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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 |
For the fiscal year ended December 31, 2006, or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-32601
LIVE NATION, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State of Incorporation)
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20-3247759
(I.R.S. Employer Identification No.) |
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 |
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. þ Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. o Yes þ No
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. þ Yes o No
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.
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Indicate
by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange
Act. (Check one):
þ Large accelerated filer o Accelerated filer o Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
On June 30, 2006, the last business day of the registrants most recently completed second
fiscal quarter, the aggregate market value of the Common Stock beneficially held by non-affiliates
of the registrant was approximately $990.7 million. (For purposes hereof, directors, executive
officers and 10% or greater shareholders have been deemed affiliates).
On February 23, 2007, there were 65,534,260 outstanding shares of the registrants common
stock, $0.01 par value per share, excluding 1,702,652 shares held in treasury.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Definitive Proxy Statement for the 2007 Annual Meeting, expected to be filed
within 120 days of our fiscal year end, are incorporated by reference into Part III.
LIVE NATION, INC.
INDEX TO FORM 10-K
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PART I
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 or subsidiaries, as the context requires.
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, internet 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.
Item 1. Business
Our Company
We are the worlds largest live music company. Our mission is to inspire passion for live
music around the world. We are the largest promoter of live concerts in the world, the
second-largest entertainment venue management company and have a rapidly growing online presence.
We strive to create superior experiences for artists and fans, regularly promoting and/or producing
tours for artists such as The Rolling Stones, Barbra Streisand, Madonna, U2 and Coldplay.
Globally, we own, operate, have booking rights for and/or have an equity interest in more than 160
venues, including House of Blues® music venues and prestigious locations such as The
Fillmore in San Francisco, Nikon at Jones Beach Theater in New York and Londons Wembley Arena. Our
websites collectively are the second most popular entertainment/event websites in the United
States, according to Nielsen//NetRatings. In addition, we also produce, promote or host
theatrical, specialized motor sports and other live entertainment events. In 2006, we connected
nearly 60 million fans with their favorite performers at approximately 26,000 events in 18 countries
around the world.
Our principal executive offices are located at 9348 Civic Center Drive, Beverly Hills,
California 90210 (telephone: 310-867-7000). Our principal website is www.livenation.com. Live
Nation is listed on the New York Stock Exchange, trading under the symbol LYV.
Our Strategy
Our strategy is to streamline our business assets to focus on live music. We believe that
this focus will enable us to increase shareholder value by developing new ancillary revenue streams
around the live music event. We have begun, and will continue, to execute on this strategy through
pursuing the objectives listed below.
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Divest Non-Core Assets. We are focused on building our live music business and
ancillary services in major music markets around the world. As a result, we expect,
where it is economically justifiable, to divest non-live music related |
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business assets and/or underperforming live music business assets and use the net proceeds
to re-invest in our core live music business, repay outstanding indebtedness or for
general corporate purposes. |
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Increase Our North American Platform. We believe the markets with the greatest live
music profit potential in North America are markets within the top 25 designated market
areas, or DMAs®, and those where we operate venues which can service artists with
audiences of all sizes. Our North American venue expansion strategy includes, where
economically feasible, to own and/or operate (i) a large capacity venue such as an
amphitheater with a capacity up to 30,000, (ii) a mid-sized music venue with a capacity
of up to 5,000 and (iii) a small-sized venue with a capacity of 2,000 or less. In
addition, we believe that multi-day music festivals, often located outside of major
metropolitan markets, such as our Jamboree in the Hills annual festival located in
Morristown, OH, are a growing segment of the market in which we expect to increasingly
participate. Festivals are already a significant part of our international business
where we own, operate and/or have an equity interest in over 20 festivals. Finally, our
focus in North America is on increasing our venue presence as the owner/operator of the
venue generally has the right to sell the ticket. |
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Increase Our International Platform. We plan to expand our international promoter
presence to include the top music markets and population centers around the world and to
selectively expand our international venue presence. We currently have operations in
eight of the top ten recorded music markets globally. By extending our global presence,
we benefit through the diversification of our operations to include local acts,
generating synergies from the promotion of our global artists and capitalizing on
multi-national sponsorships. In addition, our focus internationally is on increasing our
promoter presence as the promoter of the concert/performance generally has the right to
sell the ticket. |
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Improve the Profitability of Our Existing Core Business. We continue to be focused on
improving the profitability of our existing core live music operations by implementing
strategies to improve promoter profit, to increase ancillary sales per fan at our venues,
to capitalize on opportunities to reduce variable costs when renewing third-party vendor
contracts and to limit fixed cost growth. For example, during 2006, one of our key
focuses was to improve food and beverage sales per fan at our North American venues. We
were able to accomplish 9.6% growth in food and beverage sales per fan by implementing
such initiatives as value and simplified pricing, increased food and beverage selections,
hawking and improved signage. |
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Extend Relationships with Artists, Fans and Sponsors. We seek to develop deeper
relationships with the artists, fans and sponsors with whom we work. We believe that we
should be able to expand the business lines related to the live music event, such as the
sale of tour merchandise and live concert DVDs as well as providing other products and
services to fans and artists both before and after the concert, including the development
of artist fan clubs and websites. |
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Develop Online and Ancillary Services. Our goal is to be the leading online live
music destination website. Our website, www.livenation.com, has been the second most
popular entertainment/event site in North America since September 2006 according to
Nielsen//NetRatings. During 2007 we will be rolling out local versions of
www.livenation.com to our international operations. Currently, our website offers
comprehensive information about live concerts throughout the United States regardless of
whether they are Live Nation promoted events or not, and access to tickets and artist
merchandise. Our aim is to continue to drive the popularity of our website by expanding
our online offering thereby driving more traffic to our website and generating
incremental revenue from additional ticket sales, merchandise sales, online advertising
and other goods and services. |
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Cultivate Brand Awareness. We believe that brands help drive audiences to our venues
and events and are important to our overall success in the live music industry. In
connection with our debut as a public company in December 2005, we established the Live
Nation brand. In addition, we have a number of well-recognized live music brands around
the world including House of Blues (ten small-sized music venues as of December 31, 2006
located in the United States) and The Fillmore (two mid-sized music venues as of December
31, 2006 located in the United States) which we expect to utilize with respect to our
small- and mid-sized music venue growth strategy. |
In order to achieve our objectives and successfully implement our strategies, we have made,
and expect to continue to pursue, investments, acquisitions and divestitures that contribute to the
above goals where the valuations, returns and growth potential are consistent with our long-term
goal of increasing shareholder value. We believe that significant opportunities exist both in
North American and international markets to expand our distribution network. However, our ability
to make acquisitions and divestitures in
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the near term may be constrained by the limitations imposed by our senior secured credit
facility, market conditions and our tax matters agreement with Clear Channel Communications (see
below Our Relationship with Clear Channel Tax Matters Agreement).
Our Assets
We believe we have a portfolio of assets that is unmatched in the live music industry.
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Distribution Network. We believe that our extensive global distribution network of
promoters, venues and festivals provides us with a premier position in the live music
industry. We believe we have one of the largest global networks of music promoters in
the world, with offices in 23 cities in North America and a total of 17 countries
worldwide. In addition, we own, operate, have booking rights and/or have an equity
interest in over 160 venues located across six countries at December 31, 2006, making us,
we believe, the second largest operator of entertainment venues in the world. We also
believe that we produce one of the largest networks of music festivals in the world with
over 20 festivals globally. |
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Fans. During 2006, our events and venues were attended
by nearly 60 million fans. Our
database includes contact information for 21 million fans, providing us with the means to
efficiently market our shows to these fans as well as offer them other music related
products and services. This database is an invaluable asset that we are able to use to
service our artists and corporate clients. |
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Artists. We have extensive relationships with artists ranging from those acts that
are just beginning their careers to superstars. In 2006, we promoted shows or tours for
over 1,300 artists globally. We believe our artist relationships are a competitive
advantage and will help us pursue our strategy to develop additional ancillary revenue
streams around the live music event. |
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Sponsors. We employed a sales force of approximately 275 people that worked with over
375 major sponsors during 2006, through a combination of local venue related deals and
national deals, both in North America and internationally. Our sponsors include some of
the most well-recognized national and global brands including Verizon, American Express,
Ford and Nokia. |
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Employees. At December 31, 2006, we employed approximately 4,400 full-time employees
who are all dedicated to providing a first class service to our artists, fans and
corporate sponsors. Many of our employees have decades of experience in promoting and
producing live concerts, as well as operating live entertainment venues. |
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) 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. In December 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 trading under the symbol LYV.
Live Events Industry
Live Music Industry
The live music industry includes concert promotion and/or production. According to Pollstar,
North American gross concert revenues increased from $2.8 billion in 2004 to $3.6 billion in 2006,
a compound annual growth rate of approximately 13%. In the 2004 to 2006 period, our global live
music revenues, comprised of gross concert revenues, increased from $1.9 billion to $2.7 billion, a
compound annual growth rate of 19%. We believe this growth was primarily due to increasing ticket
prices for top-grossing acts and the continued desire of these acts such as Madonna, The Rolling
Stones and U2, to continue touring.
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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. Performers are paid by the promoter under one of several
different formulas, which may include fixed guarantees and/or a percentage of ticket sales or event
profits. 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 booking 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.
Theatrical Industry
The theatrical industry includes groups engaged in promoting, which is generally referred to
in the theatrical industry as presenting, and producing live theatrical presentations. According
to data from members of The League of American Theatres and Producers, Inc., gross ticket sales for
the North American theatrical industry of touring Broadway theatrical performances has increased
from $714 million during the 2003-04 season to $915 million during the 2005-06 season, a compounded
annual growth rate of 13%. In the 2004 to 2006 period, our global theatrical revenues increased
from $230.0 million to $277.5 million, a compounded annual growth rate of 10%.
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. 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 typically share any remaining
ticket revenues. 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.
Specialized Motor Sports Industry
The specialized motor sports industry includes promoters and producers of specialized motor
sports events. Typical events include motorcycle road racing, supercross racing, monster truck
shows, freestyle motocross events and other similar events. In general, most markets where we
operate host one to four motor sports events each year, with larger markets hosting more events.
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,
including Europe, 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 the National Association for Stock Car Auto Racing, or NASCAR and the Indy Racing League, or IRL.
A number of events are also broadcast domestically and internationally.
Venue Management Industry
The venue management industry includes venue and concession operation and the sale of
sponsorships and advertising. 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
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percentages of ticket sales, as well as percentages of total concession sales from the vendors
and percentages of total merchandise sales from the merchandisers.
Our Business
We operate in three reportable business segments: Events, Venues and Sponsorship, and Digital
Distribution. In addition, we operate in the sports representation and other businesses, which are
included under other.
Information related to these operating segments and other operations for 2006, 2005 and 2004
is included in Note P Segment Data in the Notes to Consolidated and Combined Financial Statements
in Item 8.
Events. Our Events business principally involves the promotion and/or production of live
music shows, theatrical performances and specialized motor sports events in our owned and/or
operated venues and in rented third-party venues. For the year ended December 31, 2006, our Events
business generated approximately $2.9 billion, or 79%, of our total revenues. We promoted or
produced over 10,000 live music events in 2006, including tours for artists such as the Rolling
Stones, Madonna, Barbra Streisand, Dave Matthews Band and Toby Keith. In addition, we produced
several large festivals in Europe, including Rock Werchter in Belgium, Lowlands Festival in
Holland, and the Reading Festival and the Leeds Festival, both in the United Kingdom.
In 2006, we presented and/or produced over 5,000 theatrical performances such as our
production of Phantom of the Opera in Las Vegas, tours of Cats, Starlight Express and Chicago in
the United Kingdom, our North American family show tours of Dora The Explorer Live and Doras
Pirate Adventure, as well as North American touring productions of Wicked, The Lion King, Mamma
Mia!, Spamalot, and Phantom of the Opera.
We held over 500 specialized motor sports events in 2006 in stadiums, arenas and other venues
including monster truck shows, supercross races, motocross races, freestyle motocross events,
motorcycle road racing and dirt track motorcycle racing.
Venues and Sponsorship. Our Venues and Sponsorship business principally involves the
management and operation of our owned and/or operated venues and the sale of various types of
sponsorships and advertising. For the year ended December 31, 2006, our Venues and Sponsorship
business generated approximately $635.8 million, or 17%, of our total revenues. In 2006, we owned
and/or operated 131 venues such as Tweeter Center at the Waterfront, PNC Bank Arts Center, Gibson
Amphitheater at Universal City Walk, Murat Theater, House of Blues® clubs and The Fillmore venues.
Through equity, booking or similar arrangements we also have the
right to book events at 34
additional venues. In addition, our national sponsorship programs included companies such as
American Express, Anheuser Busch and Verizon.
Digital Distribution. Our Digital Distribution business principally involves the management
of our third-party ticketing relationships, in-house ticketing operations and online and wireless
distribution activities, including the development of our website. For the year ended December 31,
2006, our Digital Distribution business generated approximately $99.0 million, or 3%, of our total
revenues. Our websites collectively are ranked as the second most popular entertainment/event
websites in the United States, according to Nielsen//NetRatings.
Other. We also provide integrated sports marketing and management services, primarily for
professional athletes. Our marketing and management services generally involve the negotiation of
player contracts with professional sports teams and endorsement contracts with major brands. We
also provide ancillary services, such as financial advisory or management services to our clients.
As of December 31, 2006, we had divested the majority of our sports representation business assets.
For the year ended December 31, 2006, businesses included under other generated approximately
$33.4 million, or 1%, of our total revenues.
Recent Acquisitions
Historic Theatre Group. In January 2006, we acquired a 51.0% interest in Historic Theatre
Group which operates three theaters in the Minneapolis, Minnesota area that primarily host
theatrical performances.
Angel Festivals. In May 2006, we acquired a 50.1% interest in Angel Festivals Limited,
located in the United Kingdom, which owns various intellectual property rights related to dance
festivals including Global Gathering.
Concert Productions International. In May 2006, we acquired a 50.1% interest in the touring
business of a commonly owned group of companies operating under the name of Concert Productions
International, or CPI, and a 50.0% interest in several entities in
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the non-touring business of CPI. Founded and led by entertainment industry veteran Michael
Cohl, CPI provides full service global touring, having produced tours for top acts such as the
Rolling Stones, Pink Floyd and U2. CPI has also developed additional revenue streams around the
tours that it produces, such as VIP ticketing, fan clubs, merchandising and DVDs. Mr. Cohl also
joined our board of directors in May 2006 in connection with this acquisition.
TRUNK, Ltd. In June 2006, we acquired a 51.0% interest in Cinq Group, LLC, which operates as
TRUNK, Ltd (Trunk). Trunk is a specialty merchandise company located in the United States, that
acquires licenses primarily from music artists to design, manufacture and sell merchandise through
various distribution channels. This acquisition expands our artist merchandising services, further
extending the live experience beyond the two-hour show.
Musictoday. In September 2006, we acquired a 51.0% interest in Musictoday, LLC (Musictoday), a leader in
connecting artists directly to their fans through online fan clubs, artist e-commerce and
fulfillment and artist fan club ticketing located in the United States. We believe this is another
important step in our ongoing efforts to add complementary product lines to our live music and
venue businesses.
House of Blues. In November 2006, we acquired HOB Entertainment, Inc. (HOB or House of
Blues) which owns and/or operates ten branded clubs in Los Angeles, Anaheim, San Diego, Las Vegas,
New Orleans, Chicago, Cleveland, Orlando, Myrtle Beach and Atlantic City; The Commodore Ballroom, a
small-sized music venue in Vancouver; and eight amphitheaters in Seattle, Los Angeles, San Diego,
Denver, Dallas, Atlanta, Cleveland and Toronto. The House of Blues® brand is one of the most
highly recognizable names in live music and we are excited about the strong foothold House of Blues
provides us in the small-sized music venue market. In addition, this acquisition also extends our
music venue portfolio into Canada and amphitheater presence into key markets in the western United
States, complementing our already strong East coast venues.
Gamerco. In December 2006, we acquired Gamerco, S.A., one of the largest concert promoters in
Spain. Gamerco complements our existing global promotion portfolio and moves us closer to our goal
to be in all of the top music markets worldwide.
Recent Divestitures
Consistent with our strategy to focus on our core live music business, we made several
divestitures of non-music assets during 2006.
Sports Representation. During the first quarter of 2006, we sold a portion of our sports
representation business assets in Los Angeles. In the second quarter of 2006 we sold substantially
all of the golf related assets of our sports representation business. During the third quarter of
2006, we sold additional portions of our North American sports representation business assets
including football, tennis, media and baseball. In the fourth quarter of 2006 we sold SFX Sports
Group, Europe located in the United Kingdom. Our remaining sports representation business
primarily specializes in the negotiation of professional sports contracts for the National
Basketball Association and endorsement contracts for those clients.
Theatrical Assets. In April 2006, we sold our interest in a venue project, and a portion of
certain prepaid production assets, theatrical productions and investments in nonconsolidated
affiliates, all located in North America, and were reimbursed for certain expenses related to these
assets. These assets were sold to an entity that is managed by two of our former officers.
Teatro Mayor and Teatro Calderon. In August 2006, we disposed of our interest in the Mayor
and Calderon theaters in Spain.
Operating Segments
Events
Within our Events segment, we are engaged in promoting, presenting and/or producing music
events and tours, theatrical performances and specialized motor sports events in our owned and/or
operated venues and in rented third-party venues.
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 or event profits. For each
event, we either use a venue we own and/or operate, or rent a third-party venue. In our theatrical
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
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generally related to the volume of ticket sales and ticket prices. Event costs such as artist
and production service expenses are included in direct operating expenses and 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. In the case
of our amphitheaters, our Events segment typically experiences losses related to the promotion of
the event. These losses are generally offset by the ancillary and sponsorship profits generated by
our Venues and Sponsorship segment and the ticket rebates recorded in our Digital Distribution
segment.
As a producer, we generally develop event content, hire directors and artistic talent, develop
sets and costumes, and coordinate the actual performances of the events. We produce tours on a
global, national and regional basis. We generate revenues from fixed production fees and by sharing
in a percentage of event or tour profits primarily related to the sale of tickets, merchandise and
event and tour sponsorships. These production revenues are generally related to the size and
profitability of the production. Production costs, included in direct 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.
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 265,000
subscribers in the 2006-2007 season). We present these subscription series in approximately 44
touring markets in North America.
We invest in the production of touring and other theatrical performances. Touring theatrical
performances consist primarily of revivals of previous commercial successes or new productions of
theatrical performances currently playing on Broadway in New York City or the West End in London.
Frequently, we invest in shows or productions to obtain touring rights and favorable scheduling to
distribute them across our presentation network. In 2006, productions in which we had investments
included The Producers, Guys and Dolls, The Sound of Music and Spamalot.
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 events, which generate revenues
primarily from ticket sales and sponsorships, as well as merchandising and video rights.
Venues and Sponsorship
Within our Venues and Sponsorship segment, we are engaged in the management and operation of
our owned and/or operated venues and the sale of various types of sponsorships and advertising.
We actively pursue the sale of national and local sponsorships and placement of advertising,
including signage, promotional programs, and naming of subscription series. Many of our venues also
have venue naming rights 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 Verizon. 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.
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, premium seating and venue sponsorships, as well
as sharing in percentages of concessions, merchandise and parking. Revenues generated from venue
management typically have a higher margin than promotion or production revenues and therefore
typically have a more direct relationship to operating income.
In the live entertainment industry, venues generally consist of:
|
|
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, 2006, we
did not own or lease any stadiums, although on occasion our Events segment may rent them for
certain music events. |
9
|
|
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, 2006, we owned 11, leased 28, operated five, had booking
rights for seven and an equity interest in two amphitheaters located in North America. |
|
|
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, 2006, we owned one, leased two, operated two and had booking rights
for four arenas located in the United Kingdom and Ireland. |
|
|
Mid-Sized Music Venues Mid-sized music venues are indoor venues that are built primarily
for musical events. These venues typically have a capacity between 1,000 and 5,000. Because
these venues have a smaller capacity than an amphitheater, they do not offer as much economic
upside on a per show basis. However, because mid-sized music venues can be used year-round,
unlike most amphitheaters, they can generate annual profits similar to those of an
amphitheater. Mid-sized music venues 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, 2006, we owned six, leased 15, operated
two, had booking rights for seven and an equity interest in one mid-sized music venues located
in North America, the United Kingdom and Sweden. |
|
|
Small-Sized Music Venues Small-sized music venues are indoor venues that are built
primarily for musical events but may also include comedy clubs. These venues typically have a capacity of
less than 1,000 and often without full fixed seating. Because of their small size, they do not
offer as much economic upside, but they also represent less 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. Small-sized music venues 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, 2006, we owned two, leased 11, operated one, had booking
rights for seven and had an equity interest in three small-sized music venues in North American and
the United Kingdom. |
|
|
Small-Sized Music Venues House of Blues House of Blues venues are indoor venues that
offer customers an integrated live music and dining experience. The live music halls are
specially designed to provide optimum acoustics and typically can accommodate between 1,000 to
2,000 guests. A full-service restaurant and bar serving lunch, dinner and late night snacks
seven days a week is located adjacent to the live music hall. We believe that the high
quality of the food, service and atmosphere in our restaurants attracts customers to these
venues independently from an entertainment event, and generates a significant amount of repeat
business from local customers. At December 31, 2006, we leased ten House of Blues venues
located in North America. |
|
|
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 lower costs associated with producing the
event and maintaining the site. The operating results from our
festivals are recorded in our
Events segment. At December 31, 2006, we owned two festival sites located in North America
and the United Kingdom. |
|
|
Theatrical Theaters Theatrical theaters are generally indoor venues that are built
specifically for 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, 2006, we owned 11, leased nine,
operated 13 and had an equity interest in three theatrical theaters located in North America,
the United Kingdom and Spain. |
At December 31, 2006, we owned, operated, had booking rights for and/or had an equity interest
in the following domestic and international venues primarily used for music events:
10
|
|
|
|
|
|
|
|
|
|
|
|
|
DMA® |
|
|
|
|
|
Estimated |
|
|
|
Region |
|
|
|
|
|
Seating |
|
Market and Venue |
|
Rank (1) |
|
Type of Venue |
|
Live Nations Interest |
|
Capacity |
|
NEW YORK, NY |
|
1 |
|
|
|
|
|
|
|
|
PNC Bank Arts Center |
|
|
|
Amphitheater |
|
22-year lease that expires October 31, 2017 |
|
|
17,500 |
|
Nikon at Jones Beach Theater |
|
|
|
Amphitheater |
|
20-year license agreement that expires December 31, 2019 |
|
|
14,400 |
|
Randalls Island |
|
|
|
Amphitheater |
|
Booking agreement |
|
|
20,000 |
|
North Fork Theatre at Westbury |
|
|
|
Mid-Sized |
|
43-year lease that expires December 31, 2034 |
|
|
2,800 |
|
Irving Plaza |
|
|
|
Small-Sized |
|
10-year lease that expires October 31, 2016 |
|
|
1,000 |
|
Hammerstein Ballroom |
|
|
|
Mid-Sized |
|
Booking agreement |
|
|
3,600 |
|
Gramercy Theatre |
|
|
|
Small-Sized |
|
10-year lease that expires December 31, 2016 |
|
|
600 |
|
Roseland Ballroom |
|
|
|
Small-Sized |
|
Booking agreement |
|
|
3,700 |
|
LOS ANGELES, CA |
|
2 |
|
|
|
|
|
|
|
|
Hyundai Pavilion at Glen Helen |
|
|
|
Amphitheater |
|
25-year lease that expires June 30, 2018 |
|
|
65,000 |
|
Verizon Wireless Amphitheater |
|
|
|
Amphitheater |
|
20-year lease that expires February 28, 2017 |
|
|
16,300 |
|
Gibson Amphitheatre |
|
|
|
Amphitheater |
|
15-year lease that expires September 9, 2014 |
|
|
6,185 |
|
Long Beach Arena |
|
|
|
Arena |
|
Booking agreement |
|
|
13,500 |
|
The Wiltern |
|
|
|
Mid-Sized |
|
5-year lease that expires June 30, 2010 |
|
|
2,300 |
|
Avalon Hollywood |
|
|
|
Small-Sized |
|
Booking agreement |
|
|
1,400 |
|
House of Blues Sunset Strip |
|
|
|
House of Blues |
|
10-year lease that expires April 30, 2012 |
|
|
1,000 |
|
House of Blues Anaheim |
|
|
|
House of Blues |
|
10-year lease that expires January 8, 2011 |
|
|
950 |
|
CHICAGO, IL |
|
3 |
|
|
|
|
|
|
|
|
First Midwest Bank Amphitheatre |
|
|
|
Amphitheater |
|
Owned |
|
|
28,600 |
|
Charter One Pavilion at
Northerly Island |
|
|
|
Amphitheater |
|
3-year lease that expires December 31, 2007 |
|
|
8,500 |
|
Allstate Arena |
|
|
|
Arena |
|
Booking agreement |
|
|
19,000 |
|
Rosemont Theater |
|
|
|
Mid-Sized |
|
Booking agreement |
|
|
4,400 |
|
House of Blues Chicago |
|
|
|
House of Blues |
|
20-year lease that expires November 23, 2016 |
|
|
1,300 |
|
PHILADELPHIA, PA |
|
4 |
|
|
|
|
|
|
|
|
Tweeter Center at the Waterfront |
|
|
|
Amphitheater |
|
31-year lease that expires September 29, 2025 |
|
|
25,000 |
|
Tower Theater |
|
|
|
Mid-Sized |
|
Owned |
|
|
3,050 |
|
Theater of the Living Arts |
|
|
|
Small-Sized |
|
Owned |
|
|
810 |
|
Electric Factory |
|
|
|
Small-Sized |
|
Booking agreement |
|
|
2,250 |
|
House of Blues Atlantic City |
|
|
|
House of Blues |
|
15-year lease that expires June 30, 2020 |
|
|
2,300 |
|
SAN FRANCISCO OAKLAND SAN
JOSE, CA |
|
5 |
|
|
|
|
|
|
|
|
Shoreline Amphitheater at
Mountain View |
|
|
|
Amphitheater |
|
20-year lease that expires December 31, 2025 |
|
|
22,000 |
|
Sleep Train Pavilion at Concord |
|
|
|
Amphitheater |
|
5-year management agreement that expires December 31, 2011 |
|
|
12,500 |
|
Mountain Winery |
|
|
|
Amphitheater |
|
Booking agreement |
|
|
1,700 |
|
The Warfield |
|
|
|
Mid-Sized |
|
10-year lease that expires May 31, 2008 |
|
|
2,250 |
|
The Fillmore |
|
|
|
Mid-Sized |
|
10-year lease that expires August 31, 2007 |
|
|
1,200 |
|
Cobbs Comedy Club |
|
|
|
Small-Sized |
|
10-year lease that expires November 1, 2015 |
|
|
150 |
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
DMA® |
|
|
|
|
|
Estimated |
|
|
|
Region |
|
|
|
|
|
Seating |
|
Market and Venue |
|
Rank (1) |
|
Type of Venue |
|
Live Nations Interest |
|
Capacity |
|
Punch Line Comedy Club San
Francisco |
|
|
|
Small-Sized |
|
5-year lease that expires September 15, 2011 |
|
|
500 |
|
DALLAS FORT WORTH, TX |
|
6 |
|
|
|
|
|
|
|
|
Smirnoff Music Center |
|
|
|
Amphitheater |
|
20-year lease that expires December 31, 2008 |
|
|
20,100 |
|
BOSTON, MA |
|
7 |
|
|
|
|
|
|
|
|
Tweeter Center for the
Performing Arts |
|
|
|
Amphitheater |
|
Owned |
|
|
19,900 |
|
Bank of America Pavilion |
|
|
|
Amphitheater |
|
Indefinite license agreement that expires 18 months after |
|
|
4,900 |
|
|
|
|
|
|
|
notification that pier is to be
occupied for water dependent use |
|
|
|
|
Orpheum Theatre |
|
|
|
Mid-Sized |
|
5-year operating agreement that expires December 31, 2010 |
|
|
2,700 |
|
Avalon |
|
|
|
Small-Sized |
|
Booking agreement |
|
|
1,920 |
|
Paradise Rock Club |
|
|
|
Small-Sized |
|
Booking agreement |
|
|
650 |
|
WASHINGTON, DC |
|
8 |
|
|
|
|
|
|
|
|
Nissan Pavilion |
|
|
|
Amphitheater |
|
Owned |
|
|
22,500 |
|
ATLANTA, GA |
|
9 |
|
|
|
|
|
|
|
|
HiFi Buys Amphitheatre |
|
|
|
Amphitheater |
|
35-year lease that expires December 31, 2033 |
|
|
19,000 |
|
Chastain Park Amphitheatre |
|
|
|
Amphitheater |
|
10-year lease that expires December 31, 2010 |
|
|
6,400 |
|
The Tabernacle |
|
|
|
Mid-Sized |
|
10-year lease that expires January 31, 2008 |
|
|
2,500 |
|
Coca-Cola Roxy Theatre |
|
|
|
Small-Sized |
|
3-year lease that expires March 31, 2007 |
|
|
1,200 |
|
HOUSTON, TX |
|
10 |
|
|
|
|
|
|
|
|
Cynthia Woods Mitchell Pavilion |
|
|
|
Amphitheater |
|
Booking agreement |
|
|
16,400 |
|
Verizon Wireless Theater |
|
|
|
Mid-Sized |
|
10-year lease that expires December 31, 2007 |
|
|
2,900 |
|
DETROIT, MI |
|
11 |
|
|
|
|
|
|
|
|
State Theatre |
|
|
|
Mid-Sized |
|
15-year lease that expires February 28, 2018 |
|
|
2,900 |
|
St. Andrews Hall |
|
|
|
Small-Sized |
|
Owned |
|
|
820 |
|
TAMPA ST. PETERSBURG -
SARASOTA, FL |
|
12 |
|
|
|
|
|
|
|
|
Ford Amphitheatre at the
Florida State Fairgrounds |
|
|
|
Amphitheater |
|
15-year lease that expires December 31, 2018 |
|
|
20,000 |
|
PHOENIX, AZ |
|
13 |
|
|
|
|
|
|
|
|
Cricket Pavilion |
|
|
|
Amphitheater |
|
60-year lease that expires June 30, 2049 |
|
|
20,000 |
|
SEATTLE TACOMA, WA |
|
14 |
|
|
|
|
|
|
|
|
White River Amphitheatre |
|
|
|
Amphitheater |
|
25-year management agreement that
expires October 31, 2028 |
|
|
20,000 |
|
MIAMI FT. LAUDERDALE, FL |
|
16 |
|
|
|
|
|
|
|
|
Revolution |
|
|
|
Small-Sized |
|
Booking agreement |
|
|
1,000 |
|
CLEVELAND AKRON, OH |
|
17 |
|
|
|
|
|
|
|
|
Blossom Music Center |
|
|
|
Amphitheater |
|
15-year lease that expires October 31, 2014 |
|
|
19,550 |
|
Tower City Amphitheater |
|
|
|
Amphitheater |
|
6-year lease that expires April 30, 2011 |
|
|
5,500 |
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
DMA® |
|
|
|
|
|
Estimated |
|
|
|
Region |
|
|
|
|
|
Seating |
|
Market and Venue |
|
Rank (1) |
|
Type of Venue |
|
Live Nations Interest |
|
Capacity |
|
Plain Dealer Pavilion |
|
|
|
Amphitheater |
|
3-year management agreement that
expires December 31, 2008 |
|
|
5,000 |
|
Odeon |
|
|
|
Small-Sized |
|
Currently not in operation |
|
|
900 |
|
House of Blues Cleveland |
|
|
|
House of Blues |
|
20-year lease that expires November 19, 2024 |
|
|
1,200 |
|
DENVER, CO |
|
18 |
|
|
|
|
|
|
|
|
Coors Amphitheatre |
|
|
|
Amphitheater |
|
15-year lease that expires December 31, 2007 |
|
|
16,820 |
|
City Lights Pavilion |
|
|
|
Amphitheater |
|
50% equity interest |
|
|
5,000 |
|
The Fillmore Auditorium |
|
|
|
Mid-Sized |
|
Owned |
|
|
3,600 |
|
Paramount Theatre |
|
|
|
Mid-Sized |
|
Booking agreement |
|
|
1,850 |
|
ORLANDO DAYTONA BEACH -
MELBOURNE, FL |
|
19 |
|
|
|
|
|
|
|
|
House of Blues Orlando |
|
|
|
House of Blues |
|
15-year lease that expires September 1, 2012 |
|
|
2,100 |
|
SACRAMENTO STOCKTON -
MODESTO, CA |
|
20 |
|
|
|
|
|
|
|
|
Sleep Train Amphitheatre |
|
|
|
Amphitheater |
|
Owned |
|
|
18,500 |
|
Punch Line Comedy Club -
Sacramento |
|
|
|
Small-Sized |
|
5-year lease that expires December 31, 2010 |
|
|
100 |
|
ST. LOUIS, MO |
|
21 |
|
|
|
|
|
|
|
|
Verizon Wireless Amphitheater
St. Louis |
|
|
|
Amphitheater |
|
Owned |
|
|
21,000 |
|
The Pageant |
|
|
|
Mid-Sized |
|
50% equity interest |
|
|
2,300 |
|
PITTSBURGH, PA |
|
22 |
|
|
|
|
|
|
|
|
Post Gazette Pavilion |
|
|
|
Amphitheater |
|
45-year lease that expires December 31, 2034 |
|
|
23,100 |
|
INDIANAPOLIS, IN |
|
25 |
|
|
|
|
|
|
|
|
Verizon Wireless Music Center |
|
|
|
Amphitheater |
|
Owned |
|
|
24,400 |
|
The Lawn at White River State
Park |
|
|
|
Amphitheater |
|
Booking agreement |
|
|
6,000 |
|
The Murat Center |
|
|
|
Mid-Sized |
|
50-year lease that expires August 31, 2045 |
|
|
2,500 |
|
CHARLOTTE, NC |
|
26 |
|
|
|
|
|
|
|
|
Verizon Wireless Amphitheater |
|
|
|
Amphitheater |
|
Owned |
|
|
18,800 |
|
SAN DIEGO, CA |
|
27 |
|
|
|
|
|
|
|
|
Coors Amphitheatre San Diego |
|
|
|
Amphitheater |
|
20-year lease that expires October 31, 2023 |
|
|
19,490 |
|
Open Air Theater |
|
|
|
Amphitheater |
|
Booking agreement |
|
|
4,790 |
|
Cox Arena |
|
|
|
Arena |
|
Booking agreement |
|
|
12,500 |
|
4th and B |
|
|
|
Small-Sized |
|
3-year management agreement that
expires September 30, 2009 |
|
|
1,500 |
|
House of Blues San Diego |
|
|
|
House of Blues |
|
15-year lease that expires May 31, 2020 |
|
|
1,100 |
|
HARTFORD NEW HAVEN, CT |
|
28 |
|
|
|
|
|
|
|
|
New England Dodge Music Center |
|
|
|
Amphitheater |
|
40-year lease that expires June 30, 2035 |
|
|
24,200 |
|
Mohegan Sun Arena |
|
|
|
Arena |
|
Booking agreement |
|
|
9,000 |
|
Chevrolet Theatre |
|
|
|
Mid-Sized |
|
Owned |
|
|
4,560 |
|
RALEIGH DURHAM, NC |
|
29 |
|
|
|
|
|
|
|
|
Alltel Pavilion at Walnut Creek |
|
|
|
Amphitheater |
|
40-year lease that expires October 31, 2030 |
|
|
20,000 |
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
DMA® |
|
|
|
|
|
Estimated |
|
|
|
Region |
|
|
|
|
|
Seating |
|
Market and Venue |
|
Rank (1) |
|
Type of Venue |
|
Live Nations Interest |
|
Capacity |
|
NASHVILLE, TN |
|
30 |
|
|
|
|
|
|
|
|
Starwood Amphitheater |
|
|
|
Amphitheater |
|
Owned |
|
|
17,500 |
|
KANSAS CITY, MO |
|
31 |
|
|
|
|
|
|
|
|
Verizon Wireless Amphitheater |
|
|
|
Amphitheater |
|
5-year lease that expires December 31, 2007 |
|
|
18,000 |
|
Memorial Hall |
|
|
|
Mid-Sized |
|
2-year lease that expires December 31, 2007 |
|
|
3,200 |
|
COLUMBUS, OH |
|
32 |
|
|
|
|
|
|
|
|
Germain Amphitheater |
|
|
|
Amphitheater |
|
Owned |
|
|
20,000 |
|
CINCINNATI, OH |
|
33 |
|
|
|
|
|
|
|
|
Riverbend Music Center |
|
|
|
Amphitheater |
|
Booking agreement |
|
|
20,500 |
|
Taft Theatre |
|
|
|
Mid-Sized |
|
5-year lease that expires July 31, 2010 |
|
|
2,500 |
|
Bogarts club |
|
|
|
Small-Sized |
|
5-year lease that expires September 30, 2007 |
|
|
1,470 |
|
MILWAUKEE, WI |
|
34 |
|
|
|
|
|
|
|
|
Alpine Valley Music Theatre |
|
|
|
Amphitheater |
|
21-year management agreement that expires December 31, 2019 |
|
|
35,300 |
|
Marcus Amphitheater |
|
|
|
Amphitheater |
|
Booking agreement |
|
|
23,000 |
|
SAN ANTONIO, TX |
|
37 |
|
|
|
|
|
|
|
|
Verizon Wireless Amphitheater |
|
|
|
Amphitheater |
|
Owned |
|
|
19,300 |
|
WEST PALM BEACH FORT PIERCE,
FL |
|
38 |
|
|
|
|
|
|
|
|
Sound Advice Amphitheatre |
|
|
|
Amphitheater |
|
10-year lease that expires December 31, 2015 |
|
|
19,300 |
|
BIRMINGHAM, AL |
|
40 |
|
|
|
|
|
|
|
|
Verizon Wireless Music Center -
Birmingham |
|
|
|
Amphitheater |
|
Owned |
|
|
10,550 |
|
NORFOLK PORTSMOUTH NEWPORT
NEWS, VA |
|
42 |
|
|
|
|
|
|
|
|
Verizon Wireless Virginia Beach
Amphitheater |
|
|
|
Amphitheater |
|
30-year lease that expires December 31, 2026 |
|
|
20,000 |
|
LAS VEGAS, NV |
|
43 |
|
|
|
|
|
|
|
|
House of Blues Las Vegas |
|
|
|
House of Blues |
|
15-year lease that expires March 15, 2014 |
|
|
1,800 |
|
ALBUQUERQUE SANTA FE, NM |
|
45 |
|
|
|
|
|
|
|
|
Journal Pavilion |
|
|
|
Amphitheater |
|
20-year lease that expires April 16, 2021 |
|
|
12,000 |
|
Sandia Casino |
|
|
|
Mid-Sized |
|
Booking agreement |
|
|
2,200 |
|
LOUISVILLE, KY |
|
48 |
|
|
|
|
|
|
|
|
Palace Theatre |
|
|
|
Mid-Sized |
|
Owned |
|
|
2,700 |
|
BUFFALO, NY |
|
49 |
|
|
|
|
|
|
|
|
Darien Lake Performing Arts
Center |
|
|
|
Amphitheater |
|
25-year lease that expires October 15, 2020 |
|
|
21,800 |
|
Dome Theatre |
|
|
|
Small-Sized |
|
Booking agreement |
|
|
2,450 |
|
WILKES BARRE SCRANTON, PA |
|
53 |
|
|
|
|
|
|
|
|
Toyota Pavilion at Montage
Mountain |
|
|
|
Amphitheater |
|
10-year lease that expires December 31, 2011 |
|
|
17,500 |
|
NEW ORLEANS, LA |
|
54 |
|
|
|
|
|
|
|
|
House of Blues New Orleans |
|
|
|
House of Blues |
|
35-year lease that expires October 14, 2027 |
|
|
1,000 |
|
ALBANY SCHNECTADY TROY, NY |
|
56 |
|
|
|
|
|
|
|
|
Saratoga Performing Arts Center |
|
|
|
Amphitheater |
|
10-year license agreement that expires September 7, 2009 |
|
|
25,200 |
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
DMA® |
|
|
|
|
|
Estimated |
|
|
|
Region |
|
|
|
|
|
Seating |
|
Market and Venue |
|
Rank (1) |
|
Type of Venue |
|
Live Nations Interest |
|
Capacity |
|
PORTLAND AUBURN, ME |
|
74 |
|
|
|
|
|
|
|
|
Portland Sports Complex |
|
|
|
Mid-Sized |
|
Booking agreement |
|
|
3,500 |
|
State Theater |
|
|
|
Mid-Sized |
|
Booking agreement |
|
|
1,750 |
|
|
|
|
|
|
|
|
|
|
|
|
BATON ROUGE, LA |
|
93 |
|
|
|
|
|
|
|
|
Cypress Bayou Casino |
|
|
|
Mid-Sized |
|
Booking agreement |
|
|
1,860 |
|
|
|
|
|
|
|
|
|
|
|
|
FLORENCE MYRTLE BEACH, SC |
|
105 |
|
|
|
|
|
|
|
|
House of Blues Myrtle Beach |
|
|
|
House of Blues |
|
27-year lease that expires May 31, 2025 |
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
YAKIMA PASCO RICHLAND -
KENNEWICK, WA |
|
125 |
|
|
|
|
|
|
|
|
The Gorge Amphitheatre |
|
|
|
Amphitheater |
|
20-year lease that expires October 31, 2023 |
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
WHEELING, WV / STEUBENVILLE, OH |
|
155 |
|
|
|
|
|
|
|
|
Capitol Music Hall |
|
|
|
Mid-Sized |
|
Owned |
|
|
2,490 |
|
Jamboree in the Hills |
|
|
|
Festival Site |
|
Owned |
|
|
35,000 |
|
|
|
|
|
|
|
|
|
|
|
|
TORONTO, CANADA |
|
N/A |
|
|
|
|
|
|
|
|
Molson Amphitheater |
|
|
|
Amphitheater |
|
50% equity interest |
|
|
16,000 |
|
Koolhaus |
|
|
|
Small-Sized |
|
50% equity interest |
|
|
2,400 |
|
The
Guvernment |
|
|
|
Small-Sized |
|
50% equity interest |
|
|
1,200 |
|
|
|
|
|
|
|
|
|
|
|
|
VANCOUVER, CANADA |
|
N/A |
|
|
|
|
|
|
|
|
Commodore Ballroom |
|
|
|
Small-Sized |
|
50% equity interest |
|
|
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
LEICESTERSHIRE, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Donington Park (2) |
|
|
|
Arena |
|
24-year lease that expires December 31, 2021 |
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
LONDON, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Wembley Arena |
|
|
|
Arena |
|
15-year management agreement that expires March 31, 2021 |
|
|
12,750 |
|
Hammersmith Apollo |
|
|
|
Mid-Sized |
|
125-year lease that expires March 24, 2089 |
|
|
5,035 |
|
Forum |
|
|
|
Mid-Sized |
|
15-year lease that expires March 24, 2020 |
|
|
1,350 |
|
Astoria |
|
|
|
Mid-Sized |
|
15-year lease that expires December 31, 2008 |
|
|
1,800 |
|
Mean Fiddler |
|
|
|
Mid-Sized |
|
15-year lease that expires December 31, 2008 |
|
|
1,000 |
|
Jazz Café |
|
|
|
Small-Sized |
|
25-year lease that expires November 3, 2022 |
|
|
300 |
|
G-A-Y |
|
|
|
Small-Sized |
|
25-year lease that expires October 19, 2024 |
|
|
310 |
|
G-A-Y Late |
|
|
|
Small-Sized |
|
25-year lease that expires November 27, 2028 |
|
|
300 |
|
Borderline |
|
|
|
Small-Sized |
|
25-year lease that expires November 27, 2028 |
|
|
300 |
|
Media |
|
|
|
Small-Sized |
|
Currently not in operation |
|
|
1,380 |
|
Old Fiddler |
|
|
|
Small-Sized |
|
Currently not in operation |
|
|
500 |
|
Garage |
|
|
|
Small-Sized |
|
Currently not in operation |
|
|
500 |
|
Universe |
|
|
|
Small-Sized |
|
Currently not in operation |
|
|
200 |
|
Upstairs at the Garage |
|
|
|
Small-Sized |
|
Currently not in operation |
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
|
MANCHESTER, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Manchester Apollo |
|
|
|
Mid-Sized |
|
Owned |
|
|
3,500 |
|
|
|
|
|
|
|
|
|
|
|
|
READING, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Little Johns Farm |
|
|
|
Festival Site |
|
Owned |
|
|
30,000 |
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
DMA® |
|
|
|
|
|
Estimated |
|
|
|
Region |
|
|
|
|
|
Seating |
|
Market and Venue |
|
Rank (1) |
|
Type of Venue |
|
Live Nations Interest |
|
Capacity |
|
SHEFFIELD, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Hallam FM Arena Sheffield |
|
|
|
Arena |
|
18-year management agreement that expires March 31, 2008 |
|
|
11,250 |
|
|
|
|
|
|
|
|
|
|
|
|
SOUTHAMPTON, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Southampton Guildhall |
|
|
|
Mid-Sized |
|
25-year management agreement that expires February 10, 2028 |
|
|
1,750 |
|
|
|
|
|
|
|
|
|
|
|
|
CARDIFF, WALES |
|
N/A |
|
|
|
|
|
|
|
|
Cardiff International Arena |
|
|
|
Arena |
|
137-year lease that expires December 31, 2131 |
|
|
6,700 |
|
|
|
|
|
|
|
|
|
|
|
|
DUBLIN, IRELAND |
|
N/A |
|
|
|
|
|
|
|
|
The Point |
|
|
|
Arena |
|
Owned |
|
|
8,500 |
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLM, SWEDEN |
|
N/A |
|
|
|
|
|
|
|
|
Cirkus |
|
|
|
Mid-Sized |
|
10-year lease that expires March 31, 2009 |
|
|
3,000 |
|
|
|
|
(1) |
|
DMA® region refers to a United States designated market area as of January 1, 2007.
At that date, there were 210 DMA®s. DMA® is a registered trademark of
Nielsen Media Research, Inc. |
|
(2) |
|
This venue was sold in January 2007. |
At December 31, 2006, we owned, operated, and/or had an equity interests in the following
domestic and international venues. primarily used for theatrical events:
|
|
|
|
|
|
|
|
|
|
|
|
|
DMA® |
|
|
|
|
|
Estimated |
|
|
|
Region Rank |
|
|
|
|
|
Seating |
|
Market and Venue |
|
(1) |
|
Type of Venue |
|
Live Nations Interest |
|
Capacity |
|
NEW YORK, NY |
|
1 |
|
|
|
|
|
|
|
|
Hilton Theatre |
|
|
|
Theatrical Theater |
|
40-year lease that expires December 31, 2038 |
|
|
1,800 |
|
|
|
|
|
|
|
|
|
|
|
|
CHICAGO, IL |
|
3 |
|
|
|
|
|
|
|
|
Ford Center Theater for
the Performing Arts
Oriental Theater |
|
|
|
Theatrical Theater |
|
Owned |
|
|
1,815 |
|
The Cadillac Palace Theater |
|
|
|
Theatrical Theater |
|
50% equity interest |
|
|
2,340 |
|
LaSalle Bank Theatre |
|
|
|
Theatrical Theater |
|
50% equity interest |
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
PHILADELPHIA, PA |
|
4 |
|
|
|
|
|
|
|
|
Merriam Theater |
|
|
|
Theatrical Theater |
|
10-year management agreement that expires August 31, 2010 |
|
|
1,850 |
|
Chestnut Theatre |
|
|
|
Theatrical Theater |
|
Currently not in operation |
|
|
2,350 |
|
|
|
|
|
|
|
|
|
|
|
|
BOSTON, MA |
|
7 |
|
|
|
|
|
|
|
|
The Opera House |
|
|
|
Theatrical Theater |
|
Owned |
|
|
2,700 |
|
Colonial Theatre |
|
|
|
Theatrical Theater |
|
10-year lease that expires August 31, 2011 |
|
|
1,725 |
|
Charles Playhouse |
|
|
|
Theatrical Theater |
|
Owned |
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
WASHINGTON, DC |
|
8 |
|
|
|
|
|
|
|
|
Warner Theatre |
|
|
|
Theatrical Theater |
|
5-year lease that expires September 30, 2007 |
|
|
1,850 |
|
|
|
|
|
|
|
|
|
|
|
|
MINNEAPOLIS, MN |
|
15 |
|
|
|
|
|
|
|
|
Historic Orpheum Theatre |
|
|
|
Theatrical Theater |
|
30-year management agreement that expires December 20, 2035 |
|
|
2,610 |
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
DMA® |
|
|
|
|
|
Estimated |
|
|
|
Region Rank |
|
|
|
|
|
Seating |
|
Market and Venue |
|
(1) |
|
Type of Venue |
|
Live Nations Interest |
|
Capacity |
|
State Theater |
|
|
|
Theatrical Theater |
|
30-year management agreement that expires December 20, 2035 |
|
|
2,160 |
|
Pantages Theatre |
|
|
|
Theatrical Theater |
|
30-year management agreement that expires December 20, 2035 |
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
BALTIMORE, MD |
|
24 |
|
|
|
|
|
|
|
|
Frances-Merrick Performing
Arts Center |
|
|
|
Theatrical Theater |
|
20-year operating agreement that expires June 18, 2022 |
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
TORONTO, CANADA |
|
N/A |
|
|
|
|
|
|
|
|
Canon Theatre |
|
|
|
Theatrical Theater |
|
Owned |
|
|
2,300 |
|
Panasonic Theatre |
|
|
|
Theatrical Theater |
|
Owned |
|
|
710 |
|
|
|
|
|
|
|
|
|
|
|
|
ASHTON-UNDER-LYNE, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Tameside Hippodrome |
|
|
|
Theatrical Theater |
|
15-year management agreement that expires September 30, 2007 |
|
|
1,260 |
|
|
|
|
|
|
|
|
|
|
|
|
BIRMINGHAM, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Alexandra Theatre |
|
|
|
Theatrical Theater |
|
20-year lease that expires February 20, 2014 |
|
|
1,350 |
|
|
|
|
|
|
|
|
|
|
|
|
BRISTOL, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
The Bristol Hippodrome |
|
|
|
Theatrical Theater |
|
Owned |
|
|
1,980 |
|
|
|
|
|
|
|
|
|
|
|
|
FOLKSTONE, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Leas Cliff Hall |
|
|
|
Theatrical Theater |
|
20-year management agreement that expires August 20, 2023 |
|
|
1,510 |
|
|
|
|
|
|
|
|
|
|
|
|
GRIMSBY, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Grimsby Auditorium |
|
|
|
Theatrical Theater |
|
10-year management agreement that expires March 31, 2011 |
|
|
1,700 |
|
|
|
|
|
|
|
|
|
|
|
|
HASTINGS, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
White Rock Theatre |
|
|
|
Theatrical Theater |
|
11-year management agreement that expires March 31, 2013 |
|
|
1,450 |
|
|
|
|
|
|
|
|
|
|
|
|
HAYES, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
The Beck Theatre |
|
|
|
Theatrical Theater |
|
15-year management agreement that expires March 31, 2007 |
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
|
LIVERPOOL, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Liverpool Empire Theatre |
|
|
|
Theatrical Theater |
|
125-year lease that expires June 8, 2127 |
|
|
2,365 |
|
|
|
|
|
|
|
|
|
|
|
|
LONDON, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Lyceum Theatre |
|
|
|
Theatrical Theater |
|
150-year lease that expires November 21, 2138 |
|
|
2,095 |
|
Apollo Victoria Theatre |
|
|
|
Theatrical Theater |
|
Owned |
|
|
2,600 |
|
The Dominion Theatre |
|
|
|
Theatrical Theater |
|
33% equity interest |
|
|
2,100 |
|
|
|
|
|
|
|
|
|
|
|
|
MANCHESTER, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Palace Theatre Manchester |
|
|
|
Theatrical Theater |
|
Owned |
|
|
1,995 |
|
Opera House Manchester |
|
|
|
Theatrical Theater |
|
Owned |
|
|
1,915 |
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
DMA® |
|
|
|
|
|
Estimated |
|
|
|
Region Rank |
|
|
|
|
|
Seating |
|
Market and Venue |
|
(1) |
|
Type of Venue |
|
Live
Nations Interest |
|
Capacity |
|
OXFORD, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
New Oxford Theatre |
|
|
|
Theatrical Theater |
|
75-year lease that expires December 24, 2007 |
|
|
1,780 |
|
O.F.S. Studio |
|
|
|
Theatrical Theater |
|
20-year lease that expires February 22, 2021 |
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
SOUTHPORT, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Southport Theatre |
|
|
|
Theatrical Theater |
|
12-year lease that expires March 31, 2008 |
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
SUNDERLAND, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Sunderland Empire |
|
|
|
Theatrical Theater |
|
25-year management agreement that expires December 31, 2029 |
|
|
2,025 |
|
|
|
|
|
|
|
|
|
|
|
|
TORBAY, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Princess Theatre |
|
|
|
Theatrical Theater |
|
60-year management agreement that expires November 30, 2058 |
|
|
1,490 |
|
|
|
|
|
|
|
|
|
|
|
|
YORK, ENGLAND |
|
N/A |
|
|
|
|
|
|
|
|
Grand Opera House York |
|
|
|
Theatrical Theater |
|
Owned |
|
|
970 |
|
|
|
|
|
|
|
|
|
|
|
|
EDINBURGH, SCOTLAND |
|
N/A |
|
|
|
|
|
|
|
|
The Edinburgh Playhouse |
|
|
|
Theatrical Theater |
|
Owned |
|
|
3,055 |
|
|
|
|
|
|
|
|
|
|
|
|
MADRID, SPAIN |
|
N/A |
|
|
|
|
|
|
|
|
Teatro Rialto |
|
|
|
Theatrical Theater |
|
10-year lease that expires February 28, 2014 |
|
|
1,100 |
|
|
|
|
(1) |
|
DMA® region refers to a United States designated market area as of January 1, 2007.
At that date, there were 210 DMA®s. DMA® is a registered trademark of
Nielsen Media Research, Inc. |
The following table summarizes the number of venues by type that we owned, operated, had
booking rights for and/or had an equity interest in as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Booking |
|
Equity |
|
|
Venue Type |
|
Capacity |
|
Owned |
|
Leased |
|
Operated |
|
Rights |
|
Interest |
|
Total |
Music Venues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Festival Site |
|
10,000 120,000 |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Amphitheater |
|
5,000 30,000 |
|
|
11 |
|
|
|
28 |
|
|
|
5 |
|
|
|
7 |
|
|
|
2 |
|
|
|
53 |
|
Arena |
|
5,000 20,000 |
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
|
|
|
|
9 |
|
Mid-Sized Music Venue |
|
1,000 5,000 |
|
|
6 |
|
|
|
15 |
|
|
|
2 |
|
|
|
7 |
|
|
|
1 |
|
|
|
31 |
|
Small-Sized Music Venue |
|
Less than 1,000 |
|
|
2 |
|
|
|
11 |
|
|
|
1 |
|
|
|
7 |
|
|
|
3 |
|
|
|
24 |
|
House of Blues |
|
1,000 2,000 |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
|
|
22 |
|
|
|
66 |
|
|
|
10 |
|
|
|
25 |
|
|
|
6 |
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatrical Theater |
|
Less than 5,000 |
|
|
11 |
|
|
|
9 |
|
|
|
13 |
|
|
|
|
|
|
|
3 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
33 |
|
|
|
75 |
|
|
|
23 |
|
|
|
25 |
|
|
|
9 |
|
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Venues currently not in operation |
|
|
|
|
2 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
18
Digital Distribution
Within our Digital Distribution segment, we are engaged in managing our third-party ticketing
relationships, in-house ticketing operations and online and wireless distribution activities,
including the development of our website. This segment derives the majority of its revenues from
ticket rebates earned on tickets sold through phone, outlet and internet, for events promoted
and/or presented by our Events segment. The sale of the majority of these tickets is outsourced
with our share of ticket rebates recorded in revenue with no significant direct operating expenses
associated with it.
Other
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 terms 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, 2006, we had sold the majority of our sports representation business
assets.
Competition
Competition in the live entertainment industry is intense. We believe that 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:
|
|
|
the quality of service delivered to our clients; |
|
|
|
|
our track record in promoting and producing live entertainment events and tours both in
the United States and internationally; |
|
|
|
|
the scope and effectiveness of our expertise of marketing and sponsorship programs; and |
|
|
|
|
our 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.
Events. 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.
Our main competitors in the North American live music industry include Anschutz Entertainment
Group, Jam Productions and Palace Sports & Entertainment, in addition to numerous smaller regional
companies and various casinos in North America and Europe. Anschutz Entertainment Group operates
under a number of different names including AEG Live, Concerts West and The Messina Group. 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.
In the markets in which we present theatrical performances, we compete with other presenters
to obtain presentation arrangements with venues and performing arts organizations, 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.
19
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 in North America. In Europe, our competitors include Cameron Mackintosh, Really Useful
Theater Group and Ambassadors Theatre Group, as well as smaller regional players. Some of our
competitors in the theatrical industry 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.
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.
Venues and Sponsorship. In markets where we own and/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. Our main competitors in
the venue management industry include SMG and Anschutz Entertainment Group, in addition to numerous
smaller regional companies and various casinos in North America and Europe. Some of our
competitors in the venue management industry have a greater number of venues in certain markets as
well as greater financial resources and brand recognition in those markets.
Our main competitors at the local market level for sponsorship consists of local sports teams
with their new state of the art venues and strong local media packages. Additionally, our
competitors locally can include festivals, theme parks and other local events. On the national
level, our competitors include the major sports leagues that all sell sponsorships combined with
significant national media packages.
Digital Distribution. In the online environment, we compete with other website companies to
provide event information, sell tickets and provide other online services such as fan clubs and
artist websites. Our main competitors for online event sites include Ticketmaster, Tickets.com and
other secondary ticketing companies.
Our Relationship with Clear Channel
In connection with our separation from Clear Channel, we entered into certain agreements with
Clear Channel. The key terms of the principal agreements that continue to be operative are
discussed in Note J to the consolidated and combined financial statements, under Item 8. Financial
Statements and Supplementary Data and are summarized below:
Transition Services Agreement. In December 2005, we entered into a transition services
agreement with an affiliate of Clear Channel, pursuant to which that affiliate has provided
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 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 is based on various measures depending
on the service provided, including relative revenue, employee headcount or number of users of a
service. As of December 31, 2006, the only significant services that Clear Channel continues to
provide are information systems related services.
Tax Matters Agreement. In December 2005, we entered into a tax matters agreement with Clear
Channel 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.
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:
20
|
|
|
licensing and permitting; |
|
|
|
|
human health, safety and sanitation requirements; |
|
|
|
|
the service of food and alcoholic beverages; |
|
|
|
|
working conditions, labor, minimum wage and hour, citizenship, and employment laws; |
|
|
|
|
compliance with The Americans with Disabilities Act of 1990 and the United Kingdoms
Disability Discrimination Act 1995; |
|
|
|
|
sales and other taxes and withholding of taxes; |
|
|
|
|
historic landmark rules; and |
|
|
|
|
environmental protection. |
We believe that our venues are in material compliance with these laws. The regulations
relating to our food and support service in our venues are many and complex. A variety of
regulations at various governmental levels relating to the handling, preparation and serving of
food (including in some cases requirements relating to the temperature of food), the cleanliness of
food production facilities, and the hygiene of food-handling personnel are enforced primarily at
the local public health department level.
We also must comply with applicable licensing laws, as well as state and local service laws,
commonly called dram shop statutes. Dram shop statutes generally prohibit serving alcoholic
beverages to certain persons such as an individual who is intoxicated or a minor. If we violate
dram shop laws, we may be liable to third parties for the acts of the patron. Although we generally
hire outside vendors to provide these services at our larger 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 effect on our business. For example, some legislatures have proposed laws in the past that
would impose potential liability on us and other promoters and producers of live entertainment
events for entertainment taxes and for 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.
Employees
At December 31, 2006, we had approximately 4,400 full-time employees, including 3,200 domestic
and 1,200 international employees, of which approximately 4,300 were employed in our operations
departments and approximately 100 were employed in our corporate area.
Our staffing needs vary significantly throughout the year. Therefore, we also, from time to
time, employ part-time or seasonal employees. At December 31, 2006, we employed approximately 5,400
seasonal part-time employees and during peak seasonal periods, particularly in the summer months,
we have employed as many as 15,300 seasonal 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
21
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 and/or operated venues or at our produced
and/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.
Executive Officers
Set forth below are the names and ages and current positions of our executive officers and
other significant employees as of February 23, 2007.
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
Michael Rapino
|
|
|
41 |
|
|
President and Chief Executive Officer and
Director |
Alan Ridgeway
|
|
|
40 |
|
|
Chief Financial Officer |
Kathy Willard
|
|
|
40 |
|
|
Chief Accounting Officer |
Michael Rowles
|
|
|
41 |
|
|
General Counsel |
Bruce Eskowitz
|
|
|
48 |
|
|
Chief Executive Officer North American Music |
Arthur Fogel
|
|
|
53 |
|
|
Chairman Global Music |
Thomas O. Johansson
|
|
|
58 |
|
|
Chairman International Music |
David I. Lane
|
|
|
46 |
|
|
Chairman Global Theatre and Chief Executive
Officer European Theatre |
Bryan Perez
|
|
|
39 |
|
|
President Global Digital |
Carl B. Pernow
|
|
|
45 |
|
|
President International Music |
Steve K. Winton
|
|
|
45 |
|
|
Chief Executive Officer North American
Theater |
Michael Rapino is our Chief Executive Officer and has served in this capacity since August
2005. He has also been on our board of directors since December 2005. From August 2004 to August
2005, Mr. Rapino was Chief Executive Officer and President of our Global Music division. From July
2003 to July 2004, Mr. Rapino served as Chief Executive Officer and President of our International
Music division. From July 2001 to 2003, Mr. Rapino served as Chief Executive Officer of our
European Music division. Prior to July 2001, Mr. Rapino was an executive in our marketing services
group.
Alan Ridgeway is our Chief Financial Officer and has served in this capacity since September
2005. Prior to that, Mr. Ridgeway served as President of our European Music division. From October
2003 to 2004, Mr. Ridgeway was Chief Operating Officer of the European Music division. Mr. Ridgeway
served as Chief Financial Officer for the European Music division from January 2002 to October
2003. Previously, he was Finance Director for Hertz Rent-A-Cars French operation.
Kathy Willard is our Chief Accounting Officer and has served in this capacity since September
2005. Prior to that, Ms. Willard served as Chief Financial Officer of Clear Channel Entertainment
from December 2004 to September 2005. From January 2001 to December 2004 she served as Senior Vice
President and Chief Accounting Officer of Clear Channel Entertainment.
Michael Rowles is our General Counsel and has served in this capacity since March 2006.
Previously, Mr. Rowles served as Senior Vice President, General Counsel and Secretary of
Entravision Communications Corporation since September 2000.
Bruce Eskowitz is the Chief Executive Officer of our North American Music division and has
served in this capacity since January 2007. From October 2005 to December 2006, Mr. Eskowitz was
President and Chief Executive Officer of our Global Venues and Alliances division. Prior to that,
he served as President and Chief Executive Officer of our Properties division from 2004 to October
2005. Prior to 2004, Mr. Eskowitz was President of our National Sales and Marketing division.
Arthur Fogel is the Chairman of our Global Music division and has served in this capacity
since 2005. Previously, Mr. Fogel served as President of our Music Touring division since 1999.
22
Thomas O. Johansson is the Chairman of our International Music division and has served in this
capacity since September 2004. Previously, Mr. Johansson served as the Chief Executive Officer of
our subsidiary EMA Telstar Group, a company he founded in April 1969 and which we acquired in 1999.
David I. Lane is the Chairman of our Global Theatre division and Chief Executive Officer of
our European Theatre division and has served in these capacities since 2005 and 2001, respectively.
Bryan Perez is the President of our Global Digital group and has served in this capacity since
September 2005. Prior to that, Mr. Perez served as our Executive Vice President of Strategy and
Business Development. From October 2002 through 2004, Mr. Perez was Executive Vice President of
Marketing and Communications for the Dallas Stars Hockey Club. Previously, he was Executive Vice
President of Business Development for Southwest Sports Group, LLC.
Carl B. Pernow is the President of our International Music division and has served in this
capacity since September 2005. From 2004 to September 2005 he served as the Chief Financial Officer
for our European Music division. From 1995 to 2004, he served as the Chief Financial Officer for
our EMA Telstar Group, which the Company acquired in 1999.
Steven K. Winton is the Chief Executive Officer of our North American Theater division and has
served in this capacity since May 2005. From January through March, 2005, Mr. Winton was President
and Chief Operating Officer of the Naples Philharmonic Center in Naples Florida. In 2004, Mr.
Winton served as the President of our North American Theater division. From 2002 to 2003, Mr.
Winton was the Chief Operating Officer of our European Theater division. Previously, Mr. Winton was
an Executive Vice President of our European Theatre division.
Available Information
We are required to file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission, or the 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.
Item 1A. Risk Factors
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. 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 $679.1 million at December 31, 2006. Our available borrowing capacity as of December 31, 2006
under our senior secured credit facility is approximately $835.0 million, consisting of our $550.0
million term loan facility, $546.8 million of which is outstanding, and our $285.0 million
revolving credit facility, $48.0 million of which is outstanding, with sub-limits up to $235.0
million available for letters of credit. At December 31, 2006, outstanding letters of credit were
approximately $44.0 million leaving total available credit of $193.0 million for future borrowings.
We may also incur additional substantial indebtedness in the future.
Our substantial indebtedness could have adverse consequences, including:
23
|
|
increasing our vulnerability to adverse economic, regulatory and industry conditions; |
|
|
|
limiting our ability to compete and our flexibility in planning for, or reacting to, changes in our business and the industry; |
|
|
|
limiting our ability to borrow additional funds; and |
|
|
|
requiring us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, thereby reducing funds available for working capital, capital
expenditures, acquisitions and other purposes. |
In addition, our $40 million of 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.
As of December 31, 2006, we also had approximately $1.1 billion in operating lease agreement
obligations, of which approximately $71.7 million is due in 2007 and $68.9 million is due in 2008.
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, 2006, approximately $31.7 million of our total
indebtedness (excluding interest) is due in 2007, $13.8 million is due in the aggregate for 2008
and 2009, $54.1 million is due in the aggregate for 2010 and 2011, and $579.5 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 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. 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. Our ability to issue additional equity may be constrained because the issuance of
additional stock may cause the Distribution to be taxable under section 355(e) of the Internal
Revenue Code, and, under our tax matters agreement with Clear Channel, we would be required to
indemnify Clear Channel against the tax, if any. 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.
24
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. |
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.
Any inability to fund the significant up-front cash requirements associated with our touring
business could result in the loss of key tours.
In order to secure a tour, including global tours by major artists, we are often required to
post a letter of credit or advance cash to the artist prior to the sale of any tickets for that
tour. If we do not have sufficient cash on hand or capacity under our revolving credit facility to
advance the necessary cash or post the required letter of credit, for any given tour, we would not
be able to promote that tour and our touring business would be negatively impacted.
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. We have cancellation insurance policies in place to cover
our losses if an performer cancels a tour. Furthermore, consumer preferences change from time to
time, and our failure to anticipate, identify or react to these changes could result in reduced
demand for our services, which would adversely affect our operating results and profitability.
We have incurred net losses and may experience future net losses.
25
Our operating results have been adversely affected by, among other things, increased cost of
entertainers and a decline in the number of live entertainment events. We incurred net losses of
approximately $31.4 million and $130.6 million for the years ended December 31, 2006 and 2005,
respectively, while we generated net income of approximately $16.3 million for the year ended
December 31, 2004. We may face reduced demand for our live entertainment events and other factors
that could adversely affect our results of operations in the future. We cannot predict whether we
will achieve profitability in future periods.
Our operations are seasonal and our results of operations vary from quarter to quarter and year
over year, so our financial performance in certain financial quarters or years may not be
indicative of or comparable to our financial performance in subsequent financial quarters or
years.
We believe our financial results and cash needs will vary greatly from quarter to quarter and
year to year depending on, among other things, the timing of tours and theatrical productions, tour
cancellations, capital expenditures, seasonal and other fluctuations in our operating results, the
timing of guaranteed payments and receipt of ticket sales, financing activities, acquisitions and
investments and receivables management. Because our results may vary significantly from quarter to
quarter and year to year, our financial results for one quarter or year cannot necessarily be
compared to another quarter or year and may not be indicative of our future financial performance
in subsequent quarters or years. Typically, we experience our lowest financial performance in the
first and fourth quarters of the calendar year as our outdoor venues are primarily used, and our
festivals occur, during May through September. In addition, the timing of tours of top grossing
acts can impact comparability of quarterly results year over year and potentially annual results.
The following table sets forth our operating income (loss) for the last eight fiscal quarters
(in thousands):
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Operating |
Fiscal Quarter |
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income (loss) |
March 31, 2005 |
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$ |
(27,526 |
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June 30, 2005 |
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$ |
15,258 |
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September 30, 2005 |
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$ |
61,868 |
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December 31, 2005 |
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$ |
(62,783 |
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March 31, 2006 |
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$ |
8,063 |
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June 30, 2006 |
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$ |
11,682 |
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September 30, 2006 |
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$ |
27,567 |
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December 31, 2006 |
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$ |
(17,048 |
) |
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 may have an
adverse effect on our revenues and operating income. In addition, during the most recent economic
slowdown in the United States, many consumers reduced their discretionary spending and advertisers
reduced their advertising expenditures. The impact of slowdowns on our business is difficult to
predict, but they may result in reductions in ticket sales, sponsorship opportunities and our
ability to generate revenues. The risks associated with our businesses become more acute in periods
of a slowing economy or recession, which may be accompanied by a decrease in attendance at live
entertainment events.
Our business depends on discretionary consumer and corporate spending. Many factors related to
corporate spending and discretionary consumer spending, including economic conditions affecting
disposable consumer income such as employment, fuel prices, interest and tax rates and inflation
can significantly impact our operating results. Business conditions, as well as various industry
conditions, including corporate marketing and promotional spending and interest levels, can also
significantly impact our operating results. These factors can affect attendance at our events,
premium seats, sponsorship, advertising and hospitality spending, concession and souvenir sales, as
well as the financial results of sponsors of our venues, events and the industry. Negative factors
such as challenging economic conditions, public concerns over additional terrorism and security
incidents, particularly when combined, can impact corporate and consumer spending, and one negative
factor can impact our results more than another. There can be no assurance that consumer and
corporate spending will not be adversely impacted by economic conditions, thereby possibly
impacting our operating results and growth.
Loss of our key management and other personnel could impact our business.
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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, 2006 and 2005, our international
operations accounted for approximately 28% and 31%, respectively, of our revenues during those
periods. The risks involved in foreign operations that could result in losses against which we are
not insured include:
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exposure to local economic conditions; |
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potential adverse changes in the diplomatic relations of foreign countries with the United States; |
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hostility from local populations; |
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restrictions on the withdrawal of foreign investment and earnings; |
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government policies against businesses owned by foreigners; |
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investment restrictions or requirements; |
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expropriations of property; |
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potential instability of foreign governments; |
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risks of insurrections; |
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risks of renegotiation or modification of existing agreements with governmental authorities; |
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diminished ability to legally enforce our contractual rights in foreign countries; |
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foreign exchange restrictions; |
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withholding and other taxes on remittances and other payments by subsidiaries; and |
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changes in foreign taxation structures. |
In addition, we may incur substantial tax liabilities if we repatriate any of the cash
generated by our international operations back to the United States due to our current inability to
recognize any foreign tax credits that would be associated with such repatriation. We are not
currently in a position to recognize any tax assets in the United States that are the result of
payments of income or withholding taxes in foreign jurisdictions.
Exchange rates may cause fluctuations in our results of operations that are not related to our
operations.
Because we own assets overseas and derive revenues from our international operations, we may
incur currency translation losses or gains due to changes in the values of foreign currencies
relative to the United States Dollar. We cannot predict the effect of exchange rate fluctuations
upon future operating results. For the years ended December 31, 2006 and 2005, our international
operations accounted for approximately 28% and 31%, respectively, of our revenues during those
periods. Although we cannot predict the future relationship between the United States Dollar and
the currencies used by our international businesses, principally the British Pound and the Euro,
for the years ended December 31, 2006 and 2004, we experienced foreign exchange rate net gains of
$3.2 million and $6.3 million, respectively, for those periods, which had a positive effect on our
operating income, while 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
27
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 our senior secured credit facility restrict our ability to make
acquisitions.
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
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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, 2006, we had property and
equipment with a net book value of approximately $876.2 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. |
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. |
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 often
contract with a third-party vendor for these services at our operated venues, in other cases we
provide these services ourselves. We cannot assure you that we or our third-party vendors are in
full compliance with all applicable laws and regulations at all times or that we or our third-party
vendors will be able to comply with any future laws and regulations or that we will not be held
liable for violations by third-party vendors. Furthermore, additional or amended regulations in
this area may significantly increase the cost of compliance.
We also serve alcoholic beverages at many of our venues during live entertainment events and
must comply with applicable licensing laws, as well as state and local service laws, commonly
called dram shop statutes. Dram shop statutes generally prohibit serving alcoholic beverages to
certain persons such as an individual who is intoxicated or a minor. If we violate dram shop laws,
we may be liable to third parties for the acts of the patron. Although we generally hire outside
vendors to provide these services at our operated venues and regularly sponsor training programs
designed to minimize the likelihood of such a situation, we cannot guarantee that intoxicated or
minor patrons will not be served or that liability for their acts will not be imposed on us. There
can be no assurance that additional regulation in this area would not limit our activities in the
future or significantly increase the cost of regulatory compliance. We must also obtain and comply
with the terms of licenses in order to sell alcoholic beverages in the states in which we serve
alcoholic beverages.
From time to time, state and federal governmental bodies have proposed legislation that could
have an effect on our business. For example, some legislatures have proposed laws in the past that
would impose potential liability on us and other promoters and producers of live entertainment
events for entertainment taxes and for incidents that occur at our events, particularly relating to
drugs and alcohol.
In addition, we and our venues are subject to extensive environmental laws and regulations
relating to the use, storage, disposal, emission and release of hazardous and non-hazardous
substances, as well as zoning and noise level restrictions which may affect, among other things,
the hours of operations of our venues.
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 live entertainment
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 or to obtain events for the venues they operate; |
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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 we currently offer, which may
lead to reduction in attendance at live events, a loss of ticket sales or to lower ticket
prices; |
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other entertainment options available to our audiences that we do not offer; |
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unfavorable changes in labor conditions which may require us to spend more to retain and attract key employees; and |
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unfavorable shifts in population and other demographics which may cause us to lose
audiences as people migrate to markets where we have a smaller presence, or which may cause
sponsors to be unwilling to pay for sponsorship and advertising opportunities if the general
population shifts into a less desirable age or geographical demographic from an advertising
perspective. |
We believe that barriers to entry into the live entertainment promotion business are low and
that certain local promoters are increasingly expanding the geographic scope of their operations.
We depend upon unionized labor for the provision of some of our services and any work stoppages
or labor disturbances could disrupt our business.
The stagehands at some of our venues, and the actors, musicians and others involved in some of
our business operations are subject to collective bargaining agreements. Our union agreements
typically have a term of three years and thus regularly expire and require negotiation in the
course of our business. Upon the expiration of any of our collective bargaining agreements,
however, we may be unable to negotiate new collective bargaining agreements on terms favorable to
us, and our business operations may be interrupted as a result of labor disputes or difficulties
and delays in the process of renegotiating our collective bargaining agreements. A work stoppage at
one or more of our owned and/or operated venues or at our produced and/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.
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. |
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, 2006 and 2005, we spent
approximately 5.7% and 6.1%, 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.
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.
Our revenues may be impacted by our ability to successfully renegotiate or replace certain key
operating contracts.
We currently have key operating contracts with certain third parties that, from time-to-time,
expire. The future expiration of these contracts will require us to either successfully
renegotiate and renew the existing contracts or replace them with suitable alternatives. There can
be no assurance that such efforts to retain or replace key contracts will be successful and we are
unable to estimate the impact on future results of operations.
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
compliance with corporate governance and securities disclosure requirements, and require an ongoing
review of our internal control procedures. These requirements could make it more difficult for us
to attract and retain qualified members of our board of directors, or qualified executive officers.
In addition, 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
continue to evaluate and monitor 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 conduct a comprehensive evaluation of its and
its consolidated subsidiaries internal control over financial reporting. To comply with this
statute, we are required to document and test our internal control procedures; our management is
required to assess and issue a report concerning our internal control over financial reporting; and
our independent auditors are required to issue an
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opinion on managements assessment of those matters. The rules governing the standards that
must be met for management to assess our internal control over financial reporting are 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 remediated 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.
Our efforts to comply with these regulations have resulted in, and are likely to continue resulting
in, increased general and administrative expenses and diversion of management time and attention
from revenue generating activities to compliance activities.
We may be adversely affected by the occurrence of extraordinary events, such as terrorist
attacks.
The occurrence and threat of extraordinary events, such as terrorist attacks, intentional or
unintentional mass-casualty incidents, natural disasters or similar events, may substantially
decrease the use of and demand for our services and the attendance at live entertainment events,
which may decrease our revenues or expose us to substantial liability. The terrorism and security
incidents of September 11, 2001, military actions in Iraq, and periodic elevated terrorism alerts
have raised numerous challenging operating factors, including public concerns regarding air travel,
military actions and additional national or local catastrophic incidents, causing a nationwide
disruption of commercial and leisure activities.
Following September 11, 2001, some artists refused to travel or book tours, which adversely
affected our music business, and many people did not travel to New York City, which caused us to
experience lower attendance levels at our theatrical performances playing on Broadway in New York
City and adversely affected our theatrical business. The occurrence of the 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 publication by securities analysts of financial estimates or reports about our business; |
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|
changes by securities analysts of earnings estimates or reports, or our inability to meet
those estimates or achieve any goals described in those reports; |
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the disclosure of facts about our business that may differ from those assumed by
securities analysts in preparing their estimates or reports about our company; |
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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. |
33
In particular, the realization of any of the risks described in these Risk Factors could have
a significant and adverse impact on the market price of our common stock. In addition, the stock
market in general has experienced extreme price and volume volatility that has often been unrelated
to the operating performance of particular companies. This volatility has had a significant impact
on the market price of securities issued by many companies, including companies in our industry.
The changes frequently appear to occur without regard to the operating performance of these
companies. The price of our common stock could fluctuate based upon factors that have little or
nothing to do with our company, and these fluctuations could materially reduce our stock price.
The price of our common stock may fluctuate significantly, and you could lose all or part of the
value of your common stock.
In recent years, the stock market has experienced extreme price and volume fluctuations. This
volatility has had a significant impact on the market price of securities issued by many companies,
including companies in our industry. The changes frequently appear to occur without regard to the
operating performance of these companies. The price of our common stock could fluctuate based upon
factors that have little or nothing to do with our company, and these fluctuations could materially
reduce our stock price.
In the past, some companies that have had volatile market prices for their securities have
been subject to securities class action suits filed against them. If a suit were to be filed
against us, regardless of the outcome, it could result in substantial legal costs and a diversion
of our managements attention and resources. This could have a material adverse effect on our
business, results of operations and financial condition.
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 twelve directors are also directors of Clear
Channel. 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 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 acquires knowledge of a potential transaction or
matter which may be a corporate opportunity for both us and Clear Channel, 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. Clear Channel 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 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.
34
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.
Risks Relating to Our Separation from Clear Channel
The cost of certain corporate functions necessary to operate as an independent company,
previously provided by Clear Channel, may increase.
Prior to the Separation, our business was operated by Clear Channel 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. Those
allocations may be less than the comparable expenses we would have incurred had we operated as a
separate publicly-traded company. Clear Channel performed various corporate functions for us,
including, but not limited to selected human resources related functions; tax administration;
selected legal functions (including compliance with the Sarbanes-Oxley Act of 2002), as well as
external reporting; treasury administration, investor relations, internal audit and insurance
functions; and selected information technology and telecommunications services.
We have now implemented, or are in the process of implementing these functions. As we
continue to implement these functions, the costs may be higher than previous years allocations or
current estimates and our losses may increase.
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.
In December 2005, we were spun-off from Clear Channel, 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 for years prior to 2006 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. As a result of our
separation, Clear Channel 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,
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 Channels 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. |
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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. These
changes may result in increased costs associated with reduced economies of scale, stand-alone
costs for services previously provided by Clear Channel, the need for additional personnel to
perform services previously provided by Clear Channel and the legal, accounting, compliance
and other costs associated with being a public company with equity securities listed on a
national stock exchange. During 2006, we continued to use on a temporary basis certain
services of Clear Channel under the transition services agreement. We have now implemented,
or are in the process of implementing these functions. As we continue to implement these
functions, the costs may be higher than previous years allocations or current estimates and
our losses may increase. |
The Separation could result in significant tax liability to our initial public shareholders.
Clear Channel 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.
35
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 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 made it a
condition to the Separation that Clear Channel 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 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 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 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 could be subject to significant United
States federal income tax liability. In general, Clear Channel 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 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 or us. For this
purpose, any acquisitions of Clear Channel 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 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, we have agreed in the tax matters agreement to indemnify Clear
Channel 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 is responsible, we and Clear Channel 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 reported a $2.4 billion capital loss as a result of the Separation. See
Item 8. Financial Statements and Supplementary Data Note J Related-Party Transactions
Relationship with Clear Channel for a more detailed discussion of the tax matters agreement between
Clear Channel and us.
We could be liable for income taxes owed by Clear Channel.
Each member of the Clear Channel consolidated group, which includes Clear Channel, our company
and our subsidiaries through December 21, 2005, and Clear Channels 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 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 has recognized a capital loss for United States
federal income tax purposes in connection with the Separation. If Clear Channel 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
for the lost tax benefits that Clear Channel would have otherwise realized if it were able to
deduct this loss. See Item 8. Financial Statements and Supplementary Data Note J Related-Party
Transactions Relationship with Clear Channel.
36
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2006, we own, operate or lease 94 venues and 49 facilities, including
office leases, throughout North America and 37 venues and 31 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,
events and venues and sponsorship 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 events
international operations management staff.
Our leases are for varying terms ranging from monthly to multi-year. These leases can
typically 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
We were a defendant in a lawsuit filed by Melinda Heerwagen on June 13, 2002, in the U.S.
District Court for the Southern District of New York. The plaintiff, on behalf of a putative class
consisting of certain concert ticket purchasers, alleged 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 U.S. Court of Appeals for the Second Circuit. On January
10, 2006, the U.S. Court of Appeals for the Second Circuit 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 a defendant in twenty-two putative class actions filed by different named plaintiffs in
various U.S. District Courts throughout the country. The claims made in these actions are
substantially similar to the claims made in the Heerwagen action described above, except that the
geographic markets alleged are regional, statewide or more 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. The plaintiffs seek unspecified compensatory, punitive and treble
damages, declaratory and injunctive relief and costs of suit, including attorneys fees. We have
filed our answers in some of these actions, and we have denied liability. On December 5, 2005, we
filed a motion before the Judicial Panel on Multidistrict Litigation to transfer these actions and
any similar ones commenced in the future to a single federal district court for coordinated
pre-trial proceedings. On April 17, 2006, the Panel granted our motion and ordered the
consolidation and transfer of the actions to the U.S. District Court for the Central District of
California. The Court has set a hearing on motions for class certification for April 23, 2007, and
trial is set for December 11, 2007. We intend to vigorously defend all claims in all of the
actions.
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
settlement or other losses for the resolution of any outstanding 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, we have assumed and will indemnify Clear Channel 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.
37
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder 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 3,632 shareholders of record as of February 23, 2007. 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
sales prices of the common stock on the New York Stock Exchange during the calendar quarter
indicated and the dividends declared during such quarter.
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Common Stock |
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|
Market Price |
|
Dividends |
|
|
High |
|
Low |
|
Declared |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter (commencing December 21, 2005) |
|
$ |
14.00 |
|
|
$ |
10.55 |
|
|
$ |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
19.99 |
|
|
$ |
12.77 |
|
|
$ |
|
|
Second Quarter |
|
$ |
24.90 |
|
|
$ |
18.87 |
|
|
$ |
|
|
Third Quarter |
|
$ |
22.66 |
|
|
$ |
18.17 |
|
|
$ |
|
|
Fourth Quarter |
|
$ |
24.66 |
|
|
$ |
19.60 |
|
|
$ |
|
|
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
In December 2005, our board of directors authorized a $150 million share repurchase program.
The program was completed on December 31, 2006, at which time we had repurchased 3.4 million shares
for an aggregate purchase price of $42.7 million, including commissions and fees, under the
repurchase program. There were no repurchases made during the fourth quarter of 2006.
Equity Compensation Plans
Information regarding our equity compensation plans is incorporated by reference from Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of
this annual report for Form 10-K and should be considered an integral part of this Item 5.
38
Item 6. Selected Financial Data
(In thousands, except per share data)
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Year Ended December 31, (1) (3) |
|
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Results of Operations Data: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
2,473,319 |
|
|
$ |
2,707,902 |
|
|
$ |
2,806,128 |
|
|
$ |
2,936,845 |
|
|
$ |
3,691,559 |
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses |
|
|
1,853,096 |
|
|
|
2,039,499 |
|
|
|
2,185,127 |
|
|
|
2,310,925 |
|
|
|
2,981,801 |
|
Selling, general and administrative expenses |
|
|
449,611 |
|
|
|
467,136 |
|
|
|
460,166 |
|
|
|
518,907 |
|
|
|
529,104 |
|
Depreciation and amortization |
|
|
64,836 |
|
|
|
63,436 |
|
|
|
64,095 |
|
|
|
64,622 |
|
|
|
128,167 |
|
Loss (gain) on sale of operating assets |
|
|
(15,241 |
) |
|
|
(978 |
) |
|
|
6,371 |
|
|
|
4,859 |
|
|
|
(11,640 |
) |
Corporate expenses |
|
|
26,101 |
|
|
|
30,820 |
|
|
|
31,386 |
|
|
|
50,715 |
|
|
|
33,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
94,916 |
|
|
|
107,989 |
|
|
|
58,983 |
|
|
|
(13,183 |
) |
|
|
30,264 |
|
Interest expense |
|
|
3,998 |
|
|
|
2,788 |
|
|
|
3,119 |
|
|
|
6,059 |
|
|
|
37,218 |
|
Interest expense with Clear Channel Communications |
|
|
58,608 |
|
|
|
41,415 |
|
|
|
42,355 |
|
|
|
46,437 |
|
|
|
|
|
Interest income |
|
|
(2,102 |
) |
|
|
(6,870 |
) |
|
|
(3,221 |
) |
|
|
(2,506 |
) |
|
|
(12,446 |
) |
Equity in losses (earnings) of nonconsolidated affiliates |
|
|
212 |
|
|
|
(1,357 |
) |
|
|
(2,906 |
) |
|
|
276 |
|
|
|
(11,265 |
) |
Minority interest expense |
|
|
3,794 |
|
|
|
3,280 |
|
|
|
3,300 |
|
|
|
5,236 |
|
|
|
12,209 |
|
Other expense (income) net |
|
|
(2,024 |
) |
|
|
366 |
|
|
|
1,611 |
|
|
|
446 |
|
|
|
(1,220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative effect of a change in
accounting principle |
|
|
32,430 |
|
|
|
68,367 |
|
|
|
14,725 |
|
|
|
(69,131 |
) |
|
|
5,768 |
|
Income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
40,102 |
|
|
|
(68,272 |
) |
|
|
(55,946 |
) |
|
|
(53,025 |
) |
|
|
26,876 |
|
Deferred |
|
|
(11,103 |
) |
|
|
79,607 |
|
|
|
54,411 |
|
|
|
114,513 |
|
|
|
10,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of a change in accounting principle |
|
|
3,431 |
|
|
|
57,032 |
|
|
|
16,260 |
|
|
|
(130,619 |
) |
|
|
(31,442 |
) |
Cumulative effect of a change in accounting principle, net of tax of $198,640(2) |
|
|
3,932,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(3,928,576 |
) |
|
$ |
57,032 |
|
|
$ |
16,260 |
|
|
$ |
(130,619 |
) |
|
$ |
(31,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss before cumulative effect of a change in accounting
principle per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1.96 |
) |
|
$ |
(0.48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, (1) (3) |
(in thousands) |
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,518,644 |
|
|
$ |
1,495,715 |
|
|
$ |
1,478,706 |
|
|
$ |
1,776,584 |
|
|
$ |
2,225,002 |
|
Long-term debt, including current maturities |
|
$ |
622,831 |
|
|
$ |
617,838 |
|
|
$ |
650,675 |
|
|
$ |
366,841 |
|
|
$ |
639,146 |
|
Redeemable preferred stock |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
40,000 |
|
|
$ |
40,000 |
|
Business/Shareholders equity |
|
$ |
230,914 |
|
|
$ |
188,283 |
|
|
$ |
156,976 |
|
|
$ |
636,700 |
|
|
$ |
638,662 |
|
|
|
|
(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 a change in accounting principle for the year ended December 31, 2002,
related to impairment of goodwill recognized in accordance with the adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. |
|
(3) |
|
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, using the historical bases of assets and liabilities of the entertainment
business. As a result of the Separation, 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
contributed at that time. |
|
|
|
The Selected Financial Data should be read in conjunction with Managements Discussion and
Analysis. |
39
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
Beginning in 2006, we adjusted our reportable segments due to a reorganization of our business
and a change in the way in which management views and manages our business. Our new segments are
Events, Venues and Sponsorship, and Digital Distribution. In addition, we have operations in the
sports representation and other businesses, which are included under other.
This has been the first year of our transformation of Live Nation from a broad-based live
entertainment company to a company focused on bringing live events and related products to music
fans worldwide. This transformation has involved exiting some of our non-music businesses and
acquiring other businesses involved in live music promotion and production and complementary
services.
The highlights for each of our segments for 2006 are:
Events
|
|
|
For the year ended December 31, 2006, our number of
events increased by 1,851 events to
16,299, a 13% increase over the same period of the prior year. |
|
|
|
|
Of particular importance, we held 923 events in our owned and/or operated amphitheaters, an increase of 155 events in those venues over the prior year. This increase in events, while resulting in
lower operating income due to higher event costs for our Events segment for the year,
allowed us to increase overall operating income through higher food and beverage sales and
sponsorships, reflected in our Venues and Sponsorship segment, and increased ticket rebates
reflected in our Digital Distribution segment. |
|
|
|
|
Our acquisition of a controlling interest in CPI in May 2006, brought new global tours
with major artists such as the Rolling Stones, Barbra Streisand and The Who. |
|
|
|
|
In June 2006, we increased our ability to service fans and artists by acquiring 51% of
Trunk. Trunk is a specialty merchandise company that acquires licenses, primarily from
music artists, to design, manufacture and sell merchandise through various retail and online
distribution channels. |
|
|
|
|
We ended the year by completing our acquisition of Gamerco SA, the leading live music
promoter in Spain, which adds another important music market to our international network of
promoters. |
Venues and Sponsorship
|
|
|
For the year ended December 31, 2006, our attendance for events at our venues increased
by 3.4 million attendees over the same period of the prior year. |
|
|
|
|
In addition to benefiting from this increased attendance, food and beverage initiatives
that were implemented at the start of the year, including simplified and value pricing as
well as improved food and beverage selections, continued to show improved results, with an
increase in sales per attendee, as well as an overall increase in operating income. |
|
|
|
|
The most significant event for our Venues and Sponsorship segment was the acquisition of
HOB which was completed on November 3, 2006. HOB owns and/or operates ten House of Blues®
venues, one club and eight amphitheaters. All of HOBs venues are located in North America.
This acquisition increased our small-sized music venue, West coast amphitheater and
Canadian presence. |
40
|
|
|
In addition to the acquisition of HOB, our venue portfolio was enhanced by obtaining a
15-year management agreement for Wembley Arena in London, England, as well as adding the
Gramercy Theatre in New York to our North American portfolio. |
|
|
|
|
As part of our continuing plan to focus our operations in the top markets globally, as
well as to appropriately maximize the value of our real estate portfolio, we are in the
process of divesting of a small number of venues. Based on this decision, we have recorded an
impairment of $31.0 million using an estimated sales price for the best use of the land or
appraised value related to certain of these venue sites. We also recorded an additional
impairment of $20.5 million related to venues that had an indicator that future operating
cash flows may not support their carrying value using a comparison of the carrying value of
these venues to their expected future cash flows based on estimated operating results. |
Digital Distribution
|
|
|
Our Digital Distribution segment successfully launched our new website, www.livenation.com,
in June 2006. The site is continuing to be refined and new features will be launched during
2007. |
|
|
|
|
In September 2006, we completed our acquisition of a majority interest in Musictoday, a
leader in connecting artists directly to their fans through online fan clubs, artist
e-commerce and fulfillment and artist fan club ticketing. We believe this is another key
step in our ongoing efforts to add complementary product lines to our live music and venue
businesses. |
|
|
|
|
Our Digital Distribution team continues its focus on increasing traffic to our website,
www.livenation.com. With the integration of Musictoday, Live Nations websites collectively
are now ranked as the second most popular entertainment/event site according to
Nielsen//NetRatings with nearly 2 million unique visitors in the month of December 2006. |
Other Operations
|
|
|
We continued our divestiture of assets that are not part of the core focus of the
business by selling the majority of the assets within our sports representation business.
Our basketball representation business is now the only significant remaining asset left
within our sports business. |
|
|
|
|
In addition, in April 2006, we sold our interest in a venue project (theaters in Planet
Hollywood in Las Vegas) and a percentage of our interest in a production of Phantom of the
Opera in Las Vegas. |
Recent Developments
|
|
|
In January 2007, we have continued with the expansion of our international music promoter
network through the acquisition of 51% of Jackie Lombard Productions, one of the leading
promoters in France. |
|
|
|
|
Also in January 2007, we added the 5,500 capacity Dodge Theater in Phoenix to our venue
portfolio. |
|
|
|
|
In January 2007, we continued to execute our plan to divest of our non-core businesses
with the sale of Donington Park in England. |
Our Separation from Clear Channel
We were formed through acquisitions of various entertainment businesses and assets by our
predecessors. On August 1, 2000, Clear Channel acquired our entertainment business. 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. 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. Following
41
our separation from Clear Channel, we became a separate publicly traded company on the New
York Stock Exchange trading under the symbol LYV.
Basis of Presentation
Prior to the Separation, our combined financial statements include amounts that are comprised
of businesses included in the consolidated financial statements and accounting records of Clear
Channel, using the historical bases of assets and liabilities of the entertainment business.
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. As a result of the Separation, 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 Channels 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 Live Nation and our majority owned subsidiaries and also variable interest entities for
which we are the primary beneficiary.
Segment Overview
Following the Separation and the reorganization of our business, we changed our reportable
segments, starting in 2006, to Events, Venues and Sponsorship, and Digital Distribution. In
addition, we have operations in the sports representation and other businesses which are included
under other. Previously, we operated in two reportable business segments: Global Music and Global
Theater. In addition, previously included under other were our operations in the specialized
motor sports, sports representation and other businesses. We have reclassified all periods
presented to conform to the current period presentation.
Events
Our Events segment principally involves the promotion and/or production of live music shows,
theatrical performances and specialized motor sports events in our owned and/or operated venues and
in rented third-party venues. While our Events segment operates year-round, we experience higher
revenues during the second and third quarters due to the seasonal nature of shows at our outdoor
amphitheaters and international festivals, which primarily occur May through September.
As a promoter or presenter, 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 or
show profits. For each event, we either use a venue we own or operate, or rent a third-party venue.
Revenues are generally related to the number of events, volume of ticket sales and ticket prices.
Event costs, included in direct 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.
In the case of our amphitheaters, our Events segment typically experiences losses related to the
promotion of the event. These losses are generally offset by the ancillary and sponsorship profits
generated by our Venues and Sponsorship segment and the ticket rebates recorded in our Digital
Distribution segment.
As a producer, we generally hire artistic talent, develop sets and coordinate the actual
performances of the events. We produce tours on a global, national and regional basis. We generate
revenues 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. Artist and production costs, included in
direct operating expenses, are typically substantial in relation to the revenues. As a result,
significant increases or decreases in revenue related to these productions do not typically result
in comparable changes to operating income.
In addition to the above, we provide various services to artists including marketing,
advertising production services, merchandise distribution and DVD/CD production and distribution.
To judge the health of our Events segment, management primarily monitors the number of
confirmed events in our network of owned and third-party venues, talent fees, average paid
attendance and advance ticket sales. In addition, because a significant portion of our events
business is conducted in foreign markets, management looks at the operating results from our
foreign operations on a constant dollar basis.
42
Venues and Sponsorship
Our Venues and Sponsorship segment primarily involves the management and operation of our
owned and/or operated venues and the sale of various types of sponsorships and advertising.
As a venue operator, we contract primarily with our Events segment to fill our venues and we
provide operational services such as concessions, merchandising, parking, security, ushering and
ticket-taking. We generate revenues primarily from the sale of food and beverages, parking, premium
seating and venue sponsorships. In our amphitheaters, the sale of food and beverages is outsourced
and we receive a share of the net revenues from the concessionaire which is recorded in revenue
with no significant direct operating expenses associated with it. Our primary food and beverage
vendor is Aramark Corporation which provides services to 38 of our venues, consisting of
substantially all amphitheaters, including seven former HOB amphitheaters.
We actively pursue the sale of national and local sponsorships and placement of advertising,
including signage and promotional programs, and naming of subscription series. Many of our venues
also have venue naming rights 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 Verizon. 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.
To judge the health of our Venues and Sponsorship segment, management primarily reviews the
number of events at our owned and/or operated venues, attendance, food and beverage sales per
attendee, premium seat sales and corporate sponsorship sales. In addition, because a significant
portion of our venues and sponsorship business is conducted in foreign markets, management looks at
the operating results from our foreign operations on a constant dollar basis.
Digital Distribution
Our Digital Distribution segment is creating the new internet and digital platform for Live
Nation. This segment is involved in managing our third-party ticketing relationships, in-house
ticketing operations and online and wireless distribution activities, including the development of
our website. This segment derives the majority of its revenues from ticket rebates earned on
tickets sold through phone, outlet and internet, for events promoted or presented by our Events
segment. The sale of the majority of these tickets is outsourced with our share of ticket rebates
recorded in revenue with no significant direct operating expenses associated with it.
The
largest component of our ticket rebate revenue is derived from
tickets sold at our North American owned and/or
operated venues. A smaller component of our ticket rebate revenue is
derived from our international promotion operations
where rebates per ticket are generally lower and we sell fewer
tickets overall. We also derive ticket rebate revenue from tickets
sold in third-party venues in connection with a Live Nation event where we either utilize our Ticketmaster
contract or participate in the ticket rebate revenues generated by
the venues ticketing deal. The economics of these deals vary by
venue. In some cases, where we receive ticket rebate revenue from
Ticketmaster for events promoted in third-party venues, a substantial
portion of that revenue is passed through to those third parties and
that cost is recorded as
a component of direct operating expenses in our Events segment.
To judge the health of our Digital Distribution segment, management primarily reviews the
rebates earned per ticket sold and the number of unique visitors to our websites.
Consolidated and Combined Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
% Change |
|
% Change |
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 vs. 2005 |
|
2005 vs. 2004 |
Revenue |
|
$ |
3,691,559 |
|
|
$ |
2,936,845 |
|
|
$ |
2,806,128 |
|
|
|
26 |
% |
|
|
5 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses |
|
|
2,981,801 |
|
|
|
2,310,925 |
|
|
|
2,185,127 |
|
|
|
29 |
% |
|
|
6 |
% |
Selling, general and administrative
expenses |
|
|
529,104 |
|
|
|
518,907 |
|
|
|
460,166 |
|
|
|
2 |
% |
|
|
13 |
% |
Depreciation and amortization |
|
|
128,167 |
|
|
|
64,622 |
|
|
|
64,095 |
|
|
|
98 |
% |
|
|
1 |
% |
Loss (gain) on sale of operating assets |
|
|
(11,640 |
) |
|
|
4,859 |
|
|
|
6,371 |
|
|
|
** |
|
|
|
** |
|
Corporate expenses |
|
|
33,863 |
|
|
|
50,715 |
|
|
|
31,386 |
|
|
|
(33 |
%) |
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
30,264 |
|
|
|
(13,183 |
) |
|
|
58,983 |
|
|
|
** |
|
|
|
** |
|
Operating margin |
|
|
1 |
% |
|
|
(0.5 |
%) |
|
|
2 |
% |
|
|
|
|
|
|
|
|
Interest expense |
|
|
37,218 |
|
|
|
6,059 |
|
|
|
3,119 |
|
|
|
|
|
|
|
|
|
Interest expense with Clear Channel
Communications |
|
|
|
|
|
|
46,437 |
|
|
|
42,355 |
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
% Change |
|
|
% Change |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 vs. 2005 |
|
|
2005 vs. 2004 |
|
Interest income |
|
|
(12,446 |
) |
|
|
(2,506 |
) |
|
|
(3,221 |
) |
|
|
|
|
|
|
|
|
Equity in losses (earnings) of
nonconsolidated affiliates |
|
|
(11,265 |
) |
|
|
276 |
|
|
|
(2,906 |
) |
|
|
|
|
|
|
|
|
Minority interest expense |
|
|
12,209 |
|
|
|
5,236 |
|
|
|
3,300 |
|
|
|
|
|
|
|
|
|
Other expense (income) net |
|
|
(1,220 |
) |
|
|
446 |
|
|
|
1,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
5,768 |
|
|
|
(69,131 |
) |
|
|
14,725 |
|
|
|
|
|
|
|
|
|
Income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
26,876 |
|
|
|
(53,025 |
) |
|
|
(55,946 |
) |
|
|
|
|
|
|
|
|
Deferred |
|
|
10,334 |
|
|
|
114,513 |
|
|
|
54,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(31,442 |
) |
|
$ |
(130,619 |
) |
|
$ |
16,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(in thousands) |
|
2006 |
|
2005 |
|
2004 |
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
16,720 |
|
|
$ |
(3,917 |
) |
|
$ |
122,453 |
|
Investing activities |
|
$ |
(375,163 |
) |
|
$ |
(106,049 |
) |
|
$ |
(84,076 |
) |
Financing activities |
|
$ |
268,294 |
|
|
$ |
363,268 |
|
|
$ |
20,699 |
|
|
|
|
Note: |
|
Non-cash compensation expense of $1.6 million and $1.7 million is included in corporate
expenses and selling, general and administrative expenses, respectively, for the year ended
December 31, 2006. For the years ended December 31, 2005 and 2004, non-cash compensation
expense of $1.3 million and $1.1 million, respectively, was included in corporate expenses and
was based on an allocation from Clear Channel related to issuance of Clear Channel stock
awards above fair value. |
|
** |
|
Percentages are not meaningful. |
Key Operating Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Events |
|
|
|
|
|
|
|
|
|
|
|
|
North American music |
|
|
7,857 |
|
|
|
6,850 |
|
|
|
7,557 |
|
International music |
|
|
2,465 |
|
|
|
1,475 |
|
|
|
1,184 |
|
Global touring |
|
|
153 |
|
|
|
94 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal music |
|
|
10,475 |
|
|
|
8,419 |
|
|
|
8,787 |
|
Theatrical |
|
|
5,264 |
|
|
|
5,478 |
|
|
|
6,101 |
|
Motor sports |
|
|
560 |
|
|
|
551 |
|
|
|
595 |
|
Third-party
rental events in Live Nation venues |
|
|
9,286 |
|
|
|
8,783 |
|
|
|
7,449 |
|
Exhibitions and sports |
|
|
358 |
|
|
|
3,544 |
|
|
|
4,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total events |
|
|
25,943 |
|
|
|
26,775 |
|
|
|
27,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Further detail of North American music: |
|
|
|
|
|
|
|
|
|
|
|
|
Owned and/or operated amphitheaters |
|
|
923 |
|
|
|
768 |
|
|
|
861 |
|
All other |
|
|
6,943 |
|
|
|
6,082 |
|
|
|
6,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total North American music events |
|
|
7,857 |
|
|
|
6,850 |
|
|
|
7,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attendance (rounded) |
|
|
|
|
|
|
|
|
|
|
|
|
North American music |
|
|
24,730,000 |
|
|
|
22,405,000 |
|
|
|
23,814,000 |
|
International music |
|
|
8,921,000 |
|
|
|
7,757,000 |
|
|
|
7,620,000 |
|
Global touring |
|
|
2,914,000 |
|
|
|
2,428,000 |
|
|
|
701,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal music |
|
|
36,565,000 |
|
|
|
32,590,000 |
|
|
|
32,135,000 |
|
Theatrical |
|
|
7,747,000 |
|
|
|
9,074,000 |
|
|
|
9,820,000 |
|
Motor sports |
|
|
4,641,000 |
|
|
|
4,643,000 |
|
|
|
4,626,000 |
|
Third-party rental attendance in Live Nation venues |
|
|
10,791,000 |
|
|
|
9,484,000 |
|
|
|
8,534,000 |
|
Exhibitions and sports |
|
|
203,000 |
|
|
|
2,903,000 |
|
|
|
5,069,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total attendance |
|
|
59,947,000 |
|
|
|
58,694,000 |
|
|
|
60,184,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Further detail of North American music: |
|
|
|
|
|
|
|
|
|
|
|
|
Owned and/or operated amphitheaters |
|
|
8,329,000 |
|
|
|
7,124,000 |
|
|
|
7,686,000 |
|
All other |
|
|
16,401,000 |
|
|
|
15,281,000 |
|
|
|
16,128,000 |
|
|
|
|
24,730,000 |
|
|
|
|
|
|
|
|
|
Total North American music attendance |
|
|
24,730,000 |
|
|
|
22,405,000 |
|
|
|
23,814,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
|
The 2006 international music data includes 710 events and
221,000 attendees for 2006 for Mean Fiddler Music Group, Plc
(Mean Fiddler) venues in the United Kingdom. The 2006
third-party rental data includes 526 events and 349,000 attendees for
2006 for Mean Fiddler venues in the United Kingdom. The data for Mean
Fiddler for 2005 is not available. |
44
Certain reclassifications have been made to the 2005 and 2004 events and attendance
information to conform to the 2006 presentation.
Revenue
Our revenue increased $754.7 million, or 26%, during the year ended December 31, 2006 as
compared to the same period of the prior year primarily due to increases in revenue from our
Events, Venues and Sponsorship and Digital Distribution segments of $666.5 million, $99.9 million
and $26.4 million, respectively, partially offset by a decrease in revenue in our other operations
of $40.0 million. The total increase in revenues includes the impact of our acquisitions during the
year. Included in the increase in revenue for the year ended December 31, 2006 is approximately
$39.6 million from increases in foreign exchange rates as compared to the same period of 2005.
Our revenue increased $130.7 million, or 5%, during the year ended December 31, 2005 as
compared to the same period of the prior year primarily due to an increase in revenues from our
Events segment of $155.4 million, partially offset by a decrease in our Venues and Sponsorship
segment of $27.1 million. Partially offsetting the increase in revenue for the year ended December
31, 2005 is approximately $7.3 million of decreases in revenue from decreases in foreign exchange
rates as compared to the same period of 2004.
More detailed explanations of the years ended 2006 and 2005 changes are included in the
applicable segment discussions contained herein.
Direct operating expenses
Our direct operating expenses increased $670.9 million, or 29%, during the year ended December
31, 2006 as compared to the same period of the prior year primarily due to increases in direct
operating expenses in our Events, Venues and Sponsorship and Digital Distribution segments of
$643.3 million, $35.3 million and $4.4 million, respectively, partially offset by a decrease in our
other operations of $14.0 million. We recorded write-downs on certain prepaid production costs
related to DVDs and a theatrical production of $4.8 million during 2006 in our Events segment.
Direct operating expenses in 2005 included $13.4 million of write-offs of advances on certain music
and theater projects and other reorganization costs. Included in the increase in direct operating
expenses for the year ended December 31, 2006 is approximately $32.2 million from increases in
foreign exchange rates as compared to the same period of 2005.
Our direct operating expenses increased $125.8 million, or 6%, during the year ended December
31, 2005 as compared to the same period of the prior year primarily due to increases in direct
operating expenses in our Events and Venues and Sponsorship segments of $116.9 million and $10.9
million, respectively, partially offset by a decrease in our other operations of $3.8 million.
Partially offsetting the increase in direct operating expenses for the year ended December 31, 2005
is approximately $4.5 million of decreases in direct operating expenses from decreases in foreign
exchange rates as compared to the same period of 2004.
Direct operating expenses include artist fees, show related marketing and advertising expenses
along with other costs.
More detailed explanations of the years ended 2006 and 2005 changes are included in the
applicable segment discussions contained herein.
Selling, general and administrative expenses
Our selling, general and administrative expenses increased $10.2 million, or 2%, during the
year ended December 31, 2006 as compared to the same period of the prior year primarily due to
increases in selling, general and administrative expenses of our Venues and Sponsorship and Digital
Distribution segments of $42.7 million and $13.0 million, respectively, partially offset by
decreases in our Events segment and other operations of $17.8 million and $27.7 million,
respectively. Partially offsetting the overall increase was a reduction of $7.0 million related to
certain pre-acquisition contingencies for legal matters which were resolved during the year. In
addition there were reductions due to expenses of approximately $45.0 million related to severance
costs and litigation contingencies and expenses that were recorded
during the year ended December 31, 2005.
Included in the increase in selling, general and administrative expenses
45
for the year ended December 31, 2006 is approximately $2.6 million from increases in foreign
exchange rates as compared to the same period of 2005.
Our selling, general and administrative expenses increased $58.7 million, or 13%, during the
year ended December 31, 2005 as compared to the same period of the prior year primarily due to
increases in selling, general and administrative expenses of our Events and Venues and Sponsorship
segments of $45.0 million and $16.3 million, respectively, partially offset by a decrease in our
other operations of $2.3 million. We recorded $45.0 million related to severance costs and
litigation contingencies during 2005. Partially offsetting the increase in selling, general and
administrative expenses for the year ended December 31, 2005 is approximately $1.5 million of
decreases in selling, general and administrative expenses from decreases in foreign exchange rates
as compared to the same period of 2004.
More detailed explanations of the years ended 2006 and 2005 changes are included in the
applicable segment discussions contained herein.
Depreciation and amortization
Our depreciation and amortization increased $63.5 million, or 98%, during the year ended
December 31, 2006 as compared to the same period of the prior year primarily due to increases in
depreciation and amortization of our Events and Venues and Sponsorship segments of $7.4 million and
$57.7 million, respectively. Driving this increase was an impairment charge of $51.6 million
primarily related to several amphitheaters and one theater development project that is no longer
being pursued.
More detailed explanations of the year ended 2006 change are included in the applicable
segment discussions contained herein.
Loss (gain) on sale of operating assets
Our gain on sale of operating assets increased $16.5 million during the year ended December
31, 2006 as compared to the same period of the prior year primarily due to gains recorded in 2006
on the sale of portions of our sports representation business assets related to basketball, golf,
football, tennis, media, baseball, soccer and rugby. These gains were partially offset by a loss
recorded in 2006 on the disposal of certain theatrical venue interests in Spain and a loss recorded
in 2005 on the sale of certain exhibition assets.
Our loss on sale of operating assets decreased $1.5 million during the year ended December 31,
2005 as compared to the same period of the prior year primarily due to a loss recorded in 2004 on
the sale of our international leisure center operations. During 2005, we recorded a smaller loss
on the sale of certain exhibition and music publishing assets.
Corporate expenses
Corporate expenses decreased $16.9 million, or 33%, during the year ended December 31, 2006 as
compared to the same period of the prior year primarily due to $17.0 million of litigation
contingencies and expenses related to a case settled in 2005 and $4.7 million of severance expense
recorded in 2005. Partially offsetting these decreases were increases in consultant expense
primarily related to corporate functions that were provided by Clear Channel in 2005 and insurance
expense primarily due to increased rates in 2006.
Corporate expenses increased $19.3 million, or 62%, during the year ended December 31, 2005 as
compared to the same period of the prior year primarily due to $17.0 million of litigation
contingencies and expenses related to a case settled in 2005 and $4.7 million of severance expenses
recorded in 2005.
Interest expense
Interest expense increased $31.2 million during the year ended December 31, 2006 as compared
to the same period of the prior year primarily due to interest expense related to our term loans,
revolving credit facility and redeemable preferred stock, which did not exist until late December
2005, and a loan from a minority interest holder, which occurred in the third quarter of 2005.
Partially offsetting the increase was interest expense recorded in 2005 related to a contingent
purchase price payment for a prior acquisition.
Interest expense increased $2.9 million during the year ended December 31, 2005 as compared to
the same period of the prior year 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.
46
Our debt balances, including redeemable preferred stock, and weighted average cost of debt
were $679.1 million and 8.18%, respectively, at December 31, 2006, and $406.8 million and 7.28%,
respectively, at December 31, 2005.
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.
Our weighted average cost of debt during all periods was 7.0%. Our debt balance owed to Clear
Channel as of December 31, 2004 was $628.9 million.
Interest income
Interest income increased $9.9 million during the year ended December 31, 2006 as compared to
the same period of the prior year primarily due to interest income earned on excess cash invested
in money market funds and other short-term investments. Excess cash balances in 2005 were used to
pay down intercompany debt with Clear Channel and therefore did not generate interest income.
Equity in losses (earnings) of nonconsolidated affiliates
Equity in losses (earnings) of nonconsolidated affiliates increased $11.5 million during the
year ended December 31, 2006 as compared to the same period of the prior year primarily due to an
increase in earnings from our investments in NBC-Live Nation Ventures, LLC, Dominion Theatre and
Marek Lieberberg Konzertagentur and earnings from investments acquired in the CPI acquisition,
partially offset by losses on other investments. Additionally, in 2005 we recorded a write-down of
$4.9 million on an investment with no similar significant write-down in 2006.
Equity in losses (earnings) of nonconsolidated affiliates decreased $3.2 million during the
year ended December 31, 2005 as compared to the same period of the prior year primarily as a result
of impairments and losses in several of our nonconsolidated affiliates during 2005.
Minority interest expense
Minority interest expense increased $7.0 million during the year ended December 31, 2006 as
compared to the same period of the prior year primarily due to our acquisition of controlling
interests in the CPI entities during the second quarter of 2006.
Minority interest expense increased $1.9 million during the year ended December 31, 2005 as
compared to the same period of the prior year primarily due to our acquisition of a 50.1% interest
in Mean Fiddler during the third quarter of 2005.
Income Taxes
Our effective tax rate is 645% for 2006 compared to an effective tax rate of (89)% in 2005.
Our effective tax rate for 2006 would be 134% excluding the impact of
valuation allowances recorded against increases in deferred tax
assets related to impairments recorded during the year or 71%
excluding combined effects of tax reserves and these valuation allowances.
The negative effective tax rate in 2005 was due primarily to a valuation allowance recorded
against deferred tax assets during the fourth quarter of 2005 and other nondeductible expenses
incurred. This effective tax rate represents net tax expense of $37.2 million and $61.5 million
for the years ended December 31, 2006 and 2005, respectively. The net decrease in tax expense is
primarily attributable to increases in taxable income and a reduction
in deferred tax expense due to a smaller valuation allowance
adjustment in 2006. Our
effective tax rate is higher than the U.S. statutory rate of 35% due primarily to nondeductible
expenses, state income taxes, tax reserves and tax rate differences since a significant portion of
our full year earnings are subject to tax in countries other than the United States.
Current tax benefit for the year ended December 31, 2005 decreased $2.9 million as compared to
the same period of the prior year. Deferred tax expense increased $60.1 million for the year ended
December 31, 2005 as compared to the same period of the prior year. 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 related to our deferred tax asset. As a
subsidiary of Clear Channel, taxable losses of our subsidiaries were able to be utilized under a
consolidated income tax return with Clear Channel. After the Separation, our
47
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.
Events Results of Operations
Our Events segment operating results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
% Change |
|
% Change |
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 vs. 2005 |
|
2005 vs. 2004 |
Revenue |
|
$ |
2,932,720 |
|
|
$ |
2,266,176 |
|
|
$ |
2,110,824 |
|
|
|
29 |
% |
|
|
7 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses |
|
|
2,764,189 |
|
|
|
2,120,884 |
|
|
|
2,003,969 |
|
|
|
30 |
% |
|
|
6 |
% |
Selling, general and administrative
expenses |
|
|
230,609 |
|
|
|
248,454 |
|
|
|
203,422 |
|
|
|
(7 |
%) |
|
|
22 |
% |
Depreciation and amortization |
|
|
17,010 |
|
|
|
9,631 |
|
|
|
10,975 |
|
|
|
77 |
% |
|
|
(12 |
%) |
Loss (gain) on sale of operating assets |
|
|
(1,733 |
) |
|
|
2,161 |
|
|
|
(3,285 |
) |
|
|
** |
|
|
|
** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(77,355 |
) |
|
|
(114,954 |
) |
|
|
(104,257 |
) |
|
|
33 |
% |
|
|
(10 |
%) |
Operating margin |
|
|
(3 |
%) |
|
|
(5 |
%) |
|
|
(5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
** |
|
Percentages are not meaningful. |
Year Ended 2006 Compared to Year Ended 2005
Events revenue increased $666.5 million, or 29%, during the year ended December 31, 2006 as
compared to the same period of the prior year primarily due to an
increase of events for global
touring primarily due to the number of artists on tour during the respective years. We had an
extraordinary year in 2006 with the Rolling Stones, U2, Madonna, Barbra Streisand and The Who all
touring in the same year. In 2005, U2 and Sting were the only significant global tours. The
number of North American music events at our owned and/or operated amphitheaters and related
attendance also increased by 155 and 1.2 million, respectively, as we focused on increasing the
bookings for these venues. This increase was partially achieved through successful packaging of
artists such as Def Leppard and Journey. These events at our owned and/or operated amphitheaters
do not include events at these venues promoted by our global touring group or third-party rentals
or events at amphitheaters for which we have a right to book events. The number of North American
music events at our owned and/or operated mid-sized music venues and related attendance increased
by 161 and 0.5 million, respectively. In addition, we experienced improved attendance at several
music festivals in the United Kingdom such as Download and the newly created Hyde Park Calling, as
well as stronger promotion activity for international tours by artists such as the Rolling Stones,
Madonna and Red Hot Chili Peppers. Partially offsetting these increases, was a decline in revenues
resulting from our divestiture of an artist agency business in the United Kingdom during the fourth
quarter of 2005. Finally, our production of Phantom of the Opera opened in Las Vegas at the end of
the second quarter of 2006, we had an increase in the number of North American theater events
including shows such as Spamalot and stronger results for our touring productions of Chicago,
Starlight Express and Cats in the United Kingdom. Included in the increase was $238.6 million of
revenue related to our acquisitions during the year ended December 31, 2006.
Events direct operating expenses increased $643.3 million, or 30%, during the year ended
December 31, 2006 as compared to the same period of the prior year primarily due to increases in
the number of events for global touring and in our owned and/or operated amphitheaters and
mid-sized music venues, as well as several international music festivals and other events, all of
which resulted in higher talent fees and other event related costs. We also recorded $4.8 million
related to a write-down of certain DVD and theatrical prepaid production assets. In addition,
direct operating expenses increased due to the opening and pre-opening costs of our production of
Phantom of the Opera in Las Vegas and the increase in the number of North American theater events
noted above. Partially offsetting these increases, was a decline in direct operating expenses
resulting from our divestiture of an artist agency business in the United Kingdom during the fourth
quarter of 2005, $11.9 million of write-offs of advances on certain domestic music and theater
projects and other reorganization costs during the fourth quarter of 2005 and a further reduction
in write-offs of advances on certain domestic theater productions during 2006. Included in the
increase was $210.6 million of direct operating expenses related to our acquisitions during the
year ended December 31, 2006.
Events selling, general and administrative expenses decreased $17.8 million, or 7%, during the
year ended December 31, 2006 as compared to the same period of the prior year primarily due to
$14.3 million of severance and other reorganization costs and $20.4 million of litigation
contingencies and expenses recorded during 2005. In addition, we experienced reduced salary
expense during
48
2006 as a result of the headcount reductions made in 2005. Partially offsetting these
decreases were increases in selling, general and administrative expenses of $10.8 million related to
our acquisitions during the year ended December 31, 2006.
Events depreciation and amortization expense increased $7.4 million, or 77%, during the year
ended December 31, 2006 as compared to the same period of the prior year primarily due to
amortization of the intangible assets resulting from our acquisitions of CPI during the second
quarter of 2006 and Mean Fiddler in the third quarter of 2005 due to the finalization of the
purchase price allocations between goodwill and intangibles.
Events gain on sale of operating assets increased $3.9 million during the year ended December
31, 2006 as compared to the same period of the prior year due to a gain recorded on the sale of
certain theatrical assets in 2006 and a loss recorded on certain exhibition assets in 2005.
Year Ended 2005 Compared to Year Ended 2004
Events revenue increased $155.4 million, or 7%, during the year ended December 31, 2005 as
compared to the same period of the prior year due primarily to the acquisition of international
promotion companies during the second half of 2004, the acquisition of a United Kingdom festival
promoter in 2005, an increase in promotion revenue related to shows with higher ticket prices and
an increase in the attendance at our festivals. In addition, growth in the revenue from our
specialized motor sports events resulted from a slight increase in attendance and ticket prices.
Partially offsetting these increases was a decrease in our global touring revenue due primarily to
the mix of artists on tour during the respective years. In 2004, artists such as Madonna, David
Bowie, Sting, Bette Midler and Rush were touring; while in 2005, artists such as U2 and Sting were
touring.
Events direct operating expenses increased $116.9 million, or 6%, during the year ended
December 31, 2005 as compared to the same period of the prior year primarily due to the acquisition
of international promotion companies during the second half of 2004, the acquisition of a United
Kingdom festival promoter in 2005 and an increase in both international and United Kingdom
promotion activity. In addition, during 2005 we recorded $11.9 million of write-offs of advances on
certain domestic music and theater projects and other reorganization costs. Finally, global theater
direct operating expenses increased due primarily to an increase in the number of events during
2005.
Events selling, general and administrative expenses increased $45.0 million, or 22%, during
the year ended December 31, 2005 as compared to the same period of the prior year primarily due to
the acquisition of international promotion companies during the second half of 2004 and the
acquisition of a United Kingdom festival promoter in 2005. In addition, in 2005 we had $20.4
million of increased litigation contingencies and expenses and $14.3 million of costs related to
severance and reorganization of the business.
Events loss on sale of operating assets increased $5.4 million during the year ended December
31, 2005 as compared to the same period of the prior year primarily due to a loss recorded on the
sale of certain exhibition assets in 2005 and a gain recorded on the sale of a ticketing operation
in Sweden in 2004.
Venues and Sponsorship Results of Operations
Our Venues and Sponsorship segment operating results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
% Change |
|
% Change |
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 vs. 2005 |
|
2005 vs. 2004 |
Revenue |
|
$ |
635,753 |
|
|
$ |
535,870 |
|
|
$ |
562,967 |
|
|
|
19 |
% |
|
|
(5 |
%) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses |
|
|
213,277 |
|
|
|
177,961 |
|
|
|
167,035 |
|
|
|
20 |
% |
|
|
7 |
% |
Selling, general and administrative
expenses |
|
|
267,651 |
|
|
|
224,914 |
|
|
|
208,617 |
|
|
|
19 |
% |
|
|
8 |
% |
Depreciation and amortization |
|
|
106,320 |
|
|
|
48,602 |
|
|
|
45,019 |
|
|
|
119 |
% |
|
|
8 |
% |
Loss (gain) on sale of operating assets |
|
|
1,195 |
|
|
|
(105 |
) |
|
|
9,640 |
|
|
|
** |
|
|
|
** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
47,310 |
|
|
|
84,498 |
|
|
|
132,656 |
|
|
|
(44 |
%) |
|
|
(36 |
%) |
Operating margin |
|
|
7 |
% |
|
|
16 |
% |
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
** |
|
Percentages are not meaningful. |
49
Year Ended 2006 Compared to Year Ended 2005
Venues and Sponsorship revenue increased $99.9 million, or 19%, during the year ended December
31, 2006 as compared to the same period of the prior year primarily due to increased attendance at
our owned and/or operated amphitheaters of 1.2 million and increased attendance from third-party
rentals which increased food and beverage and merchandise revenues. However, these increases were
partially offset by a decline in revenues from a few of our larger theatrical venues and an arena
due to weaker content in 2006. In addition, sponsorship revenues declined due to the loss of
revenues related to a one-time sponsorship event held in 2005. Included in the increase was $61.1
million of revenue related to our acquisitions during the year ended December 31, 2006 and full
year revenues of our acquisitions during 2005.
Venues and Sponsorship direct operating expenses increased $35.3 million, or 20%, during the
year ended December 31, 2006 as compared to the same period of the prior year primarily due to
increased attendance at our owned and/or operated amphitheaters of 1.2 million and increased
attendance from third-party rentals which increased merchandise direct operating expenses. However,
these increases were partially offset by a decline in sponsorship direct operating expenses
primarily due to a one-time sponsorship event held in 2005. In addition, we recorded a $1.5
million write-down of advances on certain international theater projects during the fourth quarter
of 2005. Included in the increase was $24.5 million of direct operating expenses related to our
acquisitions during the year ended December 31, 2006 and full year direct operating expenses for
our acquisitions during 2005.
Venues and Sponsorship selling, general and administrative expenses increased $42.7 million,
or 19%, during the year ended December 31, 2006 as compared to the same period of the prior year
primarily due to $36.7 million of selling, general and administrative expenses related to our
acquisitions during the year ended December 31, 2006 and full year selling, general and
administrative expenses for our acquisitions during 2005. In addition, we experienced increased
compensation related expense due to building the venue management team and incentive plans based on
driving increased food and beverage sales at our owned and/or operated venues, increased property
insurance expense and increased utility expenses. Finally, in 2005 we had $3.2 million of
increased litigation contingencies and expenses and $3.1 million of costs related to severance and
reorganization of the business.
Venues and Sponsorship depreciation and amortization expense increased $57.7 million, or 119%,
during the year ended December 31, 2006 as compared to the same period of the prior year primarily
due to an impairment of $51.6 million recorded during the third and fourth quarters of 2006 related
primarily to several amphitheaters and one theater development project that we have decided not to
pursue. In addition, we incurred increased depreciation expense related to capital expenditures to
improve the audience experience at our amphitheaters and depreciation of asset retirement
obligations for the Mean Fiddler venues purchased in the third quarter of 2005 due to the
finalization of the purchase price allocation.
Venues and Sponsorship loss on sale of operating assets increased $1.3 million during the year
ended December 31, 2006 as compared to the same period of the prior year primarily due to a loss
recorded on the disposal of our interest in two theatrical venues in Spain.
Year Ended 2005 Compared to Year Ended 2004
Venues and Sponsorship revenue decreased $27.1 million, or 5%, during the year ended December
31, 2005 as compared to the same period of the prior year primarily due to a decline in the number of
events and attendance at our domestic amphitheaters. In addition, we implemented ticketing
initiatives during 2005 to reduce certain ancillary charges included in the ticket price. We also
experienced a decline in revenues due to the sale of the international leisure center business in
the United Kingdom during the second quarter of 2004. These decreases were partially offset by an
increase in our international venues revenue primarily due to our acquisitions of the Mean Fiddler
venues and four theaters in Spain during 2005.
Venues and Sponsorship direct operating expenses increased $10.9 million, or 7%, during the
year ended December 31, 2005 as compared to the same period of the prior year primarily due to an
increase in the number of events in our United Kingdom venues and our acquisition of the Mean
Fiddler venues and theaters in Spain during 2005. In addition, sponsorship direct operating
expenses increased due to a one-time sponsorship event held in 2005. These increases were
partially offset by a decrease in direct operating expenses due to the sale of the international
leisure center business noted above.
Venues and Sponsorship selling, general and administrative expenses increased $16.3 million,
or 8%, during the year ended December 31, 2005 as compared to the same period of the prior year
primarily due to $3.2 million of increased litigation contingencies and expenses and $3.1 million of
costs related to severance and other reorganization costs. In addition, we experienced increased
50
compensation related expenses primarily driven by contractual agreements for our sponsorship
sales team and increased maintenance expense for our North American venues. Partially offsetting
these increases was a decrease in selling, general and administrative expenses due to the sale of
the international leisure center business in the United Kingdom during the second quarter of 2004.
Venues and Sponsorship depreciation and amortization expense increased $3.6 million, or 8%,
during the year ended December 31, 2005 as compared to the same period of the prior year due to
accelerating depreciation on assets for which we have determined the useful life to be shorter than
originally expected.
Venues and Sponsorship gain on sale of operating assets increased $9.7 million during the year
ended December 31, 2005 as compared to the same period of the prior year primarily due to a loss
recorded on the sale of our international leisure center operations during the second quarter of
2004.
Digital Distribution Results of Operations
Our Digital Distribution segment operating results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
% Change |
|
% Change |
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 vs. 2005 |
|
2005 vs. 2004 |
Revenue |
|
$ |
99,000 |
|
|
$ |
72,576 |
|
|
$ |
74,641 |
|
|
|
36 |
% |
|
|
(3 |
%) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses |
|
|
7,424 |
|
|
|
3,059 |
|
|
|
3,431 |
|
|
|
** |
|
|
|
(11 |
%) |
Selling, general and
administrative expenses |
|
|
16,115 |
|
|
|
3,153 |
|
|
|
3,410 |
|
|
|
** |
|
|
|
(8 |
%) |
Depreciation and amortization |
|
|
875 |
|
|
|
278 |
|
|
|
320 |
|
|
|
** |
|
|
|
(13 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
74,586 |
|
|
|
66,086 |
|
|
|
67,480 |
|
|
|
13 |
% |
|
|
(2 |
%) |
Operating margin |
|
|
75 |
% |
|
|
91 |
% |
|
|
90 |
% |
|
|
|
|
|
|
|
|
Year Ended 2006 Compared to Year Ended 2005
Digital Distribution revenues increased $26.4 million, or 36%, during the year ended December
31, 2006 as compared to the same period of the prior year primarily due to additional ticket
service charge rebates resulting from the increase in attendance within our Events segment.
Included in the increase is $12.4 million of revenues related to the impact of acquisitions during
the year ended December 31, 2006. Of the $99.0 million of revenue we generated in 2006, $6.4
million was from ticket service charges from our in-house ticketing system, $10.7 million was from
Musictoday and other non-ticketing related services and the remaining $81.9 million was from ticket
service charge rebates from Ticketmaster or other ticketing service providers.
Digital Distribution direct operating expenses increased $4.4 million during the year ended
December 31, 2006 as compared to the same period of the prior year primarily due to incremental
direct operating expenses of $4.8 million related to our acquisitions during 2006.
Digital Distribution selling, general and administrative expenses increased $13.0 million
during the year ended December 31, 2006 as compared to the same period of the prior year primarily
due to increases in salary for new staff and consultant expenses related to our website and
internet management. Included in the increase is $4.3 million of selling, general and
administrative expenses related to the impact of acquisitions during the year ended December 31,
2006.
Year Ended 2005 Compared to Year Ended 2004
Digital Distribution revenues decreased $2.1 million, or 3%, during the year ended December
31, 2005 as compared to the same period of the prior year primarily due to a decrease in ticket
service charge rebates from our internal ticketing operations resulting from the decline in the
number of domestic events and attendance in our Events segment.
Digital Distribution direct operating and selling, general and administrative expenses
remained relatively flat during the year ended December 31, 2005 as compared to the same period of
the prior year due to the minimal amount of direct operating and selling, general and
administrative expenses that are required for our internal ticketing operations.
51
Other Results of Operations
Our other operating results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
% Change |
|
% Change |
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 vs. 2005 |
|
2005 vs. 2004 |
Revenue |
|
$ |
33,398 |
|
|
$ |
73,422 |
|
|
$ |
72,379 |
|
|
|
(55 |
%) |
|
|
1 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses |
|
|
6,223 |
|
|
|
20,173 |
|
|
|
23,960 |
|
|
|
(69 |
%) |
|
|
(16 |
%) |
Selling, general and administrative
expenses |
|
|
14,729 |
|
|
|
42,461 |
|
|
|
44,761 |
|
|
|
(65 |
%) |
|
|
(5 |
%) |
Depreciation and amortization |
|
|
945 |
|
|
|
2,115 |
|
|
|
2,800 |
|
|
|
(55 |
%) |
|
|
(24 |
%) |
Loss (gain) on sale of operating assets |
|
|
(10,981 |
) |
|
|
738 |
|
|
|
20 |
|
|
|
** |
|
|
|
** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
22,482 |
|
|
|
7,935 |
|
|
|
838 |
|
|
|
183 |
% |
|
|
847 |
% |
Operating margin |
|
|
67 |
% |
|
|
11 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
** |
|
Percentages are not meaningful. |
Year Ended 2006 Compared to Year Ended 2005
Other revenues decreased $40.0 million, or 55%, during the year ended December 31, 2006 as
compared to the same period of the prior year primarily as a result of the sale of portions of our
sports representation business assets related to basketball, golf, football, tennis, media,
baseball, soccer and rugby and the loss of a golf event due to its relocation to another country.
Other direct operating expenses decreased $14.0 million, or 69%, during the year ended
December 31, 2006 as compared to the same period of the prior year primarily as a result of the
sale of portions of our sports representation business assets and the loss of a golf event.
Other selling, general and administrative expenses decreased $27.7 million, or 65%, during the
year ended December 31, 2006 as compared to the same period of the prior year primarily due to the
sale of portions of our sports representation business assets. In addition, we experienced a
decline in litigation contingencies and expenses in 2006 as compared to the prior year due to $7.0
million of certain pre-acquisition contingencies for legal matters which were resolved during the
year. Finally, in 2005 we had $0.4 million of increased litigation contingencies and expenses and
$3.6 million of costs related to severance and reorganization of the business.
Other depreciation and amortization expense decreased $1.2 million, or 55%, during the year
ended December 31, 2006 as compared to the same period of the prior year primarily due to the sale
of portions of our sports representation business assets.
Other gain on sale of operating assets increased $11.7 million during the year ended December
31, 2006 as compared to the same period of the prior year primarily due to gains recorded in 2006
on the sale of portions of our sports representation business assets.
Year Ended 2005 Compared to Year Ended 2004
Other revenues increased $1.0 million, or 1%, during the year ended December 31, 2005 as
compared to the same period of the prior year primarily due to an increase in our United Kingdom
sports representation business resulting from an acquisition of a rugby sports representation
business in the second quarter of 2005. Partially offsetting the increase, were decreases
resulting from the sale of certain non-core businesses and a decline in sponsorship and event fees
for our domestic sports events business.
Other direct operating expenses decreased $3.8 million, or 16%, during the year ended December
31, 2005 as compared to the same period of the prior year primarily due the sale of certain
non-core businesses during 2005, partially offset by the acquisition of a rugby sports
representation business in the United Kingdom noted above.
Other selling, general and administrative expenses decreased $2.3 million, or 5%, during the
year ended December 31, 2005 as compared to the same period of the prior year primarily due to a
decline in litigation contingencies and expenses. Partially
offsetting this decline, was an increase in salary and benefits expense for our domestic sports
representation agents based on contractual arrangements.
52
Reconciliation of Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Events |
|
$ |
(77,355 |
) |
|
$ |
(114,954 |
) |
|
$ |
(104,257 |
) |
Venues and Sponsorship |
|
|
47,310 |
|
|
|
84,498 |
|
|
|
132,656 |
|
Digital Distribution |
|
|
74,586 |
|
|
|
66,086 |
|
|
|
67,480 |
|
Other |
|
|
22,482 |
|
|
|
7,935 |
|
|
|
838 |
|
Corporate |
|
|
(36,759 |
) |
|
|
(56,776 |
) |
|
|
(36,363 |
) |
Eliminations |
|
|
|
|
|
|
28 |
|
|
|
(1,371 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated and combined operating income (loss) |
|
$ |
30,264 |
|
|
$ |
(13,183 |
) |
|
$ |
58,983 |
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Our working capital requirements and capital for our general corporate purposes, including
acquisitions and capital expenditures, are funded from operations or from borrowings under our
senior secured credit facility described below. Our cash is currently managed on a worldwide 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 realize foreign
tax credits.
Our balance sheet reflects cash and cash equivalents of $313.9 million and current and
long-term debt of $639.1 million at December 31, 2006, and cash and cash equivalents of $403.7
million and current and long-term debt of $366.8 million at December 31, 2005. These debt balances
do not include our outstanding redeemable preferred stock.
On November 3, 2006, we completed our previously announced acquisition of HOB for $354 million
in cash (approximately $360 million including transaction and financing fees and expenses). The
sources of funds to finance the acquisition included $83.1 million of cash on hand, $73 million of
borrowings under our revolving credit facility and the addition of a new $200 million term loan.
We may need to incur additional debt or issue equity to make other 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 the issuance of additional stock may cause the Distribution to be taxable under
section 355(e) of the Internal Revenue Code, and, under our tax matters agreement with Clear
Channel, we would be required to indemnify Clear Channel 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 revenue 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. We view our available cash as cash and cash
equivalents less event-related deferred revenue, less accrued expenses due to artists and for cash
collected on behalf of others, plus event-related prepaids. This is essentially our cash available
to, among other things, repay debt balances, make acquisitions, repurchase stock and finance
capital expenditures.
Our intra-year cash fluctuations are impacted by the seasonality of our various businesses.
Examples of seasonal effects include our Events segment, which reports the majority of its revenues
in the second and third quarters, while our Venues and Sponsorship segment reports the majority of
its revenues in the second, third and fourth quarters of the year. Cash inflows and outflows depend
on the timing of event-related payments but the majority of the inflows 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, along with potential
additional financing alternatives, to satisfy working capital, capital expenditure and debt service
requirements for at least the succeeding year.
Sources of Cash
Senior Secured Credit Facility
53
We have a senior secured credit facility consisting of a term loan in the original amount of
$325 million and a $285 million revolving credit facility. The revolving credit facility provides
for borrowings up to the amount of the facility with sub-limits of up to $235 million to be
available for the issuance of letters of credit and up to $100 million to be available for
borrowings in foreign currencies. The term loan and revolving credit portions of the credit
facility mature in June 2013 and June 2012, respectively. We are required to make minimum quarterly
principal repayments under the original 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 certain additional
debt issuance proceeds.
In connection with the HOB acquisition in November 2006, we entered into an Incremental
Assumption Agreement and Amendment No. 1 to our senior secured credit facility. This amendment
increases the amount available under the senior secured credit facility by providing for a new $200
million term loan which matures in December 2013. We are required to make minimum quarterly
principal repayments under this additional term loan of approximately $2.0 million per year through
September 2013, with the remaining balance due at maturity.
In December 2006, we entered into Amendment No. 2 to our senior secured credit facility. This
amendment provides that all term loans under the credit facility bear interest at per annum
floating rates equal, at our option, to either (a) the base rate (which is the greater of the prime
rate offered by JPMorgan Chase Bank, N.A. or the federal funds rate plus .5%) plus 1.75% or (b)
Adjusted LIBOR plus 2.75%.
In December 2006, we entered into an Incremental Assumption Agreement and Amendment No. 3 to
our senior secured credit facility. This amendment increases the amount available under the senior
secured credit facility by providing for an additional $25 million term loan which matures in
December 2013. We are required to make minimum quarterly
principal repayments under this additional term
loan of approximately $0.3 million per year through September 2013, with the remaining balance due
at maturity.
During the year ended December 31, 2006, we made principal payments totaling $3.3 million and
$69.0 million on the term loans and revolving credit facility, respectively. The payments on the
revolving credit facility were due to short-term borrowings to fund working capital requirements
during the year. At December 31, 2006, the outstanding balances on the term loans and revolving
credit facility were $546.8 million and $48.0, respectively. Taking into account letters of credit
of $44.0 million, $193.0 million was available for future borrowings.
As of February 23, 2007, the outstanding balances on the term loans and revolving credit
facility were $546.8 million and $58.0 million, respectively. Taking into account letters of credit of
$50.4 million, $176.6 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 greater of the prime
rate offered by JPMorgan Chase Bank, N.A. or the federal funds rate plus .5%) plus 1.75% or (b)
Adjusted LIBOR plus 2.75%. 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, 2006, the applicable margins for base rate, Adjusted LIBOR and EURIBOR
borrowings were .75%, 1.75% and 1.75%, respectively. Under the terms of the original term loan, 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.
The interest rate we pay on borrowings on our senior term loans is 2.75% above LIBOR. The
interest rate we pay on our $285 million multi-currency
revolving credit facility depends on our
total leverage ratio. Based on our current total leverage ratio, our interest rate on revolving
credit borrowings is 1.75% above LIBOR. 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, 2006, the
commitment fee rate was .25%. We also are required to pay customary letter of credit fees, as
necessary. In the event our leverage ratio improves, the interest rate on revolving credit
borrowings declines gradually to .75% at a total leverage ratio of less than, or equal to, 1.25
times.
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
54
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, one of our subsidiaries 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 which 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. As of December 31, 2006,
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 million. The Preferred Stock accrues dividends at 13% per annum and
is mandatorily redeemable on 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 Redeemable 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.
At December 31, 2006, we were in compliance with all Redeemable Preferred Stock covenants. We
expect to remain in compliance with all of our Preferred Stock covenants throughout 2007.
Guarantees of Third-Party Obligations
As of December 31, 2006 and 2005, we guaranteed the debt of third parties of approximately
$1.9 million for each of the respective periods, primarily related to maximum credit limits on
employee and tour related credit cards and, in 2006, this included guarantees of bank lines of
credit of a nonconsolidated affiliate and a third-party promoter.
As of December 31, 2006, in connection with the sale of a portion of our sports representation
business assets, we guaranteed the performance of a third-party related to an employment contract
in the amount of approximately $0.9 million.
Disposal of Assets
During the year ended December 31, 2006, we received $36.3 million of proceeds primarily
related to the sale of certain theatrical assets and portions of our sports representation business
assets.
Debt Covenants
The significant covenants on our multi-currency senior secured 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, up to a maximum of $150 million (all 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 million. The senior leverage
covenant, which is only applicable provided aggregate subordinated indebtedness is greater than $25
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 million or less through December 31, 2006, and $110 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 million.
Our other indebtedness does not contain provisions that would make it a default if we were to
default on our credit facilities.
55
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, 2006, we were in compliance with all debt covenants. We expect to remain in
compliance with all of our debt covenants throughout 2007.
Uses of Cash
Acquisitions
When we make acquisitions, especially of entities where we buy a controlling interest only,
the acquired entity may have cash on its balance sheet at the time of acquisition. All amounts
discussed in this section are presented net of any cash acquired. During the year ended December
31, 2006, our Venues and Sponsorship segment used $336.9 million in cash, primarily for our
acquisition of HOB and an interest in Historic Theatre Group. HOB owns and/or operates ten branded
clubs in Los Angeles, Anaheim, San Diego, Las Vegas, New Orleans, Chicago, Cleveland, Orlando,
Myrtle Beach and Atlantic City; The Commodore Ballroom, a small-sized music venue in Vancouver; and
eight amphitheaters in Seattle, Los Angeles, San Diego, Denver, Dallas, Atlanta, Cleveland and
Toronto. Historic Theatre Group operates three theaters in the Minneapolis area that primarily
host theatrical performances. In addition, our Events segment used $19.0 million in cash, primarily
for our acquisitions of an interest in Angel Festivals Limited, a dance festival promotion company;
an interest in Trunk Ltd., a specialty merchandise company; interests in several Concert
Productions International entities, which engage in full service global tours, provide certain
artist services and invest in theatrical productions; and Gamerco, S.A., a concert promotion
company in Spain. Finally, our Digital Distribution segment received $4.0 million in cash,
primarily related to our acquisition of an interest in Musictoday which provides services to
artists for online fan clubs, artist e-commerce and fulfillment, VIP packaging and artist fan club
and secondary market ticketing.
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 capital expenditures and revenue generating
capital expenditures. Maintenance capital expenditures are associated with the renewal and
improvement of existing venues and, to a lesser extent, capital expenditures related to information
systems, web development and administrative offices. Revenue generating capital 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 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Maintenance capital expenditures |
|
$ |
48,120 |
|
|
$ |
56,325 |
|
|
$ |
31,474 |
|
Revenue generating capital expenditures |
|
|
17,585 |
|
|
|
36,195 |
|
|
|
41,961 |
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
65,705 |
|
|
$ |
92,520 |
|
|
$ |
73,435 |
|
|
|
|
|
|
|
|
|
|
|
Maintenance capital expenditures for 2005 include higher expenditures relating to capital
spent to improve the audience experience at our owned and/or operated amphitheaters. We expect
maintenance capital expenditures for 2007 to be consistent with 2006.
Revenue generating capital expenditures declined during 2006 primarily due to the timing of
capital expenditures associated with the development and renovation of five venues, three of which
were completed in 2005. In addition, in May 2006, we sold one of these venue projects which would
have required us to incur capital expenditures to build-out this venue. This sale relieved us of
these future capital expenditure commitments and reimbursed us for capital expenditures already
incurred on this venue. Although management has determined not to pursue the development of this
remaining venue project, we expect our revenue generating capital expenditures in 2007 to increase
related to the renovation or construction of other venues.
56
Share Repurchase Program
Our board of directors authorized a $150 million share repurchase program in December 2005.
That program expired on December 31, 2006. A total of 3.4 million shares were repurchased under
this share repurchase program for an aggregate purchase price of $42.7 million, including
commissions and fees, with an average purchase price of $12.65 per share. From January 1, 2006 to
December 31, 2006, we repurchased 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
capital expenditures while our long-term liquidity needs are primarily acquisition related. 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 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, 2006 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, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
(In thousands) |
|
Total |
|
|
2007 |
|
|
2008 2009 |
|
|
2010 2011 |
|
|
2012 and thereafter |
|
Long-term debt
obligations, including
current maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans and revolving
credit facility |
|
$ |
594,750 |
|
|
$ |
5,500 |
|
|
$ |
11,000 |
|
|
$ |
11,000 |
|
|
$ |
567,250 |
|
Other long-term debt |
|
|
44,396 |
|
|
|
26,221 |
|
|
|
2,848 |
|
|
|
3,066 |
|
|
|
12,261 |
|
Preferred stock |
|
|
40,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000 |
|
Estimated interest payments(1) |
|
|
305,470 |
|
|
|
39,255 |
|
|
|
86,415 |
|
|
|
100,179 |
|
|
|
79,621 |
|
Non-cancelable operating
lease obligations (4) |
|
|
1,114,747 |
|
|
|
71,722 |
|
|
|
131,159 |
|
|
|
111,690 |
|
|
|
800,176 |
|
Non-cancelable contracts(2)
(4) |
|
|
399,773 |
|
|
|
250,593 |
|
|
|
63,681 |
|
|
|
19,326 |
|
|
|
66,173 |
|
Capital expenditures |
|
|
12,127 |
|
|
|
8,889 |
|
|
|
738 |
|
|
|
2,500 |
|
|
|
|
|
Other long-term liabilities(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,511,263 |
|
|
$ |
402,180 |
|
|
$ |
295,841 |
|
|
$ |
247,761 |
|
|
$ |
1,565,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes dividends on the Series A and Series B redeemable preferred stock. Excludes
interest on the outstanding revolver balance. Based on the outstanding revolver balance of
$48.0 million at December 31, 2006, annual interest expense through maturity in June 2012
would be approximately $3.4 million assuming a rate of 7.10% and that we maintain this level
of indebtedness under the revolver. |
|
(2) |
|
Excluded from the non-cancelable contracts is $74.3 million related to severance obligations
for employment contracts calculated as if such employees were terminated on January 1, 2007. |
57
|
|
|
(3) |
|
Other long-term liabilities consist of $22.9 million of tax contingencies, $13.3 million of
deferred revenue, $33.7 million of accrued rent and $18.8 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. |
|
(4) |
|
Commitment amounts for non-cancelable operating leases and non-cancelable contracts which
stipulate an increase in the commitment amount based on an inflationary index have been
estimated using an inflation factor of 3% for North America and 1.75% for the United Kingdom. |
During
2006, in connection with our acquisition of the Historic Theatre
Group, we guaranteed obligations related to a lease agreement. In the
event of default, we could be liable for obligations which have
future lease payments (undiscounted) of approximately $45.3 million
through the end of 2035 which are not reflected in the table above.
The scheduled future minimum rentals for this lease for the years
2007 through 2011 are $1.6 million each year. We believe that the
likelihood of material liability being triggered under this lease is
remote, and no liability has been accrued for these contingent lease
obligations as of December 31, 2006.
Minimum rentals of $116.5 million to be received in years 2007 through 2020 under
non-cancelable subleases are excluded from the commitment amounts in the above table.
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(in thousands) |
|
2006 |
|
2005 |
|
2004 |
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
16,720 |
|
|
$ |
(3,917 |
) |
|
$ |
122,453 |
|
Investing activities |
|
$ |
(375,163 |
) |
|
$ |
(106,049 |
) |
|
$ |
(84,076 |
) |
Financing activities |
|
$ |
268,294 |
|
|
$ |
363,268 |
|
|
$ |
20,699 |
|
Operating Activities
Year Ended 2006 Compared to Year Ended 2005
Cash provided by operations was $16.7 million for the year ended December 31, 2006, compared
to cash used in operations of $3.9 million for the year ended December 31, 2005. The $20.6 million
increase in cash provided by operations primarily resulted from an increase in net income, adjusted
for non-cash charges and non-operating activities, and changes in the event related operating
accounts which are dependent on the number and size of events ongoing at period end. We paid less
prepaid event related expenses in 2006 as compared to 2005 resulting in an increase to cash
provided by operations. Conversely, we paid more accrued event related expenses and received less
deferred revenue in 2006 as compared to 2005 resulting in a decrease to cash provided by
operations. In addition, the accounts receivable increase was higher due to the timing and number
of events in 2006 as compared to 2005 resulting in a decrease to cash provided by operations.
Finally, the other assets increase was higher due primarily to prepaid rent for new lease
agreements in 2006 as compared to 2005 resulting in a decrease to cash provided by operations.
Year Ended 2005 Compared to Year Ended 2004
Cash used in operations was $3.9 million for the year ended December 31, 2005 as compared to
cash provided by operations of $122.5 million for the year ended December 31, 2004. The $126.4
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 dependent on the number and size of events ongoing 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.
Investing Activities
Year Ended 2006 Compared to Year Ended 2005
Cash used in investing activities was $375.2 million for the year ended December 31, 2006, as
compared to $106.0 million for the year ended December 31, 2005. The $269.2 million increase in
cash used in investing activities is primarily due to $351.9 million of cash used primarily for our
acquisition of HOB and Gamerco, S.A. during 2006. This increase is offset by $36.3 million of
proceeds received from the sale of certain theatrical assets and portions of our sports
representation business assets. In addition, our capital expenditures declined during 2006 as
compared to the prior year due to the timing of five venue development and renovation projects,
three of which were completed in 2005. Finally, we received more distributions from our
nonconsolidated affiliates in 2006 as compared to 2005.
Year Ended 2005 Compared to Year Ended 2004
58
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.
Financing Activities
Historically, we had funded our cash needs through an intercompany promissory note with Clear
Channel. 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, generally
on a daily basis. As we had cash needs, they were funded from Clear Channel through this account.
Since our separation from Clear Channel, we have funded our cash needs through cash from
operations, borrowings under our revolving credit facility and available cash and cash equivalents.
Year Ended 2006 Compared to Year Ended 2005
Cash provided by financing activities was $268.3 million for the year ended December 31, 2006
as compared to $363.3 million for the year ended December 31, 2005. The $95.0 million decrease in
cash provided by financing activities was primarily a result of repayments on our senior secured
credit facility during 2006, repurchases of our common stock during 2006, proceeds received from
the issuance of redeemable preferred stock during 2005 and a slight decline in proceeds received
from borrowings under our senior secured credit facility. Partially offsetting these decreases
was an increase in contributions from minority interest partners primarily related to a
contribution received in advance of certain capital expenditures during 2006 compared to a
contribution received from the minority interest partner for the Mean Fiddler acquisition during
2005.
Year Ended 2005 Compared to Year Ended 2004
Cash provided by financing activities was $363.3 million for the year ended December 31, 2005,
as compared to $20.7 million for the year ended December 31, 2004. The $342.6 million increase in
cash provided by financing activities was a result of proceeds received from our term loan, the
issuance of redeemable preferred stock and a contribution received from the minority interest
partner for the Mean Fiddler acquisition during 2005, offset by repurchases of our common stock.
Seasonality
Our Events segment typically experiences operating losses in the second and third quarters due
to the timing of the live music events, especially domestically, where artist performance fees and
other costs typically exceed ticket revenues. These losses are generally offset by higher operating
income in the second and third quarters in our Venues and Sponsorship segment as our outdoor venues
are primarily used in, and our sponsorship fulfillment is higher during, May through September. We
also experience higher operating income in the second and third quarters in our Digital
Distribution segment based on ticket rebates earned on the activity in our Events segment. 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.
Cash flows from our Events segment typically have a slightly different seasonality as payments
are often made for artist performance fees and 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.
59
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. Currently, we do not operate in any
hyper-inflationary countries. Our foreign operations reported operating income of $53.6 million for
the year ended December 31, 2006. 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, 2006 by $5.4 million. As of December 31, 2006, 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 conditions of the United States or other foreign countries in which we operate or
on the results of operations of our 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, 2006, we had $0.9 million outstanding in
forward currency contracts.
Interest Rate Risk
Our market risk is also affected by changes in interest rates. We had $639.1 million total
debt outstanding as of December 31, 2006. Of the total amount, we have an interest rate hedge with
a notional amount of $162.5 million, $43.9 million of fixed rate debt and $432.7 million of
variable rate debt.
Based on the amount of our floating-rate debt as of December 31, 2006, each 25 basis point
increase or decrease in interest rates would increase or decrease our annual interest expense and
cash outlay by approximately $1.1 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, 2006 with no subsequent change in rates
for the remainder of the period.
We currently use interest rate swaps and other derivative instruments to reduce our exposure
to market risk from changes in interest rates. We do not intend to hold or issue interest rate
swaps for trading purposes. The accounting for changes in the fair value of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging relationship, and
further, on the type of hedging relationship. For derivative instruments that are designated and
qualify as hedging instruments, we must designate the hedging instrument, based upon the exposure
being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign
operation. We formally document all relationships between hedging instruments and hedged items, as
well as its risk management objectives and strategies for undertaking various hedge transactions.
We formally assess, both at inception and at least quarterly thereafter, whether the derivatives
that are used in hedging transactions are highly effective in offsetting changes in either the fair
value or cash flows of the hedged item. If a derivative ceases to be a highly effective hedge, we
discontinue hedge accounting. We account for our derivative instruments that are not designated as
hedges at fair value with changes in fair value recorded in current earnings during the period of
change.
For derivative instruments that are designated and qualify as a fair value hedge (i.e.,
hedging the exposure to changes in the fair value of an asset or a liability or an identified
portion thereof that is attributable to a particular risk), the gain or loss on the derivative
instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged
risk are recognized in the same line item associated with the hedged item in current earnings
during the period of the change in fair values (for example, in interest expense when the hedged
item is fixed-rate debt). For derivative instruments that are designated and qualify as a cash flow
hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable
to a particular risk), the effective portion of the gain or loss on the derivative instrument is
reported as a component of other comprehensive income (loss) and reclassified into earnings in the
same line item associated with the forecasted transaction in the same period or periods during
which the hedged transaction affects earnings (for example, in interest expense when the hedged
transactions are interest cash flows associated with floating-rate debt). The remaining gain or
loss on the derivative instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, is recognized in other expense (income) net in current
earnings during the period of change. For derivative instruments that are designated and qualify as
a hedge of a net investment in a foreign currency, the gain or loss is reported in other
comprehensive income (loss) as part of the cumulative translation adjustment to the extent it is
effective. Any ineffective portions of net investment hedges are recognized in other expense
(income) net in current earnings during the period of change.
60
In March 2006, we entered into two separate interest rate swaps for which we purchased a
series of interest rate caps and sold a series of interest rate floors with a $162.5 million
aggregate notional amount that effectively converts a portion of our floating-rate debt to a
fixed-rate basis. These agreements expire in March 2009. The fair value of these agreements at
December 31, 2006 was an asset of $0.1 million. These agreements were put in place to eliminate or
reduce the variability of a portion of the cash flows from the interest payments related to the
senior secured credit facility. The terms of our senior secured credit facility required that an
interest rate swap be put in place for at least 50% of the $325 million senior term loan and for at
least three years.
Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (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 FASB Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (Statement 123(R)), provided that (i) 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 (ii) the award includes no other features that would require
liability classification. We considered FSP FAS 123(R)-4 with our implementation of Statement
123(R), and determined it had no impact on our financial position or results of operations.
In April 2006, the FASB issued FASB Staff Position FIN 46(R)-6, Determining the Variability to
be Considered When Applying FASB Interpretation No. 46(R) (FSP FIN 46(R)-6). FSP FIN 46(R)-6
addresses the approach to determine the variability to consider when applying FASB Interpretation
No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46(R)). The
variability that is considered in applying FIN 46(R) may affect (i) the determination as to whether
the entity is a variable interest entity, (ii) the determination of which interests are variable
interests in the entity, (iii) if necessary, the calculation of expected losses and residual
returns of the entity, and (iv) the determination of which party is the primary beneficiary of the
variable interest entity. We adopted FSP FIN 46(R)-6 on July 1, 2006 and its adoption did not
materially impact our financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 creates a single model to
address uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN
48 on January 1, 2007, as required. The cumulative effect of adopting FIN 48, if any, will be
recorded in retained earnings and other accounts as applicable. While we continue to assess the
effects of adoption of FIN 48, we expect that our adoption of FIN 48 will not have a material
impact on our financial position and results of operations. We also expect that application of FIN
48 may result in a greater degree of volatility in the effective tax rate and balance sheet
classification of tax liabilities.
In June 2006, the Emerging Issues Task Force (EITF) ratified the consensus reached in Issue
06-3 How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation) (EITF 06-3). EITF 06-3
is applicable to all taxes that are externally imposed on a revenue producing transaction between a
seller and a customer. EITF 06-3 concludes that a company may adopt a policy of presenting taxes
either gross within revenue or net. If taxes subject to EITF 06-3 are significant, a company is
required to disclose its accounting policy for presenting taxes and the amounts of such taxes that
are recognized on a gross basis. EITF 06-3 is effective for the first interim reporting period
beginning after December 15, 2006, with early application of this guidance permitted. We early
adopted EITF 06-3 on June 30, 2006, and have added the required disclosures to reflect our policy
on presenting taxes on a net basis.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (Statement 157). Statement 157 provides guidance for using fair value to
measure assets and liabilities and also responds to investors requests for expanded information
about the extent to which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on earnings. Statement 157
applies whenever other standards require (or permit) assets or liabilities to be measured at fair
value. Statement 157 does not expand the use of fair value in any new circumstances. Statement 157
is effective for financial statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. Earlier application is encouraged, provided that the
reporting entity has not yet issued financial statements for that year, including financial
statements for an interim period within that fiscal year. The provisions of Statement 157 are
applied prospectively with retrospective application to certain financial instruments. We will
adopt Statement 157 on January 1, 2008 and are currently assessing the impact its adoption will
have on our financial position and results of operations.
61
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 (SAB Topic 1.N) addresses
quantifying the financial statement effects of misstatements, specifically, how the effects of
prior year uncorrected errors must be considered in quantifying misstatements in the current year
financial statements. SAB 108 does not change the SEC staffs previous positions in Staff
Accounting Bulletin No. 99, Materiality, (SAB Topic 1.M) regarding qualitative considerations in
assessing the materiality of misstatements. SAB 108 is effective for fiscal years ending after
November 15, 2006. SAB 108 offers special transition provisions only for circumstances where its
application would have altered previous materiality conclusions. The SEC staff encourages early
application of the guidance in SAB 108 in financial statements filed after the publication of SAB
108 for any interim period of the first fiscal year ending after November 15, 2006. We adopted SAB
108 during the fourth quarter of 2006 and its adoption did not materially impact our financial
position or results of operations.
Stock Option Accounting
We adopted Statement 123(R), which is a revision of FASB Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (Statement 123) effective January 1,
2006. Statement 123(R) supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and amends FASB 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. In accordance with Statement 123(R), we continue to use the
Black-Scholes option pricing model to estimate the fair value of our stock options at the date of
grant. Pro forma disclosure is no longer an alternative. We chose the modified-prospective
application of Statement 123(R)and recorded $2.1 million of non-cash compensation expense during
the year ended December 31, 2006. We expect that future periods of 2007 will be impacted by similar
amounts until additional stock option grants are approved. The total amount of compensation costs
not yet recognized related to nonvested stock options at December 31, 2006 was $6.2 million with a
weighted average period over which it is expected to be recognized of five years.
Prior to our adoption of Statement 123(R), we accounted for our stock-based award plans in
accordance with APB 25, and related interpretations, under which compensation expense was recorded
only to the extent that the current market price of the underlying stock exceeds the exercise
price. In addition, we disclosed the pro forma net income (loss) as if the stock-based awards had
been accounted for using the provisions of Statement 123. Pro forma earnings (loss) per share
amounts are not disclosed as we had no common stock prior to the Separation. There have been no
modifications made to or changes in the terms related to any outstanding stock options prior to our
adoption of Statement 123(R).
Critical Accounting Policies and Estimates
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. Management
believes that the following accounting estimates are the most critical to aid in fully
understanding and evaluating our reported financial results, and they require managements most
difficult, subjective or complex judgments, resulting from the need to make estimates about the
effect of matters that are inherently uncertain. The following narrative describes these critical
accounting estimates, the judgments and assumptions and the effect if actual results differ from
these assumptions.
Allowance for Doubtful Accounts
We evaluate the collectibility of our accounts receivable based on a combination of factors.
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.
62
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.
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 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 and other
fair value measures. 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 any potential impairment at least
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. Based on
our analysis for 2006, no impairment was required.
Revenue Recognition
Revenue from the presentation and production of an event is recognized after the performance
occurs upon settlement of the event. Revenue related to larger global tours is recognized after the
performance occurs; however, any profits related to these tours, primarily related to music tour
production and tour management services, is recognized after minimum revenue thresholds, if any,
have been achieved. Revenue collected in advance of the event is recorded as deferred revenue until
the event occurs. Revenue collected from sponsorships and other revenue, which is not related to
any single event, is classified as deferred revenue and generally amortized over the operating
season or the term of the contract.
We account for taxes that are externally imposed on revenue producing transactions on a net
basis, as a reduction to revenue.
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 value of the display space or tickets relinquished or the fair value of the advertising,
merchandise or services received. Revenue is recognized on barter 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.
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.
63
Income Taxes
We account for income taxes using the liability method in accordance with FASB Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. 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 U.S. taxes on foreign operations. It is not practical to
determine the amount of federal income taxes, if any, that might become due in the event that the
earnings were distributed.
Our provision for income taxes has been computed on the basis that we file 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. Certain tax
liabilities owed by us were remitted to the appropriate taxing authority by Clear Channel and were
accounted for as non-cash capital contributions by Clear Channel to us. Tax benefits recognized on
employee stock option exercises were retained by Clear Channel. Subsequent to the Separation, we
file separate consolidated income tax returns.
Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges is as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
0.91
|
|
0.07
|
|
1.18
|
|
2.04
|
|
1.40 |
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 nonconsolidated affiliates plus fixed charges. Fixed charges represent interest,
amortization of debt discount and expense, and the estimated interest portion of rental charges.
Rental charges exclude variable rent expense for events in third-party venues. Prior period
calculations have been revised to conform to the current period presentation.
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.
64
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 balance sheets of Live Nation, Inc. and subsidiaries
as of December 31, 2006 and 2005, and the related consolidated and combined statements of
operations, changes in business/shareholders equity, and cash flows for each of the three years in
the period ended December 31, 2006. Our audit also included the financial statement schedule
listed in the Index at Item 15(a)2. These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to express an opinion on these financial
statements and 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. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as 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 financial position of Live Nation, Inc. and subsidiaries at December 31,
2006 and 2005, 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, 2006, in conformity with U.S.
generally accepted accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the financial statements takes as a whole, presents fairly
in all material respects the information set forth herein.
As discussed in Notes A and M to the consolidated financial statements, in 2006 the Company changed
its method of accounting for stock based compensation.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Live Nation, Inc.s internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 28, 2007 expressed an unqualified opinion thereon.
Los Angeles, California
February 28, 2007
65
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands except share data) |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
313,880 |
|
|
$ |
403,716 |
|
Accounts receivable, less allowance of $13,465 in 2006 and $9,518 in 2005 |
|
|
248,772 |
|
|
|
190,207 |
|
Prepaid expenses |
|
|
136,938 |
|
|
|
115,055 |
|
Other current assets |
|
|
38,519 |
|
|
|
46,295 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
738,109 |
|
|
|
755,273 |
|
PROPERTY, PLANT AND EQUIPMENT |
|
|
|
|
|
|
|
|
Land, buildings and improvements |
|
|
999,561 |
|
|
|
910,926 |
|
Furniture and other equipment |
|
|
193,290 |
|
|
|
166,004 |
|
Construction in progress |
|
|
43,370 |
|
|
|
39,856 |
|
|
|
|
|
|
|
|
|
|
|
1,236,221 |
|
|
|
1,116,786 |
|
Less accumulated depreciation |
|
|
360,049 |
|
|
|
307,867 |
|
|
|
|
|
|
|
|
|
|
|
876,172 |
|
|
|
808,919 |
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS |
|
|
|
|
|
|
|
|
Intangible assets net |
|
|
73,398 |
|
|
|
12,351 |
|
Goodwill |
|
|
423,169 |
|
|
|
137,110 |
|
OTHER ASSETS |
|
|
|
|
|
|
|
|
Notes receivable, less allowance of $545 in 2006 and $745 in 2005 |
|
|
2,613 |
|
|
|
4,720 |
|
Investments in nonconsolidated affiliates |
|
|
61,342 |
|
|
|
30,660 |
|
Other assets |
|
|
50,199 |
|
|
|
27,551 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,225,002 |
|
|
$ |
1,776,584 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
40,646 |
|
|
$ |
37,654 |
|
Accrued expenses |
|
|
471,414 |
|
|
|
382,606 |
|
Deferred revenue |
|
|
230,179 |
|
|
|
232,754 |
|
Current portion of long-term debt |
|
|
31,721 |
|
|
|
25,705 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
773,960 |
|
|
|
678,719 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
607,425 |
|
|
|
341,136 |
|
Other long-term liabilities |
|
|
88,790 |
|
|
|
53,667 |
|
Minority interest liability |
|
|
76,165 |
|
|
|
26,362 |
|
Series A and Series B redeemable preferred stock |
|
|
40,000 |
|
|
|
40,000 |
|
Commitments and contingent liabilities (Note I) |
|
|
|
|
|
|
|
|
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 and
outstanding |
|
|
672 |
|
|
|
672 |
|
Additional paid-in capital |
|
|
757,748 |
|
|
|
748,011 |
|
Retained deficit |
|
|
(119,005 |
) |
|
|
(87,563 |
) |
Cost of shares held in treasury (1,697,227 shares in 2006 and 1,506,900 shares in 2005) |
|
|
(21,472 |
) |
|
|
(18,003 |
) |
Accumulated other comprehensive income (loss) |
|
|
20,719 |
|
|
|
(6,417 |
) |
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
638,662 |
|
|
|
636,700 |
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
2,225,002 |
|
|
$ |
1,776,584 |
|
|
|
|
|
|
|
|
See Notes to Consolidated and Combined Financial Statements
66
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands except share and per share data) |
|
Revenue |
|
$ |
3,691,559 |
|
|
$ |
2,936,845 |
|
|
$ |
2,806,128 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses |
|
|
2,981,801 |
|
|
|
2,310,925 |
|
|
|
2,185,127 |
|
Selling, general and administrative expenses |
|
|
529,104 |
|
|
|
518,907 |
|
|
|
460,166 |
|
Depreciation and amortization (Note B) |
|
|
128,167 |
|
|
|
64,622 |
|
|
|
64,095 |
|
Loss (gain) on sale of operating assets |
|
|
(11,640 |
) |
|
|
4,859 |
|
|
|
6,371 |
|
Corporate expenses |
|
|
33,863 |
|
|
|
50,715 |
|
|
|
31,386 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
30,264 |
|
|
|
(13,183 |
) |
|
|
58,983 |
|
Interest expense |
|
|
37,218 |
|
|
|
6,059 |
|
|
|
3,119 |
|
Interest expense with Clear Channel Communications |
|
|
|
|
|
|
46,437 |
|
|
|
42,355 |
|
Interest income |
|
|
(12,446 |
) |
|
|
(2,506 |
) |
|
|
(3,221 |
) |
Equity in losses (earnings) of nonconsolidated affiliates |
|
|
(11,265 |
) |
|
|
276 |
|
|
|
(2,906 |
) |
Minority interest expense |
|
|
12,209 |
|
|
|
5,236 |
|
|
|
3,300 |
|
Other expense (income) net |
|
|
(1,220 |
) |
|
|
446 |
|
|
|
1,611 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
5,768 |
|
|
|
(69,131 |
) |
|
|
14,725 |
|
Income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
26,876 |
|
|
|
(53,025 |
) |
|
|
(55,946 |
) |
Deferred |
|
|
10,334 |
|
|
|
114,513 |
|
|
|
54,411 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(31,442 |
) |
|
|
(130,619 |
) |
|
|
16,260 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain on cash flow derivatives |
|
|
(104 |
) |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(27,032 |
) |
|
|
4,398 |
|
|
|
18,472 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(4,306 |
) |
|
$ |
(135,017 |
) |
|
$ |
(2,212 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.48 |
) |
|
$ |
(1.96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares
outstanding |
|
|
64,853,243 |
|
|
|
66,809,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated and Combined Financial Statements
67
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN BUSINESS/SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Shares |
|
|
Comprehensive |
|
|
|
|
|
|
Common |
|
|
|
|
|
|
Additional |
|
|
Retained |
|
|
Owners Net |
|
|
Held in |
|
|
Income |
|
|
|
|
|
|
Shares Issued |
|
|
Common Stock |
|
|
Paid-in Capital |
|
|
Deficit |
|
|
Investment |
|
|
Treasury |
|
|
(Loss) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,442 |
) |
Non-cash compensation |
|
|
|
|
|
|
|
|
|
|
3,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,307 |
|
Common shares issued for business
acquisitions |
|
|
|
|
|
|
|
|
|
|
16,395 |
|
|
|
|
|
|
|
|
|
|
|
21,246 |
|
|
|
|
|
|
|
37,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spin-off adjustment |
|
|
|
|
|
|
|
|
|
|
(9,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,965 |
) |
Purchase of common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,715 |
) |
|
|
|
|
|
|
(24,715 |
) |
Unrealized holding gain on cash flow
derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104 |
|
|
|
104 |
|
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,032 |
|
|
|
27,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006 |
|
|
67,174,912 |
|
|
$ |
672 |
|
|
$ |
757,748 |
|
|
$ |
(119,005 |
) |
|
$ |
|
|
|
$ |
(21,472 |
) |
|
$ |
20,719 |
|
|
$ |
638,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated and Combined Financial Statements
68
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(31,442 |
) |
|
$ |
(130,619 |
) |
|
$ |
16,260 |
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
118,343 |
|
|
|
62,279 |
|
|
|
60,918 |
|
Amortization of intangibles |
|
|
9,824 |
|
|
|
2,343 |
|
|
|
3,177 |
|
Deferred income tax expense |
|
|
10,334 |
|
|
|
114,513 |
|
|
|
54,411 |
|
Amortization of debt issuance costs |
|
|
736 |
|
|
|
9 |
|
|
|
|
|
Current tax benefit dividends to Clear Channel Communications |
|
|
|
|
|
|
(76,705 |
) |
|
|
(64,063 |
) |
Non-cash compensation expense |
|
|
3,432 |
|
|
|
1,256 |
|
|
|
1,084 |
|
Loss (gain) on sale of operating assets |
|
|
(11,640 |
) |
|
|
4,859 |
|
|
|
6,371 |
|
Loss on sale of other investments |
|
|
1,659 |
|
|
|
|
|
|
|
|
|
Equity in losses (earnings) of nonconsolidated affiliates |
|
|
(11,265 |
) |
|
|
276 |
|
|
|
(2,906 |
) |
Minority interest expense |
|
|
12,209 |
|
|
|
5,236 |
|
|
|
3,300 |
|
Decrease in other net |
|
|
|
|
|
|
(119 |
) |
|
|
(462 |
) |
Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable |
|
|
(53,554 |
) |
|
|
(15,911 |
) |
|
|
11,100 |
|
Decrease (increase) in prepaid expenses |
|
|
(11,837 |
) |
|
|
(41,759 |
) |
|
|
5,527 |
|
Decrease (increase) in other assets |
|
|
(1,762 |
) |
|
|
4,592 |
|
|
|
1,178 |
|
Increase in accounts payable, accrued expenses and other liabilities |
|
|
3,902 |
|
|
|
41,946 |
|
|
|
10,511 |
|
Increase (decrease) in deferred revenue |
|
|
(22,219 |
) |
|
|
24,132 |
|
|
|
16,047 |
|
Decrease in other net |
|
|
|
|
|
|
(245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
16,720 |
|
|
|
(3,917 |
) |
|
|
122,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Collection of notes receivable |
|
|
4,427 |
|
|
|
2,517 |
|
|
|
2,076 |
|
Advances to notes receivable |
|
|
(2,420 |
) |
|
|
(2,341 |
) |
|
|
(133 |
) |
Distributions from nonconsolidated affiliates |
|
|
18,148 |
|
|
|
5,456 |
|
|
|
5,060 |
|
Investments made to nonconsolidated affiliates |
|
|
(15,975 |
) |
|
|
(11,203 |
) |
|
|
(6,473 |
) |
Proceeds from disposal of other investments |
|
|
1,743 |
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(65,705 |
) |
|
|
(92,520 |
) |
|
|
(73,435 |
) |
Proceeds from disposal of operating assets |
|
|
36,292 |
|
|
|
580 |
|
|
|
3,581 |
|
Acquisition of operating assets, net of cash acquired |
|
|
(351,858 |
) |
|
|
(8,467 |
) |
|
|
(13,727 |
) |
Decrease (increase) in other net |
|
|
185 |
|
|
|
(71 |
) |
|
|
(1,025 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(375,163 |
) |
|
|
(106,049 |
) |
|
|
(84,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt with Clear Channel Communications |
|
|
|
|
|
|
220,981 |
|
|
|
24,079 |
|
Payment on debt with Clear Channel Communications at spin-off |
|
|
|
|
|
|
(220,000 |
) |
|
|
|
|
Proceeds from long-term debt, net of debt issuance costs |
|
|
339,491 |
|
|
|
344,129 |
|
|
|
6,725 |
|
Payments on long-term debt |
|
|
(78,253 |
) |
|
|
(1,169 |
) |
|
|
(7,550 |
) |
Contributions from minority interest partners |
|
|
33,188 |
|
|
|
20,543 |
|
|
|
|
|
Distributions to minority interest partners |
|
|
(1,415 |
) |
|
|
(2,713 |
) |
|
|
(2,555 |
) |
Proceeds from issuance of redeemable preferred stock, net of debt
issuance costs |
|
|
|
|
|
|
19,500 |
|
|
|
|
|
Payments for purchases of common stock |
|
|
(24,717 |
) |
|
|
(18,003 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
268,294 |
|
|
|
363,268 |
|
|
|
20,699 |
|
Effect of exchange rate changes on cash |
|
|
313 |
|
|
|
(28,723 |
) |
|
|
3,701 |
|
Net increase in cash and cash equivalents |
|
|
(89,836 |
) |
|
|
224,579 |
|
|
|
62,777 |
|
Cash and cash equivalents at beginning of period |
|
|
403,716 |
|
|
|
179,137 |
|
|
|
116,360 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
313,880 |
|
|
$ |
403,716 |
|
|
$ |
179,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
35,406 |
|
|
$ |
4,549 |
|
|
$ |
3,048 |
|
Income taxes |
|
$ |
20,508 |
|
|
$ |
17,253 |
|
|
$ |
9,685 |
|
See Notes to Consolidated and Combined Financial Statements
69
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Live Nation, Inc. (the Company or Live Nation) was incorporated in Delaware on August 2,
2005 in preparation for the contribution and transfer by Clear Channel Communications, Inc. (Clear
Channel) of substantially all of its 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 trading under the symbol LYV.
Prior to the Separation, Live Nation was a wholly owned subsidiary of Clear Channel. As part
of the Separation, holders of Clear Channels common stock received one share of Live Nation common
stock for every eight shares of Clear Channel common stock.
Following the Separation, the Company reorganized its business units and the way in which
these businesses are assessed and therefore changed its reportable segments, starting in 2006, to
Events, Venues and Sponsorship, and Digital Distribution. The Events segment principally involves
the promotion or production of live music shows, theatrical performances and specialized motor
sports events as well as providing various services to artists. The Venues and Sponsorship segment
principally involves the operation of venues and the sale of premium seats, national and local
sponsorships and placement of advertising, including signage and promotional programs, and naming
of subscription series and venues. The Digital Distribution segment principally involves the
management of the Companys third-party ticketing relationships, in-house ticketing operations and
online and wireless distribution activities, including the development of the Companys website. In
addition, the Company has operations in the sports representation and other businesses.
Seasonality
Due to the seasonal nature of shows in outdoor amphitheaters and festivals, which primarily
occur May through September, the Company experiences higher revenues during the second and third
quarters. This seasonality also results in higher balances in cash and cash equivalents, accounts
receivable, prepaid expenses, accrued expenses and deferred revenue during these quarters.
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, using the historical bases of assets and liabilities of the entertainment business.
Management believes the assumptions underlying the combined financials statements are reasonable.
However, the combined financial statements included herein may not reflect what the Companys
results of operations, financial position and cash flows would have been had it operated as a
separate, stand-alone entity during the periods presented or what its results of operations,
financial position and cash flows will be in the future. Clear Channels 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 its 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, its majority owned
subsidiaries and variable interest entities for which the Company is the primary beneficiary.
Significant intercompany accounts among the consolidated and combined businesses have been
eliminated in consolidation. Minority interest expense is recorded for consolidated affiliates in
which the Company owns more than 50%, but not all, of the voting common stock and also variable
interest entities for which the Company is the primary beneficiary. Investments in nonconsolidated
affiliates in which the Company owns 20% to 50% of the voting common stock or otherwise exercises
significant influence over operating and financial policies of the nonconsolidated affiliate are
accounted for using the equity method of accounting. Investments
70
in nonconsolidated affiliates in which the Company owns less than 20% of the voting
common stock are accounted for using the cost method of accounting.
During 2006, the Company recorded an adjustment to additional paid-in capital of $10.0 million
to adjust the carrying value of assets distributed at the date of spin-off.
Reclassifications
Certain reclassifications have been made to the 2005 and 2004 consolidated and combined
financial statements to conform to the 2006 presentation. The reclassifications primarily relate to
a change on the consolidated and combined statements of cash flows to reflect contributions from
and distributions to minority interest partners as cash flows provided by (used in) financing
activities. These cash flows had been reflected previously as cash flows provided by (used in)
operating activities. The increase to cash flows provided by (used in) financing activities and the
offsetting decrease to cash flows provided by (used in) operating activities was $17.8 million for
the year ended December 31, 2005. The decrease to cash flows provided by (used in) financing
activities and the offsetting increase to cash flows provided by (used in) operating activities was
$2.6 million for the year ended December 31, 2004. In addition, as of the year ended December 31,
2005, $22.9 million of long-term accrued rent was reclassified from accrued expenses to other
long-term liabilities. Finally, as of the year ended December 31, 2005, $0.4 million of debt
issuance costs was reclassified from other current assets to other assets. None of the these
reclassifications are considered significant to the Companys results of operations or financial
position.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an original maturity of
three months or less.
Allowance for Doubtful Accounts
The Company evaluates the collectibility of its accounts receivable based on a combination of
factors. 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.
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.
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
71
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
circumstances change, such as a reduction in operating cash flow or a 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 based on the difference
between the fair value and the carrying value. Any such impairment charge is recorded in
depreciation and amortization expense in the statement of operations. 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.
Intangible Assets
The Company classifies intangible assets as definite-lived, indefinite-lived or goodwill.
Definite-lived intangibles primarily include non-compete agreements, intellectual property 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 or fair
value. Indefinite-lived intangibles include primarily intangible value related to trade names. The
excess cost over fair value of net assets acquired is classified as goodwill. The goodwill and
indefinite-lived intangibles are not subject to amortization, but are tested for impairment at
least annually.
The Company tests for possible impairment of definite-lived intangible assets whenever events
or circumstances change, such as a reduction in operating cash flow or a 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 based on the
difference between the fair value and the carrying value. Any such impairment charge is recorded
in depreciation and amortization expense in the statement of operations. 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
and indefinite-lived intangibles 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 and indefinite-lived intangibles. The second step, used to measure the amount
of any potential impairment, uses a discounted cash flow model to determine if the carrying value
of the reporting unit, including goodwill and indefinite-lived intangibles, 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 and indefinite-lived intangibles. 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
72
As part of the Companys operations, it will invest in certain assets or rights to use assets,
generally in theatrical productions. The Company reviews the value of these assets and records
impairment charges in direct 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,
2006 and 2005. 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, 2006 and 2005.
The Company has fixed rate debt with a minority interest partner of $24.6 million at December
31, 2006. The Company is unable to determine the fair value.
Income Taxes
The Company accounts for income taxes using the liability method in accordance with Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. 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 of 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 (U.S.) taxes on foreign operations. It is not practical to
determine the amount of federal income taxes, if any, that might become due in the event that the
earnings were distributed.
The Companys provision for income taxes has been computed on the basis that the Company files
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.
Certain tax liabilities owed by the Company were remitted to the appropriate taxing authority by
Clear Channel and were accounted for as non-cash capital contributions by Clear Channel to the
Company. Tax benefits recognized on employee stock option exercises prior to the Separation were
retained by Clear Channel. Subsequent to the Separation, the Company files separate consolidated
income tax returns.
The Company has established a policy of including interest related to tax loss contingencies
in income tax expense (benefit).
The Companys provision for income taxes is further disclosed in Note K.
Revenue Recognition
Revenue from the presentation and production of an event is recognized after the performance
occurs upon settlement of the event. Revenue related to larger global tours is recognized after the
performance occurs; however, any profits related to these tours, primarily related to music tour
production and tour management services, is recognized after minimum revenue thresholds, if any,
have been achieved. Revenue collected in advance of the event is recorded as deferred revenue until
the event occurs. Revenue collected from sponsorships and other revenue, which is not related to
any single event, is classified as deferred revenue and generally amortized over the operating
season or the term of the contract. Membership revenue is recognized on a straight-line basis over
the term of the membership.
The Company accounts for taxes that are externally imposed on revenue producing transactions
on a net basis, as a reduction to revenue.
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 value
of the display space or tickets relinquished or the fair value of the advertising, merchandise or
services received. Revenue is recognized on barter 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
73
the event occurs. Barter revenues for the years ended December 31, 2006, 2005 and 2004, were
approximately $45.0 million, $34.9 million and $45.1 million, respectively, and are included in
total revenues. Barter expense for the years ended December 31, 2006, 2005 and 2004, were
approximately $44.7 million, $34.8 million and $44.5 million, respectively, and are included in
direct operating expenses and selling, general and administrative expenses.
Foreign Currency
Results of operations for foreign subsidiaries and foreign equity investees are translated
into U.S. dollars using the average exchange rates during the year. The assets and liabilities of
those subsidiaries and investees are translated into U.S. dollars using the exchange rates at the
balance sheet date. The Company does not currently have operations in highly inflationary
countries. The related translation 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 $209.3 million, $179.7 million and $194.2 million were recorded during the years ended
December 31, 2006, 2005 and 2004, respectively.
Direct Operating Expenses
Direct operating expenses include artist fees, show related marketing and advertising
expenses, salaries and wages related to seasonal employees at our venues along with other costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include salaries and wages related to full-time
employees, fixed rent along with other costs.
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 direct operating expenses or selling, general and administrative expenses.
Non-Cash Compensation Expense
Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (Statement
123(R)), which is a revision of FASB Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (Statement 123). Under the fair value recognition
provisions of Statement 123, stock-based compensation cost is measured at the grant date based on
the fair value of the award and is amortized to selling, general and administrative expenses and
corporate expenses on a straight-line basis over the options vesting period.
Prior to the Separation, non-cash compensation expense, which was based on an allocation from
Clear Channel and was related to issuance of Clear Channels 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
74
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 (i) 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 (ii) the
award includes no other features that would require liability classification. The Company
considered FSP FAS 123(R)-4 with its implementation of Statement 123(R), and determined it had no
impact on the Companys financial position or results of operations.
In April 2006, the FASB issued FASB Staff Position FIN 46(R)-6, Determining the Variability to
be Considered When Applying FASB Interpretation No. 46(R) (FSP FIN 46(R)-6). FSP FIN 46(R)-6
addresses the approach to determine the variability to consider when applying FASB Interpretation
No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46(R)). The
variability that is considered in applying FIN 46(R) may affect (i) the determination as to whether
the entity is a variable interest entity, (ii) the determination of which interests are variable
interests in the entity, (iii) if necessary, the calculation of expected losses and residual
returns of the entity, and (iv) the determination of which party is the primary beneficiary of the
variable interest entity. The Company adopted FSP FIN 46(R)-6 on July 1, 2006 and its adoption did
not materially impact the Companys financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 creates a single model to
address uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company
adopted FIN 48 on January 1, 2007, as required. The cumulative effect of the Companys adoption of
FIN 48, if any, will be recorded in retained earnings and other accounts as applicable. While the
Company continues to assess the effects of its adoption of FIN 48, the Company expects that the
adoption of FIN 48 will not have a significant impact on the Companys financial position and
results of operations. The Company also expects that its adoption of FIN 48 may result in a greater
degree of volatility in the effective tax rate and balance sheet classification of tax liabilities.
In June 2006, the Emerging Issues Task Force (EITF) ratified the consensus reached in Issue
06-3 How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation) (EITF 06-3). EITF 06-3
is applicable to all taxes that are externally imposed on a revenue producing transaction between a
seller and a customer. EITF 06-3 concludes that a company may adopt a policy of presenting taxes
either gross within revenue or net. If taxes subject to EITF 06-3 are significant, a company is
required to disclose its accounting policy for presenting taxes and the amount of such taxes that
are recognized on a gross basis. EITF 06-3 is effective for the first interim reporting period
beginning after December 15, 2006, with early application of this guidance permitted. The Company
early adopted EITF 06-3 on June 30, 2006, and has added the required disclosures. The Company
accounts for taxes that are externally imposed on revenue producing transactions on a net basis, as
a reduction to revenue.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (Statement 157). Statement 157 provides guidance for using fair value to
measure assets and liabilities and also responds to investors requests for expanded information
about the extent to which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on earnings. Statement 157
applies whenever other standards require (or permit) assets or liabilities to be measured at fair
value. Statement 157 does not expand the use of fair value in any new circumstances. Statement 157
is effective for financial statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. Earlier application is encouraged, provided that the
reporting entity has not yet issued financial statements for that year, including financial
statements for an interim period within that fiscal year. The provisions of Statement 157 are
applied prospectively with retrospective application to certain financial instruments. The Company
will adopt Statement 157 on January 1, 2008 and is currently assessing the impact its adoption will
have on its financial position and results of operations.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 (SAB Topic 1.N) addresses
quantifying the financial statement effects of misstatements, specifically, how the effects of
prior year uncorrected errors must be considered in quantifying misstatements in the current year
financial statements. SAB 108 does not change the SEC staffs previous positions in Staff
Accounting Bulletin No. 99, Materiality, (SAB Topic 1.M) regarding qualitative considerations in
assessing the materiality of misstatements. SAB 108 is effective for fiscal years ending after
November 15, 2006. SAB 108 offers special transition provisions only for circumstances where its
application would have altered previous materiality conclusions. The SEC staff encourages early
application of the guidance in SAB 108 in financial statements filed after the publication
75
of SAB 108 for any interim period of the first fiscal year ending after November 15, 2006. The
Company adopted SAB 108 during the fourth quarter of 2006 and its adoption did not materially
impact its financial position or results of operations.
NOTE B LONG-LIVED ASSETS
Definite-lived Intangibles
The Company has definite-lived intangible assets which consist primarily of non-compete
agreements, intellectual property rights and building or naming rights, all of which are amortized
over the shorter of either the respective lives of the agreements or 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 $85.8 million and $14.0 million,
respectively, as of December 31, 2006, and $18.6 million and $6.3 million, respectively, as of
December 31, 2005. During 2006, the Company acquired intellectual property rights, non-compete
agreements and certain intangible relationships of $69.2 million with an average weighted life of
five years.
Total amortization expense from definite-lived intangible assets for the years ended December
31, 2006, 2005 and 2004 was $9.8 million, $2.3 million and $3.2 million, respectively. The
following table presents the Companys estimate of amortization expense for each of the five
succeeding fiscal years for definite-lived intangible assets that exist at December 31, 2006:
|
|
|
|
|
|
|
(in thousands) |
2007 |
|
$ |
16,084 |
|
2008 |
|
|
15,922 |
|
2009 |
|
|
13,580 |
|
2010 |
|
|
11,040 |
|
2011 |
|
|
5,638 |
|
As acquisitions and dispositions occur in the future and the valuation of intangible assets
for recent acquisitions is completed, amortization expense may vary.
Indefinite-lived Intangibles
The Company has indefinite-lived intangible assets which consist primarily of the intangible
value related to trade names which are reviewed for impairment at least annually. These
indefinite-lived intangible assets had a carrying value of $1.6 million and $0.1 million as of
December 31, 2006 and 2005, respectively. The increase in indefinite-lived intangible assets
during 2006 was due to the intangible value related to trade names resulting from the Companys
acquisition of Musictoday, LLC (Musictoday).
Goodwill
The Company tests goodwill for impairment at least annually 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 any
potential impairment, compares the implied fair value of the reporting unit with the carrying
amount of goodwill. As the Company has realigned its segments, beginning in 2006, in accordance
with the change in the management of the business units, goodwill has been reallocated to the new
reporting business units that make up these segments utilizing a fair value approach. For each
reportable operating segment, the reporting units were determined to be either the operating
segment or the components thereof in accordance with FASB Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. The following table presents the changes
in the carrying amount of goodwill in each of the Companys business segments for the years ended
December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Venues and |
|
|
Digital |
|
|
|
|
|
|
Events |
|
|
Sponsorship |
|
|
Distribution |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Balance as of December 31, 2004 |
|
$ |
10,618 |
|
|
$ |
24,899 |
|
|
$ |
9,296 |
|
|
$ |
44,813 |
|
Acquisitions |
|
|
72,209 |
|
|
|
33,397 |
|
|
|
1,550 |
|
|
|
107,156 |
|
Foreign currency |
|
|
(420 |
) |
|
|
(985 |
) |
|
|
(368 |
) |
|
|
(1,773 |
) |
Adjustments |
|
|
(3,100 |
) |
|
|
(7,271 |
) |
|
|
(2,715 |
) |
|
|
(13,086 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
79,307 |
|
|
|
50,040 |
|
|
|
7,763 |
|
|
|
137,110 |
|
Acquisitions |
|
|
6,080 |
|
|
|
282,499 |
|
|
|
11,138 |
|
|
|
299,717 |
|
Foreign currency |
|
|
1,470 |
|
|
|
3,446 |
|
|
|
1,287 |
|
|
|
6,203 |
|
Adjustments |
|
|
(4,706 |
) |
|
|
(11,035 |
) |
|
|
(4,120 |
) |
|
|
(19,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 |
|
$ |
82,151 |
|
|
$ |
324,950 |
|
|
$ |
16,068 |
|
|
$ |
423,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
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 Events and Venues and Sponsorship
segments. 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 of $13.1 million primarily related to
deferred tax assets, with an offset to goodwill, 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 Clear Channels acquisition in 2000.
During November 2006, the Company acquired HOB Entertainment, Inc. (HOB) headquartered in
Los Angeles, California for approximately $360.0 million. Total assets were valued at
approximately $452.3 million, which includes $276.1 million of goodwill, and total liabilities and
minority interest of approximately $92.1 million were recorded. The Company is in the process of
finalizing its valuation of intangible assets and other assets acquired as well as liabilities
assumed which may result in a change to the allocation of the purchase price. See further
discussion of the HOB acquisition in Note C Business Acquisitions.
Also, included in the acquisition amounts for 2006 are $2.0 million, $11.1 million and $20.6
million of goodwill related to the Companys acquisitions of Historic Theater Group in the first
quarter of 2006, Musictoday in the third quarter of 2006 and Gamerco, S.A. in the fourth quarter of
2006, respectively. A reduction of goodwill was recorded during 2006 related to the finalization of
the purchase accounting for the Companys acquisition of Mean Fiddler. This Mean Fiddler adjustment
included a reduction in goodwill in the Events segment of $14.9 million related to the finalization
of the fair value of definite-lived intangibles pertaining to festival rights, partially offset by
an increase in goodwill of $4.2 million in the Venues and Sponsorship segment primarily related to
the finalization of the purchase accounting which was partially offset by the recording of asset
retirement obligations.
Finally, during 2006, the Company recorded adjustments of $19.9 million primarily related to
deferred tax assets, with an offset to goodwill, 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 Clear Channels acquisition in 2000 and related to pre-acquisition reserves.
The Company expects that $73.9 million of goodwill related to the 2006 acquisitions will be
deductible for tax purposes.
Property, Plant and Equipment
The Company tests for possible impairment of property, plant and equipment whenever events or
circumstances change, 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 flows amount, an impairment charge is recorded based on the
difference between the discounted future cash flow estimates and the carrying value. Any such
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.
During the third and fourth quarters of 2006, the Company reviewed the carrying value of
certain property, plant and equipment assets that management determined would, more likely than
not, be disposed of before the end of their previously estimated useful lives or had an indicator
that future operating cash flows may not support their carrying value. It was determined that
several of those assets were impaired since the estimated undiscounted cash flows associated with
those assets were less than their carrying value. These cash flows were calculated using estimated
sale values of the land for the assets being evaluated for disposal, that were developed based on
an approximate value related to the best use of the land or appraised values, in addition to
operating cash flows, all of which were used to approximate fair value. As a result, the Company
recorded an impairment charge of $51.6 million as a component of depreciation and amortization
expense in the Venues and Sponsorship segment primarily related to several amphitheaters to be
disposed of or determined to be impaired and a theater development project that is no longer being
pursued.
77
During
the third quarter of 2006, the Company recorded an asset retirement obligation of $5.5
million through purchase accounting which is reported in other long-term liabilities. This
liability relates to dilapidation reserves and obligations for meeting regulatory requirements for
certain venues in the United Kingdom obtained in the Mean Fiddler
acquisitions. In addition, the Company recorded $2.5 million in
additional reserves related to various properties in the United
Kingdom. The following
table presents the activity related to the Companys asset
retirement obligations:
|
|
|
|
|
|
|
2006 |
|
|
|
(in thousands) |
|
Balance as of January 1 |
|
$ |
650 |
|
Adjustment due to change in estimate of related costs |
|
|
7,976 |
|
Accretion of liability |
|
|
|
|
Liabilities settled |
|
|
(131) |
|
Foreign
currency |
|
|
340 |
|
|
|
|
|
Balance as of December 31 |
|
$ |
8,835 |
|
|
|
|
|
Other Operating Assets
The Company makes investments in various operating assets, including investments in assets and
rights related to assets for theatrical productions and DVD production and distribution. 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, 2006, 2005
and 2004, the Company recorded impairment write-downs related to these other operating assets,
included in the Companys Events segment, of $4.8 million, $0.9 million and $1.1 million,
respectively. These write-downs were recorded in direct operating expenses.
NOTE C BUSINESS ACQUISITIONS
On November 3, 2006, the Company purchased 100% of HOB for approximately $360.0 million.
Total assets were preliminarily valued at approximately $452.3 million, which includes $15.5
million of accounts receivable, $100.0 million of property, plant and equipment and $276.1 million
of goodwill, and total liabilities and minority interest of approximately $92.1 million were
recorded. HOB is a consolidated subsidiary that is part of the Companys Venues and Sponsorship,
Events and Digital Distribution segments. HOB is involved in venue operations, including the House
of Blues® clubs which integrate a live music hall, restaurant, bar and specialty retail store, and
the promotion of live music events. The goodwill recorded represents the value of the House of
Blues® brand as well as the expansion of the Companys small-sized venue and amphitheater presence
in Canada and key markets in the western United States. The Company is in the process of
finalizing its valuation of intangible assets and other assets acquired as well as liabilities
assumed which will result in a change to the allocation of the purchase price.
The results of operations for the year ended December 31, 2006 include the operations of HOB
from November 3, 2006. Unaudited pro forma consolidated and combined results of operations,
assuming the HOB acquisition had occurred on January 1, 2005, would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
|
|
2006 |
|
2005 |
|
|
(in thousands, except |
|
|
per share data) |
Revenue |
|
$ |
4,003,838 |
|
|
$ |
3,295,975 |
|
Net loss |
|
$ |
(32,537 |
) |
|
$ |
(146,491 |
) |
Net loss per common share |
|
$ |
(0.50 |
) |
|
$ |
(2.19 |
) |
Including the HOB acquisition discussed above, the Company made cash payments of $351.9
million, $8.5 million and $13.8 million during the years ended December 31, 2006, 2005 and 2004,
respectively. In 2006, these payments related to seven acquisitions including music promoters, venue operators
and artist fan club and merchandise service providers, as well as various earn-outs and deferred
purchase price consideration paid on prior year acquisitions. In May 2006, the Company also issued
1,679,373 shares of its common stock in connection with the acquisition of Concert Productions
International (CPI) for a total value of $37.6 million. In addition, Clear Channel made cash
payments of $67.9 million and $16.2 million during the years ended December 31, 2005 and 2004,
respectively, related to these acquisitions. These payments by Clear Channel were recorded as
non-cash capital contributions to the Company.
78
Acquisition Summary
The following is a summary of the assets and liabilities acquired and the consideration given,
net of cash received, for all acquisitions made during 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Accounts receivable |
|
$ |
26,406 |
|
|
$ |
7,969 |
|
Property, plant and equipment |
|
|
102,273 |
|
|
|
6,857 |
|
Goodwill |
|
|
296,702 |
|
|
|
110,036 |
|
Other assets |
|
|
118,749 |
|
|
|
10,118 |
|
|
|
|
|
|
|
|
|
|
|
544,130 |
|
|
|
134,980 |
|
Other liabilities |
|
|
(154,631 |
) |
|
|
(59,401 |
) |
Common stock issued |
|
|
(37,641 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net |
|
$ |
351,858 |
|
|
$ |
75,579 |
|
|
|
|
|
|
|
|
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, 2006, 2005 and 2004, the cash payments
discussed above include payments related to earn-outs and deferred purchase price consideration of
$0.5 million, $0.8 million and $12.8 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.
NOTE D RESTRUCTURING
Acquisition Related
As part of the HOB acquisition in November 2006, the Company accrued $5.3 million in
restructuring costs in its Venues and Sponsorship segment primarily related to severance costs
which it expects to pay in 2007. These additional costs were recorded as an adjustment to the
purchase price. As of December 31, 2006, the accrual balance for the HOB restructuring was $5.3
million. This restructuring will result in the termination of 79 employees.
As part of the Mean Fiddler acquisition in July 2005, the Company accrued $4.7 million for the
year ended 2005 and recorded an additional accrual of $2.7 million in 2006 in its Venues and
Sponsorship segment primarily related to lease terminations, which it expects to pay over the next
several years. These additional costs were recorded as adjustments to the purchase price. As of
December 31, 2006, the accrual balance for the Mean Fiddler
restructuring was $5.9 million. This
restructuring has resulted in the termination of 33 employees.
In
addition, the Company has a remaining restructuring accrual of $1.9 million as of December
31, 2006, related to its merger with Clear Channel in August 2000.
The Companys recorded liability related to severance for terminated employees and lease
terminations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Severance and lease termination costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at January 1 |
|
$ |
6,223 |
|
|
$ |
2,579 |
|
|
$ |
2,648 |
|
Restructuring accruals recorded |
|
|
7,995 |
|
|
|
4,730 |
|
|
|
|
|
Payments charged against restructuring accrual |
|
|
(1,086 |
) |
|
|
(1,086 |
) |
|
|
(69 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining accrual at December 31 |
|
$ |
13,132 |
|
|
$ |
6,223 |
|
|
$ |
2,579 |
|
|
|
|
|
|
|
|
|
|
|
The
remaining severance and lease accrual is comprised of $5.9 million of severance and $7.2
million of lease termination costs. 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 22 years. During 2006, $0.2
million was charged to the restructuring reserve related to severance. The Company is continuing
to evaluate its purchase accounting liabilities related to the HOB acquisition which may result in
additional restructuring accruals.
Other
79
During the fourth quarter of 2005, the Company recorded accruals, consisting of severance and
lease termination costs, related to the realignment of its business operations. The total expense
related to this restructuring was recorded in selling, general and administrative expenses in 2005
as a component of Events, Venues and Sponsorship, Digital Distribution and other operations in
amounts of $6.0 million, $1.6 million, $0.8 million and $1.6 million, respectively. In addition,
$4.7 million of restructuring expense was recorded in corporate expenses in 2005. As of December
31, 2006, the remaining accrual related to this 2005 restructuring is $0.4 million.
Clear Channel made payments related to acquisition contingencies of $5.2 million and $1.1
million for the years ended December 31, 2005 and 2004, respectively, on behalf of the Company.
These payments were accounted for as non-cash capital contributions by Clear Channel to the
Company.
NOTE E INVESTMENTS
The Company has investments in various nonconsolidated affiliates. These investments are not
consolidated, but are accounted for under the equity method of accounting whereby the Company
records its investments in these entities in the balance sheet as investments in nonconsolidated
affiliates. The Companys interests in their operations are recorded in the statement of operations
as equity in losses (earnings) of nonconsolidated affiliates. The following is a list of several
of the Companys larger investments in nonconsolidated affiliates.
Bodies the Exhibition
The Company owns a 50% interest in a joint venture which holds the rights and license to
present Bodies the Exhibition in various locations. This interest was acquired with the CPI
acquisition in May of 2006.
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. This joint venture was
formed in 2005 with the tour beginning in 2006.
Dominion Theatre
The Company owns a 33% interest in the Dominion Theatre, a United Kingdom theatrical company
involved in venue operations.
House of Blues Concerts Canada
The Company owns a 50% interest in House of Blues Canada which owns and operates two facilities,
and promotes and produces live music events in Canada. This interest was acquired with the HOB
acquisition in November of 2006.
Marek Lieberberg Konzertagentur
The Company owns a 20% interest in Marek Lieberberg Konzertagentur (MLK), a German music
company involved in promotion of, and venue operations for, live entertainment events.
Rolling Stones Movie
The Company owns a 50% interest in a joint venture with Shine a Light, LLC to produce and
distribute a feature length documentary and concert film about and featuring the Rolling Stones.
Summarized unaudited balance sheet and unaudited income statement information for the
Companys investments that are considered significant for the year ended December 31, 2006 is as
follows:
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadway |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in |
|
Delirium |
|
|
|
|
Dominion |
|
MLK |
|
Chicago |
|
Concert (1) |
|
Bodies |
|
|
(in thousands) |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
17,843 |
|
|
$ |
58,177 |
|
|
$ |
23,335 |
|
|
$ |
2,440 |
|
|
$ |
9,614 |
|
Noncurrent assets |
|
$ |
2,269 |
|
|
$ |
1,738 |
|
|
$ |
2,357 |
|
|
$ |
2,410 |
|
|
$ |
7 |
|
Current liabilities |
|
$ |
7,342 |
|
|
$ |
42,420 |
|
|
$ |
22,410 |
|
|
$ |
1,063 |
|
|
$ |
3,985 |
|
Noncurrent liabilities |
|
$ |
|
|
|
$ |
6,547 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
13,052 |
|
|
$ |
115,556 |
|
|
$ |
59,811 |
|
|
$ |
69,746 |
|
|
$ |
20,157 |
|
Operating income (loss) |
|
$ |
4,508 |
|
|
$ |
12,133 |
|
|
$ |
13,211 |
|
|
$ |
(10,438 |
) |
|
$ |
4,244 |
|
Net income |
|
$ |
3,284 |
|
|
$ |
6,920 |
|
|
$ |
14,154 |
|
|
$ |
(10,438 |
) |
|
$ |
4,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
14,504 |
|
|
$ |
51,968 |
|
|
$ |
32,839 |
|
|
$ |
|
|
|
$ |
|
|
Noncurrent assets |
|
$ |
1,985 |
|
|
$ |
1,416 |
|
|
$ |
865 |
|
|
$ |
|
|
|
$ |
|
|
Current liabilities |
|
$ |
5,432 |
|
|
$ |
30,673 |
|
|
$ |
25,417 |
|
|
$ |
|
|
|
$ |
|
|
Noncurrent liabilities |
|
$ |
|
|
|
$ |
8,653 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
11,417 |
|
|
$ |
87,725 |
|
|
$ |
49,515 |
|
|
$ |
|
|
|
$ |
|
|
Operating income |
|
$ |
4,349 |
|
|
$ |
8,481 |
|
|
$ |
11,687 |
|
|
$ |
|
|
|
$ |
|
|
Net income |
|
$ |
3,113 |
|
|
$ |
4,660 |
|
|
$ |
11,940 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
23,599 |
|
|
$ |
96,647 |
|
|
$ |
28,348 |
|
|
$ |
|
|
|
$ |
|
|
Operating income |
|
$ |
9,955 |
|
|
$ |
10,870 |
|
|
$ |
2,834 |
|
|
$ |
|
|
|
$ |
|
|
Net income |
|
$ |
3,812 |
|
|
$ |
5,370 |
|
|
$ |
2,838 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
(1) |
|
Included in Delirium Concerts operating income (loss) is
amortization of production costs related to the event. |
There were no accumulated undistributed earnings included in retained deficit for these
investments for the years ended December 31, 2006, 2005 and 2004. Investments for which the Company
owns less than a 20% interest are accounted for under the cost method.
These assets are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. For the years ended December 31,
2006, 2005 and 2004, the Company recorded an impairment write-down related to these investments in
nonconsolidated affiliates of $0.5 million, $4.9 million and $0.6 million, respectively. These
write-downs were recorded as equity in losses (earnings) of nonconsolidated affiliates.
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 $4.9 million, $3.1 million and $2.6 million were
incurred in 2006, 2005 and 2004, respectively, and revenues of $2.8 million, $1.9 million and $1.2
million were earned in 2006, 2005 and 2004, respectively, from these equity investees for services
rendered or provided in relation to these business ventures.
NOTE F LONG-TERM DEBT
Long-term debt, which includes capital leases, at December 31, 2006 and 2005, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Senior Secured Credit Facility: |
|
|
|
|
|
|
|
|
Term loan |
|
$ |
546,750 |
|
|
$ |
325,000 |
|
Revolving credit facility |
|
|
48,000 |
|
|
|
|
|
Other long-term debt |
|
|
44,396 |
|
|
|
41,841 |
|
|
|
|
|
|
|
|
|
|
|
639,146 |
|
|
|
366,841 |
|
Less: current portion |
|
|
31,721 |
|
|
|
25,705 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
607,425 |
|
|
$ |
341,136 |
|
|
|
|
|
|
|
|
81
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 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 in 2005, $220.0 million of the outstanding debt balance was
repaid, with Clear Channel contributing the remaining balance to the Companys capital.
Senior Secured Credit Facility
In December 2005, the Company entered into a senior secured credit facility consisting of a
term loan in the original amount of $325 million and a $285 million revolving credit facility. The
interest rate is based upon a prime rate or LIBOR, selected at the Companys discretion, plus an
applicable margin. The senior secured credit facility is secured by a first priority lien on
substantially all of its 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.
In connection with the HOB acquisition in November 2006, the Company entered into an
Incremental Assumption Agreement and Amendment No. 1 (Credit Facility Amendment No. 1) to its
senior secured credit facility. The Credit Facility Amendment No. 1 increased the amount
available under the senior secured credit facility by providing for a new $200 million term loan
which matures in December 2013.
In December 2006, the Company entered into Amendment No. 2 to its senior secured credit
facility. This amendment provides that all term loans under the credit facility bear interest at
per annum floating rates equal, at the Companys option, to either (a) the base rate (which is the
greater of the prime rate offered by JPMorgan Chase Bank, N.A. or the federal funds rate plus .5%)
plus 1.75% or (b) Adjusted LIBOR plus 2.75%.
In December 2006, the Company entered into an Incremental Assumption Agreement and Amendment
No. 3 (Credit Facility Amendment No. 3) to its senior secured credit facility. The Credit
Facility Amendment No. 3 increased the amount available under the senior secured credit facility by
providing for a new $25 million term loan which matures in December 2013.
The senior secured credit facility contains a number of covenants that, among other things,
restrict the Companys 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, 2006, the outstanding balance on the term loans and revolving credit facility
was $546.8 million and $48.0 million, respectively. Taking into account letters of credit of $44.0
million, $193.0 million was available for future borrowings. The Company is required to make
minimum quarterly principal repayments under the original term loan of approximately $3.2 million
per year through March 2013, with the balance due at maturity in June 2013 and minimum quarterly
principal repayments under the incremental term loans of approximately $2.3 million per year
through September 2013, with the balance due at maturity in December 2013. The revolving credit
portion of the credit facility matures in June 2012. At December 31, 2006, the weighted average
interest rate, including the benefit of the interest rate swap agreements, on term loans and
revolver borrowings under this credit facility was 8.03% and 7.10%, respectively.
The interest rate paid on borrowings on the Companys senior term loans is 2.75% above LIBOR.
The interest rate paid on the Companys $285 million, multi-currency revolving credit facility
depends on its total leverage ratio. Based on the Companys current total leverage ratio, its
interest rate on revolving credit borrowings is 1.75% above LIBOR. 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, 2006, the commitment fee rate was .25%. The Company is also required to pay customary
letter of credit fees, as necessary. In the event the Companys leverage ratio improves, the
interest rate on revolving credit borrowings declines gradually to .75% at a total leverage ratio of
less than, or equal to, 1.25 times.
Other long-term debt
82
Other long-term debt is comprised of capital leases of $10.0 million and notes payable of
$34.4 million, including debt to a minority interest partner of $24.6 million. The notes payable
primarily consist of three notes with interest rates ranging from 6.0% to 8.75% and maturities
ranging from six to thirteen years.
Future maturities of long-term debt at December 31, 2006 are as follows:
|
|
|
|
|
|
|
(in thousands) |
|
2007 |
|
$ |
31,721 |
|
2008 |
|
|
6,895 |
|
2009 |
|
|
6,953 |
|
2010 |
|
|
7,002 |
|
2011 |
|
|
7,064 |
|
Thereafter |
|
|
579,511 |
|
|
|
|
|
Total |
|
$ |
639,146 |
|
|
|
|
|
Debt Covenants
The significant covenants on the Companys senior secured 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 million. The senior leverage covenant, which is only applicable provided aggregate
subordinated indebtedness is greater than $25 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 million or less through
December 31, 2006, and $110 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 senior secured credit
facility at which time the credit facility may become immediately due. This senior secured credit
facility contains a cross default provision that would be triggered if the Company were to default
on any other indebtedness greater than $10 million.
The Companys other indebtedness does not contain provisions that would make it a default if
the Company were to default on its credit facility.
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, 2006, the Company was in compliance with all debt covenants. The Company
expects to remain in compliance throughout 2007.
NOTE G REDEEMABLE PREFERRED STOCK
As of December 31, 2006, 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, restrict 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
83
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 H DERIVATIVE INSTRUMENTS
FASB Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (Statement 133), requires the Company to recognize all of its
derivative instruments as either assets or liabilities in the consolidated balance sheets at fair
value. The accounting for changes in the fair value of a derivative instrument depends on whether
it has been designated and qualifies as part of a hedging relationship, and further, on the type of
hedging relationship. For derivative instruments that are designated and qualify as hedging
instruments, the Company must designate the hedging instrument, based upon the exposure being
hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign
operation. The Company formally documents all relationships between hedging instruments and hedged
items, as well as its risk management objectives and strategies for undertaking various hedge
transactions. The Company formally assesses, both at inception and at least quarterly thereafter,
whether the derivatives that are used in hedging transactions are highly effective in offsetting
changes in either the fair value or cash flows of the hedged item. If a derivative ceases to be a
highly effective hedge, the Company discontinues hedge accounting. The Company accounts for its
derivative instruments that are not designated as hedges at fair value with changes in fair value
recorded in earnings. The Company does not enter into derivative instruments for speculation or
trading purposes.
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging
the exposure to variability in expected future cash flows that is attributable to a particular
risk), the effective portion of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income (loss) and reclassified into earnings in the same line item
associated with the forecasted transaction in the same period or periods during which the hedged
transaction affects earnings (for example, in interest expense when the hedged transactions are
interest cash flows associated with floating-rate debt). The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present value of future cash flows
of the hedged item, if any, is recognized in other expense (income) net in current earnings
during the period of change.
In March 2006, the Company entered into two interest rate swap agreements, designated as cash
flow hedges, which are combinations of purchased interest rate caps on a notional amount of a total
of $162.5 million and sold floors over the same period on a total of $121.9 million of the notional
amount to effectively convert a portion of its floating-rate debt to a fixed-rate basis. The
principal objective of these contracts is to eliminate or reduce the variability of the cash flows
in interest payments associated with the Companys variable rate debt as required by the Companys
senior secured credit facility, thus reducing the impact of interest rate changes on future
interest expense. Approximately 30% of the Companys outstanding long-term debt had its interest
payments designated as the hedged forecasted transactions against the interest rate swap agreements
at December 31, 2006. As of December 31, 2006, the interest rate for these hedges was fixed at
5.11% on a variable rate of 5.36% based on a 3-month LIBOR; this variable rate is subject to
quarterly adjustments. For the year ended December 31, 2006, these hedges were determined to be
highly effective and the Company recorded an unrealized gain of $0.1 million as a component of
other comprehensive income (loss). Based on the current interest rate expectations, the Company
estimates that approximately $0.2 million of this gain in other comprehensive income will be
reclassified into earnings in the next 12 months.
The Company has recorded a gain and related liability (asset) related to these derivative
instruments during the year as follows:
|
|
|
|
|
|
|
2006 |
|
|
|
(in thousands) |
|
Balance at beginning of year |
|
$ |
|
|
Unrealized holding gain on cash flow derivatives |
|
|
(104 |
) |
|
|
|
|
Balance at end of year |
|
$ |
(104 |
) |
|
|
|
|
Occasionally, the Company will use forward currency contracts to reduce its 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, 2006, the Company had $0.9 million
outstanding in forward currency contracts. The change in fair value of these instruments from date
of purchase through December 31, 2006 was not significant to the Companys results of operations.
84
NOTE I COMMITMENTS AND CONTINGENT LIABILITIES
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 additions to property,
plant, and equipment under certain construction commitments for facilities and venues.
As of December 31, 2006, 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) |
|
2007 |
|
$ |
71,722 |
|
|
$ |
250,593 |
|
|
$ |
8,889 |
|
2008 |
|
|
68,905 |
|
|
|
34,308 |
|
|
|
738 |
|
2009 |
|
|
62,254 |
|
|
|
29,373 |
|
|
|
|
|
2010 |
|
|
57,107 |
|
|
|
10,408 |
|
|
|
2,500 |
|
2011 |
|
|
54,583 |
|
|
|
8,918 |
|
|
|
|
|
Thereafter |
|
|
800,176 |
|
|
|
66,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,114,747 |
|
|
$ |
399,773 |
|
|
$ |
12,127 |
|
|
|
|
|
|
|
|
|
|
|
Excluded from the non-cancelable contracts is $74.3 million related to severance obligations
for employment contracts calculated as if such employees were terminated on January 1, 2007.
Commitment amounts for non-cancelable operating leases and non-cancelable contracts which
stipulate an increase in the commitment amount based on an inflationary index have been estimated
using an inflation factor of 3% for North America and 1.75% for the United Kingdom.
During 2006, in connection with our acquisition of the Historic Theatre Group, we guaranteed obligations related to a lease agreement. In the event of default, we could be liable for obligations which have future lease payments (undiscounted) of approximately $45.3 million through the end of 2035 which are not reflected in the table above.
The scheduled future minimum rentals for this lease for the years 2007 through 2011 are $1.6 million each year. We believe that the likelihood of material liability being triggered under this lease is remote, and no liability has been
accrued for these contingent lease obligations as of December 31, 2006.
Minimum rentals of $116.5 million to be received in years 2007 through 2020 under
non-cancelable subleases are excluded from the commitment amounts in the above table.
Rent expense charged to operations for 2006, 2005 and 2004 was $71.7 million, $61.7 million
and $58.5 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. Contingent rent expense charged to
operations for 2006, 2005 and 2004 was $11.5 million, $7.0 million and $8.0 million, respectively.
The above does not include rent expense for events in third-party venues.
As of December 31, 2006 and 2005, the Company guaranteed the debt of third parties of
approximately $1.9 million for each of the respective periods, primarily related to maximum credit
limits on employee and tour related credit cards and, in 2006, this included guarantees of bank
lines of credit of a nonconsolidated affiliate and a third-party promoter.
In connection with the sale of a portion of its sports representation business assets during
2006, the Company guaranteed the performance of a third-party related to an employment contract in
the amount of approximately $0.9 million. This guarantee is effective through December 31, 2008;
however, it would only require payment by the Company in the event of the buyers insolvency. As of
December 31, 2006, the carrying value of this liability recorded by the Company was $0.1 million.
There was no similar agreement as of December 31, 2005 or 2004.
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, 2006, the Company is
unable to estimate the amount of the contingency as it is
85
subject to the future financial performance of the acquired companies. As the contingencies
have not been met or resolved as of December 31, 2006, 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. These values are typically contingent upon 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. At December 31, 2006, the Company is unable to estimate the amount
of the contingency as it is subject to the future financial performance of the investee. As the
contingencies have not been met or resolved as of December 31, 2006, these amounts are not
recorded. If future payments are made, amounts will be recorded as investments in nonconsolidated
affiliates.
The Company was a defendant in a lawsuit filed by Melinda Heerwagen on June 13, 2002, in the
U.S. District Court for the Southern District of New York. The plaintiff, on behalf of a putative
class consisting of certain concert ticket purchasers, alleged that anti-competitive practices for
concert promotion services by the Company nationwide caused artificially high ticket prices. On
August 11, 2003, the Court ruled in the Companys favor, denying the plaintiffs class
certification motion. The plaintiff appealed this decision to the U.S. Court of Appeals for the
Second Circuit. On January 10, 2006, the U.S. Court of Appeals for the Second Circuit affirmed the
ruling in the Companys 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.
The Company is a defendant in twenty-two putative class actions filed by different named
plaintiffs in various U.S. District Courts throughout the country. The claims made in these actions
are substantially similar to the claims made in the Heerwagen action discussed above, except that
the geographic markets alleged are regional, statewide or more 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. The plaintiffs seek unspecified compensatory, punitive and treble
damages, declaratory and injunctive relief and costs of suit, including attorneys fees. The
Company has filed its answers in some of these actions, and has denied liability. On December 5,
2005, the Company filed a motion before the Judicial Panel on Multidistrict Litigation to transfer
these actions and any similar ones commenced in the future to a single federal district court for
coordinated pre-trial proceedings. On April 17, 2006, the Panel granted the Companys motion and
ordered the consolidation and transfer of the actions to the U.S. District Court for the Central
District of California. The Court has set a hearing on motions for class certification for April
23, 2007, and trial is set for December 11, 2007. The Company intends to vigorously defend all
claims in all of the actions.
The Company is also currently involved in certain other legal proceedings and, as required,
has accrued its best estimate of the probable settlement or other losses for the resolution of
these claims. These estimates have been developed in consultation with counsel and are based upon
an analysis of potential results, assuming a combination of litigation and settlement strategies.
It is possible, however, that future results of operations for any particular period could be
materially affected by changes in the Companys assumptions or the effectiveness of its strategies
related to these proceedings.
During 2006, the Company reversed $7.0 million of certain pre-acquisition contingencies
related to legal matters which were resolved during the year. As resolution of the legal matters
occurred beyond the one-year purchase price allocation period, this reversal was recorded to
selling, general and administrative expenses in other operations.
NOTE J RELATED-PARTY TRANSACTIONS
Relationship with Clear Channel
Master Separation and Distribution Agreement
The master separation and distribution agreement provides 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, the
distribution of the Companys common stock to the holders of record of Clear Channels common stock
on December 14, 2005, and certain other agreements governing the Companys relationship with Clear
Channel after the date of the Separation. The transfers from Clear Channel 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
86
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 is required to consolidate the Companys results of operations and financial position
with its results of operations and financial position, the Company will not select an independent
registered public accounting firm different from Clear Channel.
Transition Services Agreement
The transition services agreement governs the provision by Clear Channel 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 to fully recover the
allocated direct costs of providing the services, plus all out-of-pocket expenses, generally
without profit. The allocation of costs are 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 or were terminated at various times after the completion of the Separation.
As of December 31, 2006, only information systems related services are still being provided.
Tax Matters Agreement
The tax matters agreement governs the respective rights, responsibilities and obligations of
Clear Channel 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 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.
Transactions with Clear Channel Directors
The Company has three non-employee directors on its board of directors that are also directors
and executive officers of Clear Channel. These three directors receive directors fees, stock
options and restricted stock awards as do other non-employee members of the Companys board of
directors.
Transactions with Clear Channel
Prior to the Separation, the Company had a revolving line of credit with Clear Channel. See
further disclosure in Note F Long-Term Debt.
Clear Channel had provided funding for certain of the Companys acquisitions of net assets.
These amounts funded by Clear Channel for these acquisitions were 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, were recorded in
owners net investment. During the fiscal year 2005, Clear Channel made additional non-cash capital
contributions of $8.8 million to the Company. During the fourth quarter of 2005, the Company
completed the Separation from Clear Channel. 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. As of December 31, 2005 there is no longer an owners net
investment balance recorded.
From time to time, the Company purchases advertising from Clear Channel and its subsidiaries
in the ordinary course of business. For the years ended December 31, 2006, 2005 and 2004, the
Company recorded $16.4 million, $12.9 million and $16.7 million, respectively, as components of
direct operating expenses and selling, general and administrative expenses for these
advertisements.
87
Pursuant to a transition services agreement, subsequent to the Separation, Clear Channel
provided or provides to the Company certain limited administrative and support services as
discussed above. As of December 31, 2006, the only significant services that Clear Channel
continues to provide are information systems related services. For the year ended December 31,
2006, the Company recorded an aggregate of $4.9 million for these services as components of
selling, general and administrative expenses and corporate expenses.
Prior to the Separation, Clear Channel provided management services to the Company, which
included services similar to the transition services, along with executive oversight. These
services were allocated to the Company based on actual direct costs incurred or on the Companys
share of Clear Channels 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 and 2004, the Company recorded $9.5 million and $9.8 million,
respectively, as a component of corporate expenses for these services.
Clear Channel owns the trademark and trade names used by the Company prior to the Separation.
Clear Channel charged the Company a royalty fee based upon a percentage of annual revenue. Clear
Channel used a third-party valuation firm to assist in the determination of the royalty fee. For
the years ended December 31, 2005 and 2004, the Company recorded $0.5 million and $3.1 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. The Companys provision for income taxes for 2005 and
2004 was computed on the basis that the Company files separate consolidated income tax returns with
its subsidiaries. Tax payments were made to Clear Channel on the basis of the Companys separate
taxable income. Tax benefits recognized on employee stock option exercises prior to the Separation
were retained by Clear Channel.
The Companys North American employees participated in Clear Channels 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 selling,
general and administrative expenses and were approximately $9.0 million for each of the years ended
December 31, 2005 and 2004. Subsequent to the Separation, the Company provides its own employee
benefit plans.
In connection with the Separation, the Company entered into various lease and licensing
agreements with Clear Channel primarily for office space occupied by the Companys employees. For
the year ended December 31, 2006, the Company recorded $0.7 million of expense as a component of
selling, general and administrative expenses related to these agreements.
As of December 31, 2006, the Company has recorded a liability in accrued expenses to Clear
Channel of $1.0 million for the transition services described above and certain other costs paid
for by Clear Channel on the Companys behalf.
Other Relationships
Transactions with Directors
In May 2006, the Company acquired a 50.1% controlling interest in the touring business of a
commonly owned group of companies operating under the name of Concert Productions International, or
CPI, and a 50% interest in several entities in the non-touring business of CPI (collectively, the
CPI Entities). Concurrent with the acquisition, Michael Cohl became a member of the Companys
board of directors. Mr. Cohl owns a 72.37% interest in Concert Productions International, Inc.
(CPI, Inc.) which, together with other sellers, sold the Company its interests in the CPI
Entities. Through his ownership in CPI, Inc., Mr. Cohl indirectly received consideration from the
sale of $72,370 in cash and 54,519 shares of the Companys common stock, which shares are subject
to a Lockup and Registration Rights Agreement. The CPI Entities have entered into a Services
Agreement with KSC Consulting (Barbados) Inc. for the executive services of Mr. Cohl, pursuant to
which Mr. Cohl serves as Chief Executive Officer of the CPI Entities for a term of five years. For
the year ended December 31, 2006, the Company paid $0.6 million to KSC Consulting related to these
services. In addition, the Company entered into a Securityholders Agreement and a Credit Agreement
in connection with this transaction. The Securityholders Agreement provides, among other things,
for the payment of fees and expenses to CPI, Inc. and CPI Entertainment Rights, Inc., a
wholly-owned subsidiary of CPI, Inc., and the Credit Agreement requires the Company to make certain
extensions of credit to the CPI Entities.
Other Related Parties
88
The Company conducts certain transactions in the ordinary course of business with companies
that are owned, in part or in total, by various members of management of the Companys
subsidiaries. These transactions primarily relate to venue rentals, equipment rental, ticketing and
other services and reimbursement of certain costs. Expenses of $9.3 million, $10.5 million and $7.9
million were incurred for the years ended December 31, 2006, 2005 and 2004, respectively, and
revenues of $1.0 million, $0.5 million, and $0.5 million were earned for the years ended December
31, 2006, 2005 and 2004, respectively, from these companies for services rendered or provided in
relation to these business ventures. None of these transactions were with directors or executive
officers of the Company.
NOTE K INCOME TAXES
Prior to the Separation, the operations of the Company were included in a consolidated federal
income tax return filed by Clear Channel. However, for financial reporting purposes, the Companys
provision for income taxes has been computed on the basis that the Company files separate
consolidated income tax returns with its subsidiaries. Any accruals related to domestic and
certain foreign tax contingencies for items that arose prior to the Separation were retained by
Clear Channel.
Significant components of the provision for income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Current federal |
|
$ |
2,622 |
|
|
$ |
(74,605 |
) |
|
$ |
(68,192 |
) |
Current foreign |
|
|
23,543 |
|
|
|
31,170 |
|
|
|
13,870 |
|
Current state |
|
|
711 |
|
|
|
(9,590 |
) |
|
|
(1,624 |
) |
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
26,876 |
|
|
|
(53,025 |
) |
|
|
(55,946 |
) |
Deferred federal |
|
|
10,370 |
|
|
|
111,268 |
|
|
|
50,162 |
|
Deferred foreign |
|
|
(36 |
) |
|
|
(1,127 |
) |
|
|
(2,201 |
) |
Deferred state |
|
|
|
|
|
|
4,372 |
|
|
|
6,450 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
10,334 |
|
|
|
114,513 |
|
|
|
54,411 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
37,210 |
|
|
$ |
61,488 |
|
|
$ |
(1,535 |
) |
|
|
|
|
|
|
|
|
|
|
Current income tax expense increased $79.9 million for the year ended December 31, 2006 as
compared to the same period of the prior year due primarily to losses in the United States which
the Company is not currently able to use. Losses incurred by the Company during 2005 prior to the
Separation could be used by Clear Channel to realize a current tax benefit. Deferred tax expense
decreased $104.2 million for the year ended December 31, 2006 as compared to the same period of the
prior year due primarily to a decrease in the provision for valuation reserves recorded against
deferred tax assets.
The increase in deferred tax expense of $60.1 million for the year ended December 31, 2005 as
compared to the year ended December 31, 2004 was due primarily to a valuation allowance of $77.3
million recorded against certain deferred tax assets in 2005. Prior to the Separation, as a
subsidiary of Clear Channel, taxable losses of the Companys subsidiaries were able to be utilized
under a consolidated income tax return with Clear Channel. After the Separation, the Companys
deferred tax assets had to be evaluated on a stand-alone basis and a valuation allowance was
recorded based on the Companys prior history of taxable losses and due to the uncertainty of the
Companys ability to realize its deferred tax assets.
Significant components of the Companys deferred tax liabilities and assets as of December 31,
2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
|
|
|
$ |
2,488 |
|
Intangible assets |
|
|
486 |
|
|
|
|
|
Prepaid expenses |
|
|
4,827 |
|
|
|
|
|
Foreign |
|
|
9,073 |
|
|
|
9,110 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
14,386 |
|
|
|
11,598 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Intangible and fixed assets |
|
|
71,334 |
|
|
|
48,844 |
|
Accrued expenses |
|
|
6,535 |
|
|
|
|
|
Investments in nonconsolidated affiliates |
|
|
5,309 |
|
|
|
11,687 |
|
Net operating loss carryforwards |
|
|
106,122 |
|
|
|
7,378 |
|
Bad debt reserves |
|
|
3,293 |
|
|
|
3,178 |
|
Deferred income |
|
|
2,941 |
|
|
|
736 |
|
Other |
|
|
617 |
|
|
|
7,931 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
196,151 |
|
|
|
79,754 |
|
Valuation allowance |
|
|
191,324 |
|
|
|
77,266 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
4,827 |
|
|
|
2,488 |
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities) |
|
$ |
(9,559 |
) |
|
$ |
(9,110 |
) |
|
|
|
|
|
|
|
89
The valuation allowance was recorded due to the uncertainty of the ability to generate
sufficient taxable income necessary to realize certain deferred tax assets in future years. If, at
a later date, it is determined that due to a change in circumstances, the Company will utilize all
or a portion of those deferred tax assets, the Company will reverse the corresponding valuation
allowance with the offset to income tax benefit or to goodwill.
The deferred tax asset related to intangibles and fixed assets primarily relates to the
difference in book and tax basis of tax deductible goodwill created from the Companys various
stock acquisitions. In accordance with FASB Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, the Company no longer amortizes goodwill. Thus, a deferred
tax benefit for the difference between book and tax amortization for the Companys tax-deductible
goodwill is no longer recognized, as these assets are no longer amortized for book purposes. As the
Company continues to amortize its tax basis in its tax deductible goodwill, the deferred tax asset
will decrease over time. As of December 31, 2006, the Company has U.S. federal, state and non-U.S.
net operating loss carryforwards of $266.7 million, $410.9 million and $12.3 million, respectively.
Based on current statutory carryforward periods, these losses will expire on various dates between
the years 2007 and 2027. For 2007, the amount of net operating loss
carryforwards expected to expire is approximately $6.4 million. The
Company's federal net operating loss is subject to statutory
limitations on the amount that can be used in any given year.
The reconciliation of income tax computed at the United States federal statutory tax rates to
income tax expense (benefit) is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Income tax expense (benefit) at statutory rates |
|
$ |
2,018 |
|
|
$ |
(24,196 |
) |
|
$ |
5,154 |
|
State income taxes, net of federal tax benefit |
|
|
711 |
|
|
|
(5,218 |
) |
|
|
4,825 |
|
Differences of foreign taxes from U.S. statutory rates |
|
|
(5,658 |
) |
|
|
8,457 |
|
|
|
(7,084 |
) |
Nondeductible items |
|
|
10,437 |
|
|
|
1,365 |
|
|
|
1,105 |
|
Tax contingencies |
|
|
3,641 |
|
|
|
|
|
|
|
(6,064 |
) |
Minority interest |
|
|
|
|
|
|
|
|
|
|
522 |
|
Change in valuation allowance |
|
|
29,502 |
|
|
|
77,266 |
|
|
|
|
|
Other, net |
|
|
(3,441 |
) |
|
|
3,814 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,210 |
|
|
$ |
61,488 |
|
|
$ |
(1,535 |
) |
|
|
|
|
|
|
|
|
|
|
During 2006, the Company recorded tax expense of approximately $37.2 million on income before
tax of $5.8 million. As a result of a determination by the Company during 2006 that it may not be
able to realize certain deferred tax assets in the future, the Company recorded a valuation
allowance of approximately $29.5 million in 2006. In addition, the Company established $84.6
million of additional valuation allowance in 2006 in connection with its acquisition of HOB.
During 2005, the Company recorded tax expense of approximately $61.5 million on losses before
income tax of $69.1 million. Because of uncertainty as to whether the Company may realize certain
deferred tax assets in the future, the Company recorded a valuation allowance of approximately
$77.3 million in 2005.
During 2004, the Company recorded a tax benefit of approximately $1.5 million on income before
income taxes of $14.7 million. Foreign income before income taxes was approximately $53.6 million
for 2004. As a result of the favorable resolution of certain tax contingencies, current tax expense
(benefit) for the year ended December 31, 2004 was reduced approximately $11.0 million. In 2004,
certain of the Companys Internal Revenue Service audits were settled and certain tax
contingencies, which had previously been recorded in purchase accounting with an offset to
goodwill, were resolved. Thus, the Company reversed $11.0 million of interest associated with these
items that had been accrued as tax expense in prior years as a benefit to current tax expense. The
$11.0 million was partially offset by approximately $4.9 million of additional current tax expense
related to interest expense on other tax contingencies associated with various tax planning items.
Prior to the Separation, certain tax liabilities owed by the Company were remitted to the
appropriate taxing authority by Clear Channel and were accounted for as non-cash capital
contributions by Clear Channel to the Company. To the extent tax benefits of the Company were
utilized by Clear Channel, they were accounted for as non-cash dividends from the Company to Clear
Channel. For the
90
years ended December 31, 2005 and 2004, Clear Channel utilized $76.7 million and $64.1
million, respectively, of the Companys tax benefit.
The Company regularly assesses the likelihood of additional assessments in each taxing
jurisdiction resulting from current and subsequent years examinations. Liabilities for income
taxes have been established for future income tax assessments when it is probable there will be
future assessments and the amount thereof can be reasonably estimated. Once established,
liabilities for uncertain tax positions are adjusted only when there is more information available
or when an event occurs necessitating a change to the liabilities. The Company believes that the
resolution of income tax matters for open years will not have a material effect on its consolidated
and combined financial statements although the resolution of income tax matters could impact the
Companys effective tax rate for a particular future period. As of the December 31, 2006 and 2005,
the Company had an accrual for tax contingencies of $22.9 million and $16.7 million, respectively.
NOTE L BUSINESS/SHAREHOLDERS EQUITY
Dividends
The Company presently intends to retain future earnings, if any, to finance the expansion of
its business. Therefore, it does not expect to pay any cash dividends in the foreseeable future.
Moreover, the terms of the Companys senior secured credit facility and the designations of its
preferred stock limit the amount of funds which the Company will have available to declare and
distribute as dividends on its common stock. Payment of future cash dividends, if any, will be at
the discretion of the Companys board of directors in accordance with applicable law after taking
into account various factors, including the financial condition, operating results, current and
anticipated cash needs, plans for expansion and contractual restrictions with respect to the
payment of dividends.
Common Stock Reserved for Future Issuance
Common stock of approximately 9.0 million shares is reserved for future issuances under the
stock incentive plan (including 2.2 million options and 0.4 million restricted stock awards
currently granted).
Share Repurchase Program
On December 22, 2005, the Companys board of directors authorized a $150.0 million share
repurchase program effective as of that date. The repurchase program was authorized through
December 31, 2006. As of the expiration of the program on December 31, 2006, 3.4 million shares
had been repurchased for an aggregate cost of $42.7 million, including commissions and fees.
Earnings per Share
The Company computes net income (loss) per common share in accordance with FASB Statement of
Financial Accounting Standards No. 128, Earnings per Share (Statement 128). Under the provisions
of Statement 128, basic net income per common share is computed by dividing the net income
applicable to common shares by the weighted average of common shares outstanding during the period.
Diluted net income per common share adjusts basic net income per common share for the effects of
stock options, restricted stock and other potentially dilutive financial instruments only in the
periods in which such effect is dilutive.
The following table sets forth the computation of basic and diluted net income (loss) per
common share:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands, except per share data) |
|
Numerator: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(31,442 |
) |
|
$ |
(130,619 |
) |
Effect of dilutive securities none |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for net loss per common share basic and diluted |
|
$ |
(31,442 |
) |
|
$ |
(130,619 |
) |
Denominator: |
|
|
|
|
|
|
|
|
Weighted average common shares |
|
|
64,853 |
|
|
|
66,809 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Stock options and restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net loss per common share basic and diluted |
|
|
64,853 |
|
|
|
66,809 |
|
Net loss per common share: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.48 |
) |
|
$ |
(1.96 |
) |
91
The Company has excluded all potentially dilutive securities such as unvested restricted stock
and outstanding options to purchase common stock from the calculation of diluted net loss per
common share because such securities are anti-dilutive. For the years ended December 31, 2006 and
2005, the diluted weighted average common shares outstanding excludes the dilutive effect of
829,128 and 539,938 total shares of stock options and restricted stock, respectively, because these
securities were anti-dilutive. In addition, for the year ended December 31, 2006, the dilutive
weighted average common shares outstanding excludes the dilutive effect of 80,000 stock option
shares since such options have an exercise price in excess of the average market value of the
Companys common stock during the respective period. No information is shown for the year ended
December 31, 2004 as the Company had no outstanding shares prior to the Separation.
NOTE M STOCK BASED COMPENSATION
In December 2005, the Company adopted its 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 shares of restricted stock were granted to employees and directors. The
options granted in December 2005 have an exercise price of $10.60 per share.
The Company has granted options to purchase its common stock to employees and directors of the
Company and its affiliates under the stock incentive plan at no less than the fair market value of
the underlying stock on the date of grant. These options are granted for a term not exceeding ten
years and the nonvested options are forfeited in the event the employee or director terminates his
or her employment or relationship with the Company or one of its affiliates. Any options that have
vested at the time of termination are forfeited to the extent they are not exercised within the
applicable post-employment exercise period provided in their option agreements. These options
generally vest over three to five years. The stock incentive plan contains anti-dilutive provisions
that require the adjustment of the number of shares of the Companys common stock represented by,
and the exercise price of, each option for any stock splits or stock dividends.
Prior to the Separation, Clear Channel granted options to purchase Clear Channels common
stock to employees of the Company and its affiliates under various stock option plans at no less
than the fair market value of the underlying stock on the date of grant. Compensation expense
relating to Clear Channel stock options and restricted stock awards held by the Companys employees
was allocated by Clear Channel to the Company on a specific employee basis. At the Separation, all
nonvested options outstanding under Clear Channels stock-based compensation plans that were held
by the Companys employees were forfeited and any outstanding vested options will be forfeited to
the extent they are not exercised within the applicable post-employment exercise period provided in
their option agreements. All Clear Channel 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 group of companies.
Stock Options
Effective January 1, 2006, the Company has adopted the fair value recognition provisions of
Statement 123(R), which is a revision of FASB Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (Statement 123). Statement 123(R) supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations, and amends FASB Statement of Financial Accounting Standards No. 95, Statement of
Cash Flows. The Company chose the modified-prospective transition application of Statement 123(R).
The fair value of the options is amortized to expense on a straight-line basis over the options
vesting period.
Prior to January 1, 2006, the Company accounted for its stock-based award plans using the
provisions of Statement 123. As permitted under this standard, compensation expense was recognized
using the intrinsic value method described in APB 25 under which compensation expense is recorded
to the extent that the current market price of the underlying stock exceeds the exercise price.
Prior periods were not restated to reflect the impact of adoption of the new standard.
As a result of the adoption of Statement 123(R), stock-based compensation expense recognized
during the year ended December 31, 2006 includes compensation expense for all share-based payments
granted on or prior to, but not yet vested at the end of the period based on the grant date fair
value estimated in accordance with the provisions of Statement 123(R).
92
Due to the adoption of Statement 123(R), the Companys operating income, income before income
taxes and net income (loss) were $2.1 million lower for the year ended December 31, 2006 due to the
recording of non-cash compensation related to stock options. Prior to the adoption of Statement
123(R) and through December 31, 2006, no tax benefits from the exercise of stock options have been
recognized as no options granted by the Company subsequent to the Separation have been exercised.
Any future excess tax benefits derived from the exercise of stock options will be recorded
prospectively and reported as cash flows from financing activities in accordance with Statement
123(R).
The following table illustrates the effect on operating results and per share information had
the Company accounted for share-based compensation in accordance with Statement 123(R) for the
periods indicated. Due to the Separation, the Companys pro forma disclosures for 2005 and 2004
include stock compensation expense for options granted by Clear Channel prior to the Separation,
and options granted by the Company after the Separation, when applicable. As the Company had no
shares outstanding at December 31, 2004, there is no pro forma loss per common share to disclose.
The required pro forma disclosures are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands, except per share data) |
|
Net income (loss): |
|
|
|
|
|
|
|
|
Reported |
|
$ |
(130,619 |
) |
|
$ |
16,260 |
|
Pro forma stock compensation expense, net of tax: |
|
|
|
|
|
|
|
|
Live Nation options |
|
|
(47 |
) |
|
|
|
|
Clear Channel options |
|
|
6,713 |
|
|
|
(11,368 |
) |
|
|
|
|
|
|
|
Net income (loss) including non-cash compensation expense |
|
$ |
(123,953 |
) |
|
$ |
4,892 |
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per common share: |
|
|
|
|
|
|
|
|
Reported |
|
$ |
(1.96 |
) |
|
|
|
|
Pro forma |
|
$ |
(1.86 |
) |
|
|
|
|
The fair value for options in Live Nation stock was estimated on the date of grant using a
Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities of
traded options and the historical volatility of stocks of similar companies since the Companys
common stock does not have sufficient trading history to reasonably predict its own volatility. The
Company has used the simplified method for estimating the expected life within the valuation model
which is the period of time that options granted are expected to be outstanding. The risk free rate
for periods within the life of the option is based on the U.S. Treasury Note rate. The following
assumptions were used to calculate the fair value of the Companys options on the date of grant:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Risk-free interest rate |
|
|
4.57% - 4.86 |
% |
|
|
4.71 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility factors |
|
|
28 |
% |
|
|
25 |
% |
Weighted average expected life (in years) |
|
|
5 - 7.5 |
|
|
|
5 - 7.5 |
|
Clear Channel calculated the fair value for the options in Clear Channel stock at the date of
grant using a Black-Scholes option-pricing model with the following assumptions for 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Risk-free interest rate |
|
|
3.76% - 4.44 |
% |
|
|
2.21% - 4.51 |
% |
Dividend yield |
|
|
1.46% - 2.36 |
% |
|
|
.90% - 1.65 |
% |
Volatility factors |
|
|
25 |
% |
|
|
42% - 50 |
% |
Weighted average expected life (in years) |
|
|
5 - 7.5 |
|
|
|
3 - 7.5 |
|
The following table presents a summary of the Companys stock options outstanding at, and
stock option activity during, the years ended December 31, 2006 and 2005 (Price reflects the
weighted average exercise price per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
|
|
(in thousands, except per share data) |
|
Outstanding, January 1 |
|
|
2,078 |
|
|
$ |
10.60 |
|
|
|
|
|
|
$ |
|
|
Granted |
|
|
90 |
|
|
|
21.88 |
|
|
|
2,078 |
|
|
|
10.60 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(16 |
) |
|
|
10.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31 |
|
|
2,152 |
|
|
$ |
11.07 |
|
|
|
2,078 |
|
|
$ |
10.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31 |
|
|
32 |
|
|
$ |
10.60 |
|
|
|
|
|
|
|
|
|
Weighted average fair value per option granted |
|
|
|
|
|
$ |
3.81 |
|
|
|
|
|
|
$ |
3.51 |
|
93
The weighted average fair value of stock options granted is required to be based on a
theoretical option pricing model. In actuality, because the Companys stock options are not traded
on an exchange, option holders can receive no value nor derive any benefit from holding stock
options under the plan without an increase in the market price of Live Nation stock. Such an
increase in stock price would benefit all shareholders commensurately.
There were 6.4 million shares available for future grants under the stock incentive plan at
December 31, 2006. Upon share option exercise or vesting of restricted stock, the Company issues
new shares to fulfill these grants. Vesting dates on the stock options range from December 2007 to
December 2011, and expiration dates range from December 2012 to December 2016 at exercise prices
and average contractual lives as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
Remaining |
|
Weighted |
|
|
|
|
|
Weighted |
Range of |
|
as of |
|
Contractual |
|
Average |
|
Exercisable |
|
Average |
Exercise |
|
12/31/06 |
|
Life |
|
Exercise |
|
as of |
|
Exercise |
Prices |
|
(in thousands) |
|
(in years) |
|
Price |
|
12/31/06 |
|
Price |
$10.60 |
|
|
2,062 |
|
|
|
7.3 |
|
|
$ |
10.60 |
|
|
|
32 |
|
|
$ |
10.60 |
|
$20.00 - $25.00 |
|
|
90 |
|
|
|
7.7 |
|
|
$ |
21.88 |
|
|
|
|
|
|
$ |
|
|
The total intrinsic value of options exercisable as of December 31, 2006 was $.1 million.
Restricted Stock Awards
Prior to the Separation, Clear Channel granted restricted stock awards to the Companys
employees. All Clear Channel restricted stock awards held by the Companys employees at the date of
the Separation were forfeited due to the termination of their employment with the Clear Channel
group of companies.
Subsequent to the Separation, the Company has granted restricted stock awards to its employees
and directors under the stock incentive plan. These common shares carry a legend which restricts
their transferability for a term of one to five years and are forfeited in the event the
recipients employment or relationship with the Company is terminated prior to the lapse of the
restriction. Recipients of the restricted stock awards are entitled to all cash dividends as of the
date the award was granted. The fair value of the restricted stock is amortized to expense on a
straight-line basis over the restricted stocks vesting period.
The following table presents a summary of the Companys restricted stock awards outstanding at
December 31, 2006 and 2005 (Price reflects the weighted average share price at the date of
grant):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
Awards |
|
|
Price |
|
|
Awards |
|
|
Price |
|
|
|
(in thousands, except per share data) |
|
Outstanding, January 1 |
|
|
319 |
|
|
$ |
10.60 |
|
|
|
|
|
|
$ |
|
|
Granted |
|
|
65 |
|
|
|
21.12 |
|
|
|
319 |
|
|
|
10.60 |
|
Forfeited |
|
|
(1 |
) |
|
|
10.60 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
22 |
|
|
|
10.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31 |
|
|
361 |
|
|
$ |
12.39 |
|
|
|
319 |
|
|
$ |
10.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded $3.3 million of non-cash compensation expense during the year ended
December 31, 2006 related to nonvested stock-based compensation arrangements for stock options and
restricted stock awards with $1.7 million recorded in selling, general and administrative expenses
and $1.6 million recorded in corporate expenses. As of December 31, 2006, there was $9.6 million of
total unrecognized compensation cost related to nonvested stock-based compensation arrangements for
stock options and restricted stock awards. This cost is expected to be recognized over the next 5
years.
NOTE N EMPLOYEE STOCK AND SAVINGS PLANS
Employee Benefit Plans
94
Prior to the Separation, the Companys employees were eligible to participate in various
401(k) savings and other plans provided by Clear Channel for the purpose of providing retirement
benefits for substantially all employees. Both the employees and the Company made contributions to
the plan. The Company matched a portion of an employees contribution. The Company matched 50% of
the employees first 5% of pay contributed to the plan. Company matched contributions vest to the
employees based upon their years of service to the Company.
Subsequent to the Separation, the Company adopted various 401(k) savings and other plans for
the purpose of providing retirement benefits for substantially all employees. Both the employees
and the Company make contributions to the plan. The Company matches 50% of the employees first 5%
of pay contributed to the plan. Company matched contributions vest to the employees based upon
their years of service to the Company.
Contributions to these plans of $1.6 million, $2.1 million and $2.1 million were charged to
expense for the years ended December 31, 2006, 2005 and 2004, respectively.
The Companys employees were also eligible to participate in a non-qualified employee stock
purchase plan provided by Clear Channel. Under the plan, shares of Clear Channels common stock
could be purchased at 85% of the market value on the day of purchase. Employees could purchase
shares having a value not exceeding 10% of their annual gross compensation or $25,000, whichever is
lower. During 2005 and 2004, all Clear Channel employees purchased 222,789 and 262,163 shares at
weighted average share prices of $28.79 and $32.05, respectively. The Companys employees represent
approximately 6% of the total participation in this plan. Subsequent to the Separation, the
Company did not adopt a non-qualified employee stock purchase plan.
Prior to the Separation, certain highly compensated employees of the Company were eligible to
participate in a non-qualified deferred compensation plan provided by Clear Channel, which allowed
deferrals up to 50% of their annual salary and up to 80% of their bonus before taxes. The Company
did not match any deferral amounts. Clear Channel retained ownership of all assets until
distributed and recorded the liability under this deferred compensation plan. In connection with
the Separation, Clear Channel transferred to the Company the asset and liability related to the
deferrals made by the Companys employees.
Subsequent to the Separation, the Company adopted a non-qualified deferred compensation plan
for highly compensated employees and directors. The plan allows employees to defer up to 50% of
their annual salary and up to 80% of their bonus before taxes and allows directors to defer up to
100% of their compensation. Matching contributions are made at the sole discretion of the
Companys compensation committee and the Company retains ownership of all assets until distributed.
The liability under the deferred compensation plan at December 31, 2006 was approximately $1.9
million which is recorded in other long-term liabilities.
NOTE O OTHER INFORMATION
Variable Interest Entities
During May 2006, the Company acquired a 50% interest in several entities in the non-touring
business of Concert Productions International (CPI Non-Touring Entities) for $0.1 million in cash
and 75,195 shares of the Companys common stock. Based on the average of the closing prices of the
Companys common stock two trading days before and two trading days after the day of the
transaction of $22.41, the total purchase price was $1.8 million. The CPI Non-Touring Entities
primarily invest in theatrical productions. In connection with the acquisition, the Company
entered into a Credit Agreement with the CPI Non-Touring Entities agreeing to extend loans to each
of the entities for all their working capital and project funding requirements. The loans made
under the Credit Agreement are secured by substantially all of the material assets of the CPI
Non-Touring Entities, which primarily consists of investments in nonconsolidated affiliates with a
carrying value of approximately $9.0 million as of December 31, 2006. As of December 31, 2006, the
CPI Non-Touring Entities had no outstanding loans to the Company under the Credit Agreement.
The Company has consolidated the CPI Non-Touring Entities in its December 31, 2006 balance
sheet as the CPI Non-Touring Entities were determined to be variable interest entities and the
Company their primary beneficiary because the Company has assumed more risk for the CPI Non-Touring
Entities through the terms of the Credit Agreement.
Other
Included in loss (gain) on sale of operating assets for the year ended December 31, 2006 is a
$10.6 million gain related to the sale of portions of the Companys sports representation business
assets related to basketball, golf, football, media, tennis, baseball, soccer
95
and rugby representation and events which were sold in 2006. Part of these sales were made to
a former member of senior management of the Company.
Included in loss (gain) on sale of operating assets for the year ended December 31, 2005 was a
$3.0 million loss related to the sale of certain exhibition assets during the fourth quarter of
2005.
Included in other expense (income) net for the year ended December 31, 2006 is income of
$5.9 million related to a fee received on the sale of land in Ireland which was sold in April 2006
to the minority interest holder in this entity. This fee was for payment of services provided by
the Company in completing the sale since, under the terms of the original acquisition that included
this asset, the Company did not have the rights to the appreciation in the value of this property.
The minority interest holder contributed his share of the appreciation in the value of the land to
the entity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
The following details the
components of Other expense
(income) net: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of investment |
|
$ |
1,659 |
|
|
$ |
|
|
|
$ |
|
|
Currency exchange loss (gain) |
|
|
3,130 |
|
|
|
(1,154 |
) |
|
|
1,355 |
|
Other, net |
|
|
(6,009 |
) |
|
|
1,600 |
|
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
Total other expense (income) net |
|
$ |
(1,220 |
) |
|
$ |
446 |
|
|
$ |
1,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
The following details the components of Other current assets: |
|
|
|
|
|
|
|
|
Investments in theatrical productions |
|
$ |
13,578 |
|
|
$ |
9,955 |
|
Inventory |
|
|
12,369 |
|
|
|
5,587 |
|
Cash held in escrow |
|
|
10,124 |
|
|
|
23,273 |
|
Other |
|
|
2,448 |
|
|
|
7,480 |
|
|
|
|
|
|
|
|
Total other current assets |
|
$ |
38,519 |
|
|
$ |
46,295 |
|
|
|
|
|
|
|
|
The following details the components of Other assets: |
|
|
|
|
|
|
|
|
Prepaid management and booking fees |
|
$ |
12,392 |
|
|
$ |
10,724 |
|
Prepaid rent |
|
|
21,756 |
|
|
|
6,889 |
|
Debt issuance costs |
|
|
7,714 |
|
|
|
3,005 |
|
Other |
|
|
8,337 |
|
|
|
6,933 |
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
50,199 |
|
|
$ |
27,551 |
|
|
|
|
|
|
|
|
The following details the components of Accrued expenses: |
|
|
|
|
|
|
|
|
Accrued event expenses |
|
$ |
107,770 |
|
|
$ |
98,359 |
|
Collections on behalf of others |
|
|
136,643 |
|
|
|
71,823 |
|
Current deferred tax liabilities |
|
|
2,357 |
|
|
|
9,110 |
|
Accrued expenses other |
|
|
224,644 |
|
|
|
203,314 |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
471,414 |
|
|
$ |
382,606 |
|
|
|
|
|
|
|
|
The following details the components of Other long-term liabilities: |
|
|
|
|
|
|
|
|
Tax contingencies |
|
$ |
22,935 |
|
|
$ |
16,745 |
|
Deferred revenue |
|
|
13,309 |
|
|
|
4,973 |
|
Accrued rent |
|
|
33,702 |
|
|
|
22,901 |
|
Other |
|
|
18,844 |
|
|
|
9,048 |
|
|
|
|
|
|
|
|
Total other long-term liabilities |
|
$ |
88,790 |
|
|
$ |
53,667 |
|
|
|
|
|
|
|
|
96
NOTE P SEGMENT DATA
Following the Separation, the Company reorganized its business units and the way in which
these businesses are assessed and therefore changed its reportable operating segments, starting in
2006, to Events, Venues and Sponsorship, and Digital Distribution. Multiple operating segments are
aggregated as the reportable segments for Events and Venues and Sponsorship. The Events segment
principally involves the promotion or production of live music shows, theatrical performances and
specialized motor sports events and provides various services to artists. The Venues and
Sponsorship segment principally involves the operation of venues and the sale of premium seats,
national and local sponsorships and placement of advertising, including signage and promotional
programs, and naming of subscription series and venues. The Digital Distribution segment
principally involves the management of the Companys third-party ticketing relationships, in-house
ticketing operations and online and wireless distribution activities, including the development of
the Companys website. Included in the Digital Distribution revenue below are revenues from ticket
rebates earned on tickets sold through phone, outlet and internet, for events promoted by the
Events segment. Other includes sports representation, as well as other business initiatives.
The Company has reclassified all periods presented to conform to the current period
presentation. Revenue and expenses earned and charged between segments are eliminated in
consolidation. Corporate expenses, interest income, interest expense, equity in losses (earnings)
of nonconsolidated affiliates, minority interest expense (income), other expense (income) net and
income tax expense (benefit) are managed on a total company basis.
There are no customers that individually account for more than ten percent of the Companys
consolidated and combined revenues in any year.