e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2005
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to .
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Commission File Number
001-32601
LIVE NATION, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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20-3247759
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(State of
Incorporation)
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(I.R.S. Employer
Identification No.)
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9348 Civic Center Drive
Beverly Hills, CA 90210
(Address of principal executive
offices, including zip code)
(310) 867-7000
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common Stock, $.01 Par Value
per Share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer.
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
On June 30, 2005, the registrants common stock was
not publicly traded.
On February 28, 2006, there were 63,798,312 outstanding
shares of Common Stock, excluding 3,376,600 shares held in
treasury.
DOCUMENTS
INCORPORATED BY REFERENCE
None
LIVE
NATION, INC.
INDEX TO
FORM 10-K
2
PART I
Special Note About Forward-Looking Statements
Certain statements contained in this
Form 10-K
(or otherwise made by us or on our behalf from time to time in
other reports, filings with the Securities and Exchange
Commission, news releases, conferences, World Wide Web postings
or otherwise) that are not statements of historical fact
constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Exchange Act of 1934, as
amended, notwithstanding that such statements are not
specifically identified. Forward-looking statements include, but
are not limited to, statements about our financial position,
business strategy, competitive position, potential growth
opportunities, potential operating performance improvements, the
effects of competition, the effects of future legislation or
regulations and plans and objectives of our management for
future operations. We have based our forward-looking statements
on our managements beliefs and assumptions based on
information available to our management at the time the
statements are made. Use of the words may,
should, continue, plan,
potential, anticipate,
believe, estimate, expect,
intend, outlook, could,
target, project, seek,
predict, or variations of such words and similar
expressions are intended to identify forward-looking statements
but are not the exclusive means of identifying such statements.
Forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties that
could cause actual results to differ materially from those in
such statements. Factors that could cause actual results to
differ from those discussed in the forward-looking statements
include, but are not limited to, those set forth under
Item 1A. Risk Factors as well as other
factors described herein or in our annual, quarterly and other
reports we file with the Securities and Exchange Commission
(collectively, cautionary statements). Based upon
changing conditions, should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions
prove incorrect, actual results may vary materially from those
described in any forward-looking statements. All subsequent
written and oral forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their
entirety by the applicable cautionary statements. We do not
intend to update these forward-looking statements, except as
required by applicable law.
Live Nation (which may be referred to as the
Company, we, us or
our) means Live Nation, Inc. and its subsidiaries,
or one of our segments, as the context requires.
Our
Company
We believe we are one of the worlds largest diversified
venue operators for, and promoters and producers of, live
entertainment events. For the year ended December 31, 2005,
we promoted, produced or hosted over 29,500 events, including
music concerts, theatrical performances, specialized motor
sports and other events, with total attendance nearing
60 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 December 31, 2005, we owned or operated 119 venues,
consisting of 77 domestic and 42 international venues. These
venues include 37 amphitheaters, 61 theaters, 15 clubs,
four arenas and two festival sites. In addition, through equity,
booking or similar arrangements we have the right to book events
at 34 additional venues. For the year ended December 31,
2005, we generated revenues of approximately $2.9 billion.
Approximately 90% of our total revenues for 2005 resulted from
revenues related to our owned or operated venues and from our
promotion or production of music concerts and theatrical
performances.
In addition, we believe we are a leading integrated sports
marketing and management company specializing in the
representation of sports athletes.
Our principal executive offices are located at 9348 Civic Center
Drive, Beverly Hills, California 90210 (telephone: 310-867-7000).
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Our
History
We were formed through acquisitions of various entertainment
businesses and assets by our predecessors. On August 1,
2000, Clear Channel Communications, Inc. (Clear
Channel or Clear Channel Communications)
acquired our live entertainment business, which was initially
formed in 1997. On August 2, 2005, we were incorporated in
our current form as a Delaware corporation to own substantially
all of the entertainment business of Clear Channel
Communications. On December 21, 2005, the separation of the
business previously conducted by Clear Channels live
entertainment segment and sports representation business, now
comprising our business, and the distribution by Clear Channel
of all of our common stock to its shareholders, was completed in
a tax free spin- off (the Distribution, the
Separation or the spin-off). Following
our separation from Clear Channel, we became a separate publicly
traded company on the New York Stock Exchange (NYSE: LYV) on
December 21, 2005. In connection with the Separation, we
issued, through one of our subsidiaries, $40.0 million of
redeemable preferred stock and borrowed $325.0 million
under a new credit agreement. We used the proceeds to repay
$220.0 million of debt owed to Clear Channel Communications
and Clear Channel Communications contributed to our capital the
remaining balance owed them. See Recent
Developments.
Live
Music Industry
The live music industry includes concert promotion and
production, set design, venue 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, a leading publisher of concert industry
data, from 2003 to 2005, North American gross concert revenues
increased from $2.5 billion to $3.1 billion, a
compounded annual growth rate of approximately 11%. In the 2003
to 2005 period, our global music revenues, comprised of gross
concert revenues, increased from $2.1 billion to
$2.3 billion, a compounded annual growth rate of 6%. We
believe this growth was primarily due to increasing ticket
prices for top-grossing acts and the continued willingness of
these acts such as Madonna, The Rolling Stones and U2 to
continue touring. According to Pollstar, while industry revenues
increased from 2004 to 2005, ticket sales for the top 100 tours
(representing approximately 67% of total domestic concert ticket
revenues) declined by 3.5%. Although total attendance at our
owned and operated amphitheaters declined in 2005 as compared to
2004 as a result of fewer events, the average per show
attendance at these venues actually increased 7%. We believe
that this increase in average attendance was driven by a
decrease in the average ticket price by 6% during 2005.
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 them 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. Performers are paid by
the promoter 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 reduce their losses.
Promoters can also reduce the risk of losses by entering into
global or national touring agreements with performers and
including the right to offset lower ticket revenue shows with
higher performing shows on the tour in the determination of
overall artist fees.
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.
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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 from members of The League of American
Theatres and Producers, Inc., or the League, gross ticket sales
for the North American theatrical industry of touring Broadway
theatrical performances has increased from $642 million
during the
2002-2003
season to $934 million during the
2004-2005
season, a compounded annual growth rate of 21%. In the 2003 to
2005 period, our global theater revenues slightly decreased from
$318.2 million to $317.0 million based on fewer
profitable shows that we had the rights to present.
Live theater consists mainly of productions of existing musicals
and dramatic works and the development of new works. While
musicals require greater investments of time and capital than
dramatic productions, they are more likely to become touring
theatrical shows. For existing musicals, 12 to 24 months
typically elapse between producers acquisitions of
theatrical stage rights and the first performances. During this
time the producers assemble touring companies and ready the
shows for tours. In comparison, dramatic productions typically
have smaller production budgets, shorter pre-production periods,
lower operating costs and tend to occupy smaller theaters for
shorter runs as compared to musicals.
Producers of touring theatrical shows first acquire the rights
to works from their owners, who typically receive royalty
payments in return. Producers then assemble casts, hire
directors and arrange for the design and construction of sets
and costumes. Producers also arrange transportation and schedule
shows with local presenters. Local presenters, who generally
operate or have relationships with venues, provide all local
services such as selling tickets, hiring local personnel, buying
advertising and paying fixed guarantees to producers. Presenters
then have the right to recover the guarantees plus their local
costs from ticket revenues. Presenters and producers share any
remaining ticket revenues. North American venues often sell
tickets for touring theatrical performances through
subscription series, which are pre-sold season
tickets for a defined number of shows in given venues.
In order to secure exclusive touring rights, investors may take
equity positions in Broadway (New York) or West End (London)
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
Specialized
Motor Sports Industry
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
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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 a
season 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.
Sports
Representation Industry
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.
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.
Information related to the operating segments of our global
music, global theater and other operations for 2005, 2004 and
2003 is included in Note M Segment Data in
the Notes to Consolidated and Combined Financial Statements in
Item 8 of this Annual Report.
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, 2005, our global music business generated
approximately $2.3 billion, or 79%, of our total revenues.
We promoted or produced over 10,000 events in 2005, including
tours for artists such as U2, Paul McCartney, Dave Matthews Band
and Toby Keith. In addition, we produced several large festivals
in Europe, including Rock Werchter in Belgium, the North Sea
Jazz Festival in Holland, and the Reading Festival in the United
Kingdom. 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,
2005, our global theater business generated approximately
$317.0 million, or 11%, of our total revenues. In 2005, we
presented or produced over 14,000 theatrical performances
of productions such as The Producers, The Lion King, Mamma
Mia!, Hairspray, Movin Out, Phantom of the Opera and
Chicago. We pre-sell tickets for our touring shows in
approximately 46 touring markets through Broadway Across
America, one of the largest subscription series in the
United States and Canada. 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 2005, we held over 500 events in
stadiums, arenas and other venues including monster truck shows,
supercross races, motocross races, freestyle motocross events,
motorcycle road racing
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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 December 31, 2005, we
had approximately 600 clients, including Kobe Bryant
(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. In addition, we distribute television
shows and DVDs, including Motley Crue: Carnival of Sins
and Ozzfest: 10th Year Anniversary Tour.
For the year ended December 31, 2005, businesses included
under other generated approximately
$298.5 million, or 10%, of our total revenues.
Our
Business Activities
We principally act in the following capacities, performing one,
some or all of these roles in connection with our events and
tours:
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. 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.
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 consolidated and 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
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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.
Operating
Segments
Global
Music
Within our global music segment, we are engaged in owning and
operating concert venues, selling sponsorships and advertising
and promoting and presenting music events and tours. 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.
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, they are not specifically designed for
live music. At December 31, 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 December 31, 2005,
we owned 14 and leased 23 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 December 31, 2005, we owned one and leased two arenas.
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Theaters Theaters are indoor venues that
are built specifically for musical and theatrical events, but in
some cases with minimal aesthetic and acoustic consideration.
These venues typically have less than 5,000 seats. Because
of their small size, they do not offer as much economic upside
on a per show basis but as they can be used year-round, unlike
an amphitheater, they can generate profits similar to an
amphitheater. Theaters represent less risk to concert promoters
because they have lower fixed costs associated with hosting a
concert and may provide a more appropriately sized venue for
developing artists. At December 31, 2005, we owned six and
leased 17 theaters.
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Clubs Clubs are indoor venues that are
built specifically for musical events, but in some cases with
minimal aesthetic and acoustic consideration. These venues
typically have less than 1,000 seats and often without full
fixed seating. Because of their small size, they do not offer as
much economic upside, but they also represent less of a risk to
a concert promoter because they have lower fixed costs
associated with hosting a concert and also may provide a more
appropriate size venue for developing artists. Clubs can also be
used year-round and can therefore generate higher profits for
the year, even though per show profits are lower. At
December 31, 2005, we owned three and leased 11 clubs.
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Festival Sites Festival sites are
outdoor locations used primarily in the summer season to stage
day-long or multi-day concert events featuring several
performers. Depending on the location, festival site capacities
can range from 10,000 to 120,000. We believe they are popular
because of the value provided to the fan by packaging several
performers for a day-long or multi-day event. While festival
sites only host a few events each year, they can provide higher
operating income because they have
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lower costs associated with producing the event and maintaining
the site. At December 31, 2005, we owned two festival sites.
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We own or operate domestic and international music venues in the
following locations:
North
American Music Venues:
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DMA®
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Region
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Type of Venue
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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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Holmdel, NJ
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1
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Wantagh, NY
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1
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Westbury, NY
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1
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Los Angeles, CA
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2
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Devore, CA
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2
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Irvine, CA
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2
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Chicago, IL
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3
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Tinley Park, IL
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3
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Philadelphia, PA
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4
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Camden, NJ
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4
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Upper Darby, PA
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4
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|
|
|
|
|
|
|
Boston, MA
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mansfield, MA
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Francisco, CA
|
|
|
6
|
|
|
|
|
|
|
|
|
(2)
|
|
|
|
(2)
|
|
|
|
|
Concord, CA
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mountain View, CA
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bristow, VA
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta, GA
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Houston, TX
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Detroit, MI
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tampa Bay, FL
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auburn, WA
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phoenix, AZ
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cleveland, OH
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denver, CO
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sacramento, CA
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marysville, CA
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
St. Louis, MO
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pittsburgh, PA
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burgettstown, PA
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indianapolis, IN
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noblesville, IN
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charlotte, NC
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hartford, CT
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wallingford, CT
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raleigh, NC
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nashville, TN
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMA®
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Region
|
|
|
Type of Venue
|
|
City, State
|
|
Rank*
|
|
|
Amphitheater
|
|
|
Theater
|
|
|
Club
|
|
|
Festival Site
|
|
|
Kansas City, KS
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonner Springs, KS
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Columbus, OH
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East Troy, WI
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati, OH
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selma, TX
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Palm Beach, FL
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pelham, AL
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Virginia Beach, VA
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Albuquerque, NM
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Darien Center, NY
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scranton, PA
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Saratoga Springs, NY
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wheeling, WV
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morristown, OH
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
DMA®
region refers to a United States designated market area as of
January 1, 2006. At that date, there were 210
DMA®s.
DMA®
is a registered trademark of Nielsen Media Research, Inc. |
|
|
|
|
|
Bullet represents one venue by type, unless otherwise noted. |
International
Music Venues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Venue
|
|
City, Country
|
|
Arena
|
|
|
Theater
|
|
|
Club
|
|
|
Festival Site
|
|
|
Cardiff, Wales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dublin, Ireland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
London, England
|
|
|
|
|
|
|
|
(4)
|
|
|
|
(6)
|
|
|
|
|
Manchester, England
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reading, England
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sheffield, England
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southampton, England
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholm, Sweden
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bullet represents one venue by type, unless otherwise noted. |
Global
Theater
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.
We pre-sell tickets for our touring and other theatrical
performances through one of the largest subscription series,
Broadway Across America, in the United States and Canada
(with 278,000 subscribers in the
2005-2006
season). We present these subscription series in approximately
46 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
10
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 2005, productions in which we had investments included The
Producers, Guys and Dolls, Swan Lake, Fiddler on the Roof,
and Spamalot.
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. 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 5,000 seats. Additionally, given their size, they are
able to host events aimed at niche audiences. At
December 31, 2005, we owned 13 and leased 25 theaters
in our theater segment. The theater segment also leases one
club. Of these venues, 15 theatrical venues are in North
America and 24 are international venues used primarily for
theatrical presentations.
North
American Theater Venues:
|
|
|
|
|
|
|
|
|
|
|
DMA®
|
|
|
|
|
|
|
Region
|
|
|
Number of
|
|
Location
|
|
Rank*
|
|
|
Theaters
|
|
|
New York, NY
|
|
|
1
|
|
|
|
|
|
Chicago, IL
|
|
|
3
|
|
|
|
|
|
Philadelphia, PA
|
|
|
4
|
|
|
|
|
|
Boston, MA
|
|
|
5
|
|
|
|
|
(4)
|
Washington, DC
|
|
|
8
|
|
|
|
|
|
Minneapolis, MN
|
|
|
15
|
|
|
|
|
(3)
|
Baltimore, MD
|
|
|
24
|
|
|
|
|
|
Louisville, KY
|
|
|
50
|
|
|
|
|
|
Toronto, Canada
|
|
|
n/a
|
|
|
|
|
(2)
|
|
|
|
* |
|
DMA®
region refers to a United States designated market area as of
January 1, 2006. At that date, there were 210
DMA®s.
DMA®
is a registered trademark of Nielsen Media Research, Inc. |
|
|
|
|
|
Bullet represents one venue by type, unless otherwise noted. |
11
International
Theater Venues:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
Location
|
|
Theaters
|
|
|
Clubs
|
|
|
Ashton-Under-Lyne, England
|
|
|
|
|
|
|
|
|
Barcelona, Spain
|
|
|
|
|
|
|
|
|
Birmingham, England
|
|
|
|
|
|
|
|
|
Bristol, England
|
|
|
|
|
|
|
|
|
Edinburgh, Scotland
|
|
|
|
|
|
|
|
|
Felixtowe, England
|
|
|
|
|
|
|
|
|
Folkstone, England
|
|
|
|
|
|
|
|
|
Grimsby, England
|
|
|
|
|
|
|
|
|
Hastings, England
|
|
|
|
|
|
|
|
|
Hayes, England
|
|
|
|
|
|
|
|
|
Liverpool, England
|
|
|
|
|
|
|
|
|
London, England
|
|
|
|
(2)
|
|
|
|
|
Madrid, Spain
|
|
|
|
(3)
|
|
|
|
|
Manchester, England
|
|
|
|
(2)
|
|
|
|
|
Oxford, England
|
|
|
|
|
|
|
|
|
Southport, England
|
|
|
|
|
|
|
|
|
Sunderland, England
|
|
|
|
|
|
|
|
|
Torbay, England
|
|
|
|
|
|
|
|
|
York, England
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bullet represents one venue by type, unless otherwise noted. |
Other
Specialized Motor Sports. Our specialized
motor sports 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. At
December 31, 2005, we leased one arena in Leicestershire,
England that is used in our other operations.
Sports Representation. 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.
Within our sports representation business, we are engaged in
talent representation, financial advisory services, consulting
services, marketing and client endorsements and sponsorship
sales. 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 December 31, 2005, we had approximately 600 clients,
including Kobe Bryant (basketball), David Ortiz (baseball), Tom
Lehman (golf), Andy Roddick (tennis), Roy E. Williams (football)
and Steven Gerrard (soccer).
12
Other live entertainment events. We also
promote and produce other live entertainment events, including
family shows, such as Dora the Explorer and
Blues Clues. In addition, we distribute
television shows and DVDs, including Motley Crue: Carnival of
Sins and Ozzfest:
10th Year
Anniversary Tour.
Our
Strategy
Our goal is to increase shareholder value by maximizing our cash
flow from operations. To accomplish this goal, our strategy is
to acquire and distribute content through our global network and
pursue all revenue lines that transpire from the live event.
This is to be achieved through:
|
|
|
|
|
Securing, promoting and marketing live content to fill our
global network. We seek to attract large
audiences by securing compelling live content. We believe we
have an established reputation for high standards of performance
and extensive knowledge of the live entertainment industry.
|
|
|
|
Maximizing revenue streams around our global venue
distribution network. We seek to maximize our
global venue distribution network via acquiring compelling
content and expanding ancillary revenue lines: sponsorship, food
and beverage, ticketing, merchandise and digital.
|
|
|
|
Building digital distribution revenue streams resulting from
our vast live event tickets, event inventory, venue network and
fan database. We will look to create and
distribute an array of live products directly to the fan and
maximize our live event investment.
|
|
|
|
Selectively pursuing investment and acquisition
opportunities. We intend to pursue investments
and acquisitions that contribute to the above goals and where
the returns and growth potential are consistent with our
long-term goal of increasing shareholder value. We believe that
significant opportunities exist both in the United States and
foreign markets to expand our distribution network. However, our
ability to make acquisitions in the near term may be constrained
by the limitations imposed by our financing documents, market
conditions and the tax matters agreement.
|
Competition
Competition in the live entertainment industry is intense. We
compete primarily on the basis of our ability to deliver quality
entertainment products and enhanced fan experiences from music
concerts, touring theatrical performances and specialized motor
sports events, including:
|
|
|
|
|
quality of service delivered to our clients;
|
|
|
|
track record in promoting and producing live entertainment
events and tours both in the United States and internationally;
|
|
|
|
track record in negotiating favorable terms of professional
sports contracts and endorsement contracts for clients;
|
|
|
|
scope and effectiveness of our expertise of marketing and
sponsorship programs; and
|
|
|
|
financial stability.
|
Although we believe that our entertainment products and services
currently compete favorably with respect to such factors, we
cannot provide any assurance that we can maintain our
competitive position against current and potential competitors,
especially those with significantly greater brand recognition,
financial, marketing, service, support, technical and other
resources.
Global Music. In the markets in which we
promote musical concerts, we face competition from promoters, as
well as from certain artists that promote their own concerts. We
believe that barriers to entry into the promotion services
business are low and that certain local promoters are
increasingly expanding the geographic scope of their operations.
In markets where we own or operate a venue, we compete with
other venues to serve artists likely to perform in that general
region. In markets where we do not own or operate venues, we
compete with other venues and promoters for popular tours.
Consequently, touring artists have significant alternatives to
our venues in scheduling tours.
13
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 and various casinos in
the United States and Europe. Some of our competitors in the
live music industry have a stronger presence in certain markets,
and have access to other sports and entertainment assets, as
well as greater financial resources and brand recognition, which
may enable them to gain a greater competitive advantage in
relation to us.
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 West End shows,
we compete with producers of other theatrical performances for
box office sales, talent and theater space. As the producer of a
touring show, we compete with producers of other touring or
other theatrical performances to book the production in
desirable presentation markets.
Our main competitors in the global theatrical industry include
Nederlander Producing Company of America, Mirvish Productions,
The Shubert Organization, The Walt Disney Company and Jujamcyn
Theaters. Some of our competitors in the theatrical industry
operate more theaters and have more Broadway show interests than
we do in New York City, from which most North American
theatrical touring productions originate. In addition, these
competitors may have significantly greater brand recognition and
greater financial and other resources, which could enable them
to strengthen their competitive positions against us.
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 United States. Some of our
competitors in the specialized motor sports industry, such as
NASCAR, enjoy stronger brand recognition and larger revenues in
the motor sports industry than we do and may have greater
financial and other resources enabling them to gain a greater
competitive advantage in relation to us.
Our primary competition in sports representation includes
numerous agencies such as IMG, Octagon and Gaylord, as well as
regional agencies and individual agents. Some of our competitors
in the sports representation industry have a stronger
international presence than we do in the sports representation
business, as well as larger television sports programming and
distribution capabilities.
Recent
Developments
During July 2005, we purchased a 50.1% controlling interest in
Mean Fiddler Group, PLC (Mean Fiddler) in the United
Kingdom for approximately $43.6 million. Total assets were
valued at approximately $117.0 million, which includes
$93.9 million of goodwill, and total liabilities and
minority interest of approximately $73.4 million. Mean
Fiddler is 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 venue
operations.
On December 21, 2005, we were spun-off from Clear Channel
Communications through a tax free distribution of shares to
shareholders of Clear Channel Communications. At the date of the
Separation, Clear Channel Communications contributed its
ownership interest in its subsidiary, Clear Channel
Entertainment, to Live Nation, Inc. In connection with the
Separation, we issued 200,000 shares of Series A
redeemable preferred stock, par value $.01 per share, and
200,000 shares of Series B redeemable preferred stock,
par value $.01 per share, with an aggregate liquidation
preference of $40.0 million. Both series of preferred stock
accrue dividends at 13% per annum and are mandatorily
redeemable on December 21, 2011. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources.
On December 21, 2005, we entered into a $610.0 million
credit agreement with a syndicate of banks and other financial
institutions. The credit agreement consists of a
$325.0 million
71/2
-year term loan and a $285.0 million
61/2
-year revolving credit facility, with sub limits of up to
$235.0 million available for the issuance of letters of
credit and up to $100.0 million available for borrowings in
foreign currencies.
14
See Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
On January 25, 2006, we publicly announced a
15-year
agreement to manage and promote the world famous Wembley Arena
in London. Wembley Arena is currently undergoing an extensive
refurbishment with plans to re-open in April 2006. Wembley Arena
plays host to more than 200 international concerts and events
each year.
On January 26, 2006, we publicly announced the sale of a
portion of our sports talent representation business assets
located in Los Angeles for $12.0 million in cash.
On March 16, 2006, we entered into interest rate swaps as
required by our senior secured credit facility. These swaps have
a life of three years, a notional amount of $162.5 million
and a fixed rate of 5.105%.
Our
Relationship with Clear Channel Communications
In connection with our separation from Clear Channel
Communications, we entered into certain agreements with Clear
Channel. The key terms of the principal agreements that continue
to be operative are discussed in Note H to the consolidated
and combined financial statements in Item 8. Financial
Statements and Supplementary Data and Item 13. Certain
Relationships and Related Transactions, and are summarized below:
Master Separation and Distribution
Agreement. On December 20, 2005, we entered
into a Master Separation and Distribution Agreement with Clear
Channel Communications. The agreement provides for, among other
things, the principal corporate transactions required to effect
the transfer of assets and our assumption of liabilities
necessary to separate the transferred businesses from Clear
Channel, the distribution of our common stock to the holders of
record of Clear Channel common stock on December 14, 2005,
and certain other agreements governing our relationship with
Clear Channel after the date of the Distribution.
Transition Services Agreement. On
December 21, 2005, we entered into a Transition Services
Agreement with Clear Channel Management Services, L.P., an
affiliate of Clear Channel Communications, pursuant to which
Clear Channel Management Services, L.P. will provide services to
us including, but not limited to treasury, human resources,
legal, and information systems. The charges for the transition
services are intended to allow Clear Channel Management
Services, L.P. to fully recover the allocated direct costs of
providing the services, plus all
out-of-pocket
costs and expenses, generally without profit. The allocation of
costs will be based on various measures depending on the service
provided, including relative revenue, employee headcount or
number of users of a service.
Tax Matters Agreement. On December 21,
2005, we entered into a Tax Matters Agreement with Clear Channel
Communications to govern the respective rights, responsibilities
and obligations of Clear Channel 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 tax returns, as well as with respect to any
additional taxes incurred by us 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 Internal Revenue Code of 1986, as amended (the
Code), or if Clear Channel is not able to recognize
certain losses.
Employee Matters Agreement. On
December 21, 2005, we entered into an Employee Matters
Agreement with Clear Channel Communications covering a number of
compensation, employment and employee benefits matters relating
to our employees. In general, the agreement provides that we
will be solely responsible for the majority of the liabilities
and expenses relating to our current and former employees and
their covered dependents and beneficiaries, regardless of when
incurred.
Trademark and Copyright License Agreement. On
December 21, 2005, we entered into a Trademark and
Copyright License Agreement with Clear Channel Identity, L.P.,
an affiliate of Clear Channel Communications, establishing our
right to continue to use the trademark CLEAR CHANNEL,
15
other marks incorporating the term CLEAR CHANNEL or variations
thereof, the mark CC and other marks used in connection with the
businesses transferred to us during a transitional period ending
December 21, 2006.
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 and
the United Kingdoms Disability Discrimination Act 1995;
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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.
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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, the United Kingdoms
Disability Discrimination Act 1995, or the DDA, and certain
state statutes and local ordinances that, among other things,
require that places of public accommodation, including both
existing and newly constructed venues, be accessible to
customers with disabilities. The ADA and DDA require that venues
be constructed to permit persons with disabilities full use of a
live entertainment venue. The ADA and DDA may also require that
certain modifications be made to existing venues in order to
make them accessible to patrons and employees who are disabled.
In order to comply with the ADA, DDA and other similar
ordinances, 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 potential liability on us and other promoters
and producers of live entertainment events for entertainment
taxes and for other 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.
16
Employees
At December 31, 2005, we had approximately
3,000 full-time employees, including 1,700 domestic and
1,300 international employees, of which approximately 2,900 were
employed in our operations departments and approximately 100
were employed in our corporate area. We expect to hire
additional employees in our corporate area as we transition to
providing services that were and still are being provided to us
by Clear Channel Communications under a transitional services
agreement, as discussed above.
Our staffing needs vary significantly throughout the year.
Therefore, we also, from time to time, employ part-time or
seasonal employees. At December 31, 2005, we employed
approximately 3,700 seasonal part-time employees and during peak
seasonal periods, particularly in the summer months, we have
employed as many as 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.
Available
Information
We are required to file annual, quarterly and current reports,
proxy statements and other information with the Securities and
Exchange Commission (SEC). You may read and copy any
materials we have filed with the SEC at the SECs Public
Reference Room at 450 Fifth Street, NW, Washington, DC
20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
Our filings with the SEC are also available to the public
through the SECs website at http://www.sec.gov.
You can find more information about us at our Internet website
located at www.livenation.com. Our Annual Report on
Form 10-K,
our Quarterly Reports on
Form 10-Q,
our Current Reports on
Form 8-K
and any amendments to those reports are available free of charge
on our Internet website as soon as reasonably practicable after
we electronically file such material with the SEC.
You should carefully consider each of the following risks and
all of the other information set forth in this Annual Report.
The following risks relate principally to our leverage, our
business, our common stock and our separation from Clear Channel
Communications. The risks and uncertainties described below are
not the only ones facing our company. Additional risks and
uncertainties not presently known to us or that we currently
believe to be immaterial may also adversely affect our business.
If any of the following risks and uncertainties develop into
actual events, this could have a material adverse effect on our
business, financial condition or results of operations. In that
case, the trading price of our common stock could decline.
Risks
Associated with Our Leverage
We
have a large amount of debt, redeemable preferred stock and
lease obligations that could restrict our operations and impair
our financial condition.
Our total indebtedness for borrowed money, including our
redeemable preferred stock, was approximately
$406.8 million at December 31, 2005. Our current
available borrowing capacity under the senior secured credit
facility is approximately $610.0 million, consisting of our
$325.0 million term loan facility, all of which
17
is outstanding, and our $285.0 million revolving credit
facility, none of which is outstanding, with sub-limits up to
$235.0 million available for letters of credit. At
December 31, 2005, outstanding letters of credit were
approximately $46.4 million leaving total available credit
of $238.6 million for future borrowings. 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.
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In addition, our redeemable preferred stock bears an annual
dividend rate of 13%, or $5.2 million annually, and is
subject to financial and other covenants substantially similar
to the covenants applicable to our senior secured credit
facility. If we default under any of these covenants, we will
have to pay additional dividends.
In addition, as of December 31, 2005, we had approximately
$1.0 billion in operating lease agreements, of which
approximately $64.3 million is due in 2006 and
$60.7 million is due in 2007.
If our cash flow and capital resources are insufficient to
service our debt, redeemable preferred stock 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, redeemable preferred stock 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, redeemable preferred stock or lease
obligations could cause us to default on those obligations. If
we fail to meet any minimum financial requirements contained in
instruments governing our debt, we would be in default under
such instruments, which, in turn, could result in defaults under
other debt instruments. In addition, if we default under any of
the covenants applicable to our preferred stock, we will have to
pay additional dividends. Any such defaults could materially
impair our financial condition and liquidity. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources for a discussion of our obligations.
To
service our debt, lease and preferred stock obligations and to
fund potential capital expenditures, we will require a
significant amount of cash to meet our needs, which depends on
many factors beyond our control.
Our ability to service our debt, lease and preferred stock
obligations and to fund potential capital expenditures for venue
construction, expansion or renovation will require a significant
amount of cash, which depends on many factors beyond our
control. Our ability to make payments on and to refinance our
debt, including our senior secured credit facility, will also
depend on our ability to generate cash in the future. This, to
an extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are
beyond our control.
We cannot assure you that our business will generate sufficient
cash flow or that future borrowings will be available to us in
an amount sufficient to enable us to pay our debt, or to fund
our other liquidity needs. As of December 31, 2005,
approximately $25.7 million of total indebtedness
(excluding interest) is due in 2006, $9.1 million is due in
the aggregate for 2007 and 2008, $9.4 million is due in the
aggregate for 2009 and 2010, and $362.6 million is due
thereafter. See the table in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Contractual Obligations and
Commitments Firm Commitments. If our future
cash flow from operations and other capital resources are
insufficient to pay our obligations as they mature or to fund
our liquidity needs, we may be forced to reduce or delay our
business
18
activities and capital expenditures, sell assets, obtain
additional equity capital or restructure or refinance all or a
portion of our debt on or before maturity. We may be limited on
assets we can sell under the terms of the tax matters agreement
with Clear Channel Communications. We cannot assure you that we
will be able to refinance any of our debt on a timely basis or
on satisfactory terms, if at all. In addition, the terms of our
existing debt, including our senior secured credit facility,
other future debt and our preferred stock may limit our ability
to pursue any of these alternatives. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources.
Our
senior secured credit facility and preferred stock designations
may restrict our ability to finance operations and capital needs
and our operating flexibility.
Our senior secured credit facility and preferred stock
designations include restrictive covenants that, among other
things, restrict our ability to:
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incur additional debt;
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pay dividends and make distributions;
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make certain investments;
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repurchase our stock and prepay certain indebtedness;
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create liens;
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enter into transactions with affiliates;
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modify the nature of our business;
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enter into sale-leaseback transactions;
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transfer and sell material assets; and
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merge or consolidate.
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In addition, our senior secured credit facility and preferred
stock designations 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. If we default under
any of the covenants applicable to our preferred stock, the
holder of our preferred stock may be entitled to elect a
director of one of our subsidiaries, and we will have to pay
additional dividends.
Risk
Factors Relating to Our Business
Our
live entertainment business is highly sensitive to public tastes
and dependent on our ability to secure popular artists and other
live entertainment events, and we may be unable to anticipate or
respond to changes in consumer preferences, which may result in
decreased demand for our services.
Our ability to generate revenues from our entertainment
operations is highly sensitive to rapidly changing public tastes
and dependent on the availability of popular artists and events.
Our success depends in part on our ability to anticipate the
tastes of consumers and to offer events that appeal to them.
Since we rely on unrelated parties to create and perform live
entertainment content, any unwillingness to tour or lack of
availability of popular artists, touring theatrical
performances, specialized motor sports talent and other
performers could limit our ability to generate revenues. In
addition, we typically book our live music tours one to four
months in advance of the beginning of the tour and often agree
to pay an artist a fixed guaranteed amount prior to our
receiving any operating income. Therefore, if the public is not
receptive to the tour or we or a performer cancel the tour, we
may incur a loss for the tour depending on the amount of the
fixed guarantee or incurred costs relative to any revenues
earned, as well as foregone revenue we could have earned at
booked venues. Furthermore, consumer preferences change from
time to time, and our failure to anticipate, identify or react
to these changes could result in reduced demand for our
services, which would adversely affect our operating results and
profitability.
19
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 the number of live entertainment
events. We incurred a net loss of approximately
$130.6 million for the year ended December 31, 2005,
and generated net income of approximately $16.3 million and
$57.0 million for the years ended December 31, 2004
and 2003, respectively. 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.
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. In addition, the timing of tours of top grossing
acts can impact comparability of quarterly results year over
year, although annual results may not be impacted.
The following table sets forth our operating income (loss) for
the last eight fiscal quarters (in thousands):
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Operating
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Fiscal Quarter
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Income (Loss)
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March 31, 2004
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$
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293
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June 30, 2004
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$
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8,056
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September 30, 2004
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$
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70,869
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December 31, 2004
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$
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(20,235
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March 31, 2005
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$
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(27,526
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June 30, 2005
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$
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15,258
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September 30, 2005
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$
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61,868
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December 31, 2005
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$
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(62,783
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We may
be adversely affected by a general deterioration in economic
conditions, which could affect consumer and corporate spending
and, therefore, significantly adversely impact our operating
results.
A decline in attendance at or reduction in the number of 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
20
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.
Loss
of our key management and other personnel could impact our
business.
Our business is dependent upon our senior executive officers and
other key personnel to run our business. The loss of these
officers or other key personnel could adversely affect our
operations, due to their associations and contacts with
performers and other key industry agents, venue managers and
sponsors. Although we have entered into long-term agreements
with some of our key executive officers and other personnel to
protect our interests in those relationships, we can give no
assurance that all or any of these key employees will remain
with us or will retain their associations with key business
contacts.
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
years ended December 31, 2005 and 2004, our international
operations accounted for approximately 31% and 28%,
respectively, of our revenues during those periods. The risks
involved in foreign operations that could result in losses
against which we are not insured include:
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exposure to local economic conditions;
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potential adverse changes in the diplomatic relations of foreign
countries with the United States;
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hostility from local populations;
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restrictions on the withdrawal of foreign investment and
earnings;
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government policies against businesses owned by foreigners;
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investment restrictions or requirements;
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expropriations of property;
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potential instability of foreign governments;
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risks of insurrections;
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risks of renegotiation or modification of existing agreements
with governmental authorities;
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diminished ability to legally enforce our contractual rights in
foreign countries;
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foreign exchange restrictions;
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withholding and other taxes on remittances and other payments by
subsidiaries; and
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changes in foreign taxation structures.
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In addition, we may incur substantial tax liabilities if we
repatriate any of the cash generated by our international
operations back to the United States due to our current
inability to recognize any foreign tax credits that would be
associated with such repatriation. We are not currently in a
position to recognize any tax assets in the United States that
are the result of payments of income or withholding taxes in
foreign jurisdictions.
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Exchange
rates may cause fluctuations in our results of operations that
are not related to our operations.
Because we own assets overseas and derive revenues from our
international operations, we may incur currency translation
losses or gains due to changes in the values of foreign
currencies relative to the United States Dollar. We cannot
predict the effect of exchange rate fluctuations upon future
operating results. For the years ended December 31, 2005
and 2004, our international operations accounted for
approximately 31% and 28%, respectively, of our revenues during
those periods. In addition, our international operations have
accounted for approximately 63% of our operating income in prior
years. Although we cannot predict the future relationship
between the United States Dollar and the currencies used by our
international businesses, principally the British Pound and the
Euro, for the year ended December 31, 2005, we experienced
a foreign exchange rate net loss of $1.3 million which had
a negative effect on our operating income, while for the years
ended December 31, 2004 and 2003, we experienced foreign
exchange rate net gains of $6.3 million and
$7.6 million, respectively, for those periods, which had a
positive effect on our operating income. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Quantitative and
Qualitative Disclosure about Market
Risk Foreign Currency Risk.
We may
be unsuccessful in our future acquisition endeavors, if any,
which may have an adverse effect on our business. Our compliance
with antitrust, competition and other regulations may limit our
operations and future acquisitions.
Our future growth rate depends in part on our selective
acquisition of additional businesses. We may be unable to
identify suitable targets for acquisition or make acquisitions
at favorable prices. If we identify a suitable acquisition
candidate, our ability to successfully implement the acquisition
would depend on a variety of factors, including our ability to
obtain financing on acceptable terms and requisite government
approvals.
Acquisitions involve risks, including those associated with
integrating the operations, financial reporting, technologies
and personnel of acquired companies; managing geographically
dispersed operations; the diversion of managements
attention from other business concerns; the inherent risks in
entering markets or lines of business in which we have either
limited or no direct experience; unknown risks; and the
potential loss of key employees, customers and strategic
partners of acquired companies. We may not successfully
integrate any businesses or technologies we may acquire in the
future and may not achieve anticipated revenue and cost
benefits. Acquisitions may be expensive, time consuming and may
strain our resources. Acquisitions may not be accretive to our
earnings and may negatively impact our results of operations as
a result of, among other things, the incurrence of debt,
one-time write-offs of goodwill and amortization expenses of
other intangible assets. In addition, future acquisitions that
we may pursue could result in dilutive issuances of equity
securities.
We are also subject to laws and regulations, including those
relating to antitrust, that could significantly affect our
ability to expand our business through acquisitions. For
example, the Federal Trade Commission and the Antitrust Division
of the United States Department of Justice with respect to our
domestic acquisitions, and the European Commission, the
antitrust regulator of the European Union, with respect to our
European acquisitions, have the authority to challenge our
acquisitions on antitrust grounds before or after the
acquisitions are completed. State agencies may also have
standing to challenge these acquisitions under state or federal
antitrust law. Comparable authorities in foreign countries also
have the ability to challenge our foreign acquisitions. Our
failure to comply with all applicable laws and regulations could
result in, among other things, regulatory actions or legal
proceedings against us, the imposition of fines, penalties or
judgments against us or significant limitations on our
activities. In addition, the regulatory environment in which we
operate is subject to change. New or revised requirements
imposed by governmental regulatory authorities could have
adverse effects on us, including increased costs of compliance.
We also may be adversely affected by changes in the
interpretation or enforcement of existing laws and regulations
by these governmental authorities.
In addition, restrictions contained in the tax matters agreement
between us and Clear Channel and the credit agreement for the
senior secured credit facility restrict our ability to make
acquisitions.
22
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.
As a result, we may experience increased difficulty 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
December 31, 2005, we had property and equipment with a net
book value of approximately $808.9 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. We cannot guarantee that adequate
coverage limits will be available, offered at reasonable costs,
or offered by insurers with sufficient financial soundness. The
occurrence of such an incident or incidents affecting any one or
more of our venues could have a material adverse effect on our
financial position and future results of operations if asset
damage
and/or
company liability were to exceed insurance coverage limits or if
an insurer were unable to sufficiently or fully pay our related
claims or damages.
Costs
associated with capital improvements could adversely affect our
profitability and liquidity.
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.
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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 and
the United Kingdoms Disability Discrimination Act 1995;
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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.
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While we believe that our venues are in material compliance with
these laws, we cannot predict the extent to which any future
laws or regulations will impact our operations. The regulations
relating to our food and support service in our venues are many
and complex. Although we generally contract with a third-party
vendor for these services at our operated venues, we cannot
assure you that we or our third-party vendors are in full
compliance with all applicable laws and regulations at all times
or that we or our third-party vendors will be able to comply
with any future laws and regulations or that we will not be held
liable for violations by third-party vendors. Furthermore,
additional or amended regulations in this area may significantly
increase the cost of compliance.
We also serve alcoholic beverages at many of our venues during
live entertainment events and must comply with applicable
licensing laws, as well as state and local service laws,
commonly called dram shop statutes. Dram shop statutes generally
prohibit serving alcoholic beverages to certain persons such as
an individual who is intoxicated or a minor. If we violate dram
shop laws, we may be liable to third parties for the acts of the
patron. Although we generally hire outside vendors to provide
these services at our operated venues and regularly sponsor
training programs designed to minimize the likelihood of such a
situation, we cannot guarantee that intoxicated or minor patrons
will not be served or that liability for their acts will not be
imposed on us. There can be no assurance that additional
regulation in this area would not limit our activities in the
future or significantly increase the cost of regulatory
compliance. We must also obtain and comply with the terms of
licenses in order to sell alcoholic beverages in the states in
which we serve alcoholic beverages.
From time to time, state and federal governmental bodies have
proposed legislation that could have an effect on our business.
For example, some legislatures have proposed laws in the past
that would impose
24
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, and
we may not be able to maintain or increase our current revenues,
which could adversely affect our financial
performance.
Our business segments are in highly competitive industries, and
we may not be able to maintain or increase our current live
entertainment revenues. We compete in the global music and
global theater industries, and within such industries we compete
with other venues to book performers, and, in the markets in
which we promote musical concerts, we face competition from
other promoters, as well as from certain performers who promote
their own concerts. Our competitors also compete with us for key
employees who have relationships with popular music artists that
have a history of being able to book such artists for concerts
and tours. These competitors may engage in more extensive
development efforts, undertake more far-reaching marketing
campaigns, adopt more aggressive pricing policies and make more
attractive offers to existing and potential artists. Our
competitors may develop services, advertising options or
entertainment venues that are equal or superior to those we
provide or that achieve greater market acceptance and brand
recognition than we achieve. It is possible that new competitors
may emerge and rapidly acquire significant market share. Other
variables that could adversely affect our financial performance
by, among other things, leading to decreases in overall
revenues, the numbers of advertising customers, event
attendance, ticket prices or profit margins include:
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an increased level of competition for advertising dollars, which
may lead to lower sponsorships as we attempt to retain
advertisers or which may cause us to lose advertisers to our
competitors offering better programs that we are unable or
unwilling to match;
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unfavorable fluctuations in operating costs, including increased
guarantees to performers, which we may be unwilling or unable to
pass through to our customers;
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our competitors may offer more favorable terms than we do in
order to obtain agreements for new venues;
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technological changes and innovations that we are unable to
adopt or are late in adopting that offer more attractive
entertainment alternatives than what we currently offer, which
may lead to reduction in attendance at live events, a loss of
ticket sales or to lower ticket prices;
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other entertainment options available to our audiences that we
do not offer;
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unfavorable changes in labor conditions which may require us to
spend more to retain and attract key employees; and
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unfavorable shifts in population and other demographics which
may cause us to lose audiences as people migrate to markets
where we have a smaller presence, or which may cause sponsors to
be unwilling to pay for sponsorship and advertising
opportunities if the general population shifts into a less
desirable age or geographical demographic from an advertising
perspective.
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We believe that barriers to entry into the live entertainment
promotion business are low and that certain local promoters are
increasingly expanding the geographic scope of their operations.
We
depend upon unionized labor for the provision of some of our
services and any work stoppages or labor disturbances could
disrupt our business.
The stagehands at some of our venues, and the actors, musicians
and others involved in some of our business operations are
subject to collective bargaining agreements. Our union
agreements typically have a term of three years and thus
regularly expire and require negotiation in the course of our
business. Upon the expiration of any of our collective
bargaining agreements, however, we may be unable to negotiate
new
25
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, and if we are unable to do so on
acceptable terms, or at all, our results of operations could be
adversely affected.
We require access to venues to generate revenues from live
entertainment events. For these events, we use venues that we
own, but we also operate a number of our live entertainment
venues under various agreements which include leases with
third-parties or equity or booking agreements, which are
agreements where we contract to book the events at a venue for a
specific period of time. Our long-term success in the live
entertainment business will depend in part on the availability
of venues, our ability to lease these venues and our ability to
enter into booking agreements upon their expiration. As many of
these agreements are with third parties over whom we have little
or no control, we may be unable to renew these agreements or
enter into new agreements on acceptable terms or at all, and may
be unable to obtain favorable agreements with venues. Our
ability to renew these agreements or obtain new agreements on
favorable terms depends on a number of other factors, many of
which are also beyond our control, such as national and local
business conditions and competition from other promoters. If the
cost of renewing these agreements is too high or the terms of
any new agreement with a new venue are unacceptable or
incompatible with our existing operations, we may decide to
forego these opportunities. There can be no assurance that we
will be able to renew these agreements on acceptable terms or at
all, or that we will be able to obtain attractive agreements
with substitute venues, which could have a material adverse
effect on our results of operations.
We plan to continue to expand our operations through the
development of live entertainment venues and the expansion of
existing live entertainment venues, which poses a number of
risks, including:
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construction of live entertainment venues may result in cost
overruns, delays or unanticipated expenses;
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desirable sites for live entertainment venues may be unavailable
or costly; and
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the attractiveness of our venue locations may deteriorate over
time.
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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
revenues depend in part on the promotional success of our
marketing campaigns, and there can be no assurance that such
advertising, promotional and other marketing campaigns will be
successful or will generate revenues or profits.
Similar to many companies, we spend significant amounts on
advertising, promotional and other marketing campaigns for our
live entertainment events and other business activities. Such
marketing activities include, among others, promotion of ticket
sales, premium seat sales, hospitality and other services for
our events and venues and advertising associated with our
distribution of related souvenir merchandise and apparel. In the
years ended December 31, 2005 and 2004, we spent
approximately 6.1% and 6.9%, respectively, of our revenues on
marketing, including advertising, and there can be no assurance
that such advertising, promotional and other marketing campaigns
will be successful or will generate revenues or profits.
26
Poor
weather adversely affects attendance at our live entertainment
events, which could negatively impact our financial performance
from period to period.
We promote many live entertainment events. Weather conditions
surrounding these events affect sales of tickets, concessions
and souvenirs, among other things. Poor weather conditions can
have a material effect on our results of operations particularly
because we promote a finite number of events. Due to weather
conditions, we may be required to reschedule an event to the
next available day or a different venue, which would increase
our costs for the event and could negatively impact the
attendance at the event as well as, 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.
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, require changes in our corporate governance
and securities disclosure and compliance practices, and 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 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 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 United
States 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.
We may
be adversely affected by the occurrence of extraordinary events,
such as terrorist attacks.
The occurrence and threat of extraordinary events, such as
terrorist attacks, intentional or unintentional mass-casualty
incidents, natural disasters or similar events, may
substantially decrease the use of and demand for our services
and the attendance at live entertainment events, which may
decrease our revenues or expose us to substantial liability. The
terrorism and security incidents of September 11, 2001,
military actions in Iraq, and periodic elevated terrorism alerts
have raised numerous challenging operating factors, including
public concerns regarding air travel, military actions and
additional national or local catastrophic incidents, causing a
nationwide disruption of commercial and leisure activities.
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Following September 11, 2001, some artists refused to
travel or book tours, which adversely affected our music
business, and many people did not travel to New York City, which
caused us to experience lower attendance levels at our
theatrical performances playing on Broadway in New York City and
adversely affected our theatrical business. The occurrence of
the 2005 terrorist attacks in London, England, also caused us to
experience lower attendance levels at our theatrical
performances playing on the West End in London. The occurrence
or threat of future terrorist attacks, military actions by the
United States, contagious disease outbreaks, natural disasters
such as earthquakes and severe floods or similar events cannot
be predicted, and their occurrence can be expected to negatively
affect the economies of the United States and other foreign
countries where we do business generally, specifically the
market for live entertainment.
Risks
Relating to Our Common Stock
We
cannot predict the prices at which our common stock may
trade.
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 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 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.
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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,
28
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.
Our
corporate governance documents, rights agreement and Delaware
law may delay or prevent an acquisition of us that shareholders
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
shareholders to remove directors and supermajority voting
requirements for shareholders to amend our organizational
documents, a classified board of directors and limitations on
action by our shareholders by written consent. Three of our nine
directors are directors of Clear Channel Communications. In
addition, our Board of Directors has the right to issue
preferred stock without shareholder approval, which could be
used to dilute the stock ownership of a potential hostile
acquirer. 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
shareholders 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 shareholders.
Our amended and restated certificate of incorporation provides
that, subject to any written agreement to the contrary, which
agreement does not currently exist, Clear Channel Communications
will have no duty to refrain from engaging in the same or
similar business activities or lines of business as us or doing
business with any of our customers or vendors or employing or
otherwise engaging or soliciting any of our officers, directors
or employees. Our amended and restated certificate of
incorporation provides that if Clear Channel Communications
acquires knowledge of a potential transaction or matter which
may be a corporate opportunity for both us and Clear Channel
Communications, we will generally renounce our interest in the
corporate opportunity. Our amended and restated certificate of
incorporation renounces any interest or expectancy in such
corporate opportunity that will belong to Clear Channel
Communications. Clear Channel Communications will, to the
fullest extent permitted by law, have satisfied its fiduciary
duty with respect to such a corporate opportunity and will not
be liable to us or our shareholders for breach of any fiduciary
duty as our shareholder by reason of the fact that it acquires
or seeks the corporate opportunity for itself, directs that
corporate opportunity to another person or does not present that
corporate opportunity to us. These provisions could make an
acquisition of us less advantageous to a third-party.
Our obligation to indemnify, under certain circumstances, Clear
Channel Communications and its affiliates pursuant to the tax
matters agreement against tax-related liabilities, if any,
caused by the failure of the spin-off to qualify as a tax-free
transaction under Section 355 of the Code (including as a
result of Section 355(e) of the Code) could deter a change
of control of us.
We have also adopted a shareholder rights plan intended to deter
hostile or coercive attempts to acquire us. Under the plan, if
any person or group acquires, or begins a tender or exchange
offer that could result in such person acquiring, 15% or more of
our common stock, and in the case of certain Schedule 13G
filers, 20% or more of our common stock, without approval of our
Board of Directors under specified circumstances, our other
shareholders 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.
In addition, the terms of our senior secured credit facility
provide that the lenders can require us to repay all outstanding
indebtedness upon a change of control, and the preferred stock
requires one of our subsidiaries to offer to repurchase the
preferred stock at 101% of the liquidation preference upon a
change of control. These provisions make an acquisition more
costly to a potential acquirer. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources Redeemable Preferred Stock.
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Risks
Relating to Our Separation from Clear Channel
Communications
The
cost of certain corporate functions necessary to operate as an
independent company, previously provided by Clear Channel
Communications, may increase.
Prior to the Separation, our business was operated by Clear
Channel Communications as part of its broader corporate
organization, rather than as an independent company. Our
historical consolidated and combined financial results reflect
allocations of corporate expenses from Clear Channel
Communications. Those allocations may be less than the
comparable expenses we would have incurred had we operated as a
separate publicly-traded company. Clear Channel Communications
performed various corporate functions for us, including, but not
limited to:
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selected human resources related functions;
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tax administration;
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selected legal functions (including compliance with the
Sarbanes-Oxley Act of 2002), as well as external reporting;
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treasury administration, investor relations, internal audit and
insurance functions; and
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selected information technology and telecommunications services.
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As we implement these functions, the costs may be higher than
previous years allocations or current estimates and our
losses may increase. As a result of the Separation, neither
Clear Channel Communications nor any of its affiliates has any
obligation to provide these functions to us other than those
services that Clear Channel Communications provides pursuant to
the transition services agreement. See Item 13. Certain
Transactions and Related Party Transactions Our
Relationship with Clear Channel
Communications Transition Services Agreement.
If, once our transition services agreement terminates, we do not
have in place our own systems and business functions, we do not
have agreements with other providers of these services or we are
not able to make these changes cost effectively, we may not be
able to operate our business effectively and our losses may
increase. If Clear Channel Communications does not continue to
perform effectively the services that are required under the
transition services agreement, we may not be able to operate our
business effectively.
We
have a short operating history as a separate publicly-traded
company and our historical combined and consolidated financial
information is 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.
On December 21, 2005, we were spun-off from Clear Channel
Communications, and, therefore, we have minimal operating
history as a separate publicly-traded company. The historical
consolidated and combined financial information included in this
Form 10-K
does not necessarily reflect the financial condition, results of
operations or cash flows we would have achieved as a separate
publicly-traded company during the periods presented or those we
will achieve in the future. This is primarily a result of the
following factors:
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Prior to the Separation, our working capital requirements and
capital for our general corporate purposes, including
acquisitions and capital expenditures, were satisfied as part of
the corporate-wide cash management policies of Clear Channel
Communications. As a result of our separation, Clear Channel
Communications is no longer providing us with funds to finance
our working capital or other cash requirements. Without the
opportunity to obtain financing from Clear Channel
Communications, we may need to obtain additional financing from
banks, or through public offerings or private placements of debt
or equity securities, strategic relationships or other
arrangements. We currently have a credit rating of B1 by
Moodys Investors Services, Inc. and B+ by
Standards & Poors Rating Services, a division of
The McGraw-Hill Companies, Inc., that is lower than Clear
Channel Communications credit rating and, as a result, we
will incur debt on terms and at interest rates that will not be
as favorable as those generally enjoyed by Clear Channel
Communications.
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Prior to our separation from Clear Channel Communications, our
business was integrated with the other businesses of Clear
Channel Communications. We shared economies of scope and scale
in costs, employees, vendor relationships and customer
relationships. While we have entered into short-term transition
agreements that will govern certain commercial and other
relationships with Clear Channel Communications after the
Separation, those temporary arrangements may not capture the
benefits our businesses enjoyed as a result of common ownership
prior to the Separation. The loss of these benefits as a
consequence of the Separation could have an adverse effect on
our business, results of operations and financial condition.
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Significant changes may occur in our cost structure, management,
financing and business operations as a result of our operating
as a company separate from Clear Channel Communications. These
changes will result in increased costs associated with reduced
economies of scale, stand-alone costs for services previously
provided by Clear Channel Communications, the need for
additional personnel to perform services previously 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 continue to use on a temporary basis 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.
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The
Separation could result in significant tax liability to our
initial public shareholders.
Clear Channel Communications received a private letter ruling
from the Internal Revenue Service substantially to the effect
that the distribution of our common stock to its shareholders
qualifies as a tax-free distribution for United States federal
income tax purposes under Sections 355 and 368(a)(1)(D) of
the Code. Although a private letter ruling from the Internal
Revenue Service generally is binding on the Internal Revenue
Service, 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 Internal Revenue Service 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 is 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 Internal Revenue Service, Clear Channel
Communications made it a condition to the Separation 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 United States federal
income tax purposes under Sections 355 and 368(a)(1)(D) of
the Code. The opinion relies on the ruling as to matters covered
by the ruling. In addition, the opinion is 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
is not binding on the Internal Revenue Service or the courts,
and the Internal Revenue Service or the courts may not agree
with the opinion.
Notwithstanding receipt by Clear Channel Communications of the
ruling and opinion of counsel, the Internal Revenue Service
could assert that the Distribution does not qualify for tax-free
treatment for United States federal income tax purposes. If
the Internal Revenue Service were successful in taking this
position, our initial public shareholders could be subject to
significant United States federal income tax liability. In
general, our initial public shareholders could be subject to tax
as if they had received a taxable distribution equal to the fair
market value of our common stock that was distributed to them.
The
Separation could result in significant tax-related liabilities
to us.
As discussed above, notwithstanding receipt by Clear Channel
Communications of the ruling and the opinion of counsel, the
Internal Revenue Service could assert that the Distribution does
not qualify for tax-free treatment for United States federal
income tax purposes. If the Internal Revenue Service were
successful in taking this position, Clear Channel Communications
could be subject to significant United States federal
31
income tax liability. In general, Clear Channel Communications
would be subject to tax as if it had sold the common stock of
our company in a taxable sale for its fair market value. In
addition, even if the Distribution otherwise were to qualify
under Section 355 of the Code, it may be taxable to Clear
Channel Communications as if it had sold the common stock of our
company in a taxable sale for its fair market value under
Section 355(e) of the Code, if the Distribution were later
deemed to be part of a plan (or series of related transactions)
pursuant to which one or more persons acquire directly or
indirectly stock representing a 50% or greater interest in Clear
Channel Communications or us. For this purpose, any acquisitions
of Clear Channel Communications stock or of our stock within the
period beginning two years before the Distribution and ending
two years after the Distribution are presumed to be part of such
a plan, although we or Clear Channel Communications may be able
to rebut that presumption.
Although such corporate-level taxes, if any, resulting from a
taxable distribution generally would be imposed on Clear Channel
Communications, we have agreed in the tax matters agreement to
indemnify Clear Channel Communications and its affiliates
against tax-related liabilities, if any, caused by the failure
of the Separation 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 Separation 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 reported a $2.4 billion capital loss
as a result of the Separation. See Item 13. Certain
Relationships and Related Transactions Our
Relationship with Clear Channel
Communications 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 our subsidiaries through December 21, 2005, and Clear
Channel Communications other subsidiaries, is jointly and
severally liable for the United States 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 Internal
Revenue Service in amounts that we cannot quantify. In addition,
Clear Channel Communications has recognized a capital loss for
United States federal income tax purposes in connection
with the Separation. If Clear Channel Communications is unable
to deduct such capital loss for United States federal income tax
purposes as a result of any action we take following the
Separation 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 this loss. See Item 13. Certain Relationships and
Related Transactions Our Relationship with
Clear Channel Communications Tax Matters
Agreement.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
As of December 31, 2005, we own, operate or lease 77 venues
and 57 facilities throughout North America and 42 venues and 25
facilities internationally. 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.
We have a five-year lease ending June 30, 2010 for our
corporate headquarters in Beverly Hills, California, used
primarily by our executive and global music domestic operations
management staff. In addition, we have a twenty-year lease
ending September 30, 2020, for office space in New York,
New York, used by our global theater domestic operations
management staff. We also have a five-year lease ending
September 30, 2008, for office space in London, England,
used primarily by our global music and global theater
international operations management staff.
32
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.
|
|
Item 3.
|
Legal
Proceedings
|
At the United States House Judiciary Committee hearing on
July 24, 2003, an Assistant United States Attorney General
announced that the Department of Justice, or DOJ, was pursuing
an antitrust inquiry concerning whether Clear Channel
Communications, and its subsidiaries, which included 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. No adverse action has been taken against Clear Channel
Communications, and its subsidiaries, pursuant to this inquiry,
and on February 10, 2006 we were informed by the DOJ that
this investigation had been closed.
We initiated a lawsuit in July 2003 in the State Court of
Santa Clara County, California against the City of Mountain
View and Shoreline Regional Park Community, seeking declaratory
judgment, specific performance and injunctive relief and
remedies for breach of contract, inverse condemnation and
indemnification as a result of the defendants failure to
provide parking lots and calculate rent payments in accordance
with our lease agreement with the defendants. The defendants in
that suit have counterclaimed against us seeking accounting and
declaratory judgment and alleging theft, conversion, false
claims, breach of contract, and racketeering relating to our
payments under the lease agreement. An accounting firm engaged
by the city issued a report dated August 30, 2005, in which
the firm asserted that we owe the defendants $3.6 million,
excluding interest, for rent payments for the period
1999-2004.
On September 2, 2005, the defendants issued a Notice of
Default and Demand for Cure to us, demanding the payment of
these amounts and certain other non-monetary demands. The
defendants agreed to accept a bond in lieu of cash for
satisfaction of its demand, which we filed with the court on
October 11, 2005 as a cure under protest, pending the
outcome of the litigation. On December 27, 2005, the court
issued its order on the parties respective motions for
summary judgment, in which our claims for breach of contract and
indemnification were dismissed, and the defendants
counterclaim against us for conversion was also dismissed, with
all remaining claims of the parties to be further adjudicated.
Trial is currently set for April 2006.
We were among the defendants in a lawsuit filed
September 3, 2002 by JamSports in the United States Federal
District Court for the Northern District of Illinois. The
plaintiff alleged that we violated federal antitrust laws and
wrongfully interfered with plaintiffs business and
contractual rights. On March 21, 2005, the jury rendered
its verdict finding that we had not violated the antitrust laws,
but had tortiously interfered with a contract which the
plaintiff had entered into with co-defendant AMA Pro Racing and
with the plaintiffs prospective economic advantage. In
connection with the findings regarding tortious interference,
the jury awarded to the plaintiff approximately
$17.0 million in lost profits and $73.0 million in
punitive damages. In April, 2005, we filed a Renewed Motion for
Judgment as a Matter of Law and Motion For a New Trial, to seek
a judgment notwithstanding the verdict or a new trial from the
United States District Court that tried the case. On
August 15, 2005, the District Court granted that motion in
part, granting judgment in favor of the defendants on the
plaintiffs claim for tortious interference with
prospective economic advantage and granting the defendants a new
trial with respect to the issue of damages on the
plaintiffs claim for tortious interference with a
contract. On November 30, 2005, the District Court granted
plaintiffs Motion to Reconsider the August 15th ruling and
ordered a new trial on the tortious interference with
prospective economic advantage claim. On December 20, 2005
the parties entered into a settlement agreement which was
recorded in 2005 results of operations and will not have any
impact on future operations.
We are a defendant in a lawsuit filed by Melinda Heerwagen on
June 13, 2002 in the United States 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 appealed this decision to the United States Court of
Appeals for the Second Circuit, and oral argument was held on
November 3, 2004. On January 10, 2006, the Second
33
Circuit Court of Appeals affirmed the ruling in our favor by the
District Court. On January 17, 2006, the plaintiff filed a
Notice of Voluntary Dismissal of her action in the Southern
District of New York.
We are aware of putative class actions filed by different named
plaintiffs in the United States District Courts in Philadelphia,
Miami, Los Angeles, Chicago and New Jersey:
Cooperberg v. Clear Channel Communications, Inc.,
et al., Civ.
No. 2:05-cv-04492
(E.D. Pa.), Diaz v. Clear Channel Communications, Inc.,
et al., Civ.
No. 05-cv-22413
(S.D. Fla.), Thompson v. Clear Channel Communications,
Inc., Civ.
No. 2:05-cv-6704
(C.D. Cal.), Bhatia v. Clear Channel Communications,
Inc., et al., Civ.
No. 1:05-cv-05612
(N.D. Ill.), and Young v. Clear Channel Communications,
et al., Civ. Action
No. 06-277-WHW
(D.N.J.). The claims made in these actions are substantially
similar to the claims made in the Heerwagen action,
except that the geographic markets alleged are local in nature
and the members of the putative classes are limited to
individuals who purchased tickets to concerts in the relevant
geographic markets alleged. We have filed our answers in all but
the Chicago and New Jersey actions, and we have denied
liability. We intend to vigorously defend all claims in all of
the actions. Trial has been set only in the Miami action, for
January 2007.
We were 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 alleged tortious interference
with a contract, plus breach of contract, breach of covenant of
good faith and fair dealing and unfair competition, and
interference with prospective economic advantage. On
November 17, 2003, plaintiff filed a statement of damages
asserting that his estimated compensatory damages were
$3.9 million exclusive of losses for salary increases,
value of benefits, and lost profits associated with the contract
at issue. Plaintiff was also seeking unliquidated punitive
damages. On December 14, 2005, the parties entered into a
settlement agreement. This settlement, which does not constitute
an admission of wrongdoing or liability by us, was recorded in
2005 results of operations and will not have any impact on
future operations.
We were 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 alleged that they were entitled to certain earn-out
payments pursuant to a purchase agreement in connection with the
construction and operation of an amphitheater owned by us. On
December 21, 2005, the parties entered into a settlement
agreement. The settlement is on terms that are not material to
our operating results and does not constitute an admission of
wrongdoing or liability by us.
NETworks Presentations, LLC, a joint venture between us and
Gentry & Associates, Inc., is among the defendants in a
lawsuit filed in the United States District Court for the
Central District of California on September 22, 2005 by
Clifford Kellas. The plaintiff claims that he was subject to
sexual harassment, gender discrimination and unlawful
retaliation in violation of Title VII of the 1964 Civil
Rights Act. He seeks $5.0 million in general damages and
$5.0 million in punitive damages plus legal costs and
prejudgment interest. No trial has yet been set, and we intend
to vigorously defend all claims.
From time to time, we are involved in other legal proceedings
arising in the ordinary course of our business, including
proceedings and claims based upon violations of antitrust laws
and tortious interference, which could cause us to incur
significant expenses. We also have been the subject of personal
injury and wrongful death claims relating to accidents at our
venues in connection with our operations. As required, we have
accrued our 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 our assumptions or the
effectiveness of our strategies related to these proceedings. In
addition, under our agreements with Clear Channel
Communications, we have assumed and will indemnify Clear Channel
Communications for liabilities related to our business for which
they are a party in the defense.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
34
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock was listed on the New York Stock Exchange under
the symbol LYV on December 21, 2005. There were
2,532 shareholders of record as of February 28, 2006.
This figure does not include an estimate of the indeterminate
number of beneficial holders whose shares may be held of record
by brokerage firms and clearing agencies. The following table
presents the high and low closing prices of the common stock on
the New York Stock Exchange during the calendar quarter
indicated and the dividends declared during such quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Market
Price
|
|
|
Dividends
|
|
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter (commencing
December 21, 2005)
|
|
$
|
14.00
|
|
|
$
|
10.55
|
|
|
$
|
|
|
Dividend
Policy
We presently intend to retain future earnings, if any, to
finance the expansion of our business. Therefore, we do not
expect to pay any cash dividends in the foreseeable future.
Moreover, the terms of our senior secured credit facility and
the designations of our 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.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchases
On December 22, 2005, we publicly announced that our Board
of Directors authorized a $150.0 million share repurchase
program effective immediately. The repurchase program is
authorized through December 31, 2006, although prior to
such time the program may be suspended or discontinued at any
time. During the ten days ended December 31, 2005, we
repurchased the following shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Dollar
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
Value of Shares that
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
May Yet Be Purchased
|
|
Period
|
|
Shares Repurchased
|
|
|
Paid per Share
|
|
|
Announced Program
|
|
|
Under the Program
|
|
|
December 22 through
December 31
|
|
|
1,506,900
|
|
|
$
|
11.95
|
|
|
|
1,506,900
|
|
|
$
|
132,020,429
|
|
As of February 28, 2006, 3.4 million shares had been
repurchased for an aggregate purchase price of
$42.7 million, including commissions and fees, under the
repurchase program.
Recent
Sales of Unregistered Securities
Prior to the Separation, on December 21, 2005, pursuant to
an exemption from registration under Section 4(2) of the
Securities Act of 1933, a subsidiary of ours sold
200,000 shares of Series A (voting) mandatorily
Redeemable Preferred Stock to third-party institutional
investors for $100 per share ($20.0 million aggregate
offering price) and issued 200,000 shares of Series B
(non-voting) mandatorily Redeemable Preferred Stock to Clear
Channel Communications, in exchange for all of the outstanding
stock of one of our subsidiaries, who then sold this
Series B Redeemable Preferred Stock to third-party
institutional investors. We did not receive any of the proceeds
from the sale of the Series B Redeemable Preferred Stock
sold by Clear Channel Communications. All proceeds from the
issuance of Series A Redeemable Preferred Stock, which we
received, were used to repay intercompany debt owed to Clear
Channel Communications. The principal underwriter was Goldman
Sachs. The aggregate underwriting discounts and commissions were
$0.5 million. For more information regarding this issuance
of preferred stock, see Item 1.
Business Recent Developments and Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations- Liquidity and Capital Resources.
35
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,(1)
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share
data)
|
|
|
Results of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,543,668
|
|
|
$
|
2,473,319
|
|
|
$
|
2,707,902
|
|
|
$
|
2,806,128
|
|
|
$
|
2,936,845
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
2,386,504
|
|
|
|
2,302,707
|
|
|
|
2,506,635
|
|
|
|
2,645,293
|
|
|
|
2,829,832
|
|
Depreciation and amortization
|
|
|
299,343
|
|
|
|
64,836
|
|
|
|
63,436
|
|
|
|
64,095
|
|
|
|
64,622
|
|
Loss (gain) on sale of operating
assets
|
|
|
(1,278
|
)
|
|
|
(15,241
|
)
|
|
|
(978
|
)
|
|
|
6,371
|
|
|
|
4,859
|
|
Corporate expenses
|
|
|
49,294
|
|
|
|
26,101
|
|
|
|
30,820
|
|
|
|
31,386
|
|
|
|
50,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(190,195
|
)
|
|
|
94,916
|
|
|
|
107,989
|
|
|
|
58,983
|
|
|
|
(13,183
|
)
|
Interest expense
|
|
|
9,476
|
|
|
|
3,998
|
|
|
|
2,788
|
|
|
|
3,119
|
|
|
|
6,059
|
|
Interest expense with Clear Channel
Communications
|
|
|
65,501
|
|
|
|
58,608
|
|
|
|
41,415
|
|
|
|
42,355
|
|
|
|
46,437
|
|
Equity in earnings (loss) of
nonconsolidated affiliates
|
|
|
6,690
|
|
|
|
(212
|
)
|
|
|
1,357
|
|
|
|
2,906
|
|
|
|
(276
|
)
|
Other income
(expense) net
|
|
|
3,213
|
|
|
|
332
|
|
|
|
3,224
|
|
|
|
(1,690
|
)
|
|
|
(3,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
and cumulative effect of a change in accounting principle
|
|
|
(255,269
|
)
|
|
|
32,430
|
|
|
|
68,367
|
|
|
|
14,725
|
|
|
|
(69,131
|
)
|
Income tax benefit (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
44,112
|
|
|
|
(40,102
|
)
|
|
|
68,272
|
|
|
|
55,946
|
|
|
|
53,025
|
|
Deferred
|
|
|
(43,581
|
)
|
|
|
11,103
|
|
|
|
(79,607
|
)
|
|
|
(54,411
|
)
|
|
|
(114,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of a change in accounting principle
|
|
|
(254,738
|
)
|
|
|
3,431
|
|
|
|
57,032
|
|
|
|
16,260
|
|
|
|
(130,619
|
)
|
Cumulative effect of a change in
accounting principle, net of tax of $198,640(2)
|
|
|
|
|
|
|
(3,932,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(254,738
|
)
|
|
$
|
(3,928,576
|
)
|
|
$
|
57,032
|
|
|
$
|
16,260
|
|
|
$
|
(130,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss)
before cumulative effect of a change in accounting principle per
common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,391,088
|
|
|
$
|
1,518,644
|
|
|
$
|
1,495,715
|
|
|
$
|
1,478,706
|
|
|
$
|
1,776,584
|
|
Long-term debt, including current
maturities
|
|
$
|
1,112,842
|
|
|
$
|
622,831
|
|
|
$
|
617,838
|
|
|
$
|
650,675
|
|
|
$
|
366,841
|
|
Redeemable preferred stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
40,000
|
|
Business/Shareholders equity
|
|
$
|
3,701,975
|
|
|
$
|
230,914
|
|
|
$
|
188,283
|
|
|
$
|
156,976
|
|
|
$
|
636,700
|
|
|
|
|
(1) |
|
Acquisitions and dispositions significantly impact the
comparability of the historical consolidated financial data
reflected in this schedule of Selected Financial Data. |
|
(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. |
The Selected Financial Data should be read in conjunction with
Managements Discussion and Analysis.
36
|
|
Item 7.
|
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
consolidated and combined financial statements and notes to the
financial statements included elsewhere in this Annual Report.
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 under Item 1A. Risk Factors and other
sections in this Annual Report.
Executive
Overview
Our global music business experienced an increase in
international revenues primarily due to acquisitions of
promoters and increased ticket prices and attendance at our
international festivals. This was partially offset by a decline
in the number of events across our domestic amphitheaters as
compared to 2004 which resulted in a decline in total
attendance. This segment was also affected by increased
litigation expenses, severance and other reorganization costs.
Our global theater business expanded its venue network during
2005 through acquisitions, but overall, experienced reduced
attendance and show profits. This segment was also impacted by
increased write-offs of advances on theater productions,
severance and other reorganization costs during 2005.
Our other operations business experienced an increase in
divisional operating expenses due to increased litigation
expenses as well as severance and other reorganization costs.
The impact of these items was offset by growth in the motor
sports business due to additional demand in existing markets and
new demand in markets where arenas and stadiums have been built.
Basis of
Presentation
The combined financial statements include amounts prior to the
Separation that 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. Management
believes the assumptions underlying the combined financial
statements are reasonable. However, the combined financial
statements included herein 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. Clear Channel
Communications net investment in the Company is shown as
Business equity in lieu of Shareholders equity in the
combined financial statements prior to the Separation. On
December 21, 2005, we separated from Clear Channel
Communications. As a result, we recognized the par value and
additional
paid-in-capital
in connection with the issuance of our common stock in exchange
for the net assets of Clear Channel Communications
entertainment business contributed at that time, and we began
accumulating retained earnings and currency translation
adjustments upon completion of the Separation. Beginning on
December 21, 2005, our consolidated financial statements
include all accounts of the Company and its majority owned
subsidiaries.
37
Introduction
Managements discussion and analysis, or MD&A, of our
financial condition and results of operations is provided as a
supplement to the audited annual 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 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.
|
|
|
|
Consolidated and combined results of
operations. This section provides an analysis of
our results of operations for the years ended December 31,
2005, 2004 and 2003. Our discussion is presented on both a
consolidated and combined and segment basis. Our reportable
operating segments are global music, global theater and other.
Approximately 69% of our revenue is derived in North America,
with the remainder being derived internationally, primarily in
the United Kingdom, Sweden and Holland. 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 and income taxes are managed on a
total company basis and are, therefore, included only in our
discussion of consolidated and combined results.
|
|
|
|
Liquidity and capital resources. This section
provides a discussion of our financial condition as of
December 31, 2005 and 2004, as well as an analysis of our
cash flows for the years ended December 31, 2005 and 2004.
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, 2005.
|
|
|
|
Seasonality. This section discusses the
seasonal performance of our global music, global theater and
other segments.
|
|
|
|
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 Summary of Significant Accounting
Policies to our consolidated and combined financial statements
included in Item 8. Financial Statements and Supplementary
Data of this Annual Report.
|
Business
Overview
We believe we are one of the worlds largest diversified
venue operators for, and promoters and producers of, live
entertainment events. For the year ended December 31, 2005,
we promoted, produced or hosted over 29,500 events, including
music concerts, theatrical performances, specialized motor
sports and other events, with total attendance nearing
60 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 December 31, 2005, we owned or operated 119 venues,
consisting of 77 domestic and 42 international venues. These
venues include 37 amphitheaters, 61 theaters, 15 clubs,
four arenas and two festival sites. In addition, through equity,
booking or similar arrangements we have the right to book events
at 34 additional venues.
38
Our
Business Segments
We operate in two reportable business segments: global
music and global theater. In addition, we operate in the
specialized motor sports, sports 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, 2005, our global music business generated
approximately $2.3 billion, or 79%, of our total revenues.
We promoted or produced over 10,000 events in 2005, including
tours for artists such as U2, Paul McCartney, Dave Matthews Band
and Toby Keith. In addition, we produced several large festivals
in Europe, including Rock Werchter in Belgium, the North Sea
Jazz Festival in Holland and the Reading Festival in the United
Kingdom. 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,
2005, our global theater business generated approximately
$317.0 million, or 11%, of our total revenues. In 2005, we
presented or produced over 14,000 theatrical performances
of productions such as The Producers, The Lion King, Mamma
Mia!, Hairspray, Movin Out, Phantom of the Opera and
Chicago. We pre-sell tickets for our touring shows in
approximately 46 touring markets through Broadway Across
America, one of the largest subscription series in the
United States and Canada. 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 2005, we held over 500 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 December 31, 2005, we
had approximately 600 clients, including Kobe Bryant
(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. In addition, we distribute television
shows and DVDs, including Motley Crue: Carnival of Sins
and Ozzfest:
10th Year
Anniversary Tour.
For the year ended December 31, 2005, businesses included
under other generated approximately
$298.5 million, or 10%, of our total revenues.
Our
Business Activities
We principally act in the following capacities, performing one,
some or all of these roles in connection with our events and
tours:
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
39
venue sponsorships, as well as sharing in percentages of
concessions, merchandise and parking. 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 significantly higher margin than promotion or production
revenues and therefore typically have a more direct relationship
to operating income.
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 consolidated and 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.
40
Consolidated
and Combined Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
2,936,845
|
|
|
$
|
2,806,128
|
|
|
$
|
2,707,902
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
2,829,832
|
|
|
|
2,645,293
|
|
|
|
2,506,635
|
|
Depreciation and amortization
|
|
|
64,622
|
|
|
|
64,095
|
|
|
|
63,436
|
|
Loss (gain) on sale of operating
assets
|
|
|
4,859
|
|
|
|
6,371
|
|
|
|
(978
|
)
|
Corporate expenses
|
|
|
50,715
|
|
|
|
31,386
|
|
|
|
30,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(13,183
|
)
|
|
|
58,983
|
|
|
|
107,989
|
|
Interest expense
|
|
|
6,059
|
|
|
|
3,119
|
|
|
|
2,788
|
|
Interest expense with Clear
Channel Communications
|
|
|
46,437
|
|
|
|
42,355
|
|
|
|
41,415
|
|
Equity in earnings (loss) of
nonconsolidated affiliates
|
|
|
(276
|
)
|
|
|
2,906
|
|
|
|
1,357
|
|
Other income
(expense) net
|
|
|
(3,176
|
)
|
|
|
(1,690
|
)
|
|
|
3,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(69,131
|
)
|
|
|
14,725
|
|
|
|
68,367
|
|
Income tax (expense) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
53,025
|
|
|
|
55,946
|
|
|
|
68,272
|
|
Deferred
|
|
|
(114,513
|
)
|
|
|
(54,411
|
)
|
|
|
(79,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(130,619
|
)
|
|
$
|
16,260
|
|
|
$
|
57,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
13,913
|
|
|
$
|
119,898
|
|
|
$
|
138,713
|
|
Investing activities
|
|
$
|
(106,049
|
)
|
|
$
|
(84,076
|
)
|
|
$
|
(51,960
|
)
|
Financing activities
|
|
$
|
345,438
|
|
|
$
|
23,254
|
|
|
$
|
(56,894
|
)
|
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.
Revenue
Our revenue increased $130.7 million, or 5%, in fiscal year
2005 as compared to fiscal year 2004 primarily due to increases
in our global music, global theater and other operations of
$120.3 million, $3.0 million and $7.4 million,
respectively. Included in the fiscal year 2005 revenue is
approximately $7.3 million from decreases in foreign
exchange rates as compared to the same period of 2004.
Our revenue increased $98.2 million, or 4%, in fiscal year
2004 as compared to fiscal year 2003 due to an increase in
global music revenue of $131.2 million. Partially
offsetting this increase were declines in revenue from our other
operations and global theater of $28.7 million and
$4.2 million, respectively. Included in the fiscal year
2004 revenue is approximately $74.3 million, or 76% of the
total increase in revenues, from increases in foreign exchange
rates as compared to the same period of 2003.
Divisional
Operating Expenses
Our divisional operating expenses increased $184.5 million,
or 7%, in fiscal year 2005 as compared to fiscal year 2004 due
to increases in our global music, global theater and other
operations of $144.2 million, $24.8 million and
$15.5 million, respectively. Divisional operating expenses
for 2005 include $28.3 million in
41
expenses related to a reorganization of business units and
severance costs associated with reductions in personnel,
$22.8 million of increased litigation contingencies and
expenses, and $11.3 million in write-offs of advances on
certain music projects and theater productions. The increase in
fiscal year 2005 divisional operating expenses was partially
offset by approximately $5.9 million of decreases in
foreign exchange rates as compared to the same period of 2004.
Our divisional operating expenses increased $138.7 million,
or 6%, in fiscal year 2004 as compared to fiscal year 2003 due
to a $157.8 million increase in global music divisional
operating expenses, partially offset by a decrease in divisional
operating expenses from our other operations and global theater
of $15.2 million and $4.0 million, respectively.
Included in the fiscal year 2004 divisional operating expenses
is approximately $68.0 million from increases in foreign
exchange rates as compared to the same period of 2003.
Loss
(Gain) on sale of operating assets
Our loss on sale of operating assets decreased $1.5 million
during the fiscal year 2005 as compared to the fiscal year 2004.
During the second quarter of 2004, we recorded a loss on the
sale of our international leisure center operations. During the
fourth quarter of 2005, we recorded a smaller loss on the sale
of certain exhibition and music publishing assets.
Our loss on sale of operating assets increased $7.3 million
during 2004 as compared to 2003 primarily due to the sale of our
international leisure center operations during the second
quarter of 2004.
Corporate
Expenses
Corporate expenses increased $19.3 million, or 62%, during
the fiscal year 2005 as compared to the fiscal year 2004 as the
result of a $16.6 million increase in litigation
contingencies and expenses as well as $4.7 million related
to severance payments during 2005.
Corporate expenses increased $0.6 million, or 2%, in the
fiscal year ended 2004 as compared to 2003, primarily due to
increases in litigation and rent expenses, partially offset by
declines in performance-based bonus expense for the period.
Interest
Expense
Interest expense increased $2.9 million during the fiscal
year 2005 as compared to the fiscal year 2004 primarily due to
$1.1 million of interest related to a contingent purchase
price payment related to a prior acquisition and
$0.7 million of interest expense related to our term loan
and redeemable preferred stock.
Interest
Expense with Clear Channel Communications
The increases and decreases in interest expense with Clear
Channel Communications are directly related to the respective
increase or decrease in average debt outstanding as the rate
charged remained relatively consistent throughout the periods.
As of December 21, 2005, this debt was repaid to or
contributed to our capital by Clear Channel Communications.
Our weighted average cost of debt during all periods was 7.0%.
Our debt balances owed to Clear Channel Communications as of
December 31, 2005, 2004 and 2003 were:
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
2005
|
|
2004
|
|
2003
|
(In millions)
|
|
$
|
|
|
|
$
|
628.9
|
|
|
$
|
595.2
|
|
Equity
in Earnings (Loss) of Nonconsolidated Affiliates
Equity in earnings (loss) of nonconsolidated affiliates
decreased $3.2 million during the fiscal year 2005 as
compared to the fiscal year 2004 primarily as a result of
impairments and losses in several of our nonconsolidated other
operations affiliates during 2005.
42
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.
Other
Income (Expense) Net
The principal components of other income
(expense) net, for the applicable periods, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Interest income
|
|
$
|
2.5
|
|
|
$
|
3.2
|
|
|
$
|
6.9
|
|
Minority interest expense
|
|
|
(5.2
|
)
|
|
|
(3.3
|
)
|
|
|
(3.3
|
)
|
Other, net
|
|
|
(.5
|
)
|
|
|
(1.6
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense) net
|
|
$
|
(3.2
|
)
|
|
$
|
(1.7
|
)
|
|
$
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income decreased $3.7 million during fiscal year
2004 as compared to 2003 due primarily to receipt of interest
related to notes receivable that were repaid during 2003.
Minority interest expense increased $1.9 million during
fiscal year 2005 as compared to 2004 primarily due to the
acquisition of a 50.1% interest in Mean Fiddler during the third
quarter of 2005.
Income
Taxes
Current tax benefit for the fiscal year 2005 decreased
$2.9 million as compared to the fiscal year 2004. Deferred
tax expense increased $60.1 million in 2005 as compared to
2004. The increase in deferred tax expense is primarily due to
the $77.3 million valuation reserve recorded in the fourth
quarter of 2005 and subsequent to our separation from Clear
Channel Communications related to our deferred tax asset. As a
subsidiary of Clear Channel Communications, taxable losses of
our subsidiaries were able to be utilized under a consolidated
income tax return with Clear Channel Communications. After the
Separation, our deferred tax asset had to be evaluated on a
stand-alone basis based on prior historical taxable income.
Since we have had a history of taxable losses, we recorded a
valuation allowance against this asset.
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.
Global
Music Results of Operations
Our global music operating results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
2,321,302
|
|
|
$
|
2,201,007
|
|
|
$
|
2,069,857
|
|
Divisional operating expenses
|
|
|
2,226,165
|
|
|
|
2,081,945
|
|
|
|
1,924,132
|
|
Depreciation and amortization
|
|
|
39,421
|
|
|
|
37,043
|
|
|
|
35,262
|
|
Gain on sale of operating assets
|
|
|
(806
|
)
|
|
|
(3,438
|
)
|
|
|
(863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
56,522
|
|
|
$
|
85,457
|
|
|
$
|
111,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Fiscal
Year 2005 Compared to Fiscal Year 2004
Global music revenue increased $120.3 million, or 5%,
during 2005 as compared to 2004 driven primarily by an increase
of $126.7 million in our international revenues, partially
offset by a decline in our domestic revenues. The increase in
our international revenues is primarily due to the acquisition
of international promotion companies during the second half of
2004, the acquisition of a festival promoter and venue operator
in 2005, an increase in promotion revenue related to shows with
higher ticket prices and an increase in the attendance at our
international festivals. Our international music revenue
increase was partially offset by a $6.4 million decrease in
domestic revenues during 2005. 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. While the total attendance declined at our domestic
amphitheaters, the average per show attendance at these venues
actually increased 7%. We believe that this increase in average
per show attendance was driven by a decrease in the average
ticket price by 6% during 2005.
Global music divisional operating expenses increased
$144.2 million, or 7%, during 2005 as compared to 2004 due
to increases in our international and domestic divisional
operation expenses of $117.6 million and $26.6 million
respectively. The increase in divisional operating expenses is
due primarily to the acquisition of international promotion
companies during the second half of 2004, the acquisition of an
international festival promoter and venue operator in 2005, an
increase in international promotion activity and a
$5.9 million write-off of advances on certain domestic
music projects. In addition, in 2005 we had $11.3 million
of higher litigation contingencies and expenses and
$12.2 million of costs related to severance and
reorganization of the business.
Depreciation and amortization increased by $2.4 million, or
6%, in 2005 as compared to 2004 primarily due to accelerating
depreciation on assets for which we have determined the useful
life to be shorter than originally expected.
Fiscal
Year 2004 Compared to Fiscal Year 2003
Global music revenue increased $131.2 million, or 6%,
during 2004 as compared to 2003. Approximately
$57.6 million, or 44% of the increase, was attributable to
foreign exchange rate increases. The increase was also driven by
an increased number of events and attendance in our
international operations. Significant acts for 2004 included
Madonna and the Italian tour of Vasco Rossi. In addition,
revenue from global music sponsorships and premium seat sales
increased in 2004 by $15.9 million, or 12%, over 2003.
Although domestic music revenue increased, we had fewer domestic
amphitheater events in 2004 as compared to 2003 primarily due to
an unusually high number of show cancellations in 2004 as
compared to 2003. Attendance for 2004 in our owned and operated
amphitheaters was lower than 2003, partially due to these
cancellations. In general, the domestic music industry suffered
a setback in 2004 and according to Pollstar experienced a
decline of approximately 3%, as compared to 2003, in the number
of tickets sold for the top 100 tours.
Global music divisional operating expenses increased
$157.8 million, or 8%, during 2004 as compared to 2003.
Approximately $53.3 million, or 34% of the increase, was
attributable to foreign exchange rate increases. The increase
also relates to variable promotion, production and venue costs
associated with the number and type of events in 2004 as
compared to 2003. In addition, domestic music experienced higher
talent and production costs primarily due to higher artist
guarantees without a proportional increase in revenue. Domestic
music also completed a restructuring of operations in the fourth
quarter of 2004, resulting in a staff reduction and an increase
in severance costs.
Depreciation and amortization increased by $1.8 million, or
5%, in 2004 as compared to 2003 primarily due to the completion
of new venues placed in service in late 2003 and in 2004.
44
Global
Theater Results of Operations
Our global theater operating results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
317,038
|
|
|
$
|
313,974
|
|
|
$
|
318,219
|
|
Divisional operating expenses
|
|
|
303,098
|
|
|
|
278,327
|
|
|
|
282,320
|
|
Depreciation and amortization
|
|
|
15,236
|
|
|
|
14,709
|
|
|
|
13,161
|
|
Loss (gain) on sale of operating
assets
|
|
|
2
|
|
|
|
(58
|
)
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(1,298
|
)
|
|
$
|
20,996
|
|
|
$
|
22,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2005 Compared to Fiscal Year 2004
Global theater revenue increased $3.1 million, or 1%,
during 2005 as compared to 2004. Approximately
$1.6 million, or 52% of the increase, was attributable to
foreign exchange rate increases. In addition, global theater
expanded its venue network during 2005 with the acquisition of
four theaters in Spain, which resulted in an increase in
revenues.
Global theater divisional operating expenses increased
$24.8 million, or 9%, during 2005 as compared to 2004.
Approximately $1.6 million, or 6% of the increase, was
attributable to foreign exchange rate increases. The remaining
increase primarily relates to $10.5 million of severance
and other reorganization costs, $1.3 million of increased
litigation contingencies and expenses, $5.4 million of
write-offs of advances on certain domestic theater productions
and costs related to the new theaters in Spain.
Fiscal
Year 2004 Compared to Fiscal Year 2003
Global theater revenues decreased $4.2 million, or 1%,
during 2004 as compared to 2003 primarily due to fewer domestic
event dates and the replacement of a number of significant
international production investments in 2003 with smaller
interests in international productions in 2004 where we receive
only investment earnings rather than consolidated production
results. These declines were partially offset by an increase in
foreign exchange rates of approximately $10.4 million in
2004 as compared to 2003, as well as the positive impact to
revenues associated with our opening of the renovated
France-Merrick Center for Performing Arts and the Boston Opera
House during 2004.
Global theater divisional operating expenses declined
$4.0 million, or 1%, during 2004 as compared to 2003
primarily due to a decrease in global theater revenues during
2004 as compared to 2003. Included in this variance are foreign
exchange rate increases of approximately $8.9 million.
Global theater depreciation and amortization expense increased
$1.5 million, or 12%, during 2004 as compared to 2003
primarily due to foreign exchange rate increases of
$1.0 million and the completion and opening of the Boston
Opera House during 2004.
45
Other
Results of Operations
Our other operating results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
298,505
|
|
|
$
|
291,147
|
|
|
$
|
319,826
|
|
Divisional operating expenses
|
|
|
300,569
|
|
|
|
285,021
|
|
|
|
300,183
|
|
Depreciation and amortization
|
|
|
5,969
|
|
|
|
7,406
|
|
|
|
9,626
|
|
Loss (gain) on sale of operating
assets
|
|
|
3,598
|
|
|
|
9,867
|
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(11,631
|
)
|
|
$
|
(11,147
|
)
|
|
$
|
10,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2005 Compared to Fiscal Year 2004
Other revenues increased $7.4 million, or 3%, during 2005
as compared to 2004. The revenue increase is partially due to
growth of existing and creation of new touring productions and
increased sales of DVDs. Growth in the revenue from our
specialized motor sports events resulted from a slight increase
in attendance and ticket prices. These increases 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.
Other divisional operating expenses increased
$15.5 million, or 5%, during 2005 as compared to 2004. The
increase relates to the growth in our specialized motor sports
events and touring productions, $5.6 million of severance
and other reorganization costs and a $10.2 million increase
in litigation contingencies and expenses in 2005 as compared to
2004. These increases 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.
Other divisional depreciation and amortization expense decreased
$1.4 million, or 19%, for 2005 as compared to 2004
primarily as a result of the sale of the international leisure
center business during the second quarter of 2004.
Other loss on sale of operating assets decreased
$6.3 million during 2005 as compared to 2004 due primarily
to the sale of our international leisure center operations
during the second quarter of 2004 offset by the sale of certain
exhibition and music publishing assets during the fourth quarter
of 2005.
Fiscal
Year 2004 Compared to Fiscal Year 2003
Other revenues decreased $28.7 million, or 9%, during 2004
as compared to 2003. Foreign exchange rate increases of
approximately $6.3 million were offset by decreases
relating to the divestiture of certain non-core businesses,
including our international leisure center business, during the
second quarter of 2004 and a television production business
during 2003. In addition, our exhibitions group experienced a
reduction in revenues as the popular Titanic: The Artifact
Exhibit completed its run during the second quarter of 2004
after a full year of operations in 2003. These revenue declines
were partially offset by an increase in the amount of
sponsorship sales during 2004.
Other divisional operating expenses decreased
$15.2 million, or 5%, during 2004 as compared to 2003.
Foreign exchange rate increases of approximately
$5.8 million were offset by decreases relating to the
non-core divestitures and conclusion of Titanic: The Artifact
Exhibit as mentioned above.
Other divisional depreciation and amortization expense decreased
$2.2 million, or 23%, during 2004 as compared to 2003
primarily due to the divestiture of our international leisure
center operations during the second quarter of 2004.
Other loss on sale of operating assets increased
$10.0 million during 2004 as compared to 2003 primarily due
to the sale of our international leisure center operations
during the second quarter of 2004.
46
Reconciliation
of Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Global Music
|
|
$
|
56,522
|
|
|
$
|
85,457
|
|
|
$
|
111,326
|
|
Global Theater
|
|
|
(1,298
|
)
|
|
|
20,996
|
|
|
|
22,714
|
|
Other
|
|
|
(11,631
|
)
|
|
|
(11,147
|
)
|
|
|
10,156
|
|
Corporate
|
|
|
(56,776
|
)
|
|
|
(36,323
|
)
|
|
|
(36,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated and Combined
operating income (loss)
|
|
$
|
(13,183
|
)
|
|
$
|
58,983
|
|
|
$
|
107,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity
and Capital Resources
Our working capital requirements and capital for our general
corporate purposes, including acquisitions and capital
expenditures, have historically been funded primarily through an
intercompany promissory note with Clear Channel Communications.
Subsequent to our separation from Clear Channel Communications,
our working capital and other cash requirements are funded from
operations or from borrowings under our senior secured credit
facility described below. Our cash is currently managed on a
world-wide basis. 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 historical balance sheet reflects cash and cash equivalents
of $403.7 million and short-term and long-term debt of
$366.8 million at December 31, 2005, and cash and cash
equivalents of $179.1 million and short-term and long-term
debt of $650.7 million at December 31, 2004. The
increase in cash and cash equivalents during 2005 as compared to
2004 is due to $107.0 million of cash remaining from our
senior secured credit facility and higher cash in our
international operations due to improved results of operations
and timing of events.
We may need to incur additional debt or issue equity to make
strategic acquisitions or investments. We cannot assure that
such financing will be available to us on acceptable terms or
that such financing will be available at all. Our ability to
issue additional equity may be constrained because our issuance
of additional stock may cause the Distribution to be taxable
under section 355(e) of the Code, and, under the tax
matters agreement, we would be required to indemnify Clear
Channel Communications against the tax, if any. We may make
significant acquisitions in the near term, subject to
limitations imposed by our financing documents, market
conditions and the tax matters agreement.
We generally receive cash related to ticket revenues in advance
of the event, which is recorded in deferred income until the
event occurs. With the exception of some upfront costs and
artist deposits, which are recorded in prepaid expenses until
the event occurs, we pay the majority of event related expenses
at or after the event.
Our intra-year cash fluctuations are impacted by the seasonality
of our various businesses. Examples of seasonal effects include
our global music business, which reports the majority of its
revenues in the second and third quarters, while our global
theater business reports the majority of its revenues in the
first, second and fourth quarters of the year. Cash inflows and
outflows depend on the timing of event-related payments and
generally occur prior to the event. See
Seasonality below. 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 flow from operations and
borrowings under our senior secured credit facility to satisfy
working capital, capital expenditure and debt service
requirements for at least the succeeding year.
47
Sources
of Cash
Senior
Secured Credit Facility
As of December 31, 2005, we had a $610.0 million
senior secured credit facility consisting of a
$325.0 million
71/2
-year term loan and a $285.0 million
61/2
-year revolving credit facility. The
61/2
-year revolving credit facility provides for borrowings up to
the amount of the facility with sub-limits of up to
$235.0 million to be available for the issuance of letters
of credit and up to $100.0 million to be available for
borrowings in foreign currencies. The term loan portion of the
credit facility matures in June 2013. We are required to make
minimum quarterly principal repayments under the term loan of
approximately $3.2 million per year through March 2013,
with the remaining balance due at maturity. We are required to
prepay the outstanding term loan, subject to certain exceptions
and conditions, from certain asset sale proceeds and casualty
and condemnation proceeds that we do not reinvest within a
365-day
period or from additional debt issuance proceeds. The revolving
credit portion of the credit facility matures in June 2012. At
December 31, 2005, the outstanding balances on the term
loan and revolving credit facility were $325.0 million and
$0, respectively. Taking into account letters of credit of
$46.4 million, $238.6 million was available for future
borrowings.
As of February 28, 2006, the outstanding balances on the
term loan and revolving credit facility were $325.0 million
and $0, respectively. Taking into account letters of credit of
$45.7 million, $239.3 million was available for future
borrowings.
Borrowings under the term loan portion of the credit facility
bear interest at per annum floating rates equal, at our option,
to either (a) the base rate (which is the prime rate
offered by JPMorgan Chase Bank, N.A.) plus 1.25% or
(b) Adjusted LIBOR plus 2.25%. Borrowings under the
revolving portion of the credit facility bear interest at per
annum floating rates equal, at our option, to either
(a) the base rate (which is the prime rate offered by
JPMorgan Chase Bank, N.A. ) plus an applicable margin or
(b) Adjusted LIBOR plus an applicable margin. Sterling and
Euro-denominated borrowings under the revolving portion of the
credit facility currently bear interest at per annum floating
rates equal to either Adjusted LIBOR or Adjusted EURIBOR,
respectively, plus an applicable margin. The revolving credit
facility margins are subject to change based upon the amount of
leverage for the previous calendar quarter. At December 31,
2005, the applicable margins for base rate, Adjusted LIBOR and
EURIBOR borrowings were 0.75%, 1.75% and 1.75% respectively.
Under the terms of the credit facility, we are required to enter
into an interest rate swap for a minimum of 50% of the
outstanding debt for a minimum of three years.
In addition to paying interest on outstanding principal under
the credit facility, we are required to pay a commitment fee to
the lenders under the revolving credit facility in respect of
the unutilized commitments. As of December 31, 2005, the
commitment fee rate was .375%. We also are required to pay
customary letter of credit fees, as necessary.
The senior secured credit facility contains a number of
covenants that, among other things, restrict our ability to
incur additional debt, pay dividends and make distributions,
make certain investments and acquisitions, repurchase our stock
and prepay certain indebtedness, create liens, enter into
agreements with affiliates, modify the nature of our business,
enter into sale-leaseback transactions, transfer and sell
material assets, and merge or consolidate.
Redeemable
Preferred Stock
As part of the Separation, a subsidiary of ours sold
200,000 shares of Series A (voting) mandatorily
Redeemable Preferred Stock to third-party investors and issued
200,000 shares of Series B (non-voting) mandatorily
Redeemable Preferred Stock to Clear Channel Communications who
then sold this Series B Redeemable Preferred Stock to
third-party investors. We did not receive any of the proceeds
from the sale of the Series B Redeemable Preferred Stock
sold by Clear Channel Communications. As of December 31,
2005, we had 200,000 shares of Series A Redeemable
Preferred Stock and 200,000 shares of Series B
Redeemable Preferred Stock outstanding (collectively, the
Preferred Stock) with an aggregate liquidation
preference of $40.0 million. The Preferred Stock accrues
dividends at 13% per annum and is mandatorily redeemable on
48
December 21, 2011, although we are obligated to make an
offer to repurchase the Preferred Stock at 101% of the
liquidation preference in the event of a change of control. The
certificate of incorporation governing the Preferred Stock
contains a number of covenants that, among other things,
restrict our ability to incur additional debt, issue certain
equity securities, create liens, merge or consolidate, modify
the nature of our business, make certain investments and
acquisitions, transfer and sell material assets, enter into
sale-leaseback transactions, enter into swap agreements, pay
dividends and make distributions, and enter into agreements with
affiliates. If we default under any of these covenants, we will
have to pay additional dividends.
Guarantees
of Third Party Obligations
As of December 31, 2005 and 2004, we guaranteed the debt of
third parties of approximately $1.9 million and
$3.5 million, respectively, primarily related to maximum
credit limits on employee credit cards and, in 2004, this
included a guarantee of a bank line of credit for working
capital needs of a nonconsolidated affiliate.
Debt
Covenants
The significant covenants on our $610.0 million,
71/2
-year, multi-currency credit facility relate to total leverage,
senior leverage, interest coverage, and capital expenditures
contained and defined in the credit agreement. The leverage
ratio covenant requires us to maintain a ratio of consolidated
total indebtedness minus unrestricted cash and cash equivalents
(both as defined by the credit agreement) to consolidated
earnings-before-interest-taxes-depreciation-and-amortization (as
defined by the credit agreement, Consolidated
EBITDA) of less than 4.5x through December 31, 2008,
and less than 4.0x thereafter, provided that aggregated
subordinated indebtedness is less than $25.0 million. The
senior leverage covenant, which is only applicable provided
aggregate subordinated indebtedness is greater than
$25.0 million, requires us to maintain a ratio of
consolidated senior indebtedness to Consolidated EBITDA of less
than 3.0x. The interest coverage covenant requires us to
maintain a minimum ratio of Consolidated EBITDA to cash interest
expense (as defined by the credit agreement) of 2.5x. The
capital expenditure covenant limits annual capital expenditures
(as defined by the credit agreement) to $125.0 million or
less through December 31, 2006, and $110.0 million or
less thereafter. In the event that we do not meet these
covenants, we are considered to be in default on the credit
facilities at which time the credit facilities may become
immediately due. This credit facility contains a cross default
provision that would be triggered if we were to default on any
other indebtedness greater than $10.0 million.
Our other indebtedness does not contain provisions that would
make it a default if we were to default on our credit facilities.
The fee we pay on borrowings on our $325.0 million,
71/2
-year, senior term loan fee is 2.25% above LIBOR. The fees we
pay on our $285.0 million,
61/2
-year multi-currency revolving credit facility depend on our
total leverage ratio. Based on our current total leverage ratio,
our fees on borrowings are 1.75% above LIBOR and are .375% on
the total remaining availability on the revolving credit
facility. In the event our leverage ratio improves, the fees on
revolving credit borrowings and the unused availability decline
gradually to .75% and .25%, respectively, at a total leverage
ratio of less than, or equal to, 1.25x.
We believe there are no other agreements that contain provisions
that trigger an event of default upon a change in long-term debt
ratings that would have a material impact on our financial
statements.
At December 31, 2005, we were in compliance with all debt
covenants. We expect to remain in compliance throughout 2006.
Uses of
Cash
Acquisitions
During the year ended December 31, 2005 our global music
segment and other operations made cash payments of
$8.3 million and $0.2 million, respectively, related
to various earn-outs and deferred purchase price consideration
on prior year acquisitions.
49
Capital
Expenditures
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 renewal and improvement of existing venues and, to a
lesser extent, capital expenditures related to information
systems and administrative offices. New venue expenditures
relate to either the construction of new venues or major
renovations to existing buildings that are being added to our
venue network. Capital expenditures typically increase during
periods when venues are not in operation.
Our capital expenditures have consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Maintenance expenditures
|
|
$
|
56.3
|
|
|
$
|
31.4
|
|
|
$
|
34.2
|
|
New venue expenditures
|
|
|
36.2
|
|
|
|
42.0
|
|
|
|
35.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
92.5
|
|
|
$
|
73.4
|
|
|
$
|
69.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance expenditures for 2005 include higher expenditures
relating to capital spent to improve the audience experience at
our owned and operated amphitheaters. We expect this higher
level of maintenance expenditures to continue in 2006.
Of the capital expenditures above, remaining in construction in
progress at December 31, 2005 was $39.9 million
primarily consisting of development or renovation costs
associated with three venues. We will incur additional costs in
2006 related to the completion of these venues.
Company
Share Repurchase Program
During the year ended December 31, 2005, our Board of
Directors authorized a $150 million share repurchase
program effective immediately. The repurchase program is
authorized through December 31, 2006, although prior to
such time the program may be suspended or discontinued at any
time. As of December 31, 2005, we have repurchased
1.5 million shares of our common stock for an aggregate
purchase price of $18.0 million, including commissions and
fees. As of February 28, 2006, we have repurchased an
additional 1.9 million shares of our common stock for an
aggregate purchase price of $24.7 million, including
commissions and fees.
Summary
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
Firm
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 and theatrical production payments. As part
of our ongoing
50
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, 2005 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,
2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 and
|
|
|
|
Total
|
|
|
2006
|
|
|
2007 2008
|
|
|
2009 2010
|
|
|
thereafter
|
|
|
|
(In thousands)
|
|
|
Long-term debt obligations,
including current maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
325,000
|
|
|
$
|
3,250
|
|
|
$
|
6,500
|
|
|
$
|
6,500
|
|
|
$
|
308,750
|
|
Other long-term debt
|
|
|
41,841
|
|
|
|
22,455
|
|
|
|
2,615
|
|
|
|
2,932
|
|
|
|
13,839
|
|
Preferred stock
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
Estimated interest payments(1)
|
|
|
260,538
|
|
|
|
36,273
|
|
|
|
71,448
|
|
|
|
69,941
|
|
|
|
82,876
|
|
Non-cancelable operating lease
obligations
|
|
|
1,012,827
|
|
|
|
64,339
|
|
|
|
114,681
|
|
|
|
89,653
|
|
|
|
744,154
|
|
Non-cancelable contracts(2)
|
|
|
247,083
|
|
|
|
190,200
|
|
|
|
27,932
|
|
|
|
13,527
|
|
|
|
15,424
|
|
Capital expenditures
|
|
|
26,711
|
|
|
|
23,461
|
|
|
|
750
|
|
|
|
2,500
|
|
|
|
|
|
Other long-term liabilities(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,954,000
|
|
|
$
|
339,978
|
|
|
$
|
223,926
|
|
|
$
|
185,053
|
|
|
$
|
1,205,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes dividends on the Series A and Series B
redeemable preferred stock. |
|
(2) |
|
Excluded from the non-cancelable contracts is $66.0 million
related to severance obligations for employment contracts
calculated as if such employees were terminated on
January 1, 2006. |
|
(3) |
|
Other long-term liabilities consist of $16.7 million of tax
contingencies, $5.0 million of deferred income and
$9.1 million of various other obligations. All of our other
long-term liabilities do not have contractual maturities and,
therefore, we cannot predict when, or if, they will become due. |
Minimum rentals of $114.1 million to be received in years
2006 through 2020 under non-cancelable subleases are excluded
from the commitment amounts in the above table.
Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
13,913
|
|
|
$
|
119,898
|
|
|
$
|
138,713
|
|
Investing activities
|
|
$
|
(106,049
|
)
|
|
$
|
(84,076
|
)
|
|
$
|
(51,960
|
)
|
Financing activities
|
|
$
|
345,438
|
|
|
$
|
23,254
|
|
|
$
|
(56,894
|
)
|
Operating
Activities
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Cash provided by operations was $13.9 million for the year
ended December 31, 2005 as compared to cash provided by
operations of $119.9 million for the year ended
December 31, 2004. The $106.0 million decrease in cash
provided by operations resulted from a decrease in net income,
adjusted for non-cash charges related to deferred income tax
expense, and changes in the event related operating accounts
which are
51
dependent on the number and size of events on-going at year end.
We had prepaid more expenses in 2005, including artist deposits,
and accrued more expenses, based on the size and timing of the
upcoming tours.
Year
Ended December 31, 2004 Compared to Year Ended
December 31, 2003
Cash provided by operations was $119.9 million for the year
ended December 31, 2004 as compared to cash provided by
operations of $138.7 million for the year ended
December 31, 2003. The $18.8 million decrease in cash
provided by operations resulted primarily from a decrease in net
income.
Investing
Activities
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Cash used in investing activities was $106.0 million for
the year ended December 31, 2005, compared to cash used in
investing activities of $84.1 million for the year ended
December 31, 2004. The $21.9 million increase in cash
used in investing activities was primarily due to an increase in
capital expenditures of $19.1 million and an increase in
advances to nonconsolidated affiliates of $4.3 million.
These increases were partially offset by less acquisition
related payments in 2005.
Year
Ended December 31, 2004 Compared to Year Ended
December 31, 2003
Cash used in investing activities was $84.1 million for the
year ended December 31, 2004, compared to cash used in
investing activities of $52.0 million for the year ended
December 31, 2003. The $32.1 million increase in cash
used in investing activities was primarily due to more
acquisition-related payments and higher advances to
nonconsolidated affiliates in 2004 and the collection of a note
receivable in 2003.
Financing
Activities
Historically, we had funded our cash needs through an
intercompany promissory note with Clear Channel Communications.
The intercompany promissory note functioned as part of a sweep
account that allowed excess operating cash generated by our
domestic operations to be transferred to Clear Channel
Communications, generally on a daily basis. As we had cash
needs, they were funded from Clear Channel Communications
through this account.
Following our separation from Clear Channel Communications, we
expect to fund our cash needs through cash from operations,
borrowings under our revolving credit facility and available
cash and cash equivalents.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Cash provided by financing activities was $345.4 million
for the year ended December 31, 2005, compared to cash
provided by financing activities of $23.3 million for the
year ended December 31, 2004. The $322.1 million
increase in cash provided by financing activities is a result of
proceeds received from our term loan and issuance of redeemable
preferred stock, offset by repurchases of our common stock.
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.
Seasonality
For financial statement purposes, our global music segment
typically experiences higher operating income in the second and
third quarters as our outdoor venues and international festivals
are primarily used in or
52
occur during May through September. In addition, the timing of
tours of top grossing acts can impact comparability of quarterly
results year over year, although annual results may not be
impacted. 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.
These artist fees and production costs are expensed when the
event occurs. 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
Item 1A. 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.
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.
Foreign
Currency Risk
We have operations in countries throughout the world. The
financial results of our foreign operations are measured in
their local currencies. 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 $60.6 million for the year
ended December 31, 2005. Currently, we do not operate in
any hyper-inflationary countries. We estimate that a 10% change
in the value of the United States dollar relative to foreign
currencies would change our operating income for the year ended
December 31, 2005 by $6.1 million. As of
December 31, 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.
Occasionally, we will use forward currency contracts to reduce
our exposure to foreign currency risk. The principal objective
of such contracts is to minimize the risks
and/or costs
associated with artist fee commitments. At December 31,
2005, we do not have any outstanding forward currency contracts.
Interest
Rate Risk
Our market risk is also affected by changes in interest rates.
We had $366.8 million total debt outstanding as of
December 31, 2005, of which $325.1 million was
variable rate debt.
Based on the amount of our floating-rate debt as of
December 31, 2005, each 25 basis point increase or
decrease in interest rates would increase or decrease our annual
interest expense and cash outlay by approximately
$0.8 million. 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 December 31, 2005 with no
subsequent change in rates for the remainder of the period.
Beginning in 2006, we intend to use interest rate swaps and
other derivative instruments 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.
53
Recent
Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 153, Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29
(Statement 153). Statement 153
eliminates the APB Opinion No. 29 exception for nonmonetary
exchanges of similar productive assets and replaces it with an
exception for exchanges of nonmonetary assets that do not have
commercial substance. Statement 153 is effective for
financial statements for fiscal years beginning after
June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in fiscal periods
beginning after the date of issuance. The provisions of
Statement 153 should be applied prospectively. We intend to
adopt Statement 153 for our fiscal year beginning
January 1, 2006 and we do not believe that adoption will
materially impact our financial position or results of
operations.
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 of Financial Accounting Standards 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
using the modified prospective method.
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
Consolidated and Combined Financial Statements included
elsewhere herein. Statement 123(R)also requires the
benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow. This requirement
will increase net financing cash flows in periods after
adoption. We cannot estimate what those amounts will be in the
future because they depend on, among other things, the levels of
share-based payments granted in the future.
In March 2005, the Securities and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 107 Share-Based Payment
(SAB 107). SAB 107 expresses the SEC
staffs views regarding the interaction between
Statement 123(R) and certain SEC rules and regulations and
provides the staffs views regarding the valuation of
share-based payment arrangements for public companies. In
particular, SAB 107 provides guidance related to
share-based payment transactions with nonemployees, the
transition from nonpublic to public entity status, valuation
methods (including assumptions such as expected volatility and
expected term), the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the
classification of compensation expense, non-GAAP financial
measures, first time adoption of Statement 123(R) in an
interim period, capitalization of compensation cost related to
share-based payment arrangements, the accounting for income tax
effects of share-based payment arrangements upon adoption of
Statement 123(R)and the modification of employee share
options prior to adoption of Statement 123(R).
In May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error
Corrections (Statement 154).
Statement 154 replaces APB Opinion No. 20,
Accounting
54
Changes, and FASB Statement of Financial Accounting
Standards No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the
accounting for and reporting of a change in accounting
principle. Statement 154 applies to all voluntary changes
in accounting principle. It also applies to changes required by
an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions,
those provisions should be followed. Statement 154 is
effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. We will
adopt Statement 154 on January 1, 2006 and do not
anticipate adoption to materially impact our financial position
or results of operations.
In June 2005, the Emerging Issues Task Force (EITF)
issued
EITF 05-6,
Determining the Amortization Period of Leasehold Improvements
(EITF 05-6).
EITF 05-6
requires that assets recognized under capital leases generally
be amortized in a manner consistent with the lessees
normal depreciation policy except that the amortization period
is limited to the lease term (which includes renewal periods
that are reasonably assured).
EITF 05-6
also addresses the determination of the amortization period for
leasehold improvements that are purchased subsequent to the
inception of the lease. Leasehold improvements acquired in a
business combination or purchased subsequent to the inception of
the lease should be amortized over the lesser of the useful life
of the asset or the lease term that includes reasonably assured
lease renewals as determined on the date of the acquisition of
the leasehold improvement. We adopted
EITF 05-6
on July 1, 2005 which did not materially impact our
financial position or results of operations.
In October 2005, the FASB issued Staff Position
13-1
(FSP
13-1).
FSP 13-1
requires rental costs associated with ground or building
operating leases that are incurred during a construction period
be recognized as rental expense. The guidance in FSP
13-1 shall
be applied to the first reporting period beginning after
December 15, 2005. We will adopt FSP
13-1 on
January 1, 2006 and do not anticipate adoption to
materially impact our financial position or results of
operations.
In February 2006, the FASB issued FASB Staff Position
No. FAS 123(R) 4, Contingent Cash
Settlement (FSP
FAS 123(R) 4). FSP
FAS 123(R) 4 requires companies to
classify employee stock options and similar instruments with
contingent cash settlement features as equity awards under
Statement 123(R)provided that (1) the contingent event
that permits or requires cash settlement is not considered
probable of occurring and is not within the control of the
employee; and (2) the award includes no other features that
would require liability classification. We will adopt FSP
FAS 123(R) 4 on January 1, 2006 and
do not anticipate adoption to materially impact our financial
position or results of operations.
Critical
Accounting Policies
The preparation of our financial statements in conformity with
Generally Accepted Accounting Principles requires management to
make estimates, judgments and assumptions that affect the
reported 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 Consolidated and Combined
Financial Statements included in Item 8. Financial
Statements and Supplementary Data. 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.
55
Allowance
for Doubtful Accounts
We evaluate the collectibility of our accounts receivable based
on a combination of factors. Generally, we record specific
reserves to reduce the amounts recorded to what we believe will
be collected when a customers account ages beyond typical
collection patterns, or we become aware of a customers
inability to meet its financial obligations. To a lesser extent,
we recognize reserves based on historical experience of bad
debts as a percentage of revenues for applicable businesses,
adjusted for relative improvements or deteriorations in the
agings.
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 year ended December 31, 2005 would have
changed by $1.0 million and our net income for the same
period would have changed by $1.0 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 us 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 of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets,
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.
Revenue
Recognition
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
56
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.
We believe that the credit risk with respect to trade
receivables is limited due to the large number and the
geographic diversification of our customers.
Barter
Transactions
Barter transactions represent the exchange of display space or
tickets for advertising, merchandise or services. These
transactions are generally recorded at the lower of 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, 2005, 2004 and 2003, were approximately
$34.9 million, $45.1 million and $33.4 million,
respectively, and are included in total revenues. Barter and
trade expenses for the years ended December 31, 2005, 2004
and 2003, were approximately $34.8 million,
$44.5 million and $32.7 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.
Litigation
Accruals
We are currently involved in certain legal proceedings and, as
required, have accrued our estimate of the probable costs for
the resolution of these claims. Managements estimates used
have been developed in consultation with counsel and are based
upon an analysis of potential results, assuming a combination of
litigation and settlement strategies. It is possible, however,
that future results of operations for any particular period
could be materially affected by changes in our assumptions or
the effectiveness of our strategies related to these proceedings.
Income
Taxes
We account 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 we believe it is more likely than not
that some portion or the entire asset will not be realized. As
all earnings from our foreign operations are permanently
reinvested and not distributed, our income tax provision does
not include additional United States 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.
Our provision for income taxes has been computed on the basis
that we file separate consolidated income tax returns with our
subsidiaries. Prior to the Separation, our operations were
included in a consolidated federal income tax return filed by
Clear Channel Communications. Certain tax liabilities owed by us
were remitted to the appropriate taxing authority by Clear
Channel Communications and were accounted for as non-cash
capital contributions by Clear Channel Communications to us. Tax
benefits recognized on employee stock option exercises were
retained by Clear Channel Communications. Subsequent to the
Separation, we will file separate consolidated income tax
returns.
We compute our deferred income tax provision using the liability
method in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. Our
provision for income taxes is further disclosed in
Note I Income Taxes included in Item 8.
Financial Statements and Supplementary Data.
57
Inflation
Inflation has affected our performance in terms of higher costs
such as employee compensation and equipment. Although the exact
impact of inflation is indeterminable, we believe we have
reduced the impact of these higher costs by increasing ticket
prices where possible and reducing other costs.
Ratio of
Earnings to Fixed Charges
The ratio of earnings to fixed charges is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
0.41
|
|
|
|
1.11
|
|
|
|
1.67
|
|
|
|
1.29
|
|
|
|
*
|
|
|
|
|
* |
|
For the year ended December 31, 2001, fixed charges
exceeded earnings before income taxes and fixed charges by
$262.0 million. |
The ratio of earnings to fixed charges was computed on a total
enterprise basis. Earnings represent income from continuing
operations before income taxes less equity in undistributed net
income (loss) of unconsolidated affiliates plus fixed charges.
Fixed charges represent interest, amortization of debt discount
and expense, and the estimated interest portion of rental
charges.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Required information is within Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Market Risk.
58
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Live Nation, Inc.
We have audited the accompanying consolidated and combined
balance sheets of Live Nation, Inc. and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated
and combined statements of operations,
business/shareholders equity, and cash flows for each of
the three years in the period ended December 31, 2005. Our
audits also included the financial statement schedule listed in
the Index at Item 15(a) 2. These financial statements
and the schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and the schedule 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 consolidated and
combined financial position of Live Nation, Inc. and
subsidiaries at December 31, 2005 and 2004, and the
consolidated and combined results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
/s/ Ernst & Young LLP
Houston, Texas
February 28, 2006
59
CONSOLIDATED
AND COMBINED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands except
|
|
|
|
share data)
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
403,716
|
|
|
$
|
179,137
|
|
Accounts receivable, less allowance
of $9,518 in 2005 and $10,174 in 2004
|
|
|
190,207
|
|
|
|
167,868
|
|
Prepaid expenses
|
|
|
115,055
|
|
|
|
83,546
|
|
Other current assets
|
|
|
46,714
|
|
|
|
42,006
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
755,692
|
|
|
|
472,557
|
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Land, buildings and improvements
|
|
|
910,926
|
|
|
|
880,881
|
|
Furniture and other equipment
|
|
|
166,004
|
|
|
|
155,563
|
|
Construction in progress
|
|
|
39,856
|
|
|
|
14,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,116,786
|
|
|
|
1,051,361
|
|
Less accumulated depreciation
|
|
|
307,867
|
|
|
|
258,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
808,919
|
|
|
|
793,316
|
|
INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
Definite-lived intangibles, net
|
|
|
12,351
|
|
|
|
14,838
|
|
Goodwill
|
|
|
137,110
|
|
|
|
44,813
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Notes receivable, less allowance of
$745 in 2005 and $545 in 2004
|
|
|
4,720
|
|
|
|
7,110
|
|
Investments in, and advances to,
nonconsolidated affiliates
|
|
|
30,660
|
|
|
|
27,002
|
|
Deferred tax asset, net
|
|
|
|
|
|
|
97,317
|
|
Other assets
|
|
|
27,132
|
|
|
|
21,753
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,776,584
|
|
|
$
|
1,478,706
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
BUSINESS/SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
37,654
|
|
|
$
|
31,440
|
|
Deferred income
|
|
|
232,754
|
|
|
|
184,413
|
|
Accrued expenses
|
|
|
405,507
|
|
|
|
362,278
|
|
Current portion of long-term debt
|
|
|
25,705
|
|
|
|
1,214
|
|
|
|
|
|
|
|
|
|
|
Total Current
Liabilities
|
|
|
701,620
|
|
|
|
579,345
|
|
Long-term debt
|
|
|
341,136
|
|
|
|
20,564
|
|
Debt with Clear Channel
Communications
|
|
|
|
|
|
|
628,897
|
|
Other long-term liabilities
|
|
|
30,766
|
|
|
|
88,997
|
|
Minority interest
|
|
|
26,362
|
|
|
|
3,927
|
|
Series A and Series B
redeemable preferred stock
|
|
|
40,000
|
|
|
|
|
|
Commitments and contingent
liabilities (Note G)
|
|
|
|
|
|
|
|
|
BUSINESS/SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock Series A Junior Participating,
$.01 par value; 20,000,000 shares authorized; no
shares issued and outstanding
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par
value; 30,000,000 shares authorized; no shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value;
450,000,000 shares authorized; 67,174,912 shares issued
|
|
|
672
|
|
|
|
|
|
Additional paid-in capital
|
|
|
748,011
|
|
|
|
|
|
Retained deficit
|
|
|
(87,563
|
)
|
|
|
|
|
Owners net investment
|
|
|
|
|
|
|
170,497
|
|
Cost of shares (1,506,900) held in
treasury
|
|
|
(18,003
|
)
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(6,417
|
)
|
|
|
(13,521
|
)
|
|
|
|
|
|
|
|
|
|
Total
Business/Shareholders Equity
|
|
|
636,700
|
|
|
|
156,976
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Business/Shareholders Equity
|
|
$
|
1,776,584
|
|
|
$
|
1,478,706
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated and Combined Financial Statements
60
CONSOLIDATED
AND COMBINED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands except per share
data)
|
|
|
Revenue
|
|
$
|
2,936,845
|
|
|
$
|
2,806,128
|
|
|
$
|
2,707,902
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Divisional operating expenses
|
|
|
2,829,832
|
|
|
|
2,645,293
|
|
|
|
2,506,635
|
|
Depreciation and amortization
|
|
|
64,622
|
|
|
|
64,095
|
|
|
|
63,436
|
|
Loss (gain) on sale of operating
assets
|
|
|
4,859
|
|
|
|
6,371
|
|
|
|
(978
|
)
|
Corporate expenses
|
|
|
50,715
|
|
|
|
31,386
|
|
|
|
30,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(13,183
|
)
|
|
|
58,983
|
|
|
|
107,989
|
|
Interest expense
|
|
|
6,059
|
|
|
|
3,119
|
|
|
|
2,788
|
|
Interest expense with Clear
Channel Communications
|
|
|
46,437
|
|
|
|
42,355
|
|
|
|
41,415
|
|
Equity in earnings (loss) of
nonconsolidated affiliates
|
|
|
(276
|
)
|
|
|
2,906
|
|
|
|
1,357
|
|
Other income
(expense) net
|
|
|
(3,176
|
)
|
|
|
(1,690
|
)
|
|
|
3,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(69,131
|
)
|
|
|
14,725
|
|
|
|
68,367
|
|
Income tax (expense) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
53,025
|
|
|
|
55,946
|
|
|
|
68,272
|
|
Deferred
|
|
|
(114,513
|
)
|
|
|
(54,411
|
)
|
|
|
(79,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(130,619
|
)
|
|
|
16,260
|
|
|
|
57,032
|
|
Other comprehensive income (loss),
net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
(4,398
|
)
|
|
|
(18,472
|
)
|
|
|
(22,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(135,017
|
)
|
|
$
|
(2,212
|
)
|
|
$
|
34,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
common share
|
|
$
|
(1.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
common shares outstanding
|
|
|
66,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated and Combined Financial Statements
61
CONSOLIDATED
AND COMBINED STATEMENTS OF CHANGES IN
BUSINESS/SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Additional Paid-in
|
|
|
Retained
|
|
|
Owners Net
|
|
|
Cost of Shares Held
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares Issued
|
|
|
Common Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Investment
|
|
|
in Treasury
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(In thousands, except share
data)
|
|
|
Balances at December 31, 2002
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
203,800
|
|
|
$
|
|
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,332
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,497
|
|
|
|
|
|
|
|
(13,521
|
)
|
|
|
156,976
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,563
|
)
|
|
|
(43,056
|
)
|
|
|
|
|
|
|
|
|
|
|
(130,619
|
)
|
Contributions from Owner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,885
|
|
|
|
|
|
|
|
|
|
|
|
81,885
|
|
Dividends to Owner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,705
|
)
|
|
|
|
|
|
|
|
|
|
|
(76,705
|
)
|
Contribution of debt with Clear
Channel Communications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
627,564
|
|
|
|
|
|
|
|
|
|
|
|
627,564
|
|
Distribution of common stock at
spin-off
|
|
|
67,174,912
|
|
|
|
672
|
|
|
|
748,011
|
|
|
|
|
|
|
|
(760,185
|
)
|
|
|
|
|
|
|
11,502
|
|
|
|
|
|
Purchase of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,003
|
)
|
|
|
|
|
|
|
(18,003
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,398
|
)
|
|
|
(4,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
67,174,912
|
|
|
$
|
672
|
|
|
$
|
748,011
|
|
|
$
|
(87,563
|
)
|
|
$
|
|
|
|
$
|
(18,003
|
)
|
|
$
|
(6,417
|
)
|
|
$
|
636,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated and Combined Financial Statements
62
CONSOLIDATED
AND COMBINED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(130,619
|
)
|
|
$
|
16,260
|
|
|
$
|
57,032
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
62,279
|
|
|
|
60,918
|
|
|
|
60,421
|
|
Amortization of intangibles
|
|
|
2,343
|
|
|
|
3,177
|
|
|
|
3,015
|
|
Deferred income tax expense
|
|
|
114,513
|
|
|
|
54,411
|
|
|
|
79,607
|
|
Amortization of debt issuance costs
|
|
|
9
|
|
|
|
|
|
|
|
|
|
Current tax benefit dividends to
owner
|
|
|
(76,705
|
)
|
|
|
(64,063
|
)
|
|
|
(92,550
|
)
|
Non-cash compensation expense
|
|
|
1,256
|
|
|
|
1,084
|
|
|
|
1,302
|
|
Loss (gain) on sale of operating
and fixed assets
|
|
|
4,859
|
|
|
|
6,371
|
|
|
|
(978
|
)
|
Equity in (earnings) loss of
nonconsolidated affiliates
|
|
|
276
|
|
|
|
(2,906
|
)
|
|
|
(1,357
|
)
|
Minority interest expense
|
|
|
5,236
|
|
|
|
3,300
|
|
|
|
3,280
|
|
Decrease in
other net
|
|
|
(119
|
)
|
|
|
(462
|
)
|
|
|
(266
|
)
|
Changes in operating assets and
liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts
receivable
|
|
|
(15,911
|
)
|
|
|
11,100
|
|
|
|
(28,061
|
)
|
Decrease (increase) in prepaid
expenses
|
|
|
(41,759
|
)
|
|
|
5,527
|
|
|
|
9,053
|
|
Decrease in other assets
|
|
|
4,592
|
|
|
|
1,178
|
|
|
|
2,646
|
|
Increase in accounts payable,
accrued expenses and other liabilities
|
|
|
41,946
|
|
|
|
10,511
|
|
|
|
55,172
|
|
Increase (decrease) in deferred
income
|
|
|
24,132
|
|
|
|
16,047
|
|
|
|
(7,328
|
)
|
Increase (decrease) in minority
interest liability
|
|
|
17,585
|
|
|
|
(2,555
|
)
|
|
|
(2,275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
13,913
|
|
|
|
119,898
|
|
|
|
138,713
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in notes receivable, net
|
|
|
176
|
|
|
|
1,943
|
|
|
|
14,795
|
|
Decrease (increase) in investments
in, and advances to, nonconsolidated
affiliates net
|
|
|
(5,747
|
)
|
|
|
(1,413
|
)
|
|
|
8,437
|
|
Purchases of property, plant and
equipment
|
|
|
(92,520
|
)
|
|
|
(73,435
|
)
|
|
|
(69,936
|
)
|
Proceeds from disposal of assets
|
|
|
580
|
|
|
|
3,581
|
|
|
|
584
|
|
Acquisition of operating assets
|
|
|
(8,467
|
)
|
|
|
(13,727
|
)
|
|
|
(5,284
|
)
|
Increase in
other net
|
|
|
(71
|
)
|
|
|
(1,025
|
)
|
|
|
(556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(106,049
|
)
|
|
|
(84,076
|
)
|
|
|
(51,960
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (payments on) debt
with Clear Channel Communications
|
|
|
220,981
|
|
|
|
24,079
|
|
|
|
(53,859
|
)
|
Payment on debt with Clear Channel
Communications at spin-off
|
|
|
(220,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt, net
of debt issuance costs
|
|
|
344,129
|
|
|
|
6,725
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(1,169
|
)
|
|
|
(7,550
|
)
|
|
|
(3,035
|
)
|
Proceeds from issuance of
redeemable preferred stock, net of debt issuance costs
|
|
|
19,500
|
|
|
|
|
|
|
|
|
|
Payments for purchase of common
stock
|
|
|
(18,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
345,438
|
|
|
|
23,254
|
|
|
|
(56,894
|
)
|
Effect of exchange rate changes on
cash
|
|
|
(28,723
|
)
|
|
|
3,701
|
|
|
|
(18,396
|
)
|
Net increase in cash and cash
equivalents
|
|
|
224,579
|
|
|
|
62,777
|
|
|
|
11,463
|
|
Cash and cash equivalents at
beginning of year
|
|
|
179,137
|
|
|
|
116,360
|
|
|
|
104,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
403,716
|
|
|
$
|
179,137
|
|
|
$
|
116,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,549
|
|
|
$
|
3,048
|
|
|
$
|
2,564
|
|
Income taxes
|
|
$
|
17,253
|
|
|
$
|
9,685
|
|
|
$
|
9,917
|
|
See Notes to Consolidated and Combined Financial Statements
63
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE A SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
Live Nation, Inc. (the Company) was incorporated in
Delaware on August 2, 2005 in preparation for the
contribution and transfer by Clear Channel Communications, Inc.
(Clear Channel Communications) of substantially all
of the entertainment assets and liabilities to the Company (the
Separation). The Company completed the Separation on
December 21, 2005 and became a publicly traded company on
the New York Stock Exchange (NYSE: LYV).
Prior to the Separation, Live Nation was a wholly owned
subsidiary of Clear Channel Communications. As part of the
Separation, holders of Clear Channel Communications common stock
of record on December 14, 2005 received one share of Live
Nation common stock for every eight shares of Clear Channel
Communications common stock on December 21, 2005. No
fractional shares of our common stock were issued. Any
shareholder entitled to fractional shares received net cash in
lieu of such shares.
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, sports
representation and other businesses.
Basis
of Presentation and Principles of Consolidation and
Combination
Prior
to the Separation
Prior to the Separation, the combined financial statements
include amounts that 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. Management
believes the assumptions underlying the combined financials
statements are reasonable. However, the combined financial
statements included herein 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. Clear Channel
Communications net investment in the Company is shown as
Business equity in lieu of Shareholders equity in the
combined financial statements prior to the Separation.
Subsequent
to the Separation
As a result of the Separation, the Company recognized the par
value and additional
paid-in-capital
in connection with the issuance of our common stock in exchange
for the net assets contributed at that time, and the Company
began accumulating retained deficits and currency translation
adjustments upon completion of the Separation. Beginning on
December 21, 2005, the Companys consolidated
financial statements include all accounts of the Company and its
majority owned subsidiaries. Significant intercompany accounts
among the consolidated and combined businesses have been
eliminated in consolidation. Investments in nonconsolidated
affiliates are accounted for using the equity method of
accounting. Certain amounts in prior years have been
reclassified to conform to the 2005 presentation.
Cash
and Cash Equivalents
Cash and cash equivalents include all highly liquid investments
with an original maturity of three months or less.
64
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Allowance
for Doubtful Accounts
The Company evaluates the collectibility of its accounts
receivable based on a combination of factors. Generally, it
records specific reserves to reduce the amounts recorded to what
it believes will be collected when a customers account
ages beyond typical collection patterns, or the Company becomes
aware of a customers inability to meet its financial
obligations. To a lesser extent, the Company recognizes reserves
based on historical experience of bad debts as a percentage of
revenues for applicable businesses, adjusted for relative
improvements or deteriorations in the agings. When accounts
receivable are determined to be uncollectible, the amount of the
receivable is written off against the allowance for doubtful
accounts.
Prepaid
Expenses
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.
Purchase
Accounting
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, which is recorded for both
owned assets and assets under capital leases, 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 are depreciated over the shorter of the
economic life or associated lease term assuming renewal periods,
if appropriate. Expenditures for maintenance and repairs are
charged to operations as incurred, whereas expenditures for
renewal and improvements 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.
65
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Intangible
Assets
The Company classifies intangible assets as definite-lived or
goodwill. Definite-lived intangibles include primarily
non-compete and building or naming rights, all of which are
amortized over the respective lives of the agreements, typically
four to twenty years. The Company periodically reviews the
appropriateness of the amortization periods related to its
definite-lived assets. These assets are stated at cost. The
excess cost over fair value of net assets acquired is classified
as goodwill. The goodwill is not subject to amortization, but is
tested for impairment at least annually.
The Company tests for possible impairment of definite-lived
intangible assets whenever events or changes in circumstances,
such as a reduction in operating cash flow or a dramatic change
in the manner that the asset is intended to be used indicate
that the carrying amount of the asset may not be recoverable. If
indicators exist, the Company compares the estimated
undiscounted future cash flows related to the asset to the
carrying value of the asset. If the carrying value is greater
than the estimated undiscounted future cash flow amount, an
impairment charge is recorded in depreciation and amortization
expense in the statement of operations for amounts necessary to
reduce the carrying value of the asset to fair value. 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 two-step approach.
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, uses 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 are recorded in depreciation and
amortization expense in the statement of operations.
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.
Operational
Assets
As part of the Companys operations, it 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 divisional
operating expenses in the statement of operations for any
decline in value that is determined to be other-than-temporary.
Financial
Instruments
Due to their short maturity, the carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable and
accrued expenses approximated their fair values at
December 31, 2005 and 2004. As none of the Companys
debt is publicly-traded and the majority of the interest on this
debt accrues at a variable rate, the carrying amounts of
long-term debt approximated their fair value at
December 31, 2005 and 2004.
66
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
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
United States taxes on foreign operations. It is not practical
to determine the amount of federal income taxes, if any, that
might become due in the event that the earnings were distributed.
The Companys provision for income taxes has been computed
on the basis that the Company files separate consolidated income
tax returns with its subsidiaries. Prior to the Separation, the
operations of the Company were included in a consolidated
federal income tax return filed by Clear Channel Communication.
Certain tax liabilities owed by the Company were remitted to the
appropriate taxing authority by Clear Channel Communications and
were accounted for as non-cash capital contributions by Clear
Channel Communications to the Company. Tax benefits recognized
on employee stock option exercises were retained by Clear
Channel Communications. Subsequent to the Separation, the
Company will file separate consolidated income tax returns.
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. The Companys provision for income taxes is
further disclosed in Note I.
Revenue
Recognition
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
Barter transactions represent the exchange of display space or
tickets for advertising, merchandise or services. These
transactions are generally recorded at the lower of 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, 2005, 2004 and 2003, were approximately
$34.9 million, $45.1 million and $33.4 million,
respectively, and are included in total revenues. Barter and
trade expenses for the years ended December 31, 2005, 2004
and 2003, were approximately $34.8 million,
$44.5 million and $32.7 million, respectively, and are
included in divisional operating expenses.
Foreign
Currency
Results of operations for foreign subsidiaries and foreign
equity investees are translated into United States dollars using
the average exchange rates during the year. The assets and
liabilities of those subsidiaries and investees are translated
into United States dollars using the exchange rates at the
balance sheet date. The Company does not currently have
operations in highly inflationary countries. The related
translation
67
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
adjustments are recorded in a separate component of
business/shareholders equity in accumulated other
comprehensive loss. Foreign currency transaction gains and
losses, are included in operations.
Advertising
Expense
The Company records advertising expense as it is incurred on an
annual basis. Advertising expenses of $179.7 million,
$194.2 million and $172.7 million were recorded during
the year ended December 31, 2005, 2004 and 2003,
respectively.
Depreciation
and Amortization
The Companys depreciation and amortization expense is
presented as a separate line item in the consolidated and
combined statements of operations. There is no depreciation or
amortization expense included in divisional operating expenses.
Non-Cash
Compensation Expense
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 the Companys consolidated and
combined statements of operations.
Use of
Estimates
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 Statement of Financial Accounting
Standards 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
will 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.
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 of Financial Accounting Standards 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
68
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
employees no later than the beginning of the first fiscal year
beginning after June 15, 2005. The Company will adopt
Statement 123(R) on January 1, 2006 using the modified
prospective method.
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, the levels of
share-based payments granted in the future.
In March 2005, the Securities and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 107 Share-Based Payment
(SAB 107). SAB 107 expresses the SEC
staffs views regarding the interaction between
Statement 123(R) and certain SEC rules and regulations and
provides the staffs views regarding the valuation of
share-based payment arrangements for public companies. In
particular, SAB 107 provides guidance related to
share-based payment transactions with nonemployees, the
transition from nonpublic to public entity status, valuation
methods (including assumptions such as expected volatility and
expected term), the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the
classification of compensation expense, non-GAAP financial
measures, first time adoption of Statement 123(R) in an
interim period, capitalization of compensation cost related to
share-based payment arrangements, the accounting for income tax
effects of share-based payment arrangements upon adoption of
Statement 123(R) and the modification of employee share
options prior to adoption of Statement 123(R).
In May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error
Corrections (Statement 154).
Statement 154 replaces APB Opinion No. 20,
Accounting Changes, and FASB Statement of Financial
Accounting Standards No. 3, Reporting Accounting Changes
in Interim Financial Statements, and changes the
requirements for the accounting for and reporting of a change in
accounting principle. Statement 154 applies to all
voluntary changes in accounting principle. It also applies to
changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific
transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
Statement 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The Company will adopt
Statement 154 on January 1, 2006 and does not
anticipate adoption to materially impact our financial position
or results of operations.
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 adopted
EITF 05-6
on July 1, 2005 which did not materially impact its
financial position or results of operations.
In October 2005, the FASB issued Staff Position
13-1
(FSP
13-1).
FSP 13-1
requires rental costs associated with ground or building
operating leases that are incurred during a construction period
be recognized as rental expense. The guidance in FSP
13-1 shall
be applied to the first reporting period beginning
69
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
after December 15, 2005. The Company will adopt FSP
13-1 on
January 1, 2006 and does not anticipate adoption to
materially impact its financial position or results of
operations.
In February 2006, the FASB issued FASB Staff Position
No. FAS 123(R) 4, Contingent Cash
Settlement (FSP
FAS 123(R) 4). FSP
FAS 123(R) 4 requires companies to
classify employee stock options and similar instruments with
contingent cash settlement features as equity awards under
Statement 123(R) provided that (1) the contingent
event that permits or requires cash settlement is not considered
probable of occurring and is not within the control of the
employee; and (2) the award includes no other features that
would require liability classification. The Company will adopt
FSP FAS 123(R) 4 on January 1, 2006
and management does not believe that adoption will materially
impact the Companys financial position or results of
operations.
Stock
Based Compensation
Prior to the Separation, compensation expense relating to Clear
Channel Communications stock options and restricted stock awards
held by the Companys employees was allocated by Clear
Channel Communications to the Company on a specific employee
basis. At the Separation, all unvested options outstanding under
Clear Channel Communications stock-based compensation
plans that were held by the Companys employees were
forfeited and the vested options were forfeited to the extent
they were not exercised within the applicable post-employment
exercise period provided in their option agreements. All Clear
Channel Communications restricted stock awards held by the
Companys employees at the date of Separation were
forfeited due to the termination of their employment with the
Clear Channel Communications group of companies.
On December 21, 2005, the Company adopted the 2005 Stock
Incentive Plan. The plan authorizes the Company to grant stock
option awards, director shares, stock appreciation rights,
restricted stock and deferred stock awards, other equity-based
awards, and performance awards. In connection with the
Separation, options to purchase approximately 2.1 million
shares of the Companys common stock and approximately
0.3 million restricted stock awards were granted to
employees. The options granted have an exercise price of
$10.60 per share.
The Company 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. Note J provides the assumptions used to
calculate the pro forma net income (loss) and pro forma earnings
(loss) per share disclosures as if the stock-based awards had
been accounted for using the provisions of Statement 123,
Accounting for Stock-Based Compensation. Due to the
Separation, the Companys pro forma disclosures include
stock compensation expense for options granted by Clear Channel
Communications, prior to the Separation, and options granted by
the Company after the Separation. The required pro forma
disclosures are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share
data)
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
$
|
(130,619
|
)
|
|
$
|
16,260
|
|
|
$
|
57,032
|
|
Pro forma stock compensation
expense, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Live Nation options
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
Clear Channel Communications
options
|
|
|
6,713
|
|
|
|
(11,368
|
)
|
|
|
(6,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
$
|
(123,953
|
)
|
|
$
|
4,892
|
|
|
$
|
50,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted income
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
$
|
(1.96
|
)
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
(1.86
|
)
|
|
|
|
|
|
|
|
|
70
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
NOTE B LONG-LIVED
ASSETS
Definite-lived
Intangibles
The Company has definite-lived intangible assets which consist
primarily of non-compete and building or naming rights, all of
which are amortized over the shorter of either the respective
lives of the agreements or over the period of time the assets
are expected to contribute to the Companys future cash
flows. These definite-lived intangibles had a gross carrying
amount and accumulated amortization of $18.7 million and
$6.3 million, respectively, as of December 31, 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 years ended December 31, 2005, 2004 and 2003 was
$2.3 million, $3.2 million and $3.0 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, 2005:
|
|
|
|
|
|
|
(In thousands)
|
|
2006
|
|
$
|
931
|
|
2007
|
|
|
862
|
|
2008
|
|
|
765
|
|
2009
|
|
|
765
|
|
2010
|
|
|
988
|
|
As acquisitions and dispositions occur in the future
amortization expense may vary.
Goodwill
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, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
Global
|
|
|
|
|
|
|
Music
|
|
|
Theater
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance as of December 31,
2003
|
|
$
|
97,849
|
|
|
$
|
29,227
|
|
|
$
|
127,076
|
|
Acquisitions
|
|
|
13,199
|
|
|
|
3,942
|
|
|
|
17,141
|
|
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
|
|
Acquisitions
|
|
|
104,663
|
|
|
|
2,493
|
|
|
|
107,156
|
|
Foreign currency
|
|
|
(1,365
|
)
|
|
|
(408
|
)
|
|
|
(1,773
|
)
|
Adjustments
|
|
|
(10,076
|
)
|
|
|
(3,010
|
)
|
|
|
(13,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2005
|
|
$
|
127,729
|
|
|
$
|
9,381
|
|
|
$
|
137,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2004, Internal Revenue Service audits of the Company were
concluded for certain pre-acquisition periods occurring prior to
the Company being acquired by Clear Channel Communications.
Contingent tax reserve liabilities were previously established
for these periods with an offsetting increase to goodwill, as
part of Clear Channel Communications purchase accounting
entries for its acquisition of the Company. Upon
71
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
settlement of these tax periods, the Company was able to reverse
its previously recorded tax reserve liabilities and decrease its
goodwill by approximately $96.5 million.
During July, 2005, the Company purchased a 50.1% controlling
majority interest in Mean Fiddler Music Group, PLC (Mean
Fiddler) in the United Kingdom for approximately
$43.6 million. Total assets were valued at approximately
$117.0 million, which includes $93.9 million of
goodwill, and total liabilities and minority interest of
approximately $73.4 million were recorded. Mean Fiddler is
a consolidated subsidiary that is part of the Companys
global music segment. Mean Fiddler is involved in the promotion
and production of live music events, including festivals, and
venue operations. The goodwill recorded represents the value of
efficiencies that the Company expects Mean Fiddler to make in
its promotion business as well as giving the Company control of
key festivals in the United Kingdom that it can replicate in
other markets as a source of future growth.
Also, during 2005, the Company recorded adjustments increasing
deferred tax assets and decreasing goodwill by approximately
$12.8 million, due to the availability of future tax
deductions as a result of the settlement of certain Internal
Revenue Service audits of the Company for certain periods prior
to the Clear Channel Communications acquisition in 2000.
The results of operations for the year ended December 31,
2005 include the operations of Mean Fiddler from July 5,
2005. Unaudited pro forma consolidated and combined results of
operations, assuming the Mean Fiddler acquisition had occurred
on January 1, 2004 would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
Revenue
|
|
$
|
2,957,024
|
|
|
$
|
2,900,841
|
|
Net income (loss)
|
|
$
|
(135,090
|
)
|
|
$
|
11,250
|
|
Net income (loss) per common share
|
|
$
|
(2.02
|
)
|
|
|
|
|
Other
Operating Assets
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
years ended December 31, 2005 and 2004, the Company
recorded impairment write-downs related to these exhibitions,
included in the Companys other operations, of
$0.9 million and $1.1 million, respectively. These
write-downs were recorded in divisional operating expenses.
There was no similar write-off in 2003.
NOTE C BUSINESS
ACQUISITIONS
The Company made cash payments of $8.5 million,
$13.8 million and $5.3 million during the years ended
December 31, 2005, 2004 and 2003, respectively, primarily
related to acquisitions of music promoters and venue operators,
as well as various earn-outs and deferred purchase price
consideration on prior year acquisitions. In addition, Clear
Channel Communications made cash payments of $67.9 million,
$16.2 million and $2.8 million during the years ended
December 31, 2005, 2004 and 2003, respectively, related to
these acquisitions. These payments by Clear Channel
Communications were recorded as non-cash capital contributions
to the Company.
72
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Acquisition
Summary
The following is a summary of the assets and liabilities
acquired and the consideration given for all acquisitions made
during 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Accounts receivable
|
|
$
|
7,969
|
|
|
$
|
24
|
|
Property, plant and equipment
|
|
|
6,857
|
|
|
|
31
|
|
Goodwill
|
|
|
110,036
|
|
|
|
17,141
|
|
Other assets
|
|
|
10,118
|
|
|
|
473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134,980
|
|
|
|
17,669
|
|
Other liabilities
|
|
|
(59,401
|
)
|
|
|
(504
|
)
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions
|
|
$
|
75,579
|
|
|
$
|
17,165
|
|
|
|
|
|
|
|
|
|
|
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, 2005, 2004 and 2003, the cash payments
discussed above include payments related to earn-outs and
deferred purchase price consideration of $0.8 million,
$12.8 million and $4.4 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 are met, will not
significantly impact the Companys financial position or
results of operations.
Restructuring
The Company has recorded liabilities related to acquisitions and
restructurings. In July 2005, the Company acquired a controlling
majority interest in Mean Fiddler. As part of the acquisition,
the Company recorded $4.7 million in restructuring costs in
its global music operations primarily related to lease
terminations, which it expects to pay over the next several
years. As of December 31, 2005, the accrual balance for the
Mean Fiddler restructuring was $4.4 million. This
restructuring has resulted in the actual termination of
approximately 33 employees. In addition, the Company has a
remaining restructuring accrual of $1.8 million as of
December 31, 2005, related to its merger with Clear Channel
Communications in August 2000.
The Company has recorded a liability in purchase accounting
primarily related to severance for terminated employees and
lease terminations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Severance and lease termination
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at January 1
|
|
$
|
2,579
|
|
|
$
|
2,648
|
|
|
$
|
5,312
|
|
Restructuring accruals recorded
|
|
|
4,730
|
|
|
|
|
|
|
|
|
|
Payments charged against
restructuring accrual
|
|
|
(1,086
|
)
|
|
|
(69
|
)
|
|
|
(2,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining accrual at
December 31
|
|
$
|
6,223
|
|
|
$
|
2,579
|
|
|
$
|
2,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining severance and lease accrual is comprised of
$0.8 million of severance and $5.4 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 23 years.
During 2005, $0.9 million was paid and charged to the
restructuring reserve related to severance. The Company is
continuing to evaluate its purchase accounting liabilities
related to several leases in the Mean Fiddler acquisition which
may result in additional restructuring accruals.
73
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
In 2005, the Company recorded additional accruals related to the
realignment of its business operations consisting of severance
and lease termination costs. The total expense related to this
restructuring recorded in divisional operating expenses for
global music, global theater and other operations was
$4.3 million, $2.2 million and $3.5 million,
respectively. In addition, $4.7 million of restructuring
expense was recorded in corporate expenses. As of
December 31, 2005, the remaining accrual related to this
2005 restructuring was $4.8 million.
In 2004, the Company recorded additional restructuring accruals
related to the sale of a United Kingdom business included in
other operations and a reduction in operating personnel in the
global music segment. Total expense related to these
restructurings was $6.4 million recorded in divisional
operating expenses and resulted in the actual termination of
approximately 90 employees. As of December 31, 2005, there
is no remaining accrual related to this 2004 restructuring.
Clear Channel Communications made payments related to
acquisition contingencies of $5.2 million,
$1.1 million and $12.3 million for the years ended
December 31, 2005, 2004 and 2003, respectively, on behalf
of the Company. These payments were accounted for as non-cash
capital contributions by Clear Channel Communications to the
Company.
NOTE D INVESTMENTS
The Companys most significant investments in
nonconsolidated affiliates are listed below:
Dominion
Theatre
The Company owns a 33% interest in the Dominion Theatre, a
United Kingdom theatrical company involved in venue operations.
MLK
The Company owns a 20% interest in MLK, a German music company
involved in promotion of, and venue operations for, live
entertainment events.
House
of Blues/PACE JV
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.
Broadway
in Chicago
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.
Delirium
Concert, L.P.
The Company owns a 50% interest in a joint venture with Cirque
Du Soleil to develop, produce and promote a new type of live
entertainment musical and visual event.
74
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Summarized
Financial Information
The following table summarizes the Companys investments in
these nonconsolidated affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delirium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOB/PACE
|
|
|
Broadway in
|
|
|
Concert
|
|
|
All
|
|
|
|
|
|
|
Dominion
|
|
|
MLK
|
|
|
JV
|
|
|
Chicago
|
|
|
L.P.
|
|
|
Others
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
At December 31, 2004
|
|
$
|
5,544
|
|
|
$
|
6,664
|
|
|
$
|
4,566
|
|
|
$
|
3,595
|
|
|
$
|
|
|
|
$
|
6,633
|
|
|
$
|
27,002
|
|
Acquisition (disposition) of
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,965
|
|
|
|
623
|
|
|
|
5,588
|
|
Additional investment, net
|
|
|
(1,161
|
)
|
|
|
(533
|
)
|
|
|
|
|
|
|
(3,024
|
)
|
|
|
|
|
|
|
5,196
|
|
|
|
478
|
|
Equity in net earnings (loss)
|
|
|
1,102
|
|
|
|
(26
|
)
|
|
|
(1,165
|
)
|
|
|
6,069
|
|
|
|
|
|
|
|
(6,256
|
)
|
|
|
(276
|
)
|
Foreign currency translation
adjustment
|
|
|
(660
|
)
|
|
|
(857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(615
|
)
|
|
|
(2,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005
|
|
$
|
4,825
|
|
|
$
|
5,248
|
|
|
$
|
3,401
|
|
|
$
|
6,640
|
|
|
$
|
4,965
|
|
|
$
|
5,581
|
|
|
$
|
30,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the years ended December 31, 2005, 2004 and
2003. 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 years ended
December 31, 2005, 2004 and 2003, the Company recorded an
impairment write-down related to these investments in
nonconsolidated affiliates of $4.9 million,
$0.6 million and $2.8 million, respectively. These
write-downs were recorded as equity in earnings (loss) of
nonconsolidated affiliates. Of the 2005 amount,
$1.2 million related to the global music segment and the
remaining $3.7 million related to the Companys other
operations. 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
$3.1 million and $2.6 million were incurred in 2005
and 2004, respectively, and revenues of $1.9 million and
$1.2 million were earned in 2005 and 2004, respectively,
from these equity investees for services rendered or provided in
relation to these business ventures. It is the Companys
opinion that these transactions were recorded at fair value.
75
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
NOTE E LONG-TERM
DEBT
Long-term debt, which includes capital leases, at
December 31, 2005 and 2004, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Debt with Clear Channel
Communications
|
|
$
|
|
|
|
$
|
628,897
|
|
Senior Secured Credit Facility:
|
|
|
|
|
|
|
|
|
Term loan
|
|
|
325,000
|
|
|
|
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
|
Other long-term debt
|
|
|
41,841
|
|
|
|
21,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
366,841
|
|
|
|
650,675
|
|
Less: current portion
|
|
|
25,705
|
|
|
|
1,214
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
341,136
|
|
|
$
|
649,461
|
|
|
|
|
|
|
|
|
|
|
Debt
with Clear Channel Communications
Prior to the Separation, the Company had a revolving line of
credit with Clear Channel Communications that was payable upon
demand by Clear Channel Communications or on August 1,
2010, whichever was earlier, allowed for prepayment at any time,
and accrued interest at a fixed per annum rate of 7.0%. As part
of the Separation, $220.0 million of the outstanding debt
balance was repaid, with Clear Channel Communications
contributing the remaining balance to the Companys capital.
Senior
Secured Credit Facility
On December 21, 2005, the Company entered into a
$610.0 million senior secured credit facility consisting of
a $325.0 million
71/2
-year term loan and a $285.0 million
61/2
-year revolving credit facility. The interest rate is based upon
a prime or LIBOR rate, plus an applicable margin, selected at
the Companys discretion. The senior secured credit
facility is secured by a first priority lien on substantially
all of our domestic assets (other than real property and
deposits maintained by the Company in connection with promoting
or producing live entertainment events) and a pledge of the
capital stock of the Companys material domestic
subsidiaries.
The senior secured credit facility contains a number of
covenants that, among other things, restrict our ability to
incur additional debt, pay dividends and make distributions,
make certain investments and acquisitions, repurchase stock and
prepay certain indebtedness, create liens, enter into agreements
with affiliates, modify the nature of the business, enter into
sale-leaseback transactions, transfer and sell material assets,
and merge or consolidate.
At December 31, 2005, the outstanding balance on the term
loan and revolving credit facility was $325.0 million and
$0, respectively. Taking into account letters of credit of
$46.4 million, $238.6 million was available for future
borrowings. The Company is required to make minimum quarterly
principal repayments under the term loan of approximately
$3.2 million per year through March 2013, with the balance
due at maturity in June 2013. The revolving credit portion of
the credit facility matures in June 2012. At December 31,
2005, the interest rate on borrowings under this credit facility
was 6.62%.
In addition to paying interest on outstanding principal under
the credit facility, the Company is required to pay a commitment
fee to the lenders under the revolving credit facility in
respect of the unutilized commitments. As of December 31,
2005, the commitment fee rate was .375%. The Company is also
required to pay customary letter of credit fees, as necessary.
76
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Other
long-term debt
Other long-term debt is comprised of capital leases of
$10.6 million and notes payable of $31.2 million. The
notes payable primarily consists of three notes with interest
rates ranging from 6.0% to 8.75% and maturities ranging from
seven to fourteen years.
Future maturities of long-term debt at December 31, 2005
are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
2006
|
|
$
|
25,705
|
|
2007
|
|
|
4,540
|
|
2008
|
|
|
4,575
|
|
2009
|
|
|
4,668
|
|
2010
|
|
|
4,764
|
|
Thereafter
|
|
|
322,589
|
|
|
|
|
|
|
Total
|
|
$
|
366,841
|
|
|
|
|
|
|
Debt
Covenants
The significant covenants on the Companys
$610.0 million,
71/2
-year, multi-currency credit facility relate to total leverage,
senior leverage, interest coverage, and capital expenditures
contained and defined in the credit agreement. The leverage
ratio covenant requires the Company to maintain a ratio of
consolidated total indebtedness minus unrestricted cash and cash
equivalents (both as defined by the credit agreement) to
consolidated
earnings-before-interest-taxes-depreciation-and-amortization (as
defined by the credit agreement, Consolidated
EBITDA) of less than 4.5x through December 31, 2008,
and less than 4.0x thereafter, provided that aggregated
subordinated indebtedness is less than $25.0 million. The
senior leverage covenant, which is only applicable provided
aggregate subordinated indebtedness is greater than
$25.0 million, requires the Company to maintain a ratio of
consolidated senior indebtedness to Consolidated EBITDA of less
than 3.0x. The interest coverage covenant requires the Company
to maintain a minimum ratio of Consolidated EBITDA to cash
interest expense (as defined by the credit agreement) of 2.5x.
The capital expenditure covenant limits annual capital
expenditures (as defined by the credit agreement) to
$125.0 million or less through December 31, 2006, and
$110.0 million or less thereafter. In the event that the
Company does not meet these covenants, the Company is considered
to be in default on the credit facilities at which time the
credit facilities may become immediately due. This credit
facility contains a cross default provision that would be
triggered if it were to default on any other indebtedness
greater than $10.0 million.
The Companys other indebtedness does not contain
provisions that would make it a default if it were to default on
its credit facilities.
The fee paid on borrowings on the Companys
$325.0 million,
71/2
-year, senior term loan fee is 2.25% above LIBOR. The fees paid
on the Companys $285.0 million,
61/2
-year multi-currency revolving credit facility depend on its
total leverage ratio. Based on the Companys current total
leverage ratio, its fees on borrowings are 1.75% above LIBOR and
are .375% on the total remaining availability on the revolving
credit facility. In the event the Companys leverage ratio
improves, the fees on revolving credit borrowings and the unused
availability decline gradually to .75% and .25%, respectively,
at a total leverage ratio of less than, or equal to, 1.25x.
The Company believes there are no other agreements that contain
provisions that trigger an event of default upon a change in
long-term debt ratings that would have a material impact on its
financial statements.
At December 31, 2005, the Company was in compliance with
all debt covenants. The Company expects to remain in compliance
throughout 2006.
77
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
NOTE F REDEEMABLE
PREFERRED STOCK
As of December 31, 2005, one of the Companys
subsidiaries had 200,000 shares of Series A redeemable
preferred stock, par value $.01 per share, and
200,000 shares of Series B redeemable preferred stock,
par value $.01 per share, outstanding (collectively, the
Preferred Stock) with an aggregate liquidation
preference of $40.0 million. The Preferred Stock accrues
dividends at 13% per annum and is mandatorily redeemable on
December 21, 2011. The certificate of incorporation
governing the Preferred Stock contains a number of covenants
that, among other things, restricts the ability to incur
additional debt, issue certain equity securities, create liens,
merge or consolidate, modify the nature of the business, make
certain investments and acquisitions, transfer and sell material
assets, enter into sale-leaseback transactions, enter into swap
agreements, pay dividends and make distributions, and enter into
agreements with affiliates.
The Series A redeemable preferred stock has voting rights
including the right to appoint one of the four members of the
issuers board of directors. The Series B redeemable
preferred stock has 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 the issuer in the event the issuer breaches certain terms of
the designations of the preferred stock.
The issuer 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 the issuer with respect to dividends and with respect
to liquidation or dissolution of the issuer.
NOTE G 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. 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, 2005, 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)
|
|
|
2006
|
|
$
|
64,339
|
|
|
$
|
190,200
|
|
|
$
|
23,461
|
|
2007
|
|
|
60,739
|
|
|
|
17,283
|
|
|
|
750
|
|
2008
|
|
|
53,942
|
|
|
|
10,649
|
|
|
|
|
|
2009
|
|
|
48,458
|
|
|
|
9,514
|
|
|
|
|
|
2010
|
|
|
41,195
|
|
|
|
4,013
|
|
|
|
2,500
|
|
Thereafter
|
|
|
744,154
|
|
|
|
15,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,012,827
|
|
|
$
|
247,083
|
|
|
$
|
26,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluded from the non-cancelable contracts is $66.0 million
related to severance obligations for employment contracts
calculated as if such employees were terminated on
January 1, 2006.
Minimum rentals of $114.1 million to be received in years
2006 through 2020 under non-cancelable subleases are excluded
from the commitment amounts in the above table.
78
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Rent expense charged to operations for 2005, 2004 and 2003 was
$180.8 million, $175.7 million and
$160.3 million, respectively. In addition to the minimum
rental commitments discussed above, the Company has leases that
contain contingent payment requirements for which payments vary
depending on revenues, tickets sold or other variables.
As of December 31, 2005 and 2004, the Company guaranteed
the debt of third parties of approximately $1.9 million and
$3.5 million, respectively, primarily related to maximum
credit limits on employee credit cards and, in 2004, this
included a guarantee of a bank line of credit for working
capital needs of a nonconsolidated affiliate.
The Company is currently involved in certain legal proceedings
and, as required, has accrued its best estimate of the probable
costs for the resolution of these claims. These estimates have
been developed in consultation with counsel and are based upon
an analysis of potential results, assuming a combination of
litigation and settlement strategies. It is possible, however,
that future results of operations for any particular period
could be materially affected by changes in the Companys
assumptions or the effectiveness of its strategies related to
these proceedings.
Various acquisition agreements include deferred consideration
payments including future contingent payments based on the
financial performance of the acquired companies, generally over
a one to five year period. Contingent payments involving the
financial performance of the acquired companies are typically
based on the acquired company meeting certain financial
performance targets as defined in the agreement. The contingent
payment amounts are generally calculated based on predetermined
multiples of the achieved financial performance. At
December 31, 2005, the Company is unable to estimate this
contingency as it is subject to the future financial performance
of the acquired companies. As the contingencies have not been
met or resolved as of December 31, 2005, 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 H RELATED
PARTY TRANSACTIONS
Relationship
with Clear Channel Communications
Master
Separation and Distribution Agreement
The master separation and distribution agreement provided for,
among other things, the principal corporate transactions
required to effect the transfer of assets and the Companys
assumption of liabilities necessary to separate the transferred
businesses from Clear Channel Communications, the distribution
of the Companys common stock to the holders of record of
Clear Channel Communications common stock on
December 14, 2005, and certain other agreements governing
the Companys relationship with Clear Channel
Communications after the date of the Separation. The transfers
from Clear Channel Communications to the Company occurred prior
to the Separation and all of the assets were transferred on an
as is, where is basis, and the Company
and its subsidiaries agreed to bear the economic and legal risks
that any conveyance was insufficient to vest in the Company good
title, free and clear of any security interest, and that any
necessary consents or approvals were not obtained or that any
requirements of laws or judgments were not complied with. The
Company assumed and agreed to perform and fulfill all of the
liabilities arising out of ownership or use of the transferred
assets or the operation of the transferred businesses. The
Company also agreed, among other things, that for the
Companys 2005 fiscal year and for any fiscal year
thereafter for so long as Clear Channel Communications is
required to consolidate our results of operations and financial
79
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
position with its results of operations and financial position,
the Company will not select an independent registered public
accounting firm different from Clear Channel Communications.
Transition
Services Agreement
The transition services agreement governs the provision by Clear
Channel Communications to the Company of certain transitional
administrative and support services such as treasury, payroll
and other financial related services; human resources and
employee benefits; legal and related services; information
systems, network and related services; investment services; and
corporate services. The charges for the transition services are
intended to allow Clear Channel Communications to fully recover
the allocated direct costs of providing the services, plus all
out-of-pocket
expenses, generally without profit. The allocation of costs will
be based on various measures depending on the service provided,
including relative revenue, employee headcount or number of
users of a service. The services will terminate at various
times, generally ranging from two months to one year after the
completion of the Separation.
Tax
Matters Agreement
The tax matters agreement governs the respective rights,
responsibilities and obligations of Clear Channel Communications
and the Company with respect to tax liabilities and benefits,
tax attributes, tax contests and other matters regarding income
taxes, non-income taxes and preparing and filing tax returns, as
well as with respect to any additional taxes incurred by the
Company attributable to actions, events or transactions relating
to the Companys stock, assets or business following the
Separation, including taxes imposed if the Separation fails to
qualify for tax-free treatment under Section 355 of the
Internal Revenue Code of 1986, as amended, or if Clear Channel
Communications is not able to recognize certain losses.
Employee
Matters Agreement
The employee matters agreement provides that the Company will be
solely responsible for the majority of the liabilities and
expenses relating to the Companys current and former
employees and their covered dependents and beneficiaries,
regardless of when incurred.
Trademark
and Copyright License Agreement
The trademark and copyright license agreement establishes the
Companys right to continue to use the trademark CLEAR
CHANNEL, other marks incorporating the term CLEAR CHANNEL or
variations thereof, the CC, and other marks used in connection
with the transferred businesses, and trade dress and other
indicia of origin associated with such trademarks and certain
copyrights in packaging, labels, signage, marketing, advertising
and promotional materials that bear or display such trademarks
in the licensed territory for the transferred businesses, during
a transitional period ending December 21, 2006.
Transactions
with Clear Channel Communications
Prior to the Separation, the Company had a revolving line of
credit with Clear Channel Communications. See further disclosure
in Note E Long Term Debt.
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
business/shareholders 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 fiscal years 2005 and 2004, Clear Channel
Communications made additional non-cash capital contributions of
$8.8 million and $17.7 million, respectively, to the
Company. During the fourth quarter of 2005, the Company
completed the Separation from Clear Channel Communications. As a
result, the Company recognized the par value and additional
paid-in-capital
in connection with the issuance of our common stock in exchange
for the net assets contributed by Clear Channel Communications.
As of
80
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31, 2005 there is no longer an owners net
investment balance recorded. As of December 31, 2004 the
balance recorded in owners net investment is
$170.5 million.
The Company purchases advertising from Clear Channel
Communications and its subsidiaries. For the years ended
December 31, 2005, 2004 and 2003, the Company recorded
$12.9 million, $16.7 million and $15.7 million,
respectively, as a component of divisional operating expenses,
for these advertisements. It is the Companys opinion that
these transactions were recorded at fair value.
Prior to the Separation, Clear Channel Communications provided
management services to the Company, which included, among other
things: (i) treasury, payroll and other financial related
services; (ii) executive oversight; (iii) human
resources and employee benefits services; (iv) legal and
related services; and (v) information systems, network and
related services. These services were allocated to the Company
based on actual direct costs incurred or on the Companys
share of Clear Channel Communications estimate of expenses
relative to a seasonally adjusted headcount. Management believes
this allocation method to be reasonable and the expenses
allocated to be materially the same as the amount that would
have been incurred on a stand-alone basis. For the years ended
December 31, 2005, 2004 and 2003, the Company recorded
$9.5 million, $9.8 million and $9.2 million,
respectively, as a component of corporate expenses for these
services.
Clear Channel Communications owns the trademark and trade names
used by the Company prior to the Separation. Beginning
January 1, 2003, Clear Channel Communications charged 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, 2005, 2004 and 2003, the Company
recorded $0.5 million, $3.1 million and
$4.1 million, respectively, of royalty fees in corporate
expenses.
Prior to the Separation, the operations of the Company were
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 were made to Clear Channel
Communications on the basis of the Companys separate
taxable income. Tax benefits recognized on employee stock option
exercises are retained by Clear Channel Communications.
The Companys domestic employees participated in Clear
Channel Communications employee benefit plans prior to the
Separation, including employee medical insurance, an employee
stock purchase plan and a 401(k) retirement benefit plan. These
costs were recorded primarily as a component of divisional
operating expenses and were approximately $9.0 million,
$9.0 million and $7.6 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Subsequent
to the Separation, the Company will provide its own employee
benefit plans.
In connection with the Separation, the Company entered into
various lease and licensing agreements with Clear Channel
Communications primarily for office space occupied by the
Companys employees.
As of December 31, 2005, the Company has recorded a
liability to Clear Channel Communications of $12.7 million,
which is recorded in accrued expenses.
Other
Related Parties