
who will serve as
chairman, , and .
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 ,
who will serve as
chairman, , and .
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, chief financial officer and chief operating
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, chief financial
officer or chief operating 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 distribution, we will be
adding independent directors to our board of directors and plan
to pay our non-employee directors an annual cash retainer of
$ .
We may also grant stock options and/or other stock-based awards
to our non-employee directors. We plan to pay the chairpersons
of the audit committee, compensation committee and nominating
and governance committee an additional annual cash retainer.
93
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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Bonus ($) | |
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Brian Becker*
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Chief Executive Officer
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Michael Rapino
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President and Chief Executive Officer Global Music
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Miles Wilkin
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Chief Operating Officer
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Dale Head*
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Executive Vice-President and General Counsel
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* |
No longer serves in this capacity with the newly formed company |
94
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
Treatment of Outstanding Clear Channel Communications Stock
Incentive Plan Awards Held by Our Employees.
Stock Option Grant Table
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Individual Grants | |
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Alternative to | |
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Potential | |
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(f) and (g): | |
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Realizable Value | |
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Grant Date | |
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At Assumed | |
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Value | |
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Percent of | |
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Annual Rates of | |
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Number of | |
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Total | |
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Stock Price | |
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Securities | |
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Options | |
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Appreciation For | |
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Underlying | |
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Granted to | |
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Exercise of | |
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Option Term | |
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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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5% ($) | |
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10% ($) | |
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Value $ | |
(a) |
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(b) | |
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(c) | |
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(d) | |
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(e) | |
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(f) | |
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(g) | |
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(h) | |
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Brian Becker*
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Chief Executive Officer
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Michael Rapino
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President and Chief Executive Officer Global Music
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Miles Wilkin
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Chief Operating Officer
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Dale Head*
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Executive Vice-President and General Counsel
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* |
No longer serves in this capacity with the newly formed company |
95
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 | |
(a) |
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(b) | |
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(c) | |
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(d) | |
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Brian Becker*
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Chief Executive Officer
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Michael Rapino
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President and Chief Executive Officer Global Music
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Miles Wilkin
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Chief Operating Officer
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Dale Head*
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Executive Vice-President and General Counsel
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* |
No longer serves in this capacity with the newly formed company |
Employee Benefit Plans
We have entered into an 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, our executive officers and other key employees will 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 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 spin-off
and other corporate restructuring being undertaken by Clear
Channel Communications. For 2006, we will have in place our own
annual performance based incentive plan for designated executive
officers and other key employees. Our plan is described below
under the heading Our 2006 Annual Incentive
Plan.
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
96
Channel Communications Stock still held in our 401(k)plan will
be sold and the proceeds re-invested. We may establish a new CCE
Spinco stock fund to enable our employees to acquire and hold
shares of our stock in their 401(k)accounts.
We will assume responsibility for payment of deferred
compensation owed to our employees under the Clear Channel
Communications 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.
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 Clear Channel Communications options held by our
employees; however, because the spin-off will result in the
termination of our employees employment with the Clear
Channel Communications group, non-vested options will be
forfeited and vested options will be forfeited to the extent
they are not exercised within the applicable post-employment
grace period. See Treatment of Outstanding
Clear Channel Communications Stock Incentive Plan Awards Held by
Our Employees below. 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.
Treatment of Outstanding Clear Channel Communications Stock
Incentive Plan Awards Held by Our Employees
Some of our employees hold Clear Channel Communications stock
options and restricted shares of Clear Channel Communications
stock granted under the Clear Channel Communications stock
incentive plans and certain predecessor plans. In connection
with the distribution, the awards held by our employees will be
adjusted, as summarized below.
The number of Clear Channel Communications shares and the
exercise price per share covered by outstanding Clear Channel
Communications stock options held by our employees at the time
of the spin-off will be adjusted 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. Our employees will be deemed to have
terminated employment with Clear Channel Communications at the
time of the spin-off, which, in turn, will result in the earlier
termination of their unexercised options, as 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. Following the spin-off, the
restricted shares of Clear Channel Communications stock held by
our employees will be forfeited.
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
97
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 material terms of 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 to executive officers the
authority to make awards to employees, including officers, who
are below the executive officer level. 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 shares
of our common stock under the plan, no more than one-third of
which shares may be issued in the form of restricted stock. 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 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 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 it is granted to
the date it 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 or SAR 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 deems appropriate with
respect to stock options and SARs, as well as the shares of
common stock acquired upon the exercise stock options and SARs.
The exercise price under a stock option may be paid in cash or
with previously-owned shares of common stock. The exercise price
may also be paid through broker-assisted
98
cashless exercise procedures and, in certain cases, through the
issuance of net shares or by surrender of other
outstanding awards having a fair market value equal to the
exercise price. 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.
A deferred stock award gives the recipient the right to receive
shares at the end of a specified deferral period. Deferred stock
awards generally consist of the right to receive shares of
common stock in the future, upon the satisfaction of vesting
conditions, such as 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,
restricted stock units, phantom shares
or performance shares. 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 authorizes the
committee to grant awards that are denominated or payable in,
valued in whole or in part by reference to, or otherwise based
on or related to the common stock. The committee will determine
the terms and conditions of such awards, including the
consideration, if any, payable upon exercise of awards in the
nature of purchase rights, the periods during which awards will
be outstanding, and any forfeiture conditions and restrictions
on awards.
Performance-Based Awards. The committee may also grant
performance-based awards. Generally, performance awards require
satisfaction of pre-established performance goals, consisting of
one or more business criteria and targeted performance levels as
a condition of vesting, exercise or payment of shares or cash
pursuant to the award. The business criteria for
performance-based awards may include on a consolidated basis,
and/or for specified subsidiaries or affiliates or business
units, either on an absolute basis or relative to an index:
(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 before
depreciation, amortization and non-cost compensation expense,
(viii) market share or market penetration, or (ix) any
combination of the foregoing. These goals may be set with fixed,
quantitative targets, 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. The committee will determine the
appropriate adjustments to be made to the terms of the plan and
outstanding awards upon the occurrence of certain events
affecting our capital structure, including, for example, a
recapitalization, stock dividend, stock split or spin-off.
Appropriate adjustments may 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 of
restricted stock 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 of outstanding awards, and the performance objectives upon
which outstanding performance awards are based.
Change of Control. If we experience a change of control
(as defined in the plan), (a) all outstanding stock options
and SARs shall become immediately exercisable, (b) all
outstanding shares of restricted stock and deferred stock awards
shall become immediately vested, and (c) all outstanding
performance awards will be treated in the manner determined by
the committee at the time such
99
performance awards are granted. In addition, to the extent set
forth in the applicable agreement relating to a stock option or
SAR, upon a Change of Control, (x) the holder of a stock
option will have the right to a cash payment within sixty days
after the Change of Control equal to the excess of fair market
value of the shares subject to such stock option on the date
preceding the date of surrender over the aggregate purchase
price of the shares subject to such stock option, and
(y) the holder of an SAR will be entitled to receive a cash
or stock payment from us with a value equal to the fair market
value on the date preceding the date of exercise over the fair
market value of the shares subject to such SAR.
No Repricing of Stock Options. Subject to the provisions
of the plan regarding adjustments due to a change in corporate
or 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, the 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
100
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 exemption, assuming
the applicable requirements are satisfied. One of the
requirements is that the plan be approved by our stockholders
for compensation paid under the plan after the first annual
meeting of our stockholders occurring after the first
anniversary of the spin-off. Accordingly, it is anticipated that
the plan will be re-submitted for stockholder approval at or
before that annual meeting in order to enable us to continue to
pay compensation under the plan that satisfies the
Section 162(m) exemption.
The above summary pertains solely to certain 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. Our plan is similar to the Clear Channel
Communications 2005 Annual Incentive Plan and is intended to
meet the requirements of Section 162(m) of the Internal
Revenue Code. We expect to re-submit our annual incentive plan
for stockholder approval at the first annual meeting of our
stockholders occurring after the first anniversary of the
completion of this offering in order to continue meeting the
Section 162(m) requirements.
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 criteria which must be satisfied pursuant to
such awards, and make the determinations necessary with respect
to the administration and payment of such awards. The
performance objectives that may be used by the committee in
granting awards under the plan may be based upon any one or more
of the following criteria, as established on a
participant-by-participant basis: revenue growth, operating
income before depreciation and amortization 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). A performance
goal may be measured over a designated performance period on a
periodic, annual, cumulative or average basis and may be
established on a corporate-wide basis or established with
respect to one or more operating units, divisions, subsidiaries,
acquired businesses, minority investments, partnerships or joint
ventures. For purposes of our plan, a performance period shall
mean the calendar year, or such other shorter or longer period
designated by the committee, during which performance will be
measured in order to determine a participants entitlement
to receive payment of a performance award.
Our annual incentive plan contemplates that the committee will
establish performance objectives for each performance award,
based upon one or more of the permissible business criteria
described above, one or more levels of performance with respect
to each such criteria and the amount or amounts payable or other
rights that the participant will be entitled upon achievement of
such levels of performance. The 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.
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Upon certification of the achievement of performance objectives
by the committee which entitle a participant to the payment of a
performance award, unless such participant has elected to defer
payment upon approval 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 at any time during or after a
performance period, in its sole and absolute discretion, 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 also
authorized during or after a performance period to adjust the
pre-established performance objectives and/or the performance
awards to take into account certain material events, such as a
change in corporate capitalization, a corporate transaction, any
partial or a complete liquidation of us or any subsidiary;
provided that no such adjustment may cause any performance
awards to fail to qualify as qualified performance based
compensation under Section 162(m) of the Internal
Revenue Code.
Our board of directors or a committee designated by the board
may, at any time, terminate or, from time to time, amend, modify
or suspend the operation of our 2006 Annual Incentive Plan and
the terms and provisions of any performance award which has not
been settled (either by payment or deferral), subject to the
conditions of Section 162(m) of the Internal Revenue Code.
As indicated, it is expected that the plan will be re-submitted
for stockholder approval, either in the same or a different
form, at the first annual meeting of our stockholders following
the completion of the distribution.
Employment Agreements
On March 10, 2005, Clear Channel Communications entered
into an amended and restated employment agreement with Randall
T. Mays. This agreement amended and restated his existing
employment agreement dated October 1, 1999 with Clear
Channel Communications. The amended and restated agreement has a
term of seven years with automatic daily extensions unless Clear
Channel Communications or Mr. Mays elects not to extend the
agreement. This employment agreement provides for a minimum base
salary, subject to review and annual increase by the
Compensation Committee of Clear Channel Communications. In
addition, the agreement provides for an annual bonus pursuant to
Clear Channel Communications Annual Incentive Plan or as
the Executive Performance Subcommittee of the Compensation
Committee of Clear Channel Communications determines. The
employment agreement with Mr. Mays provides for a base
minimum salary of $325,000 and for a minimum option grant to
acquire 50,000 shares of Clear Channel Communications
common stock; provided, however, that the annual option grant
will not be smaller than the option grant in the preceding year
unless waived by Mr. Mays. The option will be exercisable
at fair market value at the date of grant for a ten-year period
even if Mr. Mays is not employed by Clear Channel
Communications. The Compensation Committee of Clear Channel
Communications or the Executive Performance Subcommittee of
Clear Channel Communications will determine the schedule upon
which the options will vest and become exercisable.
The executive employment agreement provides for severance and
change-in-control payments in the event that Clear Channel
Communications terminates Mr. Mays employment without
Cause or if Mr. Mays terminates for Good
Reason. Cause is narrowly defined, and any
determination of Cause is subject to a supermajority
vote of Clear Channel Communications independent
directors. Good Reason includes defined
change-in-control transactions involving Clear Channel
Communications, Clear Channel Communications election not
to automatically extend the term of the employment agreement, a
diminution in Mr. Mays pay, duties or title or, at
any time that either of the offices of Chairman or President and
Chief Executive Officer is held by someone other than himself,
L. Lowry Mays or Mark Mays. If Mr. Mays is terminated by
Clear Channel Communications without Cause or
Mr. Mays resigns for Good Reason then
Mr. Mays will receive a lump-sum cash payment equal to the
base salary and bonus that otherwise would have been paid for
the remainder of the term of the agreement (using the highest
bonus paid to the executive in the three years preceding the
termination but not less than $1,000,000), continuation of
benefits, immediate vesting on the date of termination of all
stock options
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held by Mr. Mays on the date of termination, and either:
(i) an option to acquire 1,000,000 shares of Clear
Channel Communications common stock at fair market value
as of the date of termination that is fully vested and
exercisable for a period of ten years, or (ii) a grant of a
number of shares of Clear Channel Communications common
stock equal to: (a) 1,000,000, divided by (b) the
number computed by dividing: (x) the last reported sale
price of Clear Channel Communications common stock on the
New York Stock Exchange at the close of the trading day
immediately preceding the date of termination of
executives employment, by (y) the value of the stock
option described in clause (i) above as determined by Clear
Channel Communications in accordance with generally accepted
accounting principles. Certain tax gross up payments would also
be due on such amounts. In the event Mr. Mays
employment is terminated without Cause or for
Good Reason, the employment agreements also restrict
Mr. Mays business activities that compete with the
business of Clear Channel Communications for a period of two
years following such termination.
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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 transition trademark 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 affiliates to, transfer
to Clear Channel Communications the assets related to its
business not currently owned by Clear Channel Communications.
Clear Channel Communications will assume, 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 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 separation and distribution
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.
Conditions to the Distribution. The master separation and
distribution agreement provides that the distribution is subject
to several conditions that must be satisfied or waived by Clear
Channel Communications in its sole discretion, including, among
others:
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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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we have repaid a portion of our outstanding intercompany note to
Clear Channel Communications, prior to or concurrently with the
distribution date, in an amount aggregating
$ ,
and Clear Channel Communications has contributed any remainder
of the intercompany note to our capital; |
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we have paid Clear Channel Communications approximately
$ million
in exchange for certain entertainment assets held by Clear
Channel Communications; |
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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 separation and
distribution agreement, is in effect; |
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we and Clear Channel Communications will 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 bank credit agreement in connection
with the senior secured credit facility and the purchase
agreement in connection with the senior unsecured notes
described under Description of Indebtedness; and |
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we have received any government approvals and material consents
necessary to consummate the distribution. |
The fulfillment of the foregoing 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.
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 disclosing this
waiver or file a report on Form 8-K with the Securities and
Exchange Commission.
Pursuant to the master separation and distribution 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 or concurrently with the
completion of the distribution, we will pay
$ on
our intercompany note and any remaining portion of our
indebtedness under such intercompany note will be contributed to
us as capital by Clear Channel Communications. We intend to use
the proceeds from the senior unsecured notes offering,
borrowings 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 a 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 of the Agreement. Clear Channel
Communications may amend the Master Agreement at any time prior
to the consummation of the distribution without our approval.
Clear Channel Communications, in its sole discretion, can
terminate the master separation and distribution agreement and
all ancillary agreements at any time before the consummation of
the distribution. Neither we nor Clear Channel Communications
may terminate the master separation and distribution agreement
at any time after the consummation of the distribution unless
the other agrees.
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Auditors and Audits; Annual Financial Statements and
Accounting |
We will agree:
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not to select an independent registered public accounting firm
different from Clear Channel Communications for 2005, because
our financial results for 2005 will be consolidated with 2005
Clear Channel Communications financial statements through
the date of separation; |
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not to select an independent registered public accounting firm
different from Clear Channel Communications
for years
after 2005 that include any financial reporting period for which
our financial results are consolidated with 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 Communications to meet its timetable for
the printing, filing and the dissemination to the public of any
of its annual financial statements that include any financial
reporting period for which our financial results are
consolidated with Clear Channel Communications financial
statements; and |
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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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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
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
preferred stock offering by Holdco #2, the senior secured
credit facility and the senior unsecured notes offering. 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 obligations of our business; |
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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, certain of 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 by reference from our public
filings, if the statement or omission was made or occurred after
the separation; and |
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any untrue statement of, or omission to state, a material fact
in any registration statement or information statement related
to our senior secured notes offering and associated exchange
offer, or related to the senior secured credit facility, 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 registration statement or
information statement. |
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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 certain of the other
transaction documents; |
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any untrue statement of, or omission to state, a material fact
in our public filings 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, other than any
registration statement or information statement related to the
distribution, our debt offerings or associated exchange
offer; and |
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any untrue statement of, or omission to state, a material fact
contained in any registration statement or information statement
related to our senior secured notes offering and associated
exchange offer or related to the senior secured credit facility,
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 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 for all out-of-pocket
fees, costs and expenses (including all legal, accounting and
printing expenses) incurred prior to the completion of the
concurrent transactions 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,
senior unsecured notes and the issuance of preferred stock by
Holdco #2.
Until the distribution date, Clear Channel Communications has
agreed to allow us to participate in its directors and officers
insurance program and, subject to insurance market conditions
and other factors beyond Clear Channel Communications
control, to maintain for our company and its subsidiaries other
policies of insurance that are comparable to those maintained
generally for Clear Channel Communications and its subsidiaries.
We have agreed to reimburse Clear Channel Communications for all
costs and expenses incurred by it in connection with providing
insurance coverage to our company and its subsidiaries in
accordance with Clear Channel Communications practice with
respect to our business as of the distribution date, and we also
have agreed to reimburse Clear Channel Communications for any
incremental costs or expenses incurred by it that are
attributable to us as a result of any changes to insurance
policies that relate to us.
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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
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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 the following:
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confidentiality of our and Clear Channel Communications
information; |
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restrictions on our ability to take any action or enter into any
agreement that would cause Clear Channel Communications to
violate any law, agreement or judgment; |
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restrictions on our ability to enter into any agreement that
binds or purports to bind Clear Channel Communications; and |
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litigation and settlement cooperation between us and Clear
Channel Communications. |
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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interim executive officer services; |
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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 expenses, generally without profit.
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 by giving at least 60 days prior written
notice to Clear Channel Communications. 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
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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 breach of the
Transition Services Agreement, and except to the extent that
Clear Channel Communications has indemnified us for the
liabilities under the terms of the agreement.
The Transition Services Agreement provides that with respect to
executive services, Clear Channel Communications will make
available to us the services of Randall T. Mays to serve as our
interim chief executive officer. Clear Channel Communications
will charge an allocable portion of the compensation and
benefits costs of Mr. Mays as described above.
Mr. Mays will be employed by Clear Channel Communications
and will spend a substantial part of his professional time and
effort on behalf of Clear Channel Communications and Clear
Channel Outdoor Holdings, Inc. We have not established any
minimum time requirements for Mr. Mays. In addition,
Mr. Mays will continue to participate in Clear Channel
Communications stock incentive and other benefit plans,
and he will continue to hold a substantial number of shares of
and/or options to purchase shares of common stock of Clear
Channel Communications. This substantial interest in Clear
Channel Communications equity presents Mr. Mays with
incentives different from those of our stockholders, and may
create conflicts of interest described under Risk
Factors Risk Factors Related to Our Relationship
with Clear Channel Communications.
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).
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), we and Clear Channel
Communication have entered into a tax matters agreement that
will become effective at the time of the spin-off.
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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
110
adjustment to such taxes and whether the tax being reduced is
attributable to its or our business and assets.
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 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
a capital loss for U.S. federal income tax purposes of
approximately
$ (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.
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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, we will be responsible
for all liabilities and expenses relating to our current and
former employees and their covered dependents and beneficiaries.
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 have a group health plan in place for our employees,
effective no later than the first day of the month after the
spin-off. 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.
Certain adjustments and other changes will be made to Clear
Channel Communications stock options and restricted stock held
by our employees at the time of the spin-off. The above and
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 Benefits Plans and
Treatment of Outstanding Clear Channel
Communications Stock Incentive Plan Awards Held by Our
Employees 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.
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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, (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 ,
2005, unless we indicate some other basis for the share amounts.
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Shares to Be Owned | |
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Name of Beneficial Owner |
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L. Lowry Mays (3)
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Mark P. Mays (4)
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Randall T. Mays (5)
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Miles Wilkin
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Michael Rapino
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Kathy Willard
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FMR Corp. (6)
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Capital Research and Management Company (7)
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All directors and executive officers as a group
persons (8)
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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 shares
of Clear Channel Communications common stock beneficially owned
by such individuals
on ,
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 ,
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 shares
held by trusts of which Mr. L. Mays is the trustee, but not
a
beneficiary, shares
held by certain grantor retained annuity trust of which
Mr. L. Mays is the trustee and the
beneficiary, shares
held by certain grantor retained annuity trusts of which
Mr. L. Mays is not the trustee, but is the
beneficiary, shares
held by the LLM Partners Ltd of which Mr. L. Mays shares
control of the sole general
partner, shares
held by the LLMays Management LLC of which Mr. L. Mays is
the sole
member, shares
held by the Mays Family Foundation
and 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 shares
held by trusts of which Mr. M. Mays is the trustee, but not
a beneficiary,
and 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 shares
held by trusts of which Mr. R. Mays is the trustee, but not
a beneficiary,
and shares
held by RTM Partners, Ltd. Mr. R. Mays controls the
sole general partner of RTM Partners, Ltd. |
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(6) |
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 shares
and sole dispositive power with respect
to shares. |
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(7) |
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 shares
and sole dispositive power with respect to all shares. |
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(8) |
Includes shares
held by trusts of which such persons are trustees, but not
beneficiaries, shares
held by certain grantor retained annuity trust of which such
persons are the trustee and the
beneficiary, shares
held by certain grantor retained annuity trusts of which such
persons are not the trustee, but is the
beneficiary, shares
held by the LLM Partners,
Ltd., shares
held by LLMays Management
LLC, shares
held by the MPM Partners,
Ltd., shares
held by the RTM partners,
Ltd., shares
held by the Mays Family Foundation
and shares
held by the Clear Channel Foundation. |
114
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 shares
of common stock, par value $0.01 per share,
and shares
of preferred stock, par value $0.01 per share. Immediately
following the distribution, there will be
approximately shares
of common stock outstanding 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, shares
of our junior participating preferred stock will be reserved for
issuance upon exercise of our preferred share purchase plan.
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
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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 or
vendors.
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 corporate
opportunity for both us and Clear Channel Communications, such
corporate opportunity 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.
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 the director
or officer will have satisfied his or her fiduciary duties to us
and our stockholders with respect to the corporate opportunity,
and we will have renounced our interest in the corporate
opportunity if the director or officer acts in good faith in a
manner consistent with the following policy:
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a corporate opportunity offered to any of our directors or
officers and who is also a director or officer of Clear Channel
Communications will belong to us only if that opportunity is
expressly offered to that person in writing solely in his or her
capacity as our director or officer; and |
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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 in any
manner not addressed in the foregoing description, 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 have an interest or a reasonable expectancy,
and in which, by embracing the opportunities, the self-interest
of Clear Channel Communications or its officers or directors
will be brought into conflict with our self-interest.
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.
116
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. |
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, 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 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 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.
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
118
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 deferring 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 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.
119
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
$ ,
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 Schedule 13G filers, 20% or more of our
outstanding common stock, or, if earlier, |
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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 any person or group becomes an
acquiring person. 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 $0.01 per right. The
redemption price will be adjusted if we have a stock split or
stock dividends of our common stock.
120
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 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; |
121
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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 .
New York Stock Exchange Listing
We intend to apply to list our common stock on the New York
Stock Exchange under the symbol
.
DESCRIPTION OF INDEBTEDNESS
The following is a description of some of the anticipated
material terms of the credit agreement governing the senior
secured credit facility and the indenture governing the senior
unsecured notes. This summary is qualified in its entirety by
the specific terms and provisions reflected in the forms of
these agreements, copies of which will be filed as exhibits to
the registration statement of which this information statement
is a part. We encourage you to read the forms of these
agreements. Negotiation of these agreements 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.
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
$ million senior
secured credit facility consisting of:
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a
$ million -year
term loan; and |
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a
$ million -year
revolving credit facility, including a
$ million
subfacility for letters of credit. |
The -year
revolving credit facility will provide for a
$ million
subfacility for 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.
122
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 assets other than
assets of our foreign subsidiaries 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 under the senior secured credit 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 %, or
(2) LIBOR plus an applicable margin, which applicable
margin will be based on our credit ratings determined on
specified reference dates, and we expect the initial interest
rate margins under the senior secured credit facility to be as
follows: |
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LIBOR Margin |
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-year
term loan
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-year
revolving credit facility
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interest rates will be increased
by % 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 LIBOR 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 unfunded balance of
the -year
revolving credit facility; |
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principal reductions on
the -year
term loan will commence at
least 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 a LIBOR 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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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 material agreements with affiliates; |
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modify our nature of business; |
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enter into sale and leaseback transactions; |
123
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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 the senior unsecured notes and
certain other 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 senior unsecured notes offering and
the borrowings under our senior secured credit facility, we
expect to have approximately
$ million
of indebtedness for borrowed money outstanding. We expect that
approximately
$ of
the revolving credit facility will remain available for working
capital and general corporate purposes at the completion of the
distribution, although 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 such working capital and general corporate purposes.
Senior Unsecured Notes
Prior to or concurrently with the completion of the
distribution, one of our operating subsidiaries, Holdco #3,
which owns more that 95% of the gross value of our assets, will
offer
$ million
aggregate principal amount
of -year
senior unsecured notes. Interest on the senior unsecured notes
will accrue at a fixed rate and will be payable semi-annually in
arrears. The senior unsecured notes will effectively rank junior
to Holdco #3s secured indebtedness, including debt it
incurs under the senior secured credit facility, to the extent
of the value of the assets securing such indebtedness. The
senior unsecured notes will be unsecured obligations and will
rank equally with all of our existing and future unsecured
senior indebtedness and senior to all of our future subordinated
indebtedness.
We anticipate the terms of the indenture governing the senior
unsecured notes may contain covenants that restrict our and our
subsidiaries 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 material 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. |
We further anticipate that some of these restrictions will cease
to be applicable if we attain investment grade status and we are
not in default, which we refer to as a fall away event. After a
fall away
124
event, some of the above restrictions will no longer apply, but
we expect our and our subsidiaries ability to do the
following will continue to be restricted:
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create liens; |
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enter into sale and leaseback transactions; and |
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consolidate, merge or sell all or substantially all of our
assets. |
The indenture governing the senior unsecured notes may also
contain customary events of default. We cannot be certain the
terms described herein will not change or be supplemented.
DESCRIPTION OF SUBSIDIARY PREFERRED STOCK
Prior to the completion of the distribution, third party
investors 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. 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. 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. 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 certificate of 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.
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 Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W.,
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.
125
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.
126
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-25 |
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F-26 |
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F-27 |
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F-28 |
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F-29 |
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Schedule II Valuation and Qualifying Accounts
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F-34 |
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F-1
The following report is in the form that will be signed upon
completion of the transaction described in Basis of Presentation
of Note A to the financial statements.
/s/ Ernst & Young LLP
San Antonio, Texas
August 9, 2005
Report of Independent Registered Public Accounting Firm
Board of Directors
Clear Channel Communications, Inc.
We have audited the accompanying combined balance sheets of CCE
Spinco, Inc. and subsidiaries (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 audits 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 CCE Spinco, Inc. and subsidiaries at
December 31, 2004 and 2003, and the combined results of
their operations and their 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 as to Basis of
Presentation of Note A as to
which date
is ,
2005 |
F-2
COMBINED BALANCE SHEETS
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December 31, | |
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2004 | |
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2003 | |
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(In thousands) | |
ASSETS |
CURRENT ASSETS
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Cash and cash equivalents
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$ |
179,137 |
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$ |
116,360 |
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Accounts receivable, less allowance of $10,174 in 2004 and
$11,595 in 2003
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167,868 |
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180,387 |
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Prepaid expenses
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83,546 |
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88,657 |
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Other current assets
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42,006 |
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38,213 |
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Total Current Assets
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472,557 |
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423,617 |
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PROPERTY, PLANT AND EQUIPMENT
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Land, buildings and improvements
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880,881 |
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804,722 |
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Furniture and other equipment
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155,563 |
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137,579 |
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Construction in progress
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14,917 |
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42,319 |
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1,051,361 |
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984,620 |
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Less accumulated depreciation
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258,045 |
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202,466 |
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793,316 |
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782,154 |
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INTANGIBLE ASSETS
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Definite-lived intangibles, net
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14,838 |
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15,633 |
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Goodwill
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44,813 |
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|
127,076 |
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OTHER ASSETS
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Notes receivable
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7,110 |
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9,198 |
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Investments in, and advances to, nonconsolidated affiliates
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27,002 |
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19,717 |
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Deferred tax asset
|
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97,317 |
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92,274 |
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Other assets
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21,753 |
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26,046 |
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Total Assets
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$ |
1,478,706 |
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$ |
1,495,715 |
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LIABILITIES AND OWNERS EQUITY |
CURRENT LIABILITIES
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Accounts payable
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$ |
31,440 |
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$ |
41,298 |
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Deferred income
|
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|
184,413 |
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|
169,370 |
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Accrued expenses
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362,278 |
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335,800 |
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Current portion of long-term debt
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1,214 |
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1,283 |
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Total Current Liabilities
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579,345 |
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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)
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Revenue
|
|
$ |
2,802,022 |
|
|
$ |
2,704,369 |
|
|
$ |
2,469,681 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
2,636,871 |
|
|
|
2,503,101 |
|
|
|
2,299,069 |
|
|
|
|
Depreciation and amortization
|
|
|
64,095 |
|
|
|
63,436 |
|
|
|
64,836 |
|
|
|
|
Corporate expenses
|
|
|
28,307 |
|
|
|
26,747 |
|
|
|
26,101 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
72,749 |
|
|
|
111,085 |
|
|
|
79,675 |
|
|
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
|
|
|
(15,456 |
) |
|
|
128 |
|
|
|
15,573 |
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
(Gain) loss 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
CCE Spinco, Inc. (the Company) is currently a
wholly-owned subsidiary of Clear Channel Communications, Inc.
(Clear Channel Communications), a diversified media
company with operations in radio broadcasting, outdoor
advertising and live entertainment. On April 29, 2005,
Clear Channel Communications announced its plan to separate its
entertainment businesses into a separate company. Clear Channel
Communications and its subsidiaries will contribute and transfer
to the Company all of the assets and liabilities of the
entertainment businesses prior to the completion of the
transaction. It is the intention of Clear Channel Communications
to distribute its remaining ownership interest of 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.
On August 2, 2005 the Company was incorporated in Delaware
as a wholly-owned subsidiary of Clear Channel Communications. On
this date, 1,000 shares of the Companys common stock, par
value $0.01 per share, were issued, authorized and outstanding.
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 include assets and liabilities
of Clear Channel Communications not currently owned by the
Company that will be transferred to the Company prior to or
concurrent with the spin-off transaction. 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.
F-7
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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.
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.
F-8
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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.
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.
F-9
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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 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.
F-10
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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 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.
F-11
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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
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) | |
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 |
) |
|
|
|
|
|
|
|
|
|
|
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 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 $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.
F-12
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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 2004, the Company made adjustments to goodwill for
$96.5 million primarily related to tax contingencies that
were recorded at the time of acquisition that were resolved
favorably in 2004. 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.
F-13
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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
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
F-14
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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, of which $2.1 million
was recorded in Divisional operating expenses and
$4.3 million was recorded in Other income
(expense) net, 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.
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.
F-15
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
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.
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 |
|
|
|
|
|
|
|
|
F-16
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
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.
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.
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 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
F-17
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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 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. 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.
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 Other income (expense)
net.
F-18
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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.
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. 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-19
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-20
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 includes benefits of approximately $6.1 million,
net of current year additions to current tax for other tax
contingencies of approximately $4.9 million.
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 due to 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 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 due to 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 hold 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 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.
F-21
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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 |
|
|
Gain (loss) on sale of operating and fixed assets
|
|
|
(10,687 |
) |
|
|
978 |
|
|
|
15,241 |
|
|
Minority interest expense
|
|
|
(3,300 |
) |
|
|
(3,280 |
) |
|
|
(3,794 |
) |
|
Royalty fee to Clear Channel Communications
|
|
|
(3,079 |
) |
|
|
(4,073 |
) |
|
|
|
|
|
Other, net
|
|
|
(1,611 |
) |
|
|
(367 |
) |
|
|
2,024 |
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) net
|
|
$ |
(15,456 |
) |
|
$ |
128 |
|
|
$ |
15,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
F-22
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
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 |
|
|
$ |
309,868 |
|
|
$ |
291,147 |
|
|
$ |
|
|
|
$ |
2,802,022 |
|
Divisional operating expenses
|
|
|
2,081,945 |
|
|
|
274,220 |
|
|
|
280,706 |
|
|
|
|
|
|
|
2,636,871 |
|
Depreciation and amortization
|
|
|
37,043 |
|
|
|
14,709 |
|
|
|
7,406 |
|
|
|
4,937 |
|
|
|
64,095 |
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,307 |
|
|
|
28,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
82,019 |
|
|
$ |
20,939 |
|
|
$ |
3,035 |
|
|
$ |
(33,244 |
) |
|
$ |
72,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
2,069,857 |
|
|
$ |
314,686 |
|
|
$ |
319,826 |
|
|
$ |
|
|
|
$ |
2,704,369 |
|
Divisional operating expenses
|
|
|
1,924,132 |
|
|
|
278,786 |
|
|
|
300,183 |
|
|
|
|
|
|
|
2,503,101 |
|
Depreciation and amortization
|
|
|
35,262 |
|
|
|
13,161 |
|
|
|
9,626 |
|
|
|
5,387 |
|
|
|
63,436 |
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,747 |
|
|
|
26,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
110,463 |
|
|
$ |
22,739 |
|
|
$ |
10,017 |
|
|
$ |
(32,134 |
) |
|
$ |
111,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
F-23
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global | |
|
Global | |
|
|
|
|
|
|
|
|
Music | |
|
Theater | |
|
Other | |
|
Corporate | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,821,215 |
|
|
$ |
292,822 |
|
|
$ |
355,644 |
|
|
$ |
|
|
|
$ |
2,469,681 |
|
Divisional operating expenses
|
|
|
1,693,334 |
|
|
|
251,333 |
|
|
|
354,402 |
|
|
|
|
|
|
|
2,299,069 |
|
Depreciation and amortization
|
|
|
35,285 |
|
|
|
11,133 |
|
|
|
12,694 |
|
|
|
5,724 |
|
|
|
64,836 |
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,101 |
|
|
|
26,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
92,596 |
|
|
$ |
30,356 |
|
|
$ |
(11,452 |
) |
|
$ |
(31,825 |
) |
|
$ |
79,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and identifiable assets of
$424.4 million, $348.7 million and $395.2 million
were derived from the Companys foreign operations 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.
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 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. 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;
that motion is pending before the District Court. 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 50.1% of the shares of
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 our
global music segment. Mean Fiddler is involved in the promotion
and production of live music events, including festivals, and is
involved in venue operations.
F-24
COMBINED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
(In thousands) | |
ASSETS |
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
251,949 |
|
|
$ |
179,137 |
|
Accounts receivable, less allowance of $10,437 at June 30,
2005 and $10,174 at December 31, 2004
|
|
|
236,219 |
|
|
|
167,868 |
|
Prepaid expenses
|
|
|
282,395 |
|
|
|
83,546 |
|
Other current assets
|
|
|
115,564 |
|
|
|
42,006 |
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
886,127 |
|
|
|
472,557 |
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Land, buildings and improvements
|
|
|
870,394 |
|
|
|
880,881 |
|
Furniture and other equipment
|
|
|
157,444 |
|
|
|
155,563 |
|
Construction in progress
|
|
|
54,296 |
|
|
|
14,917 |
|
|
|
|
|
|
|
|
|
|
|
1,082,134 |
|
|
|
1,051,361 |
|
Less accumulated depreciation
|
|
|
281,148 |
|
|
|
258,045 |
|
|
|
|
|
|
|
|
|
|
|
800,986 |
|
|
|
793,316 |
|
INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
Definite-lived intangibles, net
|
|
|
13,283 |
|
|
|
14,838 |
|
Goodwill
|
|
|
48,781 |
|
|
|
44,813 |
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
5,312 |
|
|
|
7,110 |
|
Investments in, and advances to, nonconsolidated affiliates
|
|
|
24,317 |
|
|
|
27,002 |
|
Deferred tax asset
|
|
|
94,504 |
|
|
|
97,317 |
|
Other assets
|
|
|
21,529 |
|
|
|
21,753 |
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
1,894,839 |
|
|
$ |
1,478,706 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND OWNERS EQUITY |
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
68,021 |
|
|
$ |
31,440 |
|
Deferred income
|
|
|
513,416 |
|
|
|
184,413 |
|
Accrued expenses
|
|
|
427,054 |
|
|
|
362,278 |
|
Current portion of long-term debt
|
|
|
1,250 |
|
|
|
1,214 |
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,009,741 |
|
|
|
579,345 |
|
Long-term debt
|
|
|
20,232 |
|
|
|
20,564 |
|
Debt with Clear Channel Communications
|
|
|
639,413 |
|
|
|
628,897 |
|
Other long-term liabilities
|
|
|
84,443 |
|
|
|
88,997 |
|
Minority interest
|
|
|
3,688 |
|
|
|
3,927 |
|
Commitment and contingent liabilities (Note 4)
|
|
|
|
|
|
|
|
|
OWNERS EQUITY
|
|
|
|
|
|
|
|
|
Owners net investment
|
|
|
4,340,552 |
|
|
|
4,358,352 |
|
Retained deficit
|
|
|
(4,209,612 |
) |
|
|
(4,187,855 |
) |
Accumulated other comprehensive income (loss)
|
|
|
6,382 |
|
|
|
(13,521 |
) |
|
|
|
|
|
|
|
|
Total Owners Equity
|
|
|
137,322 |
|
|
|
156,976 |
|
|
|
|
|
|
|
|
|
Total Liabilities and Owners Equity
|
|
$ |
1,894,839 |
|
|
$ |
1,478,706 |
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-25
UNAUDITED INTERIM COMBINED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousand) | |
Revenue
|
|
$ |
1,180,210 |
|
|
$ |
1,271,705 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
1,135,246 |
|
|
|
1,206,878 |
|
|
|
|
Depreciation and amortization
|
|
|
30,759 |
|
|
|
31,727 |
|
|
|
|
Corporate expenses
|
|
|
26,640 |
|
|
|
12,675 |
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(12,435 |
) |
|
|
20,425 |
|
|
Interest expense
|
|
|
1,494 |
|
|
|
1,389 |
|
|
Intercompany interest expense
|
|
|
22,014 |
|
|
|
19,449 |
|
|
Equity in earnings (loss) of nonconsolidated affiliates
|
|
|
(1,619 |
) |
|
|
2,674 |
|
|
Other income (expense) net
|
|
|
1,300 |
|
|
|
(13,131 |
) |
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(36,262 |
) |
|
|
(10,870 |
) |
|
Income tax (expense) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
17,521 |
|
|
|
18,730 |
|
|
|
|
Deferred
|
|
|
(3,016 |
) |
|
|
(19,863 |
) |
|
|
|
|
|
|
|
|
Net loss
|
|
|
(21,757 |
) |
|
|
(12,003 |
) |
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
19,903 |
|
|
|
(921 |
) |
|
|
|
|
|
|
|
Comprehensive loss
|
|
$ |
(1,854 |
) |
|
$ |
(12,924 |
) |
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-26
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 loss
|
|
|
|
|
|
|
(21,757 |
) |
|
|
|
|
|
|
(21,757 |
) |
Contributions from Owner
|
|
|
10,007 |
|
|
|
|
|
|
|
|
|
|
|
10,007 |
|
Dividends to Owner
|
|
|
(27,807 |
) |
|
|
|
|
|
|
|
|
|
|
(27,807 |
) |
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
19,903 |
|
|
|
19,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2005
|
|
$ |
4,340,552 |
|
|
$ |
(4,209,612 |
) |
|
$ |
6,382 |
|
|
$ |
137,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-27
UNAUDITED INTERIM COMBINED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(21,757 |
) |
|
$ |
(12,003 |
) |
Reconciling items:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
29,380 |
|
|
|
30,213 |
|
|
Amortization of intangibles
|
|
|
1,379 |
|
|
|
1,514 |
|
|
Deferred income tax expense (benefit)
|
|
|
3,016 |
|
|
|
19,863 |
|
|
Current tax expense (benefit) contributed by owner
|
|
|
(27,807 |
) |
|
|
(14,828 |
) |
|
Non-cash compensation expense
|
|
|
703 |
|
|
|
505 |
|
|
(Gain) loss on sale of operating and fixed assets
|
|
|
(617 |
) |
|
|
11,424 |
|
|
Equity in (earnings) loss of nonconsolidated affiliates
|
|
|
1,619 |
|
|
|
(2,674 |
) |
|
Minority interest expense
|
|
|
571 |
|
|
|
1,790 |
|
|
Increase (decrease) other, net
|
|
|
(98 |
) |
|
|
(193 |
) |
Changes in operating assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
(68,517 |
) |
|
|
(72,979 |
) |
|
Decrease (increase) in prepaid expenses
|
|
|
(202,060 |
) |
|
|
(107,897 |
) |
|
Decrease (increase) in other assets
|
|
|
(69,338 |
) |
|
|
(7,451 |
) |
|
Increase (decrease) in accounts payable, accrued expenses and
other liabilities
|
|
|
96,622 |
|
|
|
89,349 |
|
|
Increase (decrease) in deferred income
|
|
|
333,202 |
|
|
|
274,744 |
|
|
Increase (decrease) in minority interest liability
|
|
|
(952 |
) |
|
|
(1,261 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
75,346 |
|
|
|
210,116 |
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Decrease (increase) in notes receivable, net
|
|
|
1,119 |
|
|
|
1,415 |
|
Decrease (increase) in investments in, and advances to,
nonconsolidated affiliates net
|
|
|
(173 |
) |
|
|
(781 |
) |
Purchases of property, plant and equipment
|
|
|
(49,891 |
) |
|
|
(44,179 |
) |
Proceeds from disposal of assets
|
|
|
337 |
|
|
|
2,302 |
|
Acquisition of operating assets
|
|
|
(1,226 |
) |
|
|
(12,515 |
) |
Decrease (increase) in other net
|
|
|
19,951 |
|
|
|
(141 |
) |
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(29,883 |
) |
|
|
(53,899 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from (payments on) debt with Clear Channel
Communications
|
|
|
42,719 |
|
|
|
(67,349 |
) |
Proceeds from long-term debt
|
|
|
444 |
|
|
|
0 |
|
Payments on long-term debt
|
|
|
(508 |
) |
|
|
(678 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
42,655 |
|
|
|
(68,027 |
) |
Effect of exchange rate changes on cash
|
|
|
(15,306 |
) |
|
|
2,115 |
|
Net increase in cash and cash equivalents
|
|
|
72,812 |
|
|
|
90,305 |
|
Cash and cash equivalents at beginning of year
|
|
|
179,137 |
|
|
|
116,360 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
251,949 |
|
|
$ |
206,665 |
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-28
NOTES TO UNAUDITED INTERIM COMBINED FINANCIAL STATEMENTS
|
|
NOTE 1: |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
|
|
Preparation of Interim Financial Statements |
CCE Spinco, Inc. (the Company) includes the entities
principally comprising the live entertainment segment of Clear
Channel Communications, Inc. (Clear Channel
Communications), a diversified media company with
operations in radio broadcasting, outdoor advertising and live
entertainment.
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 include assets and liabilities
of Clear Channel Communications not currently owned by the
Company that will be transferred to the Company prior to or
concurrent with the spin-off transaction. 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:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Net loss:
|
|
|
|
|
|
|
|
|
|
Reported
|
|
$ |
(21,757 |
) |
|
$ |
(12,003 |
) |
|
Pro forma stock compensation expense, net of tax
|
|
|
(2,371 |
) |
|
|
(5,579 |
) |
|
|
|
|
|
|
|
|
Pro Forma
|
|
$ |
(24,128 |
) |
|
$ |
(17,582 |
) |
|
|
|
|
|
|
|
|
|
|
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
F-29
NOTES TO UNAUDITED INTERIM COMBINED FINANCIAL
STATEMENTS (Continued)
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 will adopt EITF 05-6
on July 1, 2005 and do not expect adoption to materially
impact the Companys 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 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 $26.4 million and $13.1 million,
respectively, as of June 30, 2005, and $26.9 million
and $12.1 million, respectively, as of December 31,
2004.
Total amortization expense from definite-lived intangible assets
for the six months ended June 30, 2005, the six months
ended June 30, 2004 and for the year ended
December 31, 2004 was $1.4 million, $1.5 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.
F-30
NOTES TO UNAUDITED INTERIM COMBINED FINANCIAL
STATEMENTS (Continued)
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 six-month period
ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global | |
|
Global | |
|
|
|
|
Music | |
|
Theater | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance as of December 31, 2004
|
|
$ |
34,507 |
|
|
$ |
10,306 |
|
|
$ |
44,813 |
|
Acquisitions
|
|
|
5,839 |
|
|
|
1,744 |
|
|
|
7,583 |
|
Foreign currency
|
|
|
(2,784 |
) |
|
|
(831 |
) |
|
|
(3,615 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2005
|
|
$ |
37,562 |
|
|
$ |
11,219 |
|
|
$ |
48,781 |
|
|
|
|
|
|
|
|
|
|
|
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
six-month period ended June 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. As of
June 30, 2005, the accrual balance for the restructuring
was $1.7 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:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
Year Ended | |
|
|
June 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Severance and lease termination costs:
|
|
|
|
|
|
|
|
|
|
Accrual at January 1
|
|
$ |
2,579 |
|
|
$ |
2,648 |
|
|
Payments charged against restructuring accrual
|
|
|
(860 |
) |
|
|
(69 |
) |
|
|
|
|
|
|
|
Remaining accrual at June 30 or December 31
|
|
$ |
1,719 |
|
|
$ |
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 six months ended June 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
six months ended June 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-31
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 June 30, 2005, the
accrual balance of the restructuring was $2.5 million. All
of this restructuring has resulted in the actual termination of
approximately 90 employees. During the six months ended
June 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 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 investment. During the six months ended June 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
June 30, 2005 and December 31, 2004, the balance
recorded in Owners net investment is
$4.3 billion and $4.4 billion, respectively.
The Company purchases advertising from Clear Channel
Communications and its subsidiaries. For the six months ended
June 30, 2005 and 2004, the Company recorded
$5.8 million and $8.4 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. For the six months
ended June 30, 2005 and 2004, the Company recorded
$4.7 million and $4.1 million, respectively, as a
component of Corporate expenses for these 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 six months ended
June 30, 2005 and 2004, the
F-32
NOTES TO UNAUDITED INTERIM COMBINED FINANCIAL
STATEMENTS (Continued)
Company recorded $0.5 million and $0.6 million,
respectively, of royalty fees in Other income
(expense) net.
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 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) | |
Six months ended June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
828,238 |
|
|
$ |
180,087 |
|
|
$ |
171,885 |
|
|
$ |
|
|
|
$ |
1,180,210 |
|
Divisional operating expenses
|
|
|
810,871 |
|
|
|
164,788 |
|
|
|
159,587 |
|
|
|
|
|
|
|
1,135,246 |
|
Depreciation and amortization
|
|
|
18,085 |
|
|
|
7,460 |
|
|
|
2,837 |
|
|
|
2,377 |
|
|
|
30,759 |
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,640 |
|
|
|
26,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
(718 |
) |
|
$ |
7,839 |
|
|
$ |
9,461 |
|
|
$ |
(29,017 |
) |
|
$ |
(12,435 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$ |
1,221,972 |
|
|
$ |
385,041 |
|
|
$ |
151,149 |
|
|
$ |
136,677 |
|
|
$ |
1,894,839 |
|
Capital expenditures
|
|
$ |
20,801 |
|
|
$ |
25,563 |
|
|
$ |
858 |
|
|
$ |
2,669 |
|
|
$ |
49,891 |
|
Six months ended June 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
912,644 |
|
|
$ |
174,069 |
|
|
$ |
184,992 |
|
|
$ |
|
|
|
$ |
1,271,705 |
|
Divisional operating expenses
|
|
|
885,739 |
|
|
|
151,600 |
|
|
|
169,539 |
|
|
|
|
|
|
|
1,206,878 |
|
Depreciation and amortization
|
|
|
17,835 |
|
|
|
7,354 |
|
|
|
3,996 |
|
|
|
2,542 |
|
|
|
31,727 |
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,675 |
|
|
|
12,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
9,070 |
|
|
$ |
15,115 |
|
|
$ |
11,457 |
|
|
$ |
(15,217 |
) |
|
$ |
20,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$ |
1,118,480 |
|
|
$ |
410,621 |
|
|
$ |
108,440 |
|
|
$ |
117,146 |
|
|
$ |
1,754,687 |
|
Capital expenditures
|
|
$ |
22,136 |
|
|
$ |
18,764 |
|
|
$ |
1,139 |
|
|
$ |
2,140 |
|
|
$ |
44,179 |
|
Revenue of $386.2 million and $324.1 million and
identifiable assets of $561.5 million and
$462.6 million were derived from the Companys foreign
operations for the six months ended June 30, 2005 and 2004,
respectively.
|
|
Note 7: |
SUBSEQUENT EVENTS |
During July 2005, the Company purchased 50.1% of the shares of
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 our
global music segment. Mean Fiddler is involved in the promotion
and production of live music events, including festivals, and is
involved in venue operations.
F-33
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-34
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-35
* See inside front cover for a map of our North American venues.