10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 13, 2006
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 AND 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2006
Commission file number 1-32663
Commission file number 1-32663
CLEAR CHANNEL OUTDOOR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 86-0812139 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
200 East Basse Road
San Antonio, Texas 78209
(210) 832-3700
San Antonio, Texas 78209
(210) 832-3700
(Address and telephone number
of principal executive offices)
of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer
or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each class of the issuers classes of common
stock, as of the latest practicable date.
Class
|
Outstanding at November 9, 2006 | |
Class A Common Stock, $.01 par value |
39,486,517 |
|
Class B Common Stock, $.01 par value
|
315,000,000 |
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Table of Contents
PART I
Item 1. UNAUDITED FINANCIAL STATEMENTS
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | (Audited) | |||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 104,657 | $ | 108,644 | ||||
Accounts receivable, less allowance of $23,289 at
September 30, 2006 and $21,699 at December 31, 2005 |
715,681 | 689,007 | ||||||
Due from Clear Channel Communications |
| 131 | ||||||
Prepaid expenses |
90,091 | 70,459 | ||||||
Other current assets |
203,338 | 181,939 | ||||||
Total Current Assets |
1,113,767 | 1,050,180 | ||||||
Property, Plant and Equipment |
||||||||
Land, buildings and improvements |
335,197 | 313,011 | ||||||
Structures |
3,490,365 | 3,327,326 | ||||||
Furniture and other equipment |
235,632 | 231,758 | ||||||
Construction in progress |
57,874 | 43,012 | ||||||
4,119,068 | 3,915,107 | |||||||
Less accumulated depreciation |
1,961,663 | 1,761,679 | ||||||
2,157,405 | 2,153,428 | |||||||
Intangible Assets |
||||||||
Definite-lived intangibles, net |
290,758 | 251,951 | ||||||
Indefinite-lived intangibles permits |
257,516 | 207,921 | ||||||
Goodwill |
1,016,744 | 748,886 | ||||||
Other Assets |
||||||||
Notes receivable |
6,150 | 5,452 | ||||||
Investments in, and advances to, nonconsolidated affiliates |
93,630 | 98,975 | ||||||
Deferred tax asset |
193,816 | 239,947 | ||||||
Other assets |
92,917 | 161,605 | ||||||
Total Assets |
$ | 5,222,703 | $ | 4,918,345 | ||||
See Notes to Consolidated and Combined Financial Statements
- 3 -
Table of Contents
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS EQUITY
(In thousands)
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | (Audited) | |||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 98,530 | $ | 213,021 | ||||
Accrued expenses |
477,966 | 337,441 | ||||||
Due to Clear Channel Communications |
49,933 | | ||||||
Accrued interest |
4,380 | 2,496 | ||||||
Accrued income taxes |
7,605 | 16,812 | ||||||
Deferred income |
116,660 | 83,196 | ||||||
Current portion of long-term debt |
77,723 | 140,846 | ||||||
Deferred tax liabilities |
3,186 | | ||||||
Total Current Liabilities |
835,983 | 793,812 | ||||||
Long-term debt |
105,268 | 86,940 | ||||||
Debt with Clear Channel Communications |
2,500,000 | 2,500,000 | ||||||
Other long-term liabilities |
165,023 | 160,879 | ||||||
Minority interest |
171,515 | 167,277 | ||||||
Commitment and contingent liabilities (Note 6) |
||||||||
Shareholders Equity |
||||||||
Class A common stock |
395 | 352 | ||||||
Class B common stock |
3,150 | 3,150 | ||||||
Additional paid-in capital |
1,275,726 | 1,183,258 | ||||||
Retained earnings |
108,218 | 20,205 | ||||||
Accumulated other comprehensive income |
57,425 | 2,472 | ||||||
Total Shareholders Equity |
1,444,914 | 1,209,437 | ||||||
Total Liabilities and Shareholders Equity |
$ | 5,222,703 | $ | 4,918,345 | ||||
See Notes to Consolidated and Combined Financial Statements
- 4 -
Table of Contents
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenue |
$ | 2,067,026 | $ | 1,931,471 | $ | 720,254 | $ | 668,003 | ||||||||
Operating expenses: |
||||||||||||||||
Direct operating expenses (includes share-based
payments of $3,279, $512, $1,081 and $334 for the nine
and three months ended September 30, 2006 and 2005,
respectively, and excludes depreciation and
amortization) |
1,053,843 | 988,448 | 367,620 | 329,688 | ||||||||||||
Selling, general and administrative expenses (includes
share-based payments of $1,275 $0, $420 and $0 for the
nine and three months ended September 30, 2006 and
2005, respectively, and excludes depreciation and
amortization) |
401,603 | 410,075 | 134,637 | 153,162 | ||||||||||||
Depreciation and amortization |
299,270 | 290,233 | 102,123 | 95,405 | ||||||||||||
Corporate expenses (includes share-based payments of
$67, $0, $22 and $0 for the nine and three months
ended September 30, 2006 and 2005, respectively, and
excludes depreciation and amortization) |
43,830 | 39,397 | 15,125 | 12,999 | ||||||||||||
Gain (loss) on the disposition of assets net |
21,607 | 2,914 | (834 | ) | 1,043 | |||||||||||
Operating income |
290,087 | 206,232 | 99,915 | 77,792 | ||||||||||||
Interest expense on debt with Clear Channel Communications |
114,101 | 133,093 | 39,538 | 60,265 | ||||||||||||
Interest expense |
11,244 | 9,874 | 4,061 | 3,407 | ||||||||||||
Equity in earnings of nonconsolidated affiliates |
5,622 | 9,908 | 1,823 | 3,961 | ||||||||||||
Other income (expense) net |
1,667 | (9,719 | ) | 467 | (5,748 | ) | ||||||||||
Income before income taxes and minority interest |
172,031 | 63,454 | 58,606 | 12,333 | ||||||||||||
Income tax (expense) benefit: |
||||||||||||||||
Current |
(28,578 | ) | (37,767 | ) | (14,376 | ) | 8,978 | |||||||||
Deferred |
(47,975 | ) | 6,023 | (12,270 | ) | (5,856 | ) | |||||||||
Income tax (expense) benefit: |
(76,553 | ) | (31,744 | ) | (26,646 | ) | 3,122 | |||||||||
Minority interest income (expense), net of tax |
(7,465 | ) | (10,548 | ) | (127 | ) | (5,913 | ) | ||||||||
Net income |
88,013 | 21,162 | 31,833 | 9,542 | ||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Foreign currency translation adjustments |
54,953 | (162,466 | ) | (6,655 | ) | 878 | ||||||||||
Comprehensive income (loss) |
$ | 142,966 | $ | (141,304 | ) | $ | 25,178 | $ | 10,420 | |||||||
Net income per common share: |
||||||||||||||||
Basic |
$ | .25 | $ | .07 | $ | .09 | $ | .03 | ||||||||
Diluted |
$ | .25 | $ | .07 | $ | .09 | $ | .03 |
See Notes to Consolidated and Combined Financial Statements
- 5 -
Table of Contents
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended September 30, | ||||||||
2006 | 2005 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 88,013 | $ | 21,162 | ||||
Reconciling items: |
||||||||
Depreciation and amortization |
299,270 | 290,233 | ||||||
Deferred taxes |
47,975 | (6,023 | ) | |||||
(Gain) loss on sale of operating and fixed assets |
(21,607 | ) | (2,914 | ) | ||||
Other reconciling items, net |
(288 | ) | (886 | ) | ||||
Changes in operating assets and liabilities, net of effects of acquisitions |
(26,918 | ) | 35,065 | |||||
Net cash provided by operating activities |
386,445 | 336,637 | ||||||
Cash flows from investing activities: |
||||||||
Decrease (increase) in notes receivable, net |
(699 | ) | 51 | |||||
Decrease (increase) in investments in, and advances to nonconsolidated
affiliates net |
2,776 | 1,114 | ||||||
Purchases of property, plant and equipment |
(163,980 | ) | (130,484 | ) | ||||
Proceeds from disposal of assets |
11,342 | 9,593 | ||||||
Acquisition of operating assets, net of cash acquired |
(200,654 | ) | (43,737 | ) | ||||
Decrease (increase) in other net |
(31,731 | ) | (59,726 | ) | ||||
Net cash used in investing activities |
(382,946 | ) | (223,189 | ) | ||||
Cash flows from financing activities: |
||||||||
Draws on credit facilities |
72,898 | 58,206 | ||||||
Payments on credit facilities |
(49,437 | ) | (21,424 | ) | ||||
Proceeds from long-term debt |
31,693 | | ||||||
Payments on long-term debt |
(111,231 | ) | (25,416 | ) | ||||
Net transfers (to) from Clear Channel Communications |
50,076 | (59,520 | ) | |||||
Proceeds from exercise of stock options |
101 | | ||||||
Net cash used in financing activities |
(5,900 | ) | (48,154 | ) | ||||
Effect of exchange rate changes on cash |
(1,586 | ) | (11,566 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
(3,987 | ) | 53,728 | |||||
Cash and cash equivalents at beginning of period |
108,644 | 37,948 | ||||||
Cash and cash equivalents at end of period |
$ | 104,657 | $ | 91,676 | ||||
See Notes to Consolidated and Combined Financial Statements
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Table of Contents
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Preparation of Interim Financial Statements
The consolidated and combined financial statements were prepared by Clear Channel Outdoor Holdings,
Inc. (the Company) pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) and, in the opinion of management, include all adjustments (consisting of normal
recurring accruals and adjustments necessary for adoption of new accounting standards) necessary to
present fairly the results of the interim periods shown. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States have been condensed or omitted pursuant to such
SEC rules and regulations. Management believes that the disclosures made are adequate to make the
information presented not misleading. Due to seasonality and other factors, the results for the
interim periods are not necessarily indicative of results for the full year. The financial
statements contained herein should be read in conjunction with the consolidated and combined
financial statements and notes thereto included in the Companys 2005 Annual Report on Form 10-K.
The combined financial statements include amounts prior to the initial public offering (IPO)
derived from Clear Channel Communications consolidated financial statements using the historical
results of operations and bases of the assets and liabilities of Clear Channel Communications
outdoor advertising businesses and give effect to allocations of expenses from Clear Channel
Communications. These allocations were made on a specifically identifiable basis or using relative
percentages of headcount or other methods management considered to be a reasonable reflection of
the utilization of services provided. The Companys historical financial data may not be
indicative of its future performance nor will such data reflect what its financial position and
results of operations would have been had it operated as an independent publicly traded company
during the periods shown. Significant intercompany accounts among the combined businesses have
been eliminated in consolidation. Investments in nonconsolidated affiliates are accounted for
using the equity method of accounting.
Certain Reclassifications
The Company has reclassified prior year operating gains and losses to be included as a component of
operating income, reclassified minority interest expense below its provision for income taxes and
reclassified certain other assets to current assets to conform to current year presentation.
Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 155,
Accounting for Certain Hybrid Financial Instruments (Statement 155). Statement 155 is an
amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
(Statement 133) and FASB Statement 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities (Statement 140) and allows companies to elect to
measure at fair value entire financial instruments containing embedded derivatives that would
otherwise have to be accounted for separately. Statement 155 also requires companies to identify
interest in securitized financial assets that are freestanding derivatives or contain embedded
derivatives that would have to be accounted for separately, clarifies which interest- and
principal-only strips are subject to Statement 133, and amends Statement 140 to revise the
conditions of a qualifying special purpose entity due to the new requirement to identify whether
interests in securitized financial assets are freestanding derivatives or contain embedded
derivatives. Statement 155 is effective for all financial instruments acquired or issued in fiscal
years beginning after September 15, 2006. The Company will adopt Statement 155 on January 1, 2007
and anticipates that adoption will not materially impact its financial position or results of
operations.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes by prescribing a recognition threshold for tax positions taken or
expected to be taken in a tax return. FIN 48 requires that entities recognize in their financial
statements the impact of a tax position if that position is more likely than not of being sustained
on audit, based on the technical merits of the position. The cumulative effect of applying the
provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings
upon adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Company will adopt FIN 48 on January 1, 2007 and is currently evaluating the impact FIN 48 will
have on its financial position and results of operations.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (Statement 157).
Statement 157 defines fair value, establishes a framework for measuring fair value and expands
disclosure requirements for fair value measurements. 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
- 7 -
Table of Contents
beginning after November 15, 2007. The Company will adopt
Statement 157 on January 1, 2008 and anticipates that adoption will not materially impact its
financial position or results of operations.
In September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)
(Statement 158). Statement 158 requires an employer to recognize the overfunded or underfunded
status of a defined benefit postretirement plan as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in which the changes
occur through comprehensive income. The portions of Statement 158 that apply to the Company are
effective as of the end of the fiscal year ending after December 15, 2006. The Company will adopt
Statement 158 as of December 31, 2006 and anticipates that adoption will not materially impact its
financial position or results of operations.
Note 2: SHARE-BASED PAYMENTS
The Company has granted options to purchase shares of its Class A common stock to employees and
directors of the Company and its affiliates under its incentive stock plan typically at no less
than the fair value of the underlying stock on the date of grant. These options are granted for a
term not exceeding ten years and are forfeited, except in certain circumstances, in the event the
employee or director terminates his or her employment or relationship with the Company or one of
its affiliates. These options generally vest over five years. The incentive stock plan contains
anti-dilutive provisions that permit an adjustment of the number of shares of the Companys common
stock represented by each option for any change in capitalization.
The Company adopted the fair value recognition provisions of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment (Statement 123(R)), on January 1, 2006, using the
modified-prospective-transition method. The fair value of the options is estimated using a
Black-Scholes option-pricing model and amortized straight-line to expense over five years. Prior
to January 1, 2006, the Company accounted for its share-based payments under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25),
and related Interpretations, as permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (Statement 123). Under that method, when options are
granted with a strike price equal to or greater than the market price on the date of issuance,
there is no impact on earnings either on the date of grant or thereafter, absent certain
modifications to the options. The amounts recorded as share-based payments prior to adopting
Statement 123(R) related to the expense associated with restricted stock awards. Under the
modified-prospective-transition method, compensation cost recognized beginning in 2006 includes:
(a) compensation cost for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with the original
provisions of Statement 123, and (b) compensation cost for all share-based payments granted
subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the
provisions of Statement 123(R). Results for prior periods have not been restated.
As a result of adopting Statement 123(R) on January 1, 2006, the Companys income before income
taxes and minority interest for the nine and three months ended September 30, 2006, was $3.4
million and $1.1 million lower, respectively, and net income for the nine and three months ended
September 30, 2006, was $1.9 million and $0.6 million lower, respectively, than if it had continued
to account for share-based compensation under APB 25. Basic and diluted earnings per share for the
nine months ended September 30, 2006 were $0.01 and $0.01 lower, respectively, than if the Company
had continued to account for share-based compensation under APB 25. Basic and diluted earnings per
share for the three months ended September 30, 2006 remained unchanged even if the Company had
continued to account for share-based compensation under APB 25.
Prior to the adoption of Statement 123(R), the Company presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the statement of cash
flows. Statement 123(R) requires the cash flows resulting from the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those options (excess tax benefits) to
be classified as financing cash flows. The excess tax benefit that is required to be classified as
a financing cash inflow after adoption of Statement 123(R) is not material.
Prior to the IPO, the Company did not have any compensation plans under which it granted stock
awards to employees. However, Clear Channel Communications granted certain of the Companys
officers and other key employees stock options to purchase shares of Clear Channel Communications
common stock. All outstanding options to purchase shares of Clear Channel Communications common
stock held by the Companys employees were converted using an intrinsic value method into options
to purchase shares of the Companys Class A common stock concurrent with the closing of the IPO.
As did the Company, Clear Channel Communications accounted for its stock-based award plans in
accordance with APB 25, and related interpretations. Clear Channel Communications calculated the
pro forma stock compensation expense as if the stock-based awards had been accounted for using the
provisions of
Statement 123. The stock compensation expense was then allocated to the Company based on the
percentage of options outstanding to employees of the Company.
- 8 -
Table of Contents
Pro forma net income and earnings per share, assuming the Company and Clear Channel Communications
accounted for all employee stock options using the fair value method and amortized such to expense
over the options vesting period is as follows:
Nine Months | Three Months | |||||||
Ended | Ended | |||||||
(In thousands, except per share data) | September 30, 2005 | September 30, 2005 | ||||||
Net income: |
||||||||
Reported |
$ | 21,162 | $ | 9,542 | ||||
Add: Stock-based employee
compensation expense included in
reported net income, net of
related tax effects |
163 | 106 | ||||||
Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards, net of
related tax effects |
1,758 | 351 | ||||||
Pro Forma |
$ | 19,567 | $ | 9,297 | ||||
Net income per common share: |
||||||||
Basic: |
||||||||
Reported |
$ | .07 | $ | .03 | ||||
Pro Forma |
$ | .06 | $ | .03 | ||||
Diluted: |
||||||||
Reported |
$ | .07 | $ | .03 | ||||
Pro Forma |
$ | .06 | $ | .03 |
The fair value of each option awarded is estimated on the date of grant using a Black-Scholes
option-pricing model. Expected volatilities are based on implied volatilities from traded options
on the Companys stock, historical volatility on the Companys stock, and other factors. The
expected life is based on historical data of options granted and represents the period of time that
options granted are expected to be outstanding. The Company uses historical data to estimate
option exercises and employee terminations within the valuation model. Prior to the adoption of
Statement 123(R), the Company recognized forfeitures as they occurred in its Statement 123 pro
forma disclosures. Beginning January 1, 2006, the Company includes estimated forfeitures in its
compensation cost and updates the estimated forfeiture rate through the final vesting date of
awards. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the
time of grant for periods equal to the expected life of the option.
The following assumptions were used to calculate the fair value of the Companys options on the
date of grant during the nine months ended September 30, 2006:
Expected volatility |
27% | |||
Expected life in years |
5.0 7.5 | |||
Risk-free interest rate |
4.58% 5.08 | % | ||
Dividend yield |
0% |
The following table presents a summary of the Companys stock options outstanding at and stock
option activity during the nine months ended September 30, 2006 (Price reflects the weighted
average exercise price per share):
Weighted Average | ||||||||||||||||
Remaining | Aggregate Intrinsic | |||||||||||||||
(In thousands, except per share data) | Options | Price | Contractual Term | Value | ||||||||||||
Outstanding, beginning of year |
8,509 | $ | 24.05 | |||||||||||||
Granted |
177 | 19.85 | ||||||||||||||
Exercised |
(6 | ) | 20.42 | |||||||||||||
Forfeited |
(276 | ) | 22.59 | |||||||||||||
Expired |
(510 | ) | 32.37 | |||||||||||||
Outstanding, September 30 |
7,894 | 23.43 | 4.5 years | $ | 8,262 | |||||||||||
Exercisable, September 30 |
3,064 | 2.3 years | $ | 174 | ||||||||||||
Weighted average fair value per option granted |
$ | 6.55 |
- 9 -
Table of Contents
A summary of the Companys nonvested options at December 31, 2005, and changes during the nine
months ended September 30, 2006, is presented below:
Weighted Average | ||||||||
Grant Date | ||||||||
(In thousands, except per share data) | Options | Fair Value | ||||||
Nonvested, beginning of year |
5,634 | $ | 4.56 | |||||
Granted |
177 | 6.55 | ||||||
Vested |
(705 | ) | .91 | |||||
Forfeited |
(276 | ) | 4.01 | |||||
Nonvested, September 30 |
4,830 | 5.21 | ||||||
There were 33.9 million shares available for future grants under the Companys option plan at
September 30, 2006. Vesting dates range from April 2004 to April 2011, and expiration dates range
from November 2006 to April 2016 at exercise prices and average contractual lives as follows:
Weighted | ||||||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||||||
(In thousands of shares) | Outstanding | Remaining | Average | Exercisable | Average | |||||||||||||||
as of | Contractual | Exercise | as of | Exercise | ||||||||||||||||
Range of Exercise Prices | 9/30/06 | Life | Price | 9/30/06 | Price | |||||||||||||||
$15.01 $20.00
|
3,408 | 6.5 | $ | 17.98 | 57 | $ | 17.35 | |||||||||||||
20.01 25.00
|
1,097 | 4.2 | 21.08 | 229 | 21.57 | |||||||||||||||
25.01 30.00
|
2,143 | 2.9 | 26.12 | 1,532 | 26.04 | |||||||||||||||
30.01 35.00
|
692 | 2.4 | 32.78 | 692 | 32.78 | |||||||||||||||
35.01 40.00
|
417 | 0.6 | 37.86 | 417 | 37.86 | |||||||||||||||
40.01 45.00
|
98 | 3.8 | 42.80 | 98 | 42.80 | |||||||||||||||
45.01 50.00
|
39 | 0.2 | 49.52 | 39 | 49.52 | |||||||||||||||
7,894 | 4.5 | 23.43 | 3,064 | 29.50 | ||||||||||||||||
Restricted Stock Awards
The Company also grants restricted stock awards to employees and directors of the Company and its
affiliates. These common shares hold a legend which restricts their transferability for a term of
up to five years and are forfeited, except in certain circumstances, in the event the employee
terminates his or her employment or relationship with the Company prior to the lapse of the
restriction. The restricted stock awards were granted out of the Companys stock option plan.
The following table presents a summary of the Companys restricted stock outstanding at and
restricted stock activity during the nine months ended September 30, 2006 (Price reflects the
weighted average share price at the date of grant):
2006 | ||||||||
(In thousands, except per share data) | Awards | Price | ||||||
Outstanding, beginning of year |
236 | $ | 18.00 | |||||
Granted |
6 | 19.87 | ||||||
Vested (restriction lapsed) |
| | ||||||
Forfeited |
(19 | ) | 18.01 | |||||
Outstanding, September 30 |
223 | 18.04 | ||||||
The Company recorded compensation expense of $0.6 million and $0.5 million for the nine months
ended September 30, 2006 and 2005, respectively, and $0.2 million and $0.3 million for the three
months ended September 30, 2006 and 2005, respectively, related to shares of Clear Channel
Communications restricted stock granted to the Companys employees prior to the IPO.
Unrecognized Share-Based Compensation Cost
As of September 30, 2006, there was $12.2 million of unrecognized compensation cost related to
nonvested share-based compensation arrangements. The cost is expected to be recognized over a
weighted average period of approximately three years.
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Note 3: INTANGIBLE ASSETS AND GOODWILL
Definite-lived Intangibles
The Company has definite-lived intangible assets which consist primarily of transit and street
furniture contracts and other contractual rights acquired in business combinations, all of which
are amortized over the shorter of either the respective lives of the agreements or over the period
of time the assets are expected to contribute to the Companys future cash flows. Other
definite-lived intangible assets are amortized over the period of time the assets are expected to
contribute directly or indirectly to the Companys future cash flows. The following table presents
the gross carrying amount and accumulated amortization for each major class of definite-lived
intangible assets at September 30, 2006 and December 31, 2005:
September 30, 2006 | December 31, 2005 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
(In thousands) | Amount | Amortization | Amount | Amortization | ||||||||||||
Transit, street
furniture, and
other contractual
rights |
$ | 777,850 | $ | 488,893 | $ | 651,456 | $ | 408,017 | ||||||||
Other |
41,969 | 40,168 | 56,449 | 47,937 | ||||||||||||
Total |
$ | 819,819 | $ | 529,061 | $ | 707,905 | $ | 455,954 | ||||||||
The Company completed the acquisition of Interspace Airport Advertising (Interspace) on July 1,
2006. As a result of the acquisition, the company recorded $39.5 million in definite-lived
intangible assets which consists primarily of airport contracts with a remaining weighted average
life of 5 years. See further discussion of the acquisition at Note 4.
Total amortization expense from definite-lived intangible assets for the nine and three months
ended September 30, 2006 and for the year ended December 31, 2005 was $61.3 million, $19.3 million
and $89.3 million, respectively. The following table presents the Companys estimate of
amortization expense for each of the five succeeding fiscal years for definite-lived intangible
assets:
(In thousands) | ||||
2007 |
$ | 61,070 | ||
2008 |
37,656 | |||
2009 |
28,071 | |||
2010 |
26,368 | |||
2011 |
17,423 |
As acquisitions and dispositions occur in the future and as purchase price allocations are
finalized, amortization expense may vary.
Indefinite-lived Intangibles
The Companys indefinite-lived intangible assets consist of billboard permits acquired primarily in
business combinations. The Companys billboard permits are issued in perpetuity by state and local
governments and are transferable or renewable at little or no cost. Permits typically include the
location for which the permit allows the Company the right to operate an advertising structure.
The Companys permits are located on either owned or leased land. In cases where the Companys
permits are located on leased land, the leases are typically from 10 to 20 years and renew
indefinitely, with rental payments generally escalating at an inflation based index. If the
Company loses its lease, the Company will typically obtain permission to relocate the permit or
bank it with the municipality for future use.
The Company does not amortize its billboard permits. The Company tests these indefinite-lived
intangible assets for impairment at least annually using the direct method. Under the direct
method, it is assumed that rather than acquiring indefinite-lived intangible assets as a part of a
going concern business, the buyer hypothetically obtains indefinite-lived intangible assets and
builds a new operation with similar attributes from scratch. Thus, the buyer incurs start-up costs
during the build-up phase which are normally associated with going concern value. Initial capital
costs are deducted from the discounted cash flows model which results in value that is directly
attributable to the indefinite-lived intangible assets.
Under the direct method, the Company continues to aggregate its indefinite-lived intangible assets
at the market level for purposes of impairment testing. The Companys key assumptions using the
direct method are market revenue growth rates, market share, profit margin, duration and profile of
the build-up period, estimated start-up capital costs and losses incurred during the build-up
period, the risk-adjusted discount rate and terminal values. This data is populated using industry
normalized market information.
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The carrying amount for billboard permits at September 30, 2006 and December 31, 2005 was $257.5
million and $207.9 million, respectively.
Goodwill
The Company tests goodwill for impairment using a two-step process. The first step, used to screen
for potential impairment, compares the fair value of the reporting unit with its carrying amount,
including goodwill. The second step, used to measure the amount of the impairment loss, compares
the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.
The following table presents the changes in the carrying amount of goodwill in each of the
Companys reportable segments for the nine-month period ended September 30, 2006:
(In thousands) | Americas | International | Total | |||||||||
Balance as of December 31, 2005 |
$ | 405,275 | $ | 343,611 | $ | 748,886 | ||||||
Acquisitions |
211,649 | 33,917 | 245,566 | |||||||||
Dispositions |
(1,913 | ) | | (1,913 | ) | |||||||
Foreign currency |
401 | 24,119 | 24,520 | |||||||||
Adjustments |
| (315 | ) | (315 | ) | |||||||
Balance as of September 30, 2006 |
$ | 615,412 | $ | 401,332 | $ | 1,016,744 | ||||||
Included in the Americas acquisitions amount above is $127.6 million related to the acquisition of
Interspace, all of which is expected to be deductible for tax purposes.
Note 4: RECENT DEVELOPMENTS
Acquisitions
The Company completed the acquisition of Interspace on July 1, 2006, by issuing 4,250,000 shares of
the Companys Class A common stock and the payment of approximately $81.3 million. The acquisition
was valued at approximately $170.4 million based on the Companys common shares issued at the
closing share price on the date of acquisition of $89.1 million and the cash consideration paid.
Interspaces 2005 revenues and operating expenses (direct and SG&A expenses) were approximately
$45.8 million and $32.5 million, respectively.
In addition to the Interspace acquisition, during the nine months ended September 30, 2006, the
Companys Americas segment acquired display faces for $27.9 million in cash, including assets
acquired in the exchange of one of its Americas markets for assets located in a different market.
In addition, the Companys international segment paid $91.4 million, primarily related to the
acquisition of an outdoor advertising business in the United Kingdom.
Disposition of Assets
During the first quarter of 2006, the Company exchanged assets in one of its Americas markets for
assets located in a different market and recognized a gain of $13.2 million in Gain (loss) on
disposition of assets net.
Recent Legal Proceedings
The Company is the defendant in a lawsuit filed October 20, 1998 by Jorge Luis Cabrera, Sr., and
Martha Serrano, as personal representatives of the Estate of Jorge Luis Cabrera, Jr., in the 11th
Judicial Circuit in and for Miami-Dade County, Florida. The plaintiff alleged the Company
negligently constructed, installed or maintained the electrical system in a bus shelter, which
resulted in the death of Jorge Luis Cabrera, Jr. Martha Serrano settled her claims with the
Company. On June 24, 2005, the jury rendered a verdict in favor of the plaintiff, and awarded the
plaintiff $4.1 million in actual damages and $61.0 million in punitive damages. The Company filed
a motion to have the punitive damages award reduced. The trial judge granted the Companys motion.
A final judgment in the amount of $4.1 million in compensatory damages and $12.3 million in
punitive damages was signed on January 23, 2006. The Company has appealed the underlying judgment
and the Plaintiff filed a cross-appeal. The Plaintiff seeks to reinstate the original award of
punitive damages. The Company has insurance coverage for up to approximately $50.0 million in
damages for this matter.
The Company is currently involved in certain other legal proceedings and, as required, has accrued
an estimate of the probable costs for the resolution of these claims, inclusive of those discussed
above. 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
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possible, however, that future results of operations for any particular period could be materially
affected by changes in the Companys assumptions or the effectiveness of its strategies related to
these proceedings.
Note 5: RESTRUCTURING
In the third quarter of 2005, the Company restructured its operations in France. As a result, the
Company recorded $26.6 million in restructuring costs as a component of selling, general and
administrative expenses; $22.5 million was related to severance costs and $4.1 million was related
to other costs. During the nine months ended September 30, 2006, $7.4 million was paid and charged
to the restructuring reserve. As of September 30, 2006, the accrual balance was $14.7 million.
In addition to the France restructuring, the Company has a restructuring liability related to Clear
Channel Communications merger with Ackerley in June 2002. At September 30, 2006, the accrual
balance for this restructuring was $1.5 million. The remaining restructuring accrual is comprised
solely of lease termination, which will be paid over the next five years.
Note 6: COMMITMENTS AND CONTINGENCIES
Certain agreements relating to acquisitions provide for purchase price adjustments and other future
contingent payments based on the financial performance of the acquired companies. The Company will
continue to accrue additional amounts related to such contingent payments if and when it is
determinable that the applicable financial performance targets will be met. The aggregate of these
contingent payments, if performance targets are met, would not significantly impact the financial
position or results of operations of the Company.
As discussed in Note 4, there are various lawsuits and claims pending against the Company. Based
on current assumptions, the Company has accrued its estimate of the probable costs for the
resolution of these claims. It is possible, however, that future results of operations for any
particular period could be materially affected by changes in the Companys assumptions or the
effectiveness of its strategies related to these proceedings.
Note 7: RELATED PARTY TRANSACTIONS
The Company records net amounts, up to a maximum of $1.0 billion, due to or from Clear Channel
Communications as Due from Clear Channel Communications or Due to Clear Channel Communications
on the consolidated balance sheets. The account represents the Companys revolving promissory note
with Clear Channel Communications. Subsequent to the IPO, the account accrues interest pursuant to
the Master Agreement and is generally payable on demand. Included in the account is the net
activity resulting from day-to-day cash management services provided by Clear Channel
Communications. As a part of these services, the Company maintains collection bank accounts swept
daily by Clear Channel Communications. In return, Clear Channel Communications funds the Companys
controlled disbursement accounts as checks or electronic payments are presented for payment. At
September 30, 2006, the balance of $49.9 million was a liability recorded in Due to Clear Channel
Communications on the consolidated balance sheet. At December 31, 2005, the balance of $0.1
million was an asset recorded in Due from Clear Channel Communications on the consolidated
balance sheet. The increase in the net amount due to Clear Channel Communications during the nine
months ended September 30, 2006 was a result of Clear Channel Communications funding a portion of
the Companys debt payments and certain acquisitions. The net interest income for the nine months
ended September 30, 2006 was $0.8 million and the net interest expense for the three months ended
September 30, 2006 was $0.4 million.
On August 2, 2005, the Company distributed a note in the original principal amount of $2.5 billion
to Clear Channel Communications as a dividend. This note matures on August 2, 2010 and may be
prepaid in whole at any time, or in part from time to time. This note accrues interest at a
variable per annum rate equal to the weighted average cost of debt for Clear Channel
Communications, calculated on a monthly basis. This note is mandatorily payable upon a change of
control of us and, subject to certain exceptions, all proceeds from debt or equity raised by us
must be used to prepay such note. At September 30, 2006, the interest rate on the $2.5 billion
intercompany note was 6.1%.
Clear Channel Communications has a five-year, multi-currency revolving credit facility in the
amount of $1.75 billion. Certain of the Companys international subsidiaries may borrow under a
$150.0 million sub-limit within this credit facility to the extent Clear Channel Communications has
not already borrowed against this capacity. This sub-limit allows for borrowings in various
foreign currencies, which are used to hedge net assets in those currencies and provides funds to
the Companys international operations for certain working capital needs. Certain of the Companys
international subsidiary borrowings under this sub-limit are guaranteed by Clear Channel
Communications. The interest rate is based upon LIBOR or, for Euro denominated borrowings, EURIBOR,
plus, in
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each case, a margin. At September 30, 2006, the interest rate on borrowings under this credit facility ranged
from 4.2% to 5.4%. At September 30, 2006, the outstanding balance on the sub-limit was
approximately $30.7 million, and approximately $119.3 million was available for future borrowings,
with the entire balance to be paid on July 12, 2009.
The Company provides advertising space on its billboards for radio stations owned by Clear Channel
Communications. For the nine months ended September 30, 2006 and 2005, the Company recorded $6.9
million and $7.0 million, respectively, in revenue for these advertisements. For the three months
ended September 30, 2006 and 2005, the Company recorded $1.9 million and $1.6 million,
respectively, in revenue for these advertisements.
Under the corporate services agreement entered into between Clear Channel Communications and the
Company at the IPO, Clear Channel Communications provides management services to the Company, which
include, among other things: (i) treasury, payroll and other financial related services; (ii)
executive officer services; (iii) human resources and employee benefits services; (iv) legal and
related services; (v) information systems, network and related services; (vi) investment services;
(vii) procurement and sourcing support services; and (viii) other general corporate services.
These services are charged to the Company based on actual direct costs incurred or allocated by
Clear Channel Communications based on headcount, revenue or other factors on a pro rata basis. For
the nine months ended September 30, 2006 and 2005, the Company recorded $15.8 million and $11.8
million, respectively, as a component of corporate expenses for these services. For the three
months ended September 30, 2006 and 2005, the Company recorded $5.2 million and $4.0 million,
respectively, as a component of corporate expenses for these services.
Pursuant to the tax matters agreement entered into between Clear Channel Communications and the
Company at the IPO, the operations of the Company are included in a consolidated federal income tax
return filed by Clear Channel Communications. The Companys provision for income taxes has been
computed on the basis that the Company files separate consolidated income tax returns with its
subsidiaries. Tax payments are made to Clear Channel Communications on the basis of the Companys
separate taxable income. Tax benefits recognized on the Companys employee stock options exercises
are retained by the Company.
The Company computes its deferred income tax provision using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, as if the
Company was a separate taxpayer. 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 some portion or
all of the asset will not be realized.
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Note 8: SEGMENT DATA
The Company has two reportable segments Americas and international. The Americas segment
includes operations in the United States, Canada and Latin America, and the international segment
includes operations in Europe, Asia, Africa and Australia.
Corporate | ||||||||||||||||
expenses and | ||||||||||||||||
gain (loss) on | ||||||||||||||||
disposition of | Consolidated/ | |||||||||||||||
(In thousands) | Americas | International | assets - net | Combined | ||||||||||||
Nine months ended September 30, 2006 |
||||||||||||||||
Revenue |
$ | 965,733 | $ | 1,101,293 | $ | ¾ | $ | 2,067,026 | ||||||||
Direct operating expenses |
382,401 | 671,442 | ¾ | 1,053,843 | ||||||||||||
Selling, general and administrative
expenses |
150,846 | 250,757 | ¾ | 401,603 | ||||||||||||
Depreciation and amortization |
129,382 | 169,888 | ¾ | 299,270 | ||||||||||||
Corporate expenses |
| | 43,830 | 43,830 | ||||||||||||
Gain (loss) on disposition of assets net |
| | 21,607 | 21,607 | ||||||||||||
Operating income (loss) |
$ | 303,104 | $ | 9,206 | $ | (22,223 | ) | $ | 290,087 | |||||||
Identifiable assets |
$ | 2,764,509 | $ | 2,265,066 | $ | 193,128 | $ | 5,222,703 | ||||||||
Capital expenditures |
$ | 60,367 | $ | 103,613 | $ | ¾ | $ | 163,980 | ||||||||
Three months ended September 30, 2006 |
||||||||||||||||
Revenue |
$ | 356,384 | $ | 363,870 | $ | ¾ | $ | 720,254 | ||||||||
Direct operating expenses |
133,468 | 234,152 | ¾ | 367,620 | ||||||||||||
Selling, general and administrative
expenses |
52,029 | 82,608 | ¾ | 134,637 | ||||||||||||
Depreciation and amortization |
45,897 | 56,226 | ¾ | 102,123 | ||||||||||||
Corporate expenses |
| | 15,125 | 15,125 | ||||||||||||
Gain (loss) on disposition of assets net |
| | (834 | ) | (834 | ) | ||||||||||
Operating income (loss) |
$ | 124,990 | $ | (9,116 | ) | $ | (15,959 | ) | $ | 99,915 | ||||||
Nine months ended September 30, 2005 |
||||||||||||||||
Revenue |
$ | 886,649 | $ | 1,044,822 | $ | ¾ | $ | 1,931,471 | ||||||||
Direct operating expenses |
359,263 | 629,185 | ¾ | 988,448 | ||||||||||||
Selling, general and administrative
expenses |
136,919 | 273,156 | ¾ | 410,075 | ||||||||||||
Depreciation and amortization |
127,019 | 163,214 | ¾ | 290,233 | ||||||||||||
Corporate expenses |
| | 39,397 | 39,397 | ||||||||||||
Gain (loss) on disposition of assets net |
| | 2,914 | 2,914 | ||||||||||||
Operating income (loss) |
$ | 263,448 | $ | (20,733 | ) | $ | (36,483 | ) | $ | 206,232 | ||||||
Identifiable assets |
$ | 2,515,518 | $ | 2,166,667 | $ | 613,337 | $ | 5,295,522 | ||||||||
Capital expenditures |
$ | 50,012 | $ | 80,472 | $ | ¾ | $ | 130,484 | ||||||||
Three months ended September 30, 2005 |
||||||||||||||||
Revenue |
$ | 317,705 | $ | 350,298 | $ | ¾ | $ | 668,003 | ||||||||
Direct operating expenses |
122,040 | 207,648 | ¾ | 329,688 | ||||||||||||
Selling, general and administrative
expenses |
45,768 | 107,394 | ¾ | 153,162 | ||||||||||||
Depreciation and amortization |
40,928 | 54,477 | ¾ | 95,405 | ||||||||||||
Corporate expenses |
| | 12,999 | 12,999 | ||||||||||||
Gain (loss) on disposition of assets net |
| | 1,043 | 1,043 | ||||||||||||
Operating income (loss) |
$ | 108,969 | $ | (19,221 | ) | $ | (11,956 | ) | $ | 77,792 | ||||||
Revenue of $59.3 million and $46.3 million derived from the Companys operations in Latin America
and Canada is included in the Americas data above for the nine months ended September 30, 2006 and
2005, respectively. Revenue of $19.5 million and $17.0 million derived from the Companys
operations in Latin America and Canada is included in the Americas data above for the three months
ended September 30, 2006 and 2005, respectively. Identifiable assets of $216.1 million and $196.9
million derived from the Companys operations in Latin America and Canada are included in the
Americas data above for the nine months ended September 30, 2006 and 2005, respectively.
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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Managements discussion and analysis, or MD&A, of our financial condition and results of
operations is provided as a supplement to the unaudited interim financial statements and
accompanying notes thereto to help provide an understanding of our financial condition, changes in
our financial condition and results of our operations. The information included in MD&A should be
read in conjunction with the annual financial statements.
Description of Business
Our revenues are derived from selling advertising space on displays owned or operated,
consisting primarily of billboards, street furniture displays and transit displays. We own the
majority of our advertising displays, which typically are located on sites that we either lease or
own or for which we have acquired permanent easements. Our advertising contracts with clients
typically outline the number of displays reserved, the duration of the advertising campaign and the
unit price per display. The margins on our billboard contracts tend to be higher than for our
other displays.
Our advertising rates are generally based on the gross rating points, or total number of
impressions delivered, expressed as a percentage of a market population, of a display or group of
displays. The number of impressions delivered by a display is measured by the number of people
passing the site during a defined period of time and, in some international markets, is weighted to
account for such factors as illumination, proximity to other displays and the speed and viewing
angle of approaching traffic. Management typically monitors our business by reviewing the average
rates, average revenues per display, occupancy and inventory levels of each of our display types by
market. In addition, because a significant portion of our advertising operations are conducted in
foreign markets, principally France and the United Kingdom, management reviews the operating
results from our foreign operations on a constant dollar basis. A constant dollar basis allows for
comparison of operations independent of foreign exchange movements. Because revenue-sharing and
minimum guaranteed payment arrangements are more prevalent in our international operations, the
margins in our international operations are typically less than the margins in our Americas
operations.
The significant expenses associated with our operations include (i) direct production,
maintenance and installation expenses, (ii) site lease expenses for land under our displays and
(iii) revenue-sharing or minimum guaranteed amounts payable under our billboard, street furniture
and transit display contracts. Our direct production, maintenance and installation expenses
include costs for printing, transporting and changing the advertising copy on our displays, the
related labor costs, the vinyl and paper costs and the costs for cleaning and maintaining our
displays. Vinyl and paper costs vary according to the complexity of the advertising copy and the
quantity of displays. Our site lease expenses include lease payments for use of the land under our
displays, as well as any revenue-sharing arrangements we may have with the landlords. The terms of
our Americas site leases generally range from 1 to 20 years. The terms of our international site
leases generally range from 1 to 15 years, but vary across our networks.
Relationship with Clear Channel Communications
Clear Channel Communications has advised us its current intent is to continue to hold all of
our Class B common stock and thereby retain its controlling interest in us. However, Clear Channel
Communications is not subject to any contractual obligation that would prohibit it from selling,
spinning off, splitting off or otherwise disposing of any shares of our common stock.
Basis of Presentation
Our combined financial statements for the periods prior to our IPO have been derived from the
financial statements and accounting records of Clear Channel Communications, principally from the
statements and records representing Clear Channel Communications Americas and International
Outdoor segments, using the historical results of operations and historical bases of assets and
liabilities of our business. The consolidated and combined statements of operations include
expense allocations for certain corporate functions historically provided to us by Clear Channel
Communications. These allocations were made on a specifically identifiable basis or using relative
percentages of headcount as compared to Clear Channel Communications other businesses or other
methods. We and Clear Channel Communications considered these allocations to be a reflection of
the utilization of services provided.
Under the Corporate Services Agreement, Clear Channel Communications allocates to us our share
of costs for services provided on our behalf based on actual direct costs incurred by Clear Channel
Communications or an estimate of Clear Channel Communications expenses incurred on our behalf.
For the three months ended September 30, 2006 and 2005, we recorded approximately $5.2 million and
$4.0 million, respectively, as a component of corporate expenses for these services. For the nine
months ended September 30, 2006 and 2005, we recorded approximately $15.8 million and $11.8
million, respectively, as a component of corporate expenses for these services.
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Table of Contents
We believe the assumptions underlying the combined financial statements prior to the IPO are
reasonable. However, the combined financial statements may not necessarily reflect our results of
operations, financial position and cash flows in the future or what our results of operations,
financial position and cash flows would have been had we been a separate, stand-alone company
during the periods presented.
Share-Based Payments
We adopted FAS 123(R), Share-Based Payment, on January 1, 2006, under the modified-prospective
approach which requires us to recognize share-based payments in the same line items as cash
compensation in the 2006 financial statements for all options granted after the date of adoption as
well as for any options that were unvested at adoption. Under the modified-prospective approach,
no stock option expense attributable to these options is reflected in the financial statements for
2005. The amounts recorded as share-based payments in the financial statements prior to adopting
FAS 123(R) related to the expense associated with restricted stock awards. As a result of
adoption, we recognized $3.2 million, $1.2 million and $0.07 million of share-based payments in
direct operating, SG&A and corporate expenses, respectively, during the nine months ended September
30, 2006. As of September 30, 2006, there was $12.2 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements. This cost is expected to be
recognized over a weighted average period of approximately three years.
The fair value of each option awarded is estimated on the date of grant using a Black-Scholes
option-pricing model. Expected volatilities are based on implied volatilities from traded options
on the Companys stock, historical volatility on the Companys stock, and other factors. The
expected life of options granted represents the period of time that options granted are expected to
be outstanding. The Company uses historical data to estimate option exercise and employees
terminations within the valuation model. The risk free rate for periods equal to the life of the
option is based on the U.S. Treasury yield curve in effect at the time of grant.
RESULTS OF OPERATIONS
Consolidated and Combined Results of Operations
The comparison of the Three and Nine Months Ended September 30, 2006 to the Three and Nine
Months Ended September 30, 2005 is as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||
September 30, | % | September 30, | % | ||||||||||||||||||||||
(In thousands) | 2006 | 2005 | Change | 2006 | 2005 | Change | |||||||||||||||||||
Revenue |
$ | 720,254 | $ | 668,003 | 8 | % | $ | 2,067,026 | $ | 1,931,471 | 7 | % | |||||||||||||
Operating expenses: |
|||||||||||||||||||||||||
Direct operating expenses |
367,620 | 329,688 | 12 | % | 1,053,843 | 988,448 | 7 | % | |||||||||||||||||
Selling, general and administrative
expenses |
134,637 | 153,162 | (12 | %) | 401,603 | 410,075 | (2 | %) | |||||||||||||||||
Depreciation and amortization |
102,123 | 95,405 | 7 | % | 299,270 | 290,233 | 3 | % | |||||||||||||||||
Corporate expenses |
15,125 | 12,999 | 16 | % | 43,830 | 39,397 | 11 | % | |||||||||||||||||
Gain (loss) on disposition of assets net |
(834 | ) | 1,043 | 21,607 | 2,914 | ||||||||||||||||||||
Operating income |
99,915 | 77,792 | 28 | % | 290,087 | 206,232 | 41 | % | |||||||||||||||||
Interest expense (including interest on debt
with Clear Channel Communications) |
43,599 | 63,672 | 125,345 | 142,967 | |||||||||||||||||||||
Equity in earnings of nonconsolidated
affiliates |
1,823 | 3,961 | 5,622 | 9,908 | |||||||||||||||||||||
Other income (expense) net |
467 | (5,748 | ) | 1,667 | (9,719 | ) | |||||||||||||||||||
Income before income taxes and minority
interest |
58,606 | 12,333 | 172,031 | 63,454 | |||||||||||||||||||||
Income tax (expense) benefit: |
|||||||||||||||||||||||||
Current |
(14,376 | ) | 8,978 | (28,578 | ) | (37,767 | ) | ||||||||||||||||||
Deferred |
(12,270 | ) | (5,856 | ) | (47,975 | ) | 6,023 | ||||||||||||||||||
Income tax (expense) benefit: |
(26,646 | ) | 3,122 | (76,553 | ) | (31,744 | ) | ||||||||||||||||||
Minority interest income (expense), net of tax |
(127 | ) | (5,913 | ) | (7,465 | ) | (10,548 | ) | |||||||||||||||||
Net income |
$ | 31,833 | $ | 9,542 | $ | 88,013 | $ | 21,162 | |||||||||||||||||
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Revenue
Three Months
Consolidated revenue increased $52.3 million for the third quarter of 2006 compared to the
third quarter of 2005. Our Americas segments revenue increased $38.7 million, primarily from
increased bulletin and airport revenues, as well as the acquisition of Interspace which contributed
$14.6 million. Our international segment contributed $13.6 million of the increase, primarily
related to $13.1 million attributable to foreign exchange gains
Nine Months
Consolidated revenue increased $135.6 million for the nine months ended September 30, 2006
compared to the nine months ended September 30, 2005. Our Americas segments revenue increased
$79.1 million from an increase in bulletin and airport revenues. Our international segment
contributed $56.5 million, of which approximately $44.9 million during the first six months of 2006
related to Clear Media, a Chinese outdoor advertising company, which we began consolidating in the
third quarter of 2005. Increased street furniture revenues also contributed to our international
revenue growth, which were partially offset by a revenue decline of $18.7 million from foreign
exchange fluctuations.
Direct Operating Expenses
Three Months
Direct operating expenses increased $37.9 million during the third quarter of 2006 compared to
the third quarter of 2005. Our Americas segment contributed $11.4 million, principally from an
increase in site-lease expenses and our acquisition of Interspace. Direct operating expenses in
our international segment increased $26.5 million over the third quarter of 2005, primarily from an
increase in fixed rent associated with guarantees on new contracts and $8.3 million from movements
in foreign exchange. Share-based payments included in direct operating expenses associated with
the adoption of FAS 123(R) were $1.1 million for the third quarter of 2006.
Nine Months
Direct operating expenses increased $65.4 million for the nine months ended September 30, 2006
compared to the nine months ended September 30, 2005. Americas direct operating expenses increased
$23.1 million, driven by increased site lease expenses associated with the increase in revenue and
the acquisition of Interspace. Interspace contributed $6.2 million to direct operating expenses in
the third quarter of 2006. Our international segment contributed $42.3 million, of which $18.0
million during the first six months of 2006 related to our consolidation of Clear Media and the
remainder was principally due to an increase in site lease expenses. The increase in the
international segments direct operating expense was partially offset by a decline of $11.2 million
related to movements in foreign exchange. Share-based payments included in direct operating
expenses associated with the adoption of FAS 123(R) were $3.2 million for the nine months ended
September 30, 2006.
Selling, General and Administrative Expenses (SG&A)
Three Months
SG&A decreased $18.5 million during the third quarter of 2006 compared to the third quarter of
2005, which included a $26.6 million charge related to restructuring our businesses in France
during the third quarter of 2005, partially offset by $2.9 million related to movements in foreign
exchange. SG&A increased in our Americas segment $6.3 million primarily from sales expenses
associated with the increase in revenue. Share-based payments included in SG&A associated with the
adoption of FAS 123(R) were $0.4 million during the third quarter of 2006.
Nine Months
SG&A decreased $8.5 million for the nine months ended September 30, 2006 compared to the nine
months ended September 30, 2005. SG&A increased $13.9 million in our Americas segment principally
related to an increase in bonus and commission expenses associated with the increase in revenues.
Our international SG&A expenses declined $22.4 million, primarily attributable to a decline of $4.6
million from movements in foreign exchange, as well as $26.6 million related to restructuring our
businesses in France recorded in the third quarter of 2005. Share-based payments included in SG&A
associated with the adoption of FAS 123(R) were $1.2 million for the nine months ended September
30, 2006.
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Depreciation and Amortization
Depreciation and amortization increased $6.7 million and $9.0 million during the three and
nine months ended September 30, 2006, respectively, as compared to the same periods of 2005. The
increase was primarily due to the acquisition of Interspace during the current quarter, the
acquisition of an outdoor advertising business in the United Kingdom during the second quarter of
2006 and the consolidation of Clear Media beginning in the third quarter of 2005.
Corporate Expenses
Corporate expenses increased $2.1 million and $4.4 million during the three and nine months
ended September 20, 3006, respectively, as compared to the same periods of 2005. The increase was
the result of additional outside professional services primarily from costs related to the first
three full quarters as a public Company.
Gain (Loss) on Disposition of Assets Net
The gain (loss) on disposition of assets net for the nine months ended September 30, 2006
increased $18.7 million as compared to the same period of 2005. The increase was primarily related
to a $13.2 million gain in our Americas segment from the exchange of assets in one of our markets
for the assets of a third party located in a different market during the first quarter of 2006.
Interest Expense (Including Interest on Debt with Clear Channel Communications)
Interest expense decreased $20.1 million and $17.6 million during the three and nine months
ended September 30, 2006 as compared to the same periods of 2005, primarily as a result of a
decrease in average debt outstanding. In 2005, we had in place two fixed principal and interest
rate notes in the aggregate amount of $1.5 billion and a variable rate note in the amount of $2.5
billion. We used all of the net proceeds of the IPO, along with our balance in the Due from Clear
Channel Communications account, to repay a portion of the outstanding balance of the aggregate
$1.5 billion intercompany notes and the remaining balance was contributed to our capital by Clear
Channel Communications.
Other Income (Expense) Net
Other income (expense) net was income of $0.5 million during the third quarter of 2006, an
increase of $6.2 million over the expense of $5.7 million recorded during the same period of 2005.
Other income (expense) net was income of $1.7 million in the first nine months of 2006, an
increase of $11.4 million compared to an expense of $9.7 million for the same period of 2005.
During the three and nine months ended September 20, 2005, we recorded $4.7 million and $11.0
million in royalty fees which represent payments to Clear Channel Communications for our use of
certain trademarks and licenses. The royalty fee was discontinued as of January 1, 2006.
Income Taxes
Our operations are included in a consolidated income tax return filed by Clear Channel
Communications. However, for our financial statements, our provision for income taxes was computed
on the basis that we file separate consolidated income tax returns with our subsidiaries.
Current tax expense for the three months ended September 30, 2006 increased $23.4 million as
compared to the same period of 2005. The increase is primarily due to an increase in taxable
income of $46.3 million. Current tax expense for the nine months ended September 30, 2006
decreased $9.2 million as compared to the same period of 2005. The decrease was due to current tax
benefits of approximately $21.3 million recorded in 2006 related to the filing of an amended tax
return and the exchange of certain operating assets in the period. In addition, current tax
expense decreased due to additional expense being recorded in the first nine months of 2005 for our
international operations for changes in tax laws in various countries in which we operate. These
amounts were offset by additional current tax expense recorded in the nine months ended September
30, 2006 due to an increase in taxable income of $108.6 million. Our effective tax rate for the
nine months ended September 30, 2006 and 2005 was 44.5% and 50.0%, respectively.
Deferred tax expense for the three months and nine months ended September 30, 2006 increased
$6.4 million and $54.0 million, respectively, over the same periods of 2005. The increase was
primarily due to deferred tax expense of approximately $21.3 million being recorded in the first
nine months of 2006 related to the filing of an amended tax return and the exchange of certain
operating assets in the period. In addition, there was an increase in deferred tax expense related
to the uncertainty of our ability to utilize certain tax losses in the future for certain
international operations as well as additional deferred tax benefits recorded during the first nine
months of 2005 in our international operations for changes in tax laws in various countries in
which we operate.
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Minority Interest Income (Expense), Net of Tax
Minority interest expense decreased $5.8 million and $3.1 million for the three and nine
months ended September 30, 2006 and 2005, respectively. The decrease was mainly attributable to an
overall decline in operating results in Italy and Australia as well as adjustments related to our
investment in China made to be in accordance with generally accepted accounting principles in the
United States.
Americas Results of Operations
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | % | September 30, | % | |||||||||||||||||||||
(In thousands) | 2006 | 2005 | Change | 2006 | 2005 | Change | ||||||||||||||||||
Revenue |
$ | 356,384 | $ | 317,705 | 12% | $ | 965,733 | $ | 886,649 | 9% | ||||||||||||||
Direct operating expenses |
133,468 | 122,040 | 9% | 382,401 | 359,263 | 6% | ||||||||||||||||||
Selling, general and administrative expenses |
52,029 | 45,768 | 14% | 150,846 | 136,919 | 10% | ||||||||||||||||||
Depreciation and amortization |
45,897 | 40,928 | 12% | 129,382 | 127,019 | 2% | ||||||||||||||||||
Operating income |
$ | 124,990 | $ | 108,969 | 15% | $ | 303,104 | $ | 263,448 | 15% | ||||||||||||||
Three Months
Our Americas revenue increased 12% during the third quarter of 2006, as compared to the third
quarter of 2005, primarily attributable to bulletin and airport revenues, as well as revenues
associated with the acquisition of Interspace. The increase in bulletin revenue was driven by an
increase in rates. The increase in airport revenues was attributable to increased occupancy and
rates as well as the acquisition of Interspace in the current quarter, which contributed $14.6
million to revenue growth over the third quarter of 2005. Strong revenue growth for the quarter
was achieved across a broad spectrum of markets including Boston, Cleveland, Dallas, Minneapolis,
Orlando, Sacramento, San Antonio and Tucson. Top advertising client categories during the quarter
included autos, business and consumer services, entertainment, insurance and retail.
Direct operating expenses increased $11.4 million during the third quarter of 2006 as compared
to the third quarter of 2005. The increase was driven by increased site lease expenses associated
with the increase in revenue. Interspace contributed $6.2 million to direct operating expenses in
the third quarter of 2006. Share-based payments were $0.9 million related to the adoption of FAS
123(R). SG&A expenses increased $6.3 million primarily related to an increase in commission
expenses associated with the increase in revenue. Share-based payments were $0.3 million related
to the adoption of FAS 123 (R).
Nine Months
Our Americas revenue increased 9% during the nine months ended September 30, 2006 as compared
to the same period of 2005 primarily attributable to bulletin and airport revenues. Bulletin
revenues increased primarily from an increase in average rates, while the increase in airport
revenues was attributable to increased occupancy and rates. Also contributing to the increased
airport revenues was $14.6 million from our acquisition of Interspace.
Direct operating expenses increased $23.1 million for the nine months ended September 30, 2006
compared to the nine months ended September 30, 2005, primarily from an increase in site lease
expenses of approximately $14.9 million, as well as $2.6 million related to the adoption of FAS
123(R). Interspace contributed $6.2 million to direct operating expenses in the nine months ended
September 30, 2006. Our SG&A expenses increased $13.9 million in the nine months of 2006 over the
same period of 2005, primarily from an increase in bonus and commission expenses of $7.2 million
related to the increase in revenue, and $0.9 million of share-based payments related to the
adoption of FAS 123(R).
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International Results of Operations
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | % | September 30, | % | |||||||||||||||||||||
(In thousands) | 2006 | 2005 | Change | 2006 | 2005 | Change | ||||||||||||||||||
Revenue |
$ | 363,870 | $ | 350,298 | 4% | $ | 1,101,293 | $ | 1,044,822 | 5% | ||||||||||||||
Direct operating expenses |
234,152 | 207,648 | 13% | 671,442 | 629,185 | 7% | ||||||||||||||||||
Selling, general and administrative expenses |
82,608 | 107,394 | (23%) | 250,757 | 273,156 | (8%) | ||||||||||||||||||
Depreciation and amortization |
56,226 | 54,477 | 3% | 169,888 | 163,214 | 4% | ||||||||||||||||||
Operating income (loss) |
$ | (9,116 | ) | $ | (19,221 | ) | N.A. | $ | 9,206 | $ | (20,733 | ) | N.A. | |||||||||||
Three Months
Revenues from our international operations increased 4% in the third quarter of 2006 as
compared to the third quarter of 2005 primarily related to $13.1 million from movements in foreign
exchange. Excluding the effects of foreign exchange, our international revenue was flat over the
third quarter of 2005, with growth in our street furniture revenues offset by a decline in our
billboard revenues in France and the United Kingdom. Top advertising client categories during the
quarter included autos, business and consumer services, entertainment, insurance and retail.
Direct operating expenses increased $26.5 million over the third quarter of 2005, primarily
from an increase in fixed rent associated with guarantees on new contracts and $8.3 million from
movements in foreign exchange. Share-based payments were $0.2 million related to the adoption of
FAS 123(R). SG&A expenses decreased $24.8 million primarily from a $26.6 million charge from
restructuring our businesses in France recorded in the third quarter of 2005, partially offset by
$2.9 million related to movements in foreign exchange. Share-based payments were $0.1 million
related to the adoption of FAS 123(R).
Nine Months
Revenue in our international segment increased 5% in the first nine months of 2006 compared to
the same period of 2005. The increase includes approximately $44.9 million during the first six
months of 2006 related to our consolidation of Clear Media, which we began consolidating in the
third quarter of 2005. Also contributing to the increase was growth in street furniture revenues,
partially offset by a decline in billboard revenues and approximately $18.7 million related to
movements in foreign exchange for the first nine months of 2006 compared to the same period of
2005.
Direct operating expenses increased $42.3 million for the nine months ended September 30, 2006
compared to the nine months ended September 30, 2005. The increase was primarily attributable to
$18.0 million during the first six months of 2006 related to our consolidation of Clear Media and
an increase in site lease expenses. Also included in the increase was $0.6 million related to the
adoption of FAS 123(R). SG&A expenses decreased $22.4 million for the nine months ended September
30, 2006 compared to the nine months ended September 30, 2005, primarily attributable to a decline
of $4.6 million from movements in foreign exchange, as well as $26.6 million related to
restructuring our businesses in France recorded in the third quarter of 2005. Share-based payments
were $0.3 million related to the adoption of FAS 123(R).
Reconciliation of Segment Operating Income (Loss)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Americas |
$ | 124,990 | $ | 108,969 | $ | 303,104 | $ | 263,448 | ||||||||
International |
(9,116 | ) | (19,221 | ) | 9,206 | (20,733 | ) | |||||||||
Corporate expenses |
(15,125 | ) | (12,999 | ) | (43,830 | ) | (39,397 | ) | ||||||||
Gain (loss)on disposition of assets net |
(834 | ) | 1,043 | 21,607 | 2,914 | |||||||||||
Consolidated and combined operating income |
$ | 99,915 | $ | 77,792 | $ | 290,087 | $ | 206,232 | ||||||||
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Operating Activities:
Net cash provided by operating activities of $386.4 million for the nine months ended
September 30, 2006 principally reflects net income of $88.0 million, depreciation and amortization
of $299.3 million, and deferred taxes of $48.0 million. Net cash flow from operating activities is
partially offset by a negative change in working capital of approximately $26.9 million and gains
on sales of operating and fixed assets of $21.6 million. Net cash provided by operating activities
of $336.6 million for the nine months ended September 30, 2005 principally reflects net income of
$21.2 million, depreciation and amortization of $290.2 million, and a positive change in working
capital of approximately $35.1 million.
Investing Activities:
Net cash used in investing activities of $382.9 million for the nine months ended September
30, 2006 principally reflects cash used for the acquisition of operating assets of $200.7 million
and capital expenditures of $164.0 million related to purchases of property, plant and equipment.
The cash used for the acquisition of operating assets primarily relates to the acquisition of
Interspace and an outdoor advertising business in the United Kingdom. Net cash used in investing
activities for the nine months ended September 30, 2005 principally reflects capital expenditures
of $130.5 million related to purchases of property, plant and equipment and $43.8 million related
to acquisitions of operating assets.
Financing Activities:
Net cash used in financing activities of $5.9 million for the nine months ended September 30,
2006 principally relates to a net decrease in debt of $56.1 million, offset by a net transfer of
cash from Clear Channel Communications of $50.1 million. Net cash used in financing activities of
$48.2 million for the nine months ended September 30, 2005 principally reflects a net transfer of
cash to Clear Channel Communications of $59.5 million, offset by a net increase in debt of $11.4
million.
SOURCES OF CAPITAL
As of September 30, 2006 and December 31, 2005 we had the following debt outstanding:
(In millions) | September 30, 2006 |
December 31, 2005 |
||||||
Bank credit facility |
$ | 30.7 | $ | 15.0 | ||||
Debt with Clear Channel Communications |
2,500.0 | 2,500.0 | ||||||
Other borrowings |
152.3 | 212.8 | ||||||
Due to Clear Channel Communications |
49.9 | | ||||||
Total debt |
2,732.9 | 2,727.8 | ||||||
Less: Cash and cash equivalents |
104.7 | 108.6 | ||||||
Less: Due from Clear Channel Communications |
| 0.1 | ||||||
$ | 2,628.2 | $ | 2,619.1 | |||||
Credit Facility
In addition to cash flows from operations, another source of liquidity is through borrowings
under a $150.0 million sub-limit included in Clear Channel Communications five-year, multicurrency
$1.75 billion revolving credit facility. Certain of our international subsidiaries may borrow
under the sub-limit to the extent Clear Channel Communications has not already borrowed against
this capacity and is in compliance with its covenants under the credit facility. The interest rate
on outstanding balances under the credit facility is based upon LIBOR or, for Euro denominated
borrowings, EURIBOR, plus, in each case, a margin. At September 30, 2006, the outstanding balance
on the sub-limit was approximately $30.7 million, and approximately $119.3 million was available
for future borrowings, with the entire balance to be paid on July 12, 2009. At September 30, 2006,
the interest rate on borrowings under this credit facility ranged from 4.2% to 5.4%. As of
November 10, 2006, the outstanding balance on the
sub-limit was $31.1 million and
$118.9 million was
available for future borrowings.
Debt With Clear Channel Communications
As part of the day-to-day cash management services provided by Clear Channel Communications,
we maintain an account that represents net amounts, up to a maximum of $1.0 billion, due to or from
Clear Channel Communications, which is recorded as
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Due from Clear Channel Communications or Due to Clear Channel Communications on the
consolidated balance sheets. The account represents our revolving promissory note with Clear
Channel Communications. Subsequent to the IPO, the account accrues interest pursuant to the Master
Agreement and is generally payable on demand. Included in the account is the net activity
resulting from day-to-day cash management services provided by Clear Channel Communications. As a
part of these services, we maintain collection bank accounts swept daily by Clear Channel
Communications. In return, Clear Channel Communications funds our controlled disbursement accounts
as checks or electronic payments are presented for payment. At September 30, 2006, the balance of
$49.9 million was a liability recorded in Due to Clear Channel Communications on the consolidated
balance sheet. At December 31, 2005, the balance of $0.1 million was an asset recorded in Due
from Clear Channel Communications on the consolidated balance sheet. The increase in the net
amount due to Clear Channel Communications during the nine months ended September 30, 2006 was a
result of Clear Channel Communications funding a portion of our debt payments and certain
acquisitions. The net interest expense for the three months ended September 30, 2006 was $0.4
million and the net interest income for the nine months ended September 30, 2006 was $0.8 million.
On August 2, 2005, we distributed a note in the original principal amount of $2.5 billion to
Clear Channel Communications as a dividend. This note matures on August 2, 2010 and may be prepaid
in whole at any time, or in part from time to time. The note accrues interest at a variable per
annum rate equal to the weighted average cost of debt for Clear Channel Communications, calculated
on a monthly basis. This note is mandatorily payable upon a change of control of us and, subject
to certain exceptions, all proceeds from debt or equity raised by us must be used to prepay such
note. At September 30, 2006, the interest rate on the $2.5 billion intercompany note was 6.1%.
Debt Covenants
The $2.5 billion intercompany note requires us to comply with various negative covenants,
including restrictions on the following activities: incurring consolidated funded indebtedness (as
defined in the note), excluding intercompany indebtedness, in a principal amount in excess of
$400.0 million at any one time outstanding; creating liens; making investments; entering into sale
and leaseback transactions (as defined in the note), which when aggregated with consolidated funded
indebtedness secured by liens, will not exceed an amount equal to 10% of our total consolidated
shareholders equity (as defined in the note) as shown on our most recently reported annual audited
consolidated financial statements; disposing of all or substantially all of our assets; entering
into mergers and consolidations; declaring or making dividends or other distributions; repurchasing
our equity; and entering into transactions with our affiliates.
In addition, the note requires us to prepay it in full upon a change of control. The note
defines a change of control to occur when Clear Channel Communications ceases to control (i)
directly or indirectly, more than 50% of the aggregate voting equity interests of us, our operating
subsidiary or our respective successors or assigns, or (ii) the ability to elect a majority of the
Board of Directors of us, our operating subsidiary or our respective successors or assigns. Upon
our issuances of equity and incurrences of debt, subject to certain exceptions, we are also
required to prepay the note in the amount of the net proceeds received by us from such events.
The significant covenants contained in the Clear Channel Communications $1.75 billion
revolving credit facility relate to leverage and interest coverage (as defined in the credit
facility). The leverage ratio covenant requires Clear Channel Communications to maintain a ratio
of consolidated funded indebtedness to operating cash flow (as defined by the credit facility) of
less than 5.25x. The interest coverage covenant requires Clear Channel Communications to maintain
a minimum ratio of operating cash flow to interest expense (as defined by the credit facility) of
2.50x. At September 30, 2006, Clear Channel Communications leverage and interest coverage ratios
were 3.7x and 4.6x, respectively.
There are no significant covenants or events of default contained in the cash management note
issued by Clear Channel Communications to us or the cash management note issued by us to Clear
Channel Communications.
At September 30, 2006, we and Clear Channel Communications were in compliance with all debt
covenants. We expect to remain in compliance throughout 2006.
USES OF CAPITAL
Acquisitions
We completed the acquisition of Interspace Airport Advertising on July 1, 2006, by issuing
4,250,000 shares of our Class A common stock and the payment of approximately $81.3 million, funded
through our revolving promissory note with Clear Channel Communications. The acquisition is valued
at approximately $170.4 million based on the Companys common shares issued at the
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closing share price on the date of acquisition of $89.1 million and the cash consideration
paid. Interspaces 2005 revenues and operating expenses (direct and SG&A expenses) were
approximately $45.8 million and $32.5 million, respectively.
In addition to the Interspace acquisition, during the nine months ended September 30, 2006,
our Americas segment acquired display faces for $27.9 million in cash, including assets acquired in
the exchange of one of our Americas markets for assets located in a different market. In addition,
our international segment paid $91.4 million, primarily related to the acquisition of an outdoor
advertising business in the United Kingdom.
Capital Expenditures
Capital expenditures were $164.0 million and $130.5 million in the nine months ended September
30, 2006 and 2005, respectively.
Nine Months Ended September 30, | ||||||||
(In millions) | 2006 | 2005 | ||||||
Non-revenue producing |
$ | 58.3 | $ | 53.0 | ||||
Revenue producing |
105.7 | 77.5 | ||||||
Total capital expenditures |
$ | 164.0 | $ | 130.5 | ||||
Commitments, Contingencies and Guarantees
From time to time, we are involved in legal proceedings arising in the ordinary course of
business. Under our agreements with Clear Channel Communications, we have assumed and will
indemnify Clear Channel Communications for liabilities related to our business. Other than as
described in our Annual Report on Form 10-K for the year ended December 31, 2005, we do not believe
there is any litigation pending that would have, individually or in the aggregate, a material
adverse effect on our financial position, results of operations or cash flow.
Certain agreements relating to acquisitions provide for purchase price adjustments and other
future contingent payments based on the financial performance of the acquired companies generally
over a one to five year period. We will continue to accrue additional amounts related to such
contingent payments if and when it is determinable that the applicable financial performance
targets will be met. The aggregate of these contingent payments, if performance targets are met,
would not significantly impact our financial position or results of operations.
MARKET RISK
Interest Rate Risk
We had approximately $2.7 billion total debt outstanding as of September 30, 2006,
substantially all of which was variable rate debt. Based on the amount of our floating-rate debt
as of September 30, 2006, each 50 basis point increase or decrease in interest rates would increase
or decrease our interest expense and cash outlay for the nine months ended September 30, 2006 by
approximately $10.0 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 September 30, 2006 with no subsequent change in rates for the remainder
of the period.
Foreign Currency
We have operations in countries throughout the world. The financial results of our foreign
operations are measured in their local currencies, except in the hyperinflationary countries in
which we operate. As a result, our financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in the foreign markets in which we
operate. We believe we mitigate a small portion of our exposure to foreign currency fluctuations
with a natural hedge through borrowings in currencies other than the U.S. dollar. Our foreign
operations reported a net loss of approximately $29.7 million for the nine months ended September
30, 2006. We estimate a 10% change in the value of the U.S. dollar relative to foreign currencies
would have changed our net income for the nine months ended September 30, 2006 by approximately
$3.0 million.
This analysis does not consider the implication such currency fluctuations could have on the
overall economic activity that could exist in such an environment in the United States or the
foreign countries or on the results of operations of these foreign entities.
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Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 155,
Accounting for Certain Hybrid Financial Instruments (Statement 155). Statement 155 is an
amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
(Statement 133) and FASB Statement 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities (Statement 140) and allows companies to elect to
measure at fair value entire financial instruments containing embedded derivatives that would
otherwise have to be accounted for separately. Statement 155 also requires companies to identify
interest in securitized financial assets that are freestanding derivatives or contain embedded
derivatives that would have to be accounted for separately, clarifies which interest- and
principal-only strips are subject to Statement 133, and amends Statement 140 to revise the
conditions of a qualifying special purpose entity due to the new requirement to identify whether
interests in securitized financial assets are freestanding derivatives or contain embedded
derivatives. Statement 155 is effective for all financial instruments acquired or issued in fiscal
years beginning after September 15, 2006. We will adopt Statement 155 on January 1, 2007 and
anticipate that adoption will not materially impact our financial position or results of
operations.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes by prescribing a recognition threshold for tax positions taken or
expected to be taken in a tax return. FIN 48 requires that entities recognize in their financial
statements the impact of a tax position if that position is more likely than not of being sustained
on audit, based on the technical merits of the position. The cumulative effect of applying the
provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings
upon adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will
adopt FIN 48 on January 1, 2007 and are currently evaluating the impact FIN 48 will have on our
financial position and results of operations.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (Statement
157). Statement 157 defines fair value, establishes a framework for measuring fair value and
expands disclosure requirements for fair value measurements. 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. We will adopt
Statement 157 on January 1, 2008 and anticipate that adoption will not materially impact our
financial position or results of operations.
In September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106,
and 132(R) (Statement 158). Statement 158 requires an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan as an asset or liability in its
statement of financial position and to recognize changes in that funded status in the year in which
the changes occur through comprehensive income. The portions of Statement 158 that apply to us are
effective as of the end of the fiscal year ending after December 15, 2006. We will adopt Statement
158 as of December 31, 2006 and anticipate that adoption will not materially impact our financial
position or results of operations.
Critical Accounting Estimates
Management believes certain critical accounting policies affect its more significant judgments
and estimates used in the preparation of its consolidated financial statements. Due to the
implementation of FAS 123(R), we identified a new critical accounting policy related to share-based
compensation, which is listed below. Our other critical accounting policies and estimates are
disclosed in the Note A of our Annual Report on Form 10-K for the year ended December 31, 2005.
Stock Based Compensation
Prior to January 1, 2006, we accounted for our share-based payments under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees and related
Interpretations, as permitted by Statement of Financial Accounting Standards No. 123, Accounting
for Stock Based Compensation (Statement 123). Under that method, when options were granted with
a strike price equal to or greater than market price on date of issuance, there is no impact on
earnings either on the date of grant or thereafter, absent certain modifications to the options.
Subsequent to January 1, 2006, we account for stock based compensation in accordance with FAS
123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, stock
based compensation cost is measured at the grant date based on the value of the award and is
recognized as expense on a straight-line basis over the vesting period. Determining the fair value
of share-based awards at the grant date requires assumptions and judgments about expected
volatility and forfeiture rates, among other factors. If actual results differ significantly from
these estimates, our results of operations could be materially impacted.
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Risks Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by us or on our behalf. Except for the historical information,
this report contains various forward-looking statements which represent our expectations or beliefs
concerning future events, including the future levels of cash flow from operations. Management
believes all statements expressing expectations and projections with respect to future matters,
including our ability to negotiate contracts having more favorable terms and the availability of
capital resources; are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. We caution that these forward-looking statements involve a number of risks
and uncertainties and are subject to many variables which could impact our financial performance.
These statements are made on the basis of managements views and assumptions, as of the time the
statements are made, regarding future events and business performance. There can be no assurance,
however, that managements expectations will necessarily come to pass.
A wide range of factors could materially affect future developments and performance,
including:
| the impact of general economic and political conditions in the U.S. and in other countries in which we currently do business, including those resulting from recessions, political events and acts or threats of terrorism or military conflicts; | ||
| the impact of the geopolitical environment; | ||
| our ability to integrate the operations of recently acquired companies; | ||
| shifts in population and other demographics; | ||
| industry conditions, including competition; | ||
| fluctuations in operating costs; | ||
| technological changes and innovations; | ||
| changes in labor conditions; | ||
| fluctuations in exchange rates and currency values; | ||
| changes in capital expenditure requirements; | ||
| the outcome of pending and future litigation; | ||
| legislative or regulatory requirements; | ||
| fluctuations in interest rates; | ||
| the effect of leverage on our financial position and earnings; | ||
| changes in tax rates; | ||
| access to capital markets and changes in credit ratings; and | ||
| certain other factors set forth in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2005. |
This list of factors that may affect future performance and the accuracy of forward-looking
statements is illustrative, but by no means exhaustive. Accordingly, all forward-looking
statements should be evaluated with the understanding of their inherent uncertainty.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Required information is within Item 2
Item 4. CONTROLS AND PROCEDURES
Our principal executive and financial officers have concluded, based on their evaluation as of
the end of the period covered by this Form 10-Q, that our disclosure controls and procedures, as
defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, are effective
to ensure that information we are required to disclose in the reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms, and include controls and procedures designed to ensure that information
we are required to disclose in such reports is accumulated and communicated to management,
including our principal executive and financial officers, as appropriate to allow timely decisions
regarding required disclosure.
There were no changes in our internal control over financial reporting that occurred during
the most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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Part II OTHER INFORMATION
Item 1. Legal Proceedings
We are currently involved in certain legal proceedings and, as required, have accrued an
estimate of the probable costs for the resolution of these claims. These estimates have been
developed in consultation with counsel and are based upon an analysis of potential results,
assuming a combination of litigation and settlement strategies. It is possible, however, that
future results of operations for any particular period could be materially affected by changes in
our assumptions or the effectiveness of our strategies related to these proceedings.
Item 1A. Risk Factors
For information regarding risk factors, please refer to Item 1A in the Companys Annual Report
on Form 10-K for the year ended December 31, 2005. Additional information relating to risk factors
is described in Managements Discussion and Analysis of Financial Condition and Results of
Operations under Risks Regarding Forward Looking Statements.
Item 6. Exhibits
See Exhibit Index on Page 29
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. |
||||
November 10, 2006 | /s/ Randall T. Mays | |||
Randall T. Mays | ||||
Chief Financial Officer | ||||
November 10, 2006 | /s/ Herbert W. Hill, Jr. | |||
Herbert W. Hill, Jr. | ||||
Senior Vice President and Chief Accounting Officer |
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INDEX TO EXHIBITS
Exhibit | ||
Number | Description | |
3.1
|
Amended and Restated Certificate of Incorporation of Clear Channel Outdoor Holdings, Inc. (incorporated herein by reference to the exhibits to the Companys Annual Report on Form 10-K filed March 31, 2006) | |
3.2
|
Amended and Restated Bylaws of the Clear Channel Outdoor Holdings, Inc. (incorporated herein by reference to the exhibits to the Companys Annual Report on Form 10-K filed March 31, 2006) | |
4.1
|
Form of Specimen Class A Common Stock certificate of Clear Channel Outdoor Holdings, Inc. (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-1 (File No. 333-333-127375 (the Registration Statement)) | |
4.2
|
Form of Specimen Class B Common Stock certificate of Clear Channel Outdoor Holdings, Inc. (incorporated herein by reference to Exhibit 4.2 to the Registration Statement) | |
11*
|
Statement re: Computation of Per Share Earnings. | |
31.1*
|
Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1*
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2*
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith |
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