Attached files
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EX-31.2 - EX-31.2 - CKX, Inc. | y84434exv31w2.htm |
EX-32.2 - EX-32.2 - CKX, Inc. | y84434exv32w2.htm |
EX-32.1 - EX-32.1 - CKX, Inc. | y84434exv32w1.htm |
EX-31.1 - EX-31.1 - CKX, Inc. | y84434exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2010 | ||
OR
|
||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File
No. 000-17436
CKX, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 27-0118168 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
650 Madison Avenue
New York, New York 10022
(Address of Principal Executive Offices and Zip Code)
Registrants Telephone Number, Including Area Code:
(212) 838-3100
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the
Act:
Common Stock, Par Value $0.01 Per Share
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the
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 has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
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
As of May 6, 2010 there were 93,065,044 shares of the
registrants common stock outstanding.
TABLE OF
CONTENTS
PART I
|
FINANCIAL INFORMATION
|
|||||||
Item 1
|
Financial Statements
|
|||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
7 | ||||||||
21 | ||||||||
35 | ||||||||
36 | ||||||||
PART II | ||||||||
37 | ||||||||
37 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
March 31, |
December 31, |
|||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 55,052 | $ | 66,587 | ||||
Receivables, net of allowance for doubtful accounts of $730 at
March 31, 2010 and $742 at December 31, 2009
|
62,333 | 52,252 | ||||||
Inventories, net of allowance for obsolescence of $670 at
March 31, 2010 and $661 at December 31, 2009
|
1,850 | 1,977 | ||||||
Prepaid expenses and other current assets
|
27,290 | 26,092 | ||||||
Prepaid income taxes
|
6,746 | 4,610 | ||||||
Deferred tax assets
|
3,419 | 3,551 | ||||||
Total current assets
|
156,690 | 155,069 | ||||||
Property and equipment net
|
46,334 | 49,590 | ||||||
Receivables
|
2,151 | 2,693 | ||||||
Loans to related parties
|
1,766 | 2,221 | ||||||
Other assets
|
38,165 | 49,453 | ||||||
Goodwill
|
114,659 | 116,873 | ||||||
Other intangible assets net
|
115,768 | 119,809 | ||||||
Deferred tax assets
|
3,676 | 3,974 | ||||||
TOTAL ASSETS
|
$ | 479,209 | $ | 499,682 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 28,440 | $ | 39,144 | ||||
Accrued expenses
|
20,403 | 25,689 | ||||||
Current portion of long-term debt
|
515 | 482 | ||||||
Deferred revenue
|
14,332 | 12,885 | ||||||
Total current liabilities
|
63,690 | 78,200 | ||||||
Long-term liabilities:
|
||||||||
Long-term debt
|
100,131 | 100,647 | ||||||
Deferred revenue
|
3,190 | 2,850 | ||||||
Other long-term liabilities
|
2,699 | 2,828 | ||||||
Deferred tax liabilities
|
21,966 | 22,835 | ||||||
Total liabilities
|
191,676 | 207,360 | ||||||
Redeemable restricted common stock
534,082 shares outstanding at March 31, 2010 and
December 31, 2009
|
7,347 | 7,347 | ||||||
Commitments and contingencies (see note 15)
|
||||||||
CKX, Inc. stockholders equity:
|
||||||||
Preferred stock, $0.01 par value, authorized
75,000,000 shares:
|
||||||||
Series B 1,491,817 shares outstanding
|
22,825 | 22,825 | ||||||
Series C 1 share outstanding
|
| | ||||||
Common stock, $0.01 par value: authorized
200,000,000 shares, 96,844,763 shares issued at
March 31, 2010 and 96,831,149 issued at December 31,
2009
|
968 | 968 | ||||||
Additional
paid-in-capital
|
395,922 | 394,839 | ||||||
Accumulated deficit
|
(88,890 | ) | (83,857 | ) | ||||
Common stock in treasury 4,477,438 shares at
March 31, 2010 and December 31, 2009
|
(22,647 | ) | (22,647 | ) | ||||
Accumulated other comprehensive loss
|
(33,594 | ) | (33,394 | ) | ||||
CKX, Inc. stockholders equity
|
274,584 | 278,734 | ||||||
Noncontrolling interests
|
5,602 | 6,241 | ||||||
Total equity
|
280,186 | 284,975 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
$ | 479,209 | $ | 499,682 | ||||
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Table of Contents
CKX,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(amounts in thousands, except share and per share data)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(amounts in thousands, except share and per share data)
Three Months |
Three Months |
|||||||
Ended |
Ended |
|||||||
March 31, 2010 | March 31, 2009 | |||||||
Revenue
|
$ | 66,647 | $ | 81,506 | ||||
Operating expenses:
|
||||||||
Cost of sales
|
29,621 | 28,310 | ||||||
Selling, general and administrative expenses
|
18,331 | 17,924 | ||||||
Corporate expenses
|
5,333 | 4,175 | ||||||
Impairment charges
|
4,853 | | ||||||
Depreciation and amortization
|
5,143 | 4,438 | ||||||
Acquisition-related costs
|
| 1,537 | ||||||
Provision for severance and other restructuring-related costs
|
6,118 | 1,418 | ||||||
Other expense
|
538 | 128 | ||||||
Total operating expenses
|
69,937 | 57,930 | ||||||
Operating income (loss)
|
(3,290 | ) | 23,576 | |||||
Interest income
|
50 | 103 | ||||||
Interest expense
|
(867 | ) | (1,050 | ) | ||||
Income (loss) before income taxes and equity in earnings
(losses) of affiliates
|
(4,107 | ) | 22,629 | |||||
Income tax expense
|
636 | 9,294 | ||||||
Income (loss) before equity in earnings (losses) of affiliates
|
(4,743 | ) | 13,335 | |||||
Equity in earnings (losses) of affiliates
|
(12 | ) | 62 | |||||
Net income (loss)
|
(4,755 | ) | 13,397 | |||||
Dividends on preferred stock
|
(456 | ) | (456 | ) | ||||
Net income (loss) available to CKX, Inc.
|
(5,211 | ) | 12,941 | |||||
Less: Net (income) loss attributable to noncontrolling interests
|
178 | (878 | ) | |||||
Net income (loss) attributable to CKX, Inc.
|
$ | (5,033 | ) | $ | 12,063 | |||
Income (loss) per share:
|
||||||||
Basic income (loss) per share
|
$ | (0.05 | ) | $ | 0.13 | |||
Diluted income (loss) per share
|
$ | (0.05 | ) | $ | 0.13 | |||
Average number of common shares outstanding:
|
||||||||
Basic
|
92,882,596 | 93,798,843 | ||||||
Diluted
|
92,882,596 | 93,954,400 |
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
Table of Contents
Three Months |
Three Months |
|||||||
Ended |
Ended |
|||||||
March 31, 2010 | March 31, 2009 | |||||||
Cash flows from operating activities:
|
||||||||
Net income (loss)
|
$ | (4,755 | ) | $ | 13,397 | |||
Adjustments to reconcile net income to net cash used in
operating activities:
|
||||||||
Depreciation and amortization
|
5,143 | 4,438 | ||||||
Impairment charges
|
4,853 | | ||||||
Non-cash provision for severance and other restructuring-related
costs
|
552 | | ||||||
Write-off of deferred costs
|
| 874 | ||||||
Unrealized foreign currency losses (gains)
|
292 | 448 | ||||||
Share-based payments
|
564 | 342 | ||||||
Equity in losses (earnings) of affiliates, net of cash received
|
12 | (62 | ) | |||||
Deferred income taxes
|
(439 | ) | 278 | |||||
Non-cash interest expense
|
359 | 231 | ||||||
Provision for inventory and accounts receivable allowance
|
19 | 112 | ||||||
Changes in operating assets and liabilities:
|
||||||||
Receivables
|
(9,536 | ) | (12,431 | ) | ||||
Prepaid income taxes
|
(2,136 | ) | | |||||
Other assets
|
10,918 | (2,076 | ) | |||||
Accounts payable and accrued expenses
|
(15,990 | ) | (6,357 | ) | ||||
Deferred revenue
|
1,787 | (14,945 | ) | |||||
Income taxes payable
|
| 1,698 | ||||||
Other
|
(1,222 | ) | 6,150 | |||||
Net cash used in operating activities
|
(9,579 | ) | (7,903 | ) | ||||
Cash flows from investing activities:
|
||||||||
Purchases of property and equipment
|
(659 | ) | (3,912 | ) | ||||
Net cash used in investing activities
|
(659 | ) | (3,912 | ) | ||||
Cash flows from financing activities:
|
||||||||
Distributions to noncontrolling interest shareholders
|
(425 | ) | (1,324 | ) | ||||
Principal payments on debt
|
(483 | ) | (489 | ) | ||||
Dividends paid on preferred stock
|
| (456 | ) | |||||
Net cash used in financing activities
|
(908 | ) | (2,269 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents
|
(389 | ) | (151 | ) | ||||
Net decrease in cash and cash equivalents
|
(11,535 | ) | (14,235 | ) | ||||
Cash and cash equivalents beginning of period
|
66,587 | 101,895 | ||||||
Cash and cash equivalents end of period
|
$ | 55,052 | $ | 87,660 | ||||
Supplemental cash flow data:
|
||||||||
Cash paid during the period for:
|
||||||||
Interest
|
$ | 561 | $ | 519 | ||||
Income taxes
|
3,104 | 6,515 |
5
Table of Contents
Supplemental Cash Flow Information
|
||||
The Company had the following non-cash investing and financing
activities in the three months ended March 31, 2010 (in
thousands):
|
||||
Accrued but unpaid Series B Convertible Preferred Stock
Dividends
|
$ | 456 | ||
The Company had the following non-cash investing and financing
activities in the three months ended March 31, 2009 (in
thousands):
|
||||
Accrued but unpaid Series B Convertible Preferred Stock
Dividends
|
$ | 456 |
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
Table of Contents
CKX,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
1. | Overview |
General
CKX, Inc. (the Company or CKX) is
engaged in the ownership, development and commercial utilization
of entertainment content. As more fully described below, our
primary assets and operations include:
| 19 Entertainment Limited (19 Entertainment), which owns, among other properties, proprietary rights to the IDOLS and So You Think You Can Dance television brands, both of which air in the United States, and, together with local adaptations of the formats, around the world; | |
| An 85% ownership interest in Elvis Presley Enterprises (the Presley Business or EPE), which owns the rights to the name, image and likeness of Elvis Presley, certain music and other intellectual property created by or related to Elvis and, the operations of Graceland; and has partnered with Cirque du Soleil for the creation of Elvis Presley-themed shows and projects around the world, including the recently opened Viva ELVIS in Las Vegas, Nevada; and | |
| An 80% ownership interest in Muhammad Ali Enterprises (the Ali Business), which owns the rights to the name, image and likeness of, as well as certain trademarks and other intellectual property related to Muhammad Ali. |
The Companys existing properties generate recurring
revenue across multiple entertainment platforms, including music
and television; licensing and merchandising; talent management;
themed attractions and touring/live events.
The financial information in this report for the three months
ended March 31, 2010 and 2009 has not been audited, but in
the opinion of management all adjustments (consisting only of
normal recurring adjustments) considered necessary to present
fairly such information have been included. The operating
results for the three months ended March 31, 2010 and 2009
are not necessarily indicative of the results to be expected for
the full year due to the seasonal nature of some of the
Companys businesses. The financial statements included
herein should be read in conjunction with the financial
statements and notes included in the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2009 filed with the
Securities and Exchange Commission on March 16, 2010.
2. | Accounting Policies |
During the three months ended March 31, 2010, there have
been no significant changes to the Companys accounting
policies and estimates as disclosed in the Companys
Form 10-K
for the year ended December 31, 2009.
Recently
Issued Accounting Standards
In June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 166, Accounting for
Transfers of Financial Assets an amendment of FASB
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, which
was later superseded by the FASB Codification and included in
ASC 860. This standard amends the criteria for a transfer
of a financial asset to be accounted for as a sale, redefines a
participating interest for transfers of portions of financial
assets, eliminates the qualifying special-purpose entity concept
and provides for new disclosures. This standard is effective for
the Company beginning in 2010 and has not had a material impact
on the Companys financial statements.
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R), which
was later superseded by the FASB Codification and included in
ASC 810. The provisions of ASC 810 amends the
consolidation guidance for variable interest entities
(VIE) by requiring an on-going qualitative
assessment of which entity has the power to direct matters that
most significantly impact the activities of a VIE and has the
7
Table of Contents
obligation to absorb losses or benefits that could be
potentially significant to the VIE. This standard is effective
for the Company beginning in 2010 and has not had a material
impact on the Companys financial statements.
In October 2009, the FASB issued Accounting Standards Update
(ASU)
2009-13 on
multiple-deliverable revenue arrangements. ASU
2009-13
addresses the unit of accounting for arrangements involving
multiple deliverables and addresses how arrangement
consideration should be allocated to the separate units of
accounting. The ASU is effective for fiscal years beginning on
or after June 15, 2010; early adoption is permitted.
Entities can elect to apply the ASU prospectively to new or
materially modified arrangements after its effective date or
retrospectively for all periods presented. The Company does not
expect the adoption to have a material impact on the
Companys financial statements.
3. | Transaction with Simon Fuller |
On January 13, 2010, the Company entered into a series of
agreements with Simon Fuller (i) securing
Mr. Fullers long-term creative services as a
consultant, (ii) providing CKX with an option to invest in
XIX Entertainment Limited, a new entertainment company that
Mr. Fuller has launched, and (iii) agreeing to the
termination of Mr. Fullers employment with 19
Entertainment. Upon entering into these agreements,
Mr. Fuller resigned as a director of CKX and as an officer
and director of 19 Entertainment. Pursuant to the consultancy
agreement, the Company has engaged Mr. Fuller to provide
services, including executive producer services, in respect of
the Companys IDOLS, So You Think You Can Dance
and If I Can Dream programs. In consideration for
providing these services, Mr. Fuller will receive 10% of
the Companys net profits from each of the aforementioned
programs for the life of the programs as long as Mr. Fuller
continues to provide consulting services with respect to such
programs (the Creative Consulting Fee). For calendar
year 2010, Mr. Fuller will receive $5.0 million as an
advance against the Creative Consulting Fee, $2.5 million
of which was paid in the three months ended March 31, 2010.
For each year after 2010, subject to certain conditions,
Mr. Fuller will receive, as an annual advance against the
Creative Consulting Fee, $3.0 million if American Idol
remains on the air and $2.0 million if So You Think
You Can Dance remains on the air. The advances are
non-refundable to CKX, but CKX may recoup the amount of such
advances from the Creative Consulting Fee payable to
Mr. Fuller. For the three months ended March 31, 2010,
the Company has recorded $2.7 million of the Creative
Consulting Fee to cost of sales.
In addition to the aforementioned payment, Mr. Fuller
receives an incremental £1.5 million
($2.3 million) in consideration for providing creative and
strategic advice with respect to the overall business of CKX for
the six-month period through July 13, 2010; the final
installment of £0.5 million ($0.8 million) is due
to be paid in the second quarter of 2010. The Company also paid
Mr. Fuller £0.5 million ($0.8 million) in
January 2010, representing consideration for CKXs option
to invest in Mr. Fullers new entertainment company,
which expired on March 15, 2010; the Company elected not to
exercise the option. Mr. Fuller also received
£1.2 million ($1.9 million) in separation
payments. The Company recorded $0.6 million of share-based
compensation expense in the three months ended March 31,
2010 due to the acceleration of the vesting of stock options
held by Mr. Fuller upon the termination of his employment
agreement. $4.4 million has been recorded to the provision
for severance and other restructuring-related costs in the three
months ended March 31, 2010 related to these agreements
with Mr. Fuller. The Company expects to expense an
additional $1.2 million in the second quarter of 2010.
4. | Provision for Severance and Other Restructuring-Related Costs |
In connection with the transaction with Simon Fuller described
in Note 3 above, management initiated a review of each of
the businesses currently conducted by 19 Entertainment and
decided to focus its efforts principally around its established
IDOLS and So You Think You Can Dance brands and
its new multimedia brand If I Can Dream. As a result,
management intends to exit most of the other businesses within
19 Entertainment by the summer of 2010. These businesses will be
closed, sold or transferred, including potentially being sold or
transferred to Mr. Fullers new entertainment venture,
XIX Entertainment. These changes are expected to substantially
reduce 19 Entertainments spending on new development
projects and associated selling, general and administrative
expenses. As a result of this process, the Company has incurred
severance and other restructuring-related costs of
$1.7 million in the three months ended March 31, 2010
and expects to incur additional charges in 2010. The amount of
such additional charges will depend on a number of factors
including the final determination of which
8
Table of Contents
businesses the Company will exit and the ultimate scope of the
reductions in selling, general and administrative expenses.
As a result of the implementation of the strategy noted above,
the Company will be reducing headcount and has notified a total
of 40 employees that they will be terminated. As of
March 31, 2010, 10 of these employees had been terminated.
The Company recorded a net liability of $1.1 million
representing the provision for severance and other
restructuring-related costs that have not yet been paid as of
March 31, 2010. The Company expects that there will be
additional headcount reductions in 2010 and will record the
corresponding provision for severance and other
restructuring-related costs when the employees are notified or
over the remaining service periods of the notified employees if
such service periods are significant.
The following table outlines the details of the components of
the restructuring charges, including costs for the transaction
with Simon Fuller, and the payments made in the three months
ended March 31, 2010:
Payments/Vesting |
||||||||||||
Provision for the |
During the Three |
|||||||||||
Three Months Ended |
Months Ended |
Net Liability as of |
||||||||||
March 31, 2010 | March 31, 2010 | March 31, 2010 | ||||||||||
Severance and other employee-related termination costs
|
$ | 1,369 | $ | (68 | ) | $ | 1,301 | |||||
Costs associated with transaction with Simon Fuller
|
4,417 | (4,794 | ) | (377 | ) | |||||||
Costs associated with termination of leases related to office
closures
|
129 | | 129 | |||||||||
Other
|
203 | (126 | ) | 77 | ||||||||
$ | 6,118 | $ | (4,988 | ) | $ | 1,130 | ||||||
In the three months ended March 31, 2009, the Company
recorded a provision for severance costs of $1.4 million at
the Ali Business, which was reclassified to the provision for
severance and other restructuring-related costs from selling,
general and administrative expenses to conform to the 2010
presentation.
5. | Transactions Involving FX Real Estate and Entertainment Inc. |
About
FXRE
CKX acquired an aggregate approximate 50% interest in FX Real
Estate and Entertainment Inc. (FXRE) in June and
September of 2007. On January 10, 2008, CKX distributed
100% of its interests in FXRE to CKXs stockholders. The
following information about FXRE is provided solely as selected
background for the description of the historical transactions
between the Company and FXRE. The Company does not own any
interest in FXRE, has not guaranteed any obligations of FXRE,
nor is it a party to any continuing material transactions with
FXRE. A further description of the Companys historical
transactions with FXRE can be found in the Companys
Form 10-K.
Information about FXRE can be found at www.sec.gov or
ir.fxree.com.
Terminated
License Agreements
Simultaneous with our investment in FXRE, EPE entered into a
worldwide license agreement with FXRE, granting FXRE the
exclusive right to utilize Elvis Presley-related intellectual
property in connection with the development, ownership and
operation of Elvis Presley-themed hotels, casinos and certain
other real estate-based projects and attractions around the
world. FXRE also entered into a worldwide license agreement with
the Ali Business, granting FXRE the right to utilize Muhammad
Ali-related intellectual property in connection with Muhammad
Ali-themed hotels and certain other real estate-based projects
and attractions.
Under the terms of the license agreements, FXRE was required to
pay to EPE and the Ali Business a specified percentage of the
gross revenue generated at the properties that incorporate the
Elvis Presley and Muhammad Ali intellectual property, as
applicable. FXRE was required to pay a guaranteed annual minimum
royalty during each year of the agreements, which amount was to
be recoupable against royalties paid during such year as
described
9
Table of Contents
above. The aggregate guaranteed minimum royalty due for 2007 of
$10.0 million was paid to the Company in April 2008 and was
deferred under the Companys revenue recognition policy.
As a result of the termination of the license agreements on
March 9, 2009, following FXREs failure to make the
$10 million annual guaranteed minimum royalty payments for
2008 when due, EPE and the Ali Business entered into a
Termination, Settlement and Release agreement with FXRE,
pursuant to which the parties agreed to terminate the EPE and
Ali Business license agreements and to release each other from
all claims related to or arising from such agreements. The
$10.0 million in 2007 license revenue was recognized in the
three months ended March 31, 2009 upon termination of the
license agreement.
6. | Elvis Cirque du Soleil Show |
Together with Cirque du Soleil and MGM MIRAGE, the Company
recently launched Viva ELVIS, a permanent live theatrical
Vegas-style Cirque du Soleil show based on the life and music of
Elvis Presley. The show, which is being presented at the brand
new ARIA Resort and Casino in CityCenter on the strip in Las
Vegas, Nevada, held its gala opening on February 19, 2010
and opened to the public the following day. The show was
developed and is operated in a partnership jointly owned by
Cirque du Soleil and the Company and has been determined by the
Company to be a variable interest entity. The Company is not the
primary beneficiary of the partnership because it does not have
the power to direct the activities of the partnership that most
significantly impact its economic performance and therefore
accounts for its investment under the equity method of
accounting. The Companys maximum exposure to loss as a
result of its involvement with the partnership is its funding
for the show, which is its investment in the partnership. The
Company and Cirque du Soleil have each agreed to pay one-half of
the creative development and production costs of the show. These
costs are being amortized over five years by the partnership.
Additionally, another partnership was created by Cirque du
Soleil and the Company to hold the intellectual property related
to the show, to collect royalty-related revenue based on the
profitability of the show and to distribute royalty payments to
the various rights holders of the shows intellectual
property. This entity also holds the rights to intellectual
property created during the creation of the show and pays a
royalty to other third party creators of the show. As this
partnership generates a distinct royalty stream, the Company
records the royalties earned related to intellectual property it
owns and it acquires through third parties as revenue. Costs
incurred to third parties by the Company are recorded as
expenses. The Company will also recognize as revenue a
management fee it receives from the operating partnership to
cover any operational expenses incurred to support the
partnership.
The Company recorded revenue of $1.8 million and cost of
sales of $0.9 million in the three months ended
March 31, 2010 related to royalties on the Companys
intellectual property partnership with Cirque du Soleil for
Viva ELVIS. The Company recorded a loss of
$0.5 million from unconsolidated affiliates for the three
months ended March 31, 2010 related to the Companys
investment in the Cirque du Soleil operating partnership. The
loss is primarily due to certain one-time costs associated with
the gala opening of the show in February 2010 without offsetting
revenue as a result of the limited number of performances during
the quarter. Additionally, the Company recorded a return of
production capital of $1.8 million in the three months
ended March 31, 2010. The Companys net investment in
the partnership with Cirque du Soleil of $19.2 million at
March 31, 2010 is recorded in the Presley
Business Royalties and Licensing segment within
other assets on the accompanying condensed consolidated balance
sheet.
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7. | Comprehensive Income (Loss) |
The following table is a reconciliation of the Companys
net income (loss) to comprehensive income (loss) for the three
months ended March 31, 2010 (in thousands):
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Net income (loss)
|
$ | (4,755 | ) | $ | 13,397 | |||
Foreign currency translation adjustments
|
(200 | ) | (2,427 | ) | ||||
(4,955 | ) | 10,970 | ||||||
Net (income) loss attributable to noncontrolling interests
|
178 | (878 | ) | |||||
Comprehensive income (loss)
|
$ | (4,777 | ) | $ | 10,092 | |||
In 2009 and prior years, foreign currency translation
adjustments resulted from the conversion of 19
Entertainments financial statements (see Change in
Functional Currency below). In the three months ended
March 31, 2010, foreign currency adjustments resulted from
foreign currency movements related to subsidiaries at 19
Entertainment that did not change functional currency from U.K.
sterling to U.S. dollars.
Change
in Functional Currency
As described in Note 3 above, Simon Fuller, the CEO and
founder of 19 Entertainment, separated from the Company in
January 2010. This departure represented a significant change in
circumstances for the 19 Entertainment operating segment. This
underlying event caused management to undertake an assessment of
the strategic and structural needs of 19 Entertainments
creative development projects and market focus. These changes
represent a significant change in facts and circumstances in the
context of ASC 830, Foreign Currency Matters, such
that management has reassessed the functional currency of the 19
Entertainment operating segment. The Company has concluded that
it is appropriate to change the functional currency of
substantially all of the subsidiaries comprising the 19
Entertainment operating segment from U.K. sterling to
U.S. dollars. The Company has effected this change as of
January 1, 2010. The change in functional currency had no
impact on the December 31, 2009 financial information
previously included in the Companys
Form 10-K.
8. | Earnings Per Share/Common Shares Outstanding |
Basic earnings per share is calculated by dividing net income
attributable to CKX, Inc. before dividends on preferred stock by
the weighted-average number of shares outstanding during the
period. For the three months ended March 31, 2010, diluted
earnings per share is the same as basic earnings per share as a
result of the Companys net loss in the current period. In
general, diluted earnings per share includes the determinants of
basic earnings per share and, in addition, gives effect to
potentially dilutive common shares, including one incremental
share for the assumed exercise of the Companys
series C preferred stock. The diluted earnings per share
calculations exclude the impact of the conversion of
1,491,817 shares of Series B Convertible Preferred
shares and the impact of employee share-based stock plan awards
that would be anti-dilutive. 2,147,900 shares were excluded
from the calculation of diluted earnings per share due to stock
plan awards that were anti-dilutive for the three months ended
March 31, 2009.
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The following table shows the reconciliation of the
Companys basic common shares outstanding to the
Companys diluted common shares outstanding for the three
months ended March 31, 2009:
Basic common shares outstanding (including redeemable restricted
common stock)
|
93,798,843 | |||
Incremental shares for assumed exercise of Series C
preferred stock, restricted stock and stock options
|
155,557 | |||
Diluted common shares outstanding (including redeemable
restricted common stock)
|
93,954,400 | |||
9. | Intangible Assets and Goodwill |
Indefinite lived intangible assets as of March 31, 2010 and
December 31, 2009 consist of (dollar amounts in thousands):
Presley and Ali trademarks, publicity rights and other
intellectual property
|
$ | 66,365 | ||
Definite lived intangible assets as of March 31, 2010
consist of (dollar amounts in thousands):
Weighted |
||||||||||||||||
Average |
Gross |
Net |
||||||||||||||
Remaining |
Carrying |
Accumulated |
Carrying |
|||||||||||||
Useful Life | Amount | Amortization | Amount | |||||||||||||
Presley record, music publishing, film and video rights
|
9.8 years | $ | 28,900 | $ | (9,784 | ) | $ | 19,116 | ||||||||
Other Presley intangible assets
|
11.9 years | 13,622 | (6,856 | ) | 6,766 | |||||||||||
19 Entertainment IDOLS television programming, merchandising and
sponsorship relationships
|
2.0 years | 64,517 | (45,766 | ) | 18,751 | |||||||||||
19 Entertainment other artist management, recording,
merchandising, sponsorship and model relationships
|
2.1 years | 17,838 | (13,841 | ) | 3,997 | |||||||||||
MBST artist contracts, profit participation rights and other
intangible assets
|
1.6 years | 4,270 | (3,497 | ) | 773 | |||||||||||
$ | 129,147 | $ | (79,744 | ) | $ | 49,403 | ||||||||||
The gross carrying amount of intangible assets of
$129.1 million as of March 31, 2010 in the table above
differs from the amount of $129.4 million as of
December 31, 2009 in the table below due to foreign
currency movements of $0.3 million related to Storm, which
continues to use U.K. sterling as its functional currency. The
Company has consolidated the results of operations of Storm
since the date of acquisition (August 6, 2009) in the
19 Entertainment operating segment.
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Definite lived intangible assets as of December 31, 2009
consist of (dollar amounts in thousands):
Gross |
Net |
|||||||||||
Carrying |
Accumulated |
Carrying |
||||||||||
Amount | Amortization | Amount | ||||||||||
Definite Lived Intangible Assets:
|
||||||||||||
Presley record, music publishing, film and video rights
|
$ | 28,900 | $ | (9,298 | ) | $ | 19,602 | |||||
Other Presley intangible assets
|
13,622 | (6,538 | ) | 7,084 | ||||||||
19 Entertainment IDOLS television programming, merchandising and
sponsorship relationships
|
64,517 | (43,423 | ) | 21,094 | ||||||||
19 Entertainment other artist management, recording,
merchandising, sponsorship and model relationships
|
18,087 | (13,387 | ) | 4,700 | ||||||||
MBST artist contracts, profit participation rights and other
intangible assets
|
4,270 | (3,306 | ) | 964 | ||||||||
$ | 129,396 | $ | (75,952 | ) | $ | 53,444 | ||||||
Amortization expense for definite lived intangible assets was
$4.4 million and $3.6 million for the three months
ended March 31, 2010 and 2009, respectively. At
March 31, 2010, the projected future amortization expense
for definite lived intangible assets, assuming no further
acquisitions or dispositions, is as follows (dollar amounts in
thousands):
For the nine months ending December 31, 2010
|
$ | 10,631 | ||
For the years ending December 31, 2011
|
13,788 | |||
2012
|
5,743 | |||
2013
|
3,126 | |||
2014
|
2,983 |
Goodwill as of March 31, 2010 consists of (dollar amounts
in thousands):
Balance at |
Balance at |
|||||||||||
December 31, |
March 31, |
|||||||||||
2009 | Impairment | 2010 | ||||||||||
Presley royalties and licensing
|
$ | 14,413 | $ | | $ | 14,413 | ||||||
Presley Graceland operations
|
10,166 | | 10,166 | |||||||||
19 Entertainment
|
89,009 | (2,214 | ) | 86,795 | ||||||||
MBST
|
2,175 | | 2,175 | |||||||||
Ali Business
|
1,110 | | 1,110 | |||||||||
Total
|
$ | 116,873 | $ | (2,214 | ) | $ | 114,659 | |||||
As noted in Note 4, management initiated a review of each
of the businesses currently conducted by 19 Entertainment and
the Company intends to focus its efforts principally around its
established IDOLS and So You Think You Can Dance
brands and its new multimedia brand If I Can Dream
and to exit most of the other businesses within 19
Entertainment. These actions are a triggering event and the
Company therefore evaluated the 19 Entertainment goodwill and
intangible assets for impairment. 19 Entertainment has
recognized a non-cash impairment charge of $2.2 million in
the three months ended March 31, 2010 to fully reduce the
carrying amount of goodwill of one of its subsidiaries as the
Company has determined that this business will be closed.
Management continues to review the businesses currently
conducted by 19 Entertainment in order to focus its efforts on
its established brands. Therefore, additional impairment charges
may be recorded in 2010.
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In addition to the costs described above, 19 Entertainment
recognized a non-cash impairment charge of $2.5 million as
of December 31, 2009 to reduce the carrying amount of
assets of Storm Model Management (Storm) as a result
of Simon Fullers resignation from 19 Entertainment and the
resulting reduction in his role in the management, oversight and
direction of that business. The Company acquired a 51% interest
in Storm, a U.K.-based modeling agency, in the third quarter of
2009, with the expectation that Mr. Fuller would be a key
contributor to its growth and operations.
10. | Debt |
On March 12, 2010, the Company entered into an amendment to
its revolving credit agreement with various lenders (the
Credit Facility). As a result of the amendment:
(i) the maximum size of the Credit Facility was reduced
from $141.7 million to $100.0 million, (ii) the
lenders agreed to remove a provision which tied an event of
default under the Credit Facility to a reduction in the
percentage of stock owned by Robert F.X. Sillerman, our then
Chairman and Chief Executive Officer, below a certain level and
(iii) the Company agreed to the removal of the
Incremental Facilities provision, which had provided
the Company with an option to seek additional term loan
commitments from the lenders in excess of the amount available
under the Credit Facility. As a result of this amendment and the
previous borrowings by the Company, there are no additional
borrowings available under the Credit Facility. The Company has
written off $0.2 million of deferred financing fees to
interest expense in the three months ended March 31, 2010
for the reduction in the size of the Credit Facility. As of
March 31, 2010, the Company had drawn down
$100.0 million on the Credit Facility, the proceeds of
which were used in June 2007 to make the investment in FXRE
described elsewhere herein.
A commitment fee of 0.375%-0.50% on any daily unused portion of
the Credit Facility was payable monthly in arrears through the
date of the amendment entered into by the Company as described
above (March 12, 2010). Under the Credit Facility, the
Company may make Eurodollar borrowings or base rate borrowings.
The $100.0 million outstanding at March 31, 2010 bears
interest at the Eurodollar rate resulting in an effective annual
interest rate at March 31, 2010 of 1.76% based upon a
margin of 150 basis points.
Deferred financing fees are included in other assets on the
consolidated balance sheet and are amortized over the remaining
term of the agreement, which ends on May 24, 2011.
The Credit Facility contains covenants that regulate the
Companys and its subsidiaries incurrence of debt,
disposition of property, acquisitions and joint ventures,
payment of cash dividends and capital expenditures. The Company
and its subsidiaries were in compliance with all financial and
non-financial loan covenants as of March 31, 2010.
The fair value of the Companys debt has been calculated
using a present value model and an observable market rate at
$95.8 million as of March 31, 2010, reflecting to the
favorable interest rates on the Companys debt instruments.
At March 31, 2010, the Company had $0.6 million
outstanding under a subordinated promissory note issued in
connection with the acquisition of the Presley Business, which
bears interest at the rate of 5.385% per annum. The principal
and interest under the note are payable in an installment of
principal and interest of $0.6 million on February 7,
2011, with a final installment of principal and interest due and
payable on February 7, 2012.
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11. | Equity |
Changes in stockholders equity attributable to CKX, Inc.
and noncontrolling interests for the three months ended
March 31, 2010 and 2009 are as follows (in thousands):
Noncontrolling |
||||||||||||
CKX, Inc. | Interests | Total | ||||||||||
Balance at January 1, 2010
|
$ | 278,734 | $ | 6,241 | $ | 284,975 | ||||||
Net loss
|
(4,577 | ) | (178 | ) | (4,755 | ) | ||||||
Distributions/distributions payable to noncontrolling interest
shareholders
|
| (425 | ) | (425 | ) | |||||||
Series B preferred dividends
|
(456 | ) | | (456 | ) | |||||||
Other comprehensive income
|
(200 | ) | | (200 | ) | |||||||
Other
|
1,083 | (36 | ) | 1,047 | ||||||||
Balance at March 31, 2010
|
$ | 274,584 | $ | 5,602 | $ | 280,186 | ||||||
Noncontrolling |
||||||||||||
CKX, Inc. | Interests | Total | ||||||||||
Balance at January 1, 2009
|
$ | 237,461 | $ | 5,279 | $ | 242,740 | ||||||
Net income
|
12,519 | 878 | 13,397 | |||||||||
Distributions to noncontrolling interest shareholders
|
| (1,324 | ) | (1,324 | ) | |||||||
Series B preferred dividends
|
(456 | ) | | (456 | ) | |||||||
Other comprehensive loss
|
(2,427 | ) | | (2,427 | ) | |||||||
Other
|
350 | | 350 | |||||||||
Balance at March 31, 2009
|
$ | 247,447 | $ | 4,833 | $ | 252,280 | ||||||
12. | Share-Based Payments |
Share-based compensation expense was $0.6 million and
$0.3 million for the three months ended March 31, 2010
and 2009, respectively. As noted in Note 3, the Company
recorded $0.6 million of additional expense to provision
for severance and other restructuring-related costs in the three
months ended March 31, 2010 due to the acceleration of the
vesting of stock options held by Simon Fuller upon the
termination of his employment agreement.
During the three months ended March 31, 2010, the Company
granted 1,271,500 stock options to employees. These options vest
20% on each of the first five anniversaries of the date of
grant. The options expire 10 years from the date of grant
and were granted with an exercise price equal to the weighted
average fair market value of the underlying common stock on the
date of grant ($5.63). The weighted average fair value of the
grants was $2.62 per option. Compensation expense is being
recognized ratably over the vesting period, assuming 10%-25% of
the options granted will not vest. The following assumptions
were used in valuing the stock options granted during the three
months ended March 31, 2010:
Weighted average risk-free average interest rate
|
3.1 | % | ||
Volatility
|
41.9 | % | ||
Expected life (years)
|
6.5 | |||
Dividend yield
|
0.0 | % |
The Company estimates forfeitures based on managements
experience. Due to the Companys short operating history,
the expected volatility is based on the Companys
historical share price volatility, and an analysis of comparable
public companies operating in our industry. Also due to the
Companys short operating history, the Company estimates
the expected life of each option granted by taking the average
of the minimum and maximum life for each vesting tranche. The
Company calculated a risk-free rate based upon the rates on five
and ten year treasury notes at the dates of grant.
15
Table of Contents
13. | Income Taxes |
In calculating the provision for income taxes on an interim
basis, the Company uses an estimate of the annual effective tax
rate based upon the facts and circumstances known at the time.
The Companys effective tax rate is based on expected
income, statutory rates and permanent differences applicable to
the Company in the various jurisdictions in which the Company
operates.
For the three months ended March 31, 2010, the Company
recorded a provision for income taxes of $0.6 million,
reflecting the Companys estimated 2010 effective tax rate
of 31.8%, a one-time beneficial adjustment for converting the
U.K. branchs functional currency from the U.K. pound
sterling to the U.S. dollar and a one-time benefit
resulting from the reorganization of 19 Entertainment, offset by
a one-time detriment relating to the 2006 IRS audit which is
currently in process and a one-time detriment relating to tax
not receiving benefit of the impairment charges.
For the three months ended March 31, 2009, the Company
recorded a provision for income taxes of $9.3 million,
reflecting the Companys estimated 2009 effective tax rate
of 41.1%.
The decrease in the 2010 effective tax rate relates primarily to
the Company anticipating less annualized book income and having
less book-tax permanent adjustments.
The Companys tax balance sheet position is reflected in
net prepaid income taxes. The Companys uncertain tax
positions relate primarily to state, local and foreign tax
issues, as well as accounting method issues. The Companys
uncertain tax positions, including interest and penalties, are
reflected in net prepaid income taxes. The Company does not
expect any material changes to the estimated amount of liability
associated with its uncertain tax positions through
March 31, 2011.
The Company generally recognizes accrued interest and penalties
related to uncertain tax positions through income tax expense.
As of March 31, 2010, the Company had approximately
$0.6 million accrued for interest and penalties.
Open tax years related to federal, state and local filings are
for the years ended December 31, 2006, 2007, 2008 and 2009.
The Internal Revenue Service is in the process of auditing the
Companys tax year ended December 31, 2006. Two
foreign tax jurisdictions have commenced audits of the business
activities of 19 Entertainment Limited and Elvis Presley
Enterprises in their respective countries.
The United Kingdoms Revenue & Customs
(HMRC) has reviewed the historic 19 Entertainment
Ltd. UK group through December 2007 with the exception of a few
entities where their review deadlines have been routinely
extended into 2010. HMRC usually has 24 months from the end
of the accounting period to review and query each return.
14. | Property and Equipment Impairment |
The Presley Business recognized a non-cash impairment of
$2.6 million to reduce the carrying amount of buildings for
a rental property that it owns which has begun to wind-down
operations in advance of being prepared for an alternative use
in the future. The charge is recorded in the Graceland
Operations operating segment.
15. | Commitments and Contingencies |
Elvis
Cirque du Soleil Show
In connection with the Cirque du Soleil Viva Elvis show,
described in Note 6 above, the Company expects its portion
of the total expected development spending to be approximately
$26 million. To date, the Company has incurred expenditures
for the development of the show of $21.5 million. The
Company expects to fund the remaining $4.5 million in the
second and third quarters of 2010.
Redeemable
Restricted Common Stock
In connection with the acquisition of 19 Entertainment, certain
sellers of 19 Entertainment entered into a Put and
16
Table of Contents
Call Option Agreement that provided them with certain rights
whereby, during a period of 20 business days beginning
March 17, 2011, the Company could exercise a call right to
purchase the common stock of such stockholders at a price equal
to $24.72 per share and these sellers could exercise a put right
to sell the common stock to the Company at a price equal to
$13.18 per share. The put and call rights applied to 1,672,170
of the shares issued in connection with the 19 Entertainment
acquisition, 1,507,135 of which were owned by Simon Fuller.
On June 8, 2009, the Company entered into an amendment to
the Put and Call Option Agreement with Mr. Fuller. Pursuant
to the amendment, the call price with respect to 1,138,088 of
Mr. Fullers shares (the Interim Shares)
was reduced to $13.18 per share and the exercise periods for the
put and call of such shares were accelerated to allow for their
exercise at any time commencing on the date of the amended
agreement. Immediately following execution of the amendment to
the Put and Call Option Agreement, the Company exercised its
call option with respect to the Interim Shares and paid to
Mr. Fuller a gross purchase price of $15.0 million.
Following the exercise of the amended call option,
534,082 shares remain subject to the Put and Call Option
Agreement.
Ryan
Seacrest Agreement
On July 7, 2009, the Company entered into two agreements
with Ryan Seacrest, the host of American Idol, and
certain of his affiliates to (i) ensure
Mr. Seacrests availability for three future seasons
of American Idol (years 2010, 2011 and 2012) and
acquire Mr. Seacrests prime time television network
exclusivity for future potential projects during the term of the
agreement, and (ii) obtain the right to use
Mr. Seacrests personal goodwill, merchandising
rights, rights to his name, voice and image, and rights of
publicity and promotion related to American Idol. Under
the terms of the agreements, the Company paid $22.5 million
upon execution of the agreements on July 7, 2009 and will
pay Mr. Seacrest an additional $22.5 million in
monthly installments during the term, for a total guaranteed
amount of $45 million.
The Company is in the process of negotiating with Fox and
Fremantle for compensation related to Mr. Seacrests
services on American Idol. The amounts paid by such
parties will either be paid directly to the Company or remitted
to the Company by Mr. Seacrest. Such amounts are being
recognized as revenue over the hours broadcast in the first and
second quarters of the broadcast seasons from 2010 through 2012.
The Company paid $26.9 million to Mr. Seacrest through
March 31, 2010. The Company will make payments to
Mr. Seacrest of $4.9 million over the reminder of
2010, $6.6 million in 2011 and $6.6 million in 2012.
Simon
Fuller Transaction
See Note 3 for a description of commitments under the Simon
Fuller transaction.
Television
Development Agreement
In March 2010, the Company entered into a three-year development
agreement with a current 19 Entertainment television executive
producer partner whereby the Company will pay advances of future
profits of $2.0 million per year; the 2010 advance was paid
in March 2010. Profits will be split evenly between the producer
and the Company. The agreement expires on December 31, 2012.
MBST
In connection with the acquisition of MBST, the sellers may
receive up to an additional 150,000 shares of common stock
upon satisfaction of certain performance thresholds over the
five-year period ending August 9, 2010. The receipt by the
sellers of any such shares will be accounted for as additional
purchase price at the time such performance thresholds are met.
Contingencies
There are various lawsuits and claims pending against the
Company. The Company believes that any ultimate liability
resulting from these actions or claims will not have a material
adverse effect on the Companys results of operations,
financial condition or liquidity.
17
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16. | Segment Information |
The Company currently has four reportable
segments: Presley Business Royalties and
Licensing, Presley Business Graceland Operations, 19
Entertainment and the Ali Business. These designations have been
made as the discrete operating results of these segments are
reviewed by the Companys chief operating decision maker to
assess performance and make operating decisions.
The Company evaluates its operating performance based on several
factors, including a financial measure of operating income
before non-cash depreciation of tangible assets and non-cash
amortization of intangible assets and non-cash compensation
(which the Company refers to as OIBDAN). The Company
considers OIBDAN to be an important indicator of the operational
strengths and performance of our businesses and the critical
measure the chief operating decision maker (CEO) uses to manage
and evaluate our businesses, including the ability to provide
cash flows to service debt. However, a limitation of the use of
OIBDAN as a performance measure is that it does not reflect the
periodic costs of certain capitalized tangible and intangible
assets used in generating revenue in the Companys
businesses or stock-based compensation expense. Accordingly,
OIBDAN should be considered in addition to, not as a substitute
for, operating income, net income and other measures of
financial performance reported in accordance with US GAAP as
OIBDAN is not a GAAP equivalent measurement.
Presley Business | ||||||||||||||||||||||||
Royalties and |
Graceland |
19 |
||||||||||||||||||||||
Segment Information | Licensing | Operations | Entertainment | Ali Business | Corporate | Total | ||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Three months ended March 31, 2010:
|
||||||||||||||||||||||||
Revenue
|
$ | 5,714 | $ | 6,611 | $ | 53,440 | $ | 882 | $ | | $ | 66,647 | ||||||||||||
Operating income (loss)
|
$ | 2,940 | $ | (4,120 | ) | $ | 2,841 | $ | 530 | $ | (5,481 | ) | $ | (3,290 | ) | |||||||||
Depreciation and amortization
|
$ | 645 | $ | 592 | $ | 3,749 | $ | 9 | $ | 148 | $ | 5,143 | ||||||||||||
OIBDAN
|
$ | 3,601 | $ | (870 | ) | $ | 9,479 | $ | 539 | $ | (4,927 | ) | $ | 7,822 | ||||||||||
Three months ended March 31, 2009:
|
||||||||||||||||||||||||
Revenue
|
$ | 12,463 | $ | 6,126 | $ | 61,289 | $ | 1,628 | $ | | $ | 81,506 | ||||||||||||
Operating income (loss)
|
$ | 10,570 | $ | (1,557 | ) | $ | 20,608 | $ | (321 | ) | $ | (5,724 | ) | $ | 23,576 | |||||||||
Depreciation and amortization
|
$ | 645 | $ | 563 | $ | 3,197 | $ | 21 | $ | 12 | $ | 4,438 | ||||||||||||
OIBDAN
|
$ | 11,227 | $ | (973 | ) | $ | 23,910 | $ | (296 | ) | $ | (5,512 | ) | $ | 28,356 | |||||||||
Asset Information:
|
||||||||||||||||||||||||
Segment assets at March 31, 2010
|
$ | 97,772 | $ | 72,035 | $ | 204,325 | $ | 31,248 | $ | 73,829 | $ | 479,209 | ||||||||||||
Segment assets at December 31, 2009
|
$ | 98,662 | $ | 73,379 | $ | 211,911 | $ | 31,262 | $ | 84,468 | $ | 499,682 | ||||||||||||
18
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Below is a reconciliation of the Companys OIBDAN to net
income (loss):
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(Amounts in thousands) | ||||||||
OIBDAN
|
$ | 7,822 | $ | 28,356 | ||||
Depreciation and amortization
|
(5,143 | ) | (4,438 | ) | ||||
Impairment charges
|
(4,853 | ) | | |||||
Non-cash compensation included in severance and other
restructuring-related costs
|
(552 | ) | | |||||
Non-cash compensation
|
(564 | ) | (342 | ) | ||||
Interest income
|
50 | 103 | ||||||
Interest expense
|
(867 | ) | (1,050 | ) | ||||
Equity in earnings (losses) of affiliates
|
(12 | ) | 62 | |||||
Income tax expense
|
(636 | ) | (9,294 | ) | ||||
Net income (loss)
|
$ | (4,755 | ) | $ | 13,397 | |||
17. | Related Party Transactions |
In March 2005, in connection with the acquisition of 19
Entertainment, certain sellers of 19 Entertainment entered into
a Put and Call Option Agreement that provided them with certain
rights whereby, during a period of 20 business days beginning
March 17, 2011, the Company could exercise a call right to
purchase the common stock of such stockholders at a price equal
to $24.72 per share and these sellers could exercise a put right
to sell the common stock to the Company at a price equal to
$13.18 per share. Of the 1,672,170 shares of common stock
covered by the Put and Call Option Agreement, 1,507,135 were
held by Simon Fuller.
On June 8, 2009, the Company entered into an amendment to
the Put and Call Option Agreement with Mr. Fuller. Pursuant
to the amendment, the call price with respect to 1,138,088 of
Mr. Fullers shares (the Interim Shares)
was reduced to $13.18 per share and the exercise periods for the
put and call of such shares were accelerated to allow for their
exercise at any time commencing on the date of the amended
agreement. The terms of the original Put and Call Option
Agreement remain in place with respect to Mr. Fullers
remaining 369,047 shares of our common stock.
Immediately following execution of the amendment to the Put and
Call Option Agreement, the Company exercised its call option
with respect to the Interim Shares and paid to Mr. Fuller a
gross purchase price of $15.0 million. The Interim Shares
purchased by the Company were recorded as treasury shares. The
Company recorded a cost of $0.8 million for payroll-related
taxes associated with the exercise of the call option in the
second quarter of 2009.
The remaining redeemable restricted common stock under the put
and call option is a single equity instrument. As the stock is
puttable to the Company at the option of these sellers, these
shares are presented in the accompanying consolidated balance
sheet as temporary equity under the heading Redeemable
Restricted Common Stock at an estimated fair value inclusive of
the put/call rights; the fair value of the remaining
534,082 shares is $7.3 million.
Please see Note 3, Transactions with Simon Fuller.
Please see Note 5, Transactions Involving FX Real Estate
and Entertainment Inc.
On December 8, 2009, the Company made a loan in the amount
of $455,115 to the holder of our Series B Convertible
Preferred Stock. The principal amount of the loan along with
interest was repaid from the proceeds of the quarterly dividend
on the preferred stock on February 8, 2010.
The Company subleases from a third party 16,180 square fee,
comprising the entire 16th and a portion of the 15th floors at
650 Madison Avenue, for its principal corporate offices in New
York, New York. CKX sublicensed a
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portion of the 15th floor to each of Flag Anguilla Management
(Flag Anguilla), Flag Luxury Properties and FXRE,
companies which are affiliated with Robert F.X. Sillerman. CKX
is responsible for payment of the full rental amount each month
to the sublandlord, and each of Flag Anguilla, Flag Luxury
Properties an FXRE pay its pro rata share of the rent for the
space it occupies to CKX. As of March 31, 2010 and through
May 2010, Flag Anguilla, FXRE and Flag Luxury Partners were each
current on all rent payments.
In 2007, the Company entered into a $1.8 million loan
agreement with a vendor that provides marketing and branding
consulting services to the Company. This vendor is owned by
several individuals who collectively own less than a one percent
interest in the Company. The loan bears interest at 10% per
annum due monthly, which has been paid currently through
March 31, 2010. Principal payments are due in each February
during the years 2009 through 2012 based on a rate of 50% of the
vendors cash flow, as defined. All amounts outstanding
under the loan come due in August 2012. No principal payments
were due or have been made through February 2010 as the vendor
had negative cash flow. The loan is personally guaranteed by the
four principals of the vendor. $1.8 million was outstanding
under the loan agreement at March 31, 2010. The Company
entered into a consulting agreement with the vendor in 2007 that
terminates in December 2010 and provides for the Company to pay
monthly consulting fees that would total $1.8 million over
the term of the agreement; $0.1 million was expensed under
the agreement in the three months ended March 31, 2010 and
2009. The consulting agreement may be terminated by either party
upon sixty days notice.
18. | Subsequent Events |
The Company evaluated subsequent events through this filing.
On May 7, 2010, the Company announced that Robert F.X.
Sillerman has resigned as Chairman and Chief Executive Officer
of the Company and has resigned from the Companys Board of
Directors, effective immediately.
The Board of Directors of the Company announced that
Michael G. Ferrel, a former Director and President of the
Company, will serve as acting Chief Executive Officer and that
Director Edward Bleier was appointed as Chairman of the Board.
Mr. Ferrel was also appointed to the Board of Directors.
* * * * * * * * *
FORWARD
LOOKING STATEMENTS
In addition to historical information, this
Form 10-Q
(this Quarterly Report) contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking
statements are those that predict or describe future events or
trends and that do not relate solely to historical matters. You
can generally identify forward-looking statements as statements
containing the words believe, expect,
will, anticipate, intend,
estimate, project, assume or
other similar expressions, although not all forward-looking
statements contain these identifying words. All statements in
this Quarterly Report regarding our future strategy, future
operations, projected financial position, estimated future
revenue, projected costs, future prospects, and results that
might be obtained by pursuing managements current plans
and objectives are forward-looking statements. You should not
place undue reliance on our forward-looking statements because
the matters they describe are subject to known and unknown
risks, uncertainties and other unpredictable factors, many of
which are beyond our control. Our forward-looking statements are
based on the information currently available to us and speak
only as of the date on which this Quarterly Report was filed
with the Securities and Exchange Commission (SEC).
We expressly disclaim any obligation to issue any updates or
revisions to our forward-looking statements, even if subsequent
events cause our expectations to change regarding the matters
discussed in those statements. Over time, our actual results,
performance or achievements will likely differ from the
anticipated results, performance or achievements that are
expressed or implied by our forward-looking statements, and such
difference might be significant and materially adverse to our
stockholders.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Managements discussion and analysis of financial
condition and results of operations should be read in
conjunction with the historical financial statements and
footnotes of the registrant included in its Annual Report on
Form 10-K
for the year ended December 31, 2009. Our future results of
operations may change materially from the historical results of
operations reflected in our historical financial statements.
General
We are engaged in the ownership, development and commercial
utilization of entertainment content. As more fully described
below, our primary assets and operations include:
| 19 Entertainment Limited, which owns, among other properties, proprietary rights to the IDOLS and So You Think You Can Dance television brands, both of which air in the United States, and, together with local adaptations of the format, around the world; | |
| An 85% ownership interest in Elvis Presley Enterprises, which owns the rights to the name, image and likeness of Elvis Presley, certain music and other intellectual property created by or related to Elvis Presley and the operations of Graceland and has partnered with Cirque du Soleil for the creation of Elvis Presley-themed shows and projects around the world, including the recently opened Viva ELVIS in Las Vegas, Nevada; and | |
| An 80% ownership interest in Muhammad Ali Enterprises, which owns the rights to the name, image and likeness of, as well as certain trademarks and other intellectual property related to Muhammad Ali. |
Our existing properties generate recurring revenue across
multiple entertainment platforms, including music and
television; licensing and merchandising; talent management;
themed attractions and touring/live events.
The Company owns an 85% interest in the Presley Business. The
former owner of the Presley Business maintains a 15% interest in
the business, is entitled to certain future distributions and
has other contractual rights. The Company owns an 80% interest
in the Ali Business. The former owner of the Ali Business
maintains a 20% interest in the business and is entitled to
certain future distributions and has other contractual rights.
Transaction
with Simon Fuller
On January 13, 2010, the Company entered into a series of
agreements with Simon Fuller (i) securing
Mr. Fullers long-term creative services as a
consultant, (ii) providing CKX with an option to invest in
XIX Entertainment Limited, a new entertainment company that
Mr. Fuller has launched, and (iii) agreeing to the
termination of Mr. Fullers employment with 19
Entertainment. Upon entering into these agreements,
Mr. Fuller resigned as a director of CKX and as an officer
and director of 19 Entertainment. Pursuant to the consultancy
agreement, the Company has engaged Mr. Fuller to provide
services, including executive producer services, in respect of
the Companys IDOLS, So You Think You Can Dance
and If I Can Dream programs. In consideration for
providing these services, Mr. Fuller will receive 10% of
the Companys net profits from each of the aforementioned
programs for the life of the programs as long as Mr. Fuller
continues to provide consulting services with respect to such
programs (the Creative Consulting Fee). For calendar
year 2010, Mr. Fuller will receive $5.0 million as an
advance against the Creative Consulting Fee, $2.5 million
of which was paid in the three months ended March 31, 2010.
For each year after 2010, subject to certain conditions,
Mr. Fuller will receive, as an annual advance against the
Creative Consulting Fee, $3.0 million if American Idol
remains on the air and $2.0 million if So You Think
You Can Dance remains on the air. The advances are
non-refundable to CKX, but CKX may recoup the amount of such
advances from the Creative Consulting Fee payable to
Mr. Fuller. For the three months ended March 31, 2010,
the Company has recorded $2.7 million of the Creative
Consulting Fee to cost of sales.
In addition to the aforementioned payment, Mr. Fuller
receives an incremental £1.5 million
($2.3 million) in consideration for providing creative and
strategic advice with respect to the overall business of CKX for
the six-month period through July 13, 2010. The Company
paid Mr. Fuller £0.5 million ($0.8 million)
in January 2010, representing consideration for CKXs
option to invest in Mr. Fullers new entertainment
company, which expired on March 15, 2010; the Company
elected not to exercise the option. Mr. Fuller also
received £1.2 million ($1.9 million)
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in separation payments. The Company recorded $0.6 million
of share-based compensation expense in the three months ended
March 31, 2010 due to the acceleration of the vesting of
stock options held by Simon Fuller upon the termination of his
employment agreement. $4.4 million has been recorded to the
provision for severance and other restructuring-related costs in
the three months ended March 31, 2010 related to these
agreements with Mr. Fuller. The Company expects to expense
an additional $1.2 million in the second quarter of 2010.
Provision
for Severance and Other Restructuring-Related Costs
In connection with the transaction with Simon Fuller described
above, management initiated a review of each of the businesses
currently conducted by 19 Entertainment and decided to focus its
efforts principally around its established IDOLS and
So You Think You Can Dance brands and its new multimedia
brand If I Can Dream. As a result, management intends to
exit most of the other businesses within 19 Entertainment by the
summer of 2010. These businesses will be closed, sold or
transferred, including potentially being sold or transferred to
Mr. Fullers new entertainment venture, XIX
Entertainment. These changes are expected to substantially
reduce 19 Entertainments spending on new development
projects and associated selling, general and administrative
expenses. As a result of this process, the Company has incurred
severance and other restructuring-related costs of
$1.7 million in the three months ended March 31, 2010
and expects to incur additional charges in 2010. The amount of
such additional charges will depend on a number of factors
including the final determination of which businesses the
Company will exit and the ultimate scope of the reductions in
selling, general and administrative expenses as well as
negotiations with XIX Entertainment regarding the potential
future transfer of assets to that company from 19 Entertainment.
Management believes that the steps it is currently taking to
restructure the business will reduce 19 Entertainments
annual selling, general and administrative expenses by
approximately $15 million beginning in the third quarter of
2010.
As a result of the implementation of the strategy noted above,
the Company will be reducing headcount and has notified a total
of 40 employees that they will be terminated. As of
March 31, 2010, 10 of these employees had been terminated.
The Company recorded a net liability of $1.1 million
representing the provision for severance and other
restructuring-related costs that have not yet been paid as of
March 31, 2010. The Company expects that there will be
additional headcount reductions in 2010 and will record the
corresponding provision for severance and other
restructuring-related costs when the employees are notified or
over the remaining service periods of the notified employees if
such service periods are significant.
In the three months ended March 31, 2009, the Company
recorded a provision for severance costs of $1.4 million at
the Ali Business, which has been reclassified to the provision
for severance and other restructuring-related costs from
selling, general and administrative expenses to conform to the
2010 presentation.
Transactions
Involving FX Real Estate and Entertainment Inc.
About
FXRE
CKX acquired an aggregate approximate 50% interest in FX Real
Estate and Entertainment Inc. (FXRE) in June and
September of 2007. On January 10, 2008, CKX distributed
100% of its interests in FXRE to CKXs stockholders. The
following information about FXRE is provided solely as
background for the description of the historical transactions
between the Company and FXRE. The Company does not own any
interest in FXRE, has not guaranteed any obligations of FXRE nor
is it a party to any continuing material transactions with FXRE.
Information about FXRE can be found at www.sec.gov or
ir.fxree.com.
Terminated
License Agreements
Simultaneous with our investment in FXRE, EPE entered into a
worldwide license agreement with FXRE, granting FXRE the
exclusive right to utilize Elvis Presley-related intellectual
property in connection with the development, ownership and
operation of Elvis Presley-themed hotels, casinos and certain
other real estate-based projects and attractions around the
world. FXRE also entered into a worldwide license agreement with
the Ali Business, granting FXRE the right to utilize Muhammad
Ali-related intellectual property in connection with Muhammad
Ali-themed hotels and certain other real estate-based projects
and attractions.
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Under the terms of the license agreements, FXRE was required to
pay to EPE and the Ali Business a specified percentage of the
gross revenue generated at the properties that incorporate the
Elvis Presley and Muhammad Ali intellectual property, as
applicable. FXRE was required to pay a guaranteed annual minimum
royalty during each year of the agreement, which amount was to
be recoupable against royalties paid during such year as
described above. The aggregate guaranteed minimum royalty due
for 2007 was $10.0 million, which was paid, together with
interest of $0.4 million, in April 2008.
On March 9, 2009, following FXREs failure to make the
$10 million annual guaranteed minimum royalty payments for
2008 when due, EPE and the Ali Business entered into a
Termination, Settlement and Release agreement with FXRE,
pursuant to which the parties agreed to terminate the EPE and
Ali Business license agreements and to release each other from
all claims related to or arising from such agreements. The
$10.0 million in 2007 license revenue was recognized in the
three months ended March 31, 2009 upon termination of the
license agreement.
19
Entertainment
19 Entertainment generates revenue from the creation and
production of entertainment properties. Our primary revenue
sources include production and license fees and related ratings
and rankings bonuses from television programs, and royalties
from the sale of recorded music by artists signed to our record
labels. We also derive revenue from the sale of merchandise,
sponsorships and tours based on our television programs and
recorded music artists, and fee income from management clients.
The majority of our revenue is derived from production and
license fees and related performance bonuses from producing and
licensing the IDOLS television show format in various
countries and ancillary revenue streams from the IDOLS
brand. Ancillary revenue from the IDOLS brand is
generated through agreements which provide us with the option to
sign finalists on the IDOLS television shows to long-term
recording contracts, concert tours we produce featuring
IDOLS finalists and the sale of sponsorships and
merchandise involving the IDOLS brand.
The majority of our IDOLS related revenue is generated
through our global television production and distribution
agreement with FremantleMedia, and through agreements with our
principal global record label partners Ronagold for seasons
American Idol 1 through American Idol 4 and Simco
for all seasons subsequent to American Idol 4. Therefore,
we are highly dependent upon the continued ability of these
entities to successfully maintain the IDOLS brand and
promote our recording artists.
Other than American Idol, which is discussed below, the
IDOLS television shows are generally produced or licensed
under one year contracts under which each local television
network has the right, but not the obligation, to renew the
agreement for additional years. Our recording artists are
generally signed to long-term recording contracts under which we
and Sony Music have the right, but not the obligation, to
require the artist to release a specified number of albums.
Our revenue from the IDOLS brand is also highly dependent
upon the continued success of the American Idol series
which currently airs on the Fox television network in the United
States, and local adaptations of the IDOLS television
show which air around the world. Our revenue is also dependent
upon the continued success and productivity of our recording
artists and management clients. A portion of our revenue from
the American Idol series is dependent upon the number of
hours of programming we deliver. The current ninth broadcast
season has aired 36.5 hours during the first quarter of
2010 and we expect to air 19.5 hours in the second quarter,
inclusive of 1.0 hour for Idol Gives Back, for a
total of 56.0 hours. In 2009, we aired 34.0 hours and
16.0 hours during the first and second quarters,
respectively, for a total of 50.0 hours. On
November 28, 2005, 19 Entertainment entered into a series
of agreements with Fox, FremantleMedia and Sony Music/Simco,
related to the American Idol television program. Under
the terms of the agreements, Fox has guaranteed the current 2010
season of American Idol, with an automatic renewal for
the 2011 season upon the show achieving certain minimum ratings.
Additional terms of the agreements call for Fox to order a
minimum of 37 hours and a maximum of 45 hours of
American Idol programming each season (though 19
Entertainment and FremantleMedia can agree to produce additional
hours) and to pay 19 Entertainment and FremantleMedia an
increased license fee per season. Fox also agreed to make an
annual payment to 19 Entertainment tied to the most recent
recording agreement with Sony Music.
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On July 7, 2009, the Company entered into two agreements
with Ryan Seacrest, the host of American Idol, and
certain of his affiliates to (i) ensure
Mr. Seacrests availability for three future seasons
of American Idol (years 2010, 2011 and 2012) and
acquire Mr. Seacrests prime time television network
exclusivity for future potential projects during the term of the
agreement, and (ii) obtain the right to use
Mr. Seacrests personal goodwill, merchandising
rights, rights to his name, voice and image, and rights of
publicity and promotion related to American Idol. Under
the terms of the agreements, the Company paid $22.5 million
upon execution of the agreements on July 7, 2009 and will
pay Mr. Seacrest an additional $22.5 million in
monthly installments during the term, for a total guaranteed
amount of $45 million.
The Company is in the process of negotiating with Fox and
Fremantle for compensation related to Mr. Seacrests
services on American Idol. The amounts paid by such
parties will either be paid directly to the Company or remitted
to the Company by Mr. Seacrest. Such amounts are being
recognized as revenue over the broadcast in the first and second
quarters of the broadcast seasons from 2010 through 2012. The
amount of revenue recorded in the three months ended
March 31, 2010 is the reimbursement to be received for the
hours broadcast in the quarter.
19 Entertainments revenue is seasonal in nature,
reflecting the timing of our television shows and tours in
various markets. Historically, 19 Entertainment generated higher
revenue during the first three quarters of the calendar year,
which corresponds to the dates on Fox in the United States our
American Idol show is broadcast (the first and second
quarters) and the dates our So You Think You Can Dance
series airs (the second and third quarters). In 2009, Fox
ordered additional broadcast hours of So You Think You Can
Dance which aired in the third and fourth quarters of 2009.
We also aired Superstars of Dance, a special series, on
NBC in the first quarter of 2009.
Our significant costs to operate 19 Entertainment include
salaries and other compensation, royalties, tour expenses, rents
and general overhead costs. Our discretionary costs include
salary and overhead costs incurred in the development of new
entertainment content.
Presley
Business
The Presley Business consists of entities that own
and/or
control the commercial utilization of the name, image and
likeness of Elvis Presley, the operation of the Graceland museum
and related attractions, as well as revenue derived from Elvis
Presleys television specials, films and certain of his
recorded musical works. The Presley Business consists of two
reportable segments: Royalties and Licensing
intellectual property, including the licensing of the name,
image, likeness and trademarks associated with Elvis Presley, as
well as other owned
and/or
controlled intellectual property and the collection of royalties
from certain motion pictures, television specials and recorded
musical works and music compositions; and Graceland
Operations the operation of the Graceland museum and
related attractions and retail establishments, including Elvis
Presleys Heartbreak Hotel and other ancillary real estate
assets.
The Royalties and Licensing segment generates revenue from the
exploitation of the name, image and likeness of Elvis Presley,
including physical and intellectual property owned or created by
Elvis Presley during his life. The primary revenue source of
this segment comes from licensing Elvis name and likeness
for consumer products, commercials and other uses and royalties
and other income derived from intellectual property created by
Elvis including records, movies, videos and music publishing.
Licensing revenue is primarily derived from long-term agreements
with terms of one to five years. Although we seek to obtain
significant minimum guarantees, our licensing revenue varies
based on the actual product sales generated by licensees. The
intellectual property created by Elvis during his lifetime which
we own has generally been assigned to third parties for
commercial exploitation under long-term agreements.
Although we maintain certain controls over the use of this
content and, in certain cases, have rights to terminate these
agreements if the third party fails to perform, our revenue from
this intellectual property is highly dependent upon the ability
of third parties to successfully market the content.
Together with Cirque du Soleil and MGM MIRAGE, the Company
recently launched Viva ELVIS, a permanent live theatrical
Vegas-style Cirque du Soleil show based on the life and music of
Elvis Presley. The show, which is being presented at the brand
new ARIA Resort and Casino in CityCenter on the strip in Las
Vegas, Nevada, held its gala opening on February 19, 2010
and opened to the public the following day. The show was
developed and is
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operated in a partnership jointly owned by Cirque du Soleil and
the Company. The Companys maximum exposure to loss as a
result of its involvement with the partnership is its funding
for the show, which is its investment in the partnership. The
Company and Cirque du Soleil have each agreed to pay one-half of
the creative development and production costs of the show and
the cost of the show is being amortized over five years by the
partnership.
Additionally, another partnership was created by Cirque du
Soleil and the Company to hold the intellectual property related
to the show, to collect royalty-related revenue based on the
profitability of the show and to distribute royalty payments to
the various rights holders of the shows intellectual
property. This entity also holds the rights to intellectual
property created during the creation of the show and pays a
royalty to other third party creators of the show. As this
partnership generates a distinct royalty stream, the Company
records the royalties earned related to intellectual property it
owns and it acquires through third parties as revenue. Costs
incurred to third parties by the Company are recorded as
expenses. The Company will also recognize as revenue a
management fee it receives from the operating partnership to
cover any operational expenses incurred to support the
partnership.
In the first quarter of 2010, the Presley Business has begun
reporting results from the Cirque du Soleil Viva ELVIS
show in Las Vegas. The financial results from the show are
highly dependent on revenue generated from ticket sales. The
costs to operate the show include production costs which are
generally fixed in nature and variable costs including royalties
and rent.
The Graceland Operations segment generates its primary revenue
from ticket and merchandise sales and related income from public
tours of Graceland as well as from the operation of Elvis
Presleys Heartbreak Hotel and the other ancillary real
estate assets. Revenue from Graceland has historically been
seasonal with sharply higher numbers of visitors during the late
spring and summer seasons as compared to the fall and winter
seasons.
Most of the Presley Business revenue sources are dependent
upon the publics continued interest in Elvis Presley and
the intellectual property he created.
Our significant costs to operate the Presley Business include
salaries, rent and other general overhead costs. Most of our
costs do not vary significantly with our revenue. Our
discretionary costs are generally in our marketing and
promotions department which we primarily incur to maintain
and/or
increase the number of visitors to Graceland. We also incur
expenses in exploring additional opportunities to bring
Elvis-related attractions to strategic locations throughout the
world.
Ali
Business
The Ali Business consists of the commercial exploitation of the
name, image, likeness and intellectual property of Muhammad Ali,
primarily through endorsement and licensing arrangements.
The primary revenue source comes from licensing Muhammad
Alis name and likeness for consumer products, commercials
and other uses. Licensing revenue is primarily derived from
long-term agreements with terms of one to five years. Although
we seek to obtain significant minimum guarantees, our licensing
revenue varies based on the actual product sales generated by
licensees. The intellectual property that is owned by the
Company is licensed to third parties for commercial exploitation
under long-term agreements. Although we maintain certain
controls over the use of this content and, in certain cases,
have rights to terminate these agreements if the third party
fails to perform, our revenue from this intellectual property is
highly dependent upon the ability of third parties to
successfully market the content. Most of our revenue sources are
dependent upon the publics continued interest in Muhammad
Ali and associated intellectual property. The Ali Business also
generates revenue from sports memorabilia signings performed by
Mr. Ali.
Our significant costs to operate the Ali Business include
commissions, salaries and other general overhead costs. With the
exception of commissions, most of our costs do not vary
significantly with our revenue.
Change in
Functional Currency
As noted above, Simon Fuller resigned as Chief Executive Officer
of 19 Entertainment in January 2010. This departure represented
a significant change in circumstances for the 19 Entertainment
operating segment. This underlying event caused management to
undertake an assessment of the strategic and structural needs of
19
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Entertainments creative development projects and market
focus. These changes represent a significant change in facts and
circumstances in the context of ASC 830, Foreign
Currency Matters, such that management has reassessed the
functional currency of the 19 Entertainment operating segment.
The Company has concluded that it is appropriate to change the
functional currency of substantially all of the subsidiaries
comprising the 19 Entertainment operating segment from U.K.
sterling to U.S. dollars. The Company has effected this
change as of January 1, 2010. The change in functional
currency had no impact on the December 31, 2009 financial
information previously included in the Companys
Form 10-K.
The impact of this change is that the 19 Entertainment operating
segment is measured in U.S. dollars effective
January 1, 2010. Historically, 19 Entertainment has
generated foreign currency gains and losses as transactions
denominated in U.S. dollars were re-measured into U.K.
sterling at the balance sheet date. As a result of the change,
19 Entertainments operating results reflect less foreign
currency-related volatility in 2010 and the 2010 operating
results of 19 Entertainment may not be directly comparable to
2009.
Use of
OIBDAN
We evaluate our operating performance based on several factors,
including a financial measure of operating income (loss) before
non-cash depreciation of tangible assets and non-cash
amortization of intangible assets and non-cash compensation
(which we refer to as OIBDAN). The Company considers
OIBDAN to be an important indicator of the operational strengths
and performance of our businesses and the critical measure the
chief operating decision maker (CEO) uses to manage and evaluate
our businesses, including the ability to provide cash flows to
service debt. However, a limitation of the use of OIBDAN as a
performance measure is that it does not reflect the periodic
costs of certain capitalized tangible and intangible assets used
in generating revenue in our businesses or stock-based
compensation expense. Accordingly, OIBDAN should be considered
in addition to, not as a substitute for, operating income
(loss), net income (loss) and other measures of financial
performance reported in accordance with US GAAP as OIBDAN is not
a GAAP equivalent measurement.
We have reconciled OIBDAN to operating income in the following
consolidated operating results table for the Company for the
three and three months ended March 31, 2010 and 2009.
Consolidated
Operating Results Three Months Ended March 31,
2010
Compared to Three Months Ended March 31, 2009
Three Months |
Three Months |
|||||||||||
Ended |
Ended |
|||||||||||
March 31, 2010 | March 31, 2009 | Variance | ||||||||||
(In thousands) | ||||||||||||
Revenue
|
$ | 66,647 | $ | 81,506 | $ | (14,859 | ) | |||||
Operating expenses
|
69,937 | 57,930 | 12,007 | |||||||||
Other expense
|
538 | 128 | 410 | |||||||||
Operating income (loss)
|
(3,290 | ) | 23,576 | (26,866 | ) | |||||||
Income tax expense
|
636 | 9,294 | (8,658 | ) | ||||||||
Net income attributable to CKX, Inc.
|
(5,033 | ) | 12,063 | (17,096 | ) | |||||||
Operating income (loss)
|
$ | (3,290 | ) | $ | 23,576 | $ | (26,866 | ) | ||||
Impairment charge
|
4,853 | | 4,853 | |||||||||
Depreciation and amortization
|
5,143 | 4,438 | 705 | |||||||||
Non-cash provision for severance and other restructuring-related
costs
|
552 | | 552 | |||||||||
Non-cash compensation
|
564 | 342 | 222 | |||||||||
OIBDAN
|
$ | 7,822 | $ | 28,356 | $ | (20,534 | ) | |||||
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Revenue decreased $14.9 million in 2010 due primarily to
$12.1 million of revenue for Superstars of Dance, a
television program that aired only in 2009, and the recognition
of $10.0 million of revenue related to the terminated FXRE
license agreements in 2009 offset by higher revenue from
American Idol. Higher operating expenses of
$12.0 million for the three months ended March 31,
2010 resulted from $6.1 million in severance and other
restructuring-related costs at 19 Entertainment,
$4.9 million of impairment charges at 19 Entertainment and
the Presley Business and $9.6 million of costs associated
with the transaction with Ryan Seacrest, which were partially
offset by $10.7 million of costs related to Superstars
of Dance in 2009.
19
Entertainment
The following tables provide a breakdown of 19
Entertainments revenue, cost of sales, selling, general
and administrative expenses and other costs, OIBDAN and
operating income for the three months ended March 31, 2010
and 2009 (all amounts reflected for 2009 have been recasted to
conform to the 2010 presentation):
Three Months Ended March 31, 2010 | Revenue | Cost of Sales | ||||||||||
(In thousands) | ||||||||||||
American Idol (including television production, foreign
syndication, sponsorship, merchandise and touring)
|
$ | 29,100 | $ | (12,663 | ) | $ | 16,437 | |||||
Other IDOLS television programs (including license fees
and sponsorship)
|
4,140 | (485 | ) | 3,655 | ||||||||
So You Think You Can Dance
|
1,621 | (1,354 | ) | 267 | ||||||||
If I Can Dream and other television productions
|
1,924 | (4,235 | ) | (2,311 | ) | |||||||
U.S. music and artist management
|
11,781 | (4,527 | ) | 7,254 | ||||||||
Other
|
4,874 | (4,077 | ) | 797 | ||||||||
$ | 53,440 | $ | (27,341 | ) | $ | 26,099 | ||||||
Selling, general and administrative expenses, excluding non-cash
compensation
|
(10,520 | ) | ||||||||||
Provision for severance and other restructuring-related costs
(excluding non-cash compensation for accelerated vesting)
|
(5,566 | ) | ||||||||||
Other expense
|
(534 | ) | ||||||||||
OIBDAN
|
$ | 9,479 | ||||||||||
OIBDAN
|
$ | 9,479 | ||||||||||
Impairment charge
|
(2,214 | ) | ||||||||||
Depreciation and amortization
|
(3,749 | ) | ||||||||||
Non-cash provision for severance and restructuring-related
charges
|
(552 | ) | ||||||||||
Non-cash compensation
|
(123 | ) | ||||||||||
Operating income
|
$ | 2,841 | ||||||||||
27
Table of Contents
Three Months Ended March 31, 2009 | Revenue | Cost of Sales | ||||||||||
(In thousands) | ||||||||||||
American Idol (including television production, foreign
syndication, sponsorship, merchandise and touring)
|
$ | 24,655 | $ | (4,125 | ) | $ | 20,530 | |||||
Other IDOLS television programs (including license fees
and sponsorship)
|
3,749 | (131 | ) | 3,618 | ||||||||
So You Think You Can Dance
|
3,566 | (2,483 | ) | 1,083 | ||||||||
If I Can Dream and other television productions
|
11,658 | (12,713 | ) | (1,055 | ) | |||||||
U.S. music and artist management
|
14,568 | (5,767 | ) | 8,801 | ||||||||
Other
|
3,093 | (1,854 | ) | 1,239 | ||||||||
$ | 61,289 | $ | (27,073 | ) | $ | 34,216 | ||||||
Selling, general and administrative expenses, excluding non-cash
compensation
|
(10,178 | ) | ||||||||||
Other expense
|
(128 | ) | ||||||||||
OIBDAN
|
$ | 23,910 | ||||||||||
OIBDAN
|
$ | 23,910 | ||||||||||
Depreciation and amortization
|
(3,197 | ) | ||||||||||
Non-cash compensation
|
(105 | ) | ||||||||||
Operating income
|
$ | 20,608 | ||||||||||
The revenue decrease of $7.8 million is due primarily to
the prior year television program, Superstars of Dance,
which had a limited run in 2009, which was partially offset by
increased revenue for American Idol. Cost of sales in
2010 includes $2.7 million for the Simon Fuller profit
share, which offset reduction in other costs.
American Idol 9 aired 36.5 series hours in the
U.S. in 2010 while American Idol 8 aired 34.0 series
hours in the U.S. in 2009. American Idol revenue
increased by $4.4 million in 2010 as the additional
2.5 hours of programming and an increase in guaranteed
license fees and revenue from the Ryan Seacrest arrangement more
than offset reduced revenue from on-air and off-air sponsorship
deals. Cost of sales for American Idol increased
$8.5 million due to $9.6 million of cost amortization
for the Ryan Seacrest deal and Simon Fullers profit share,
which partially offset other cost reductions.
Other IDOLS revenue increased $0.4 million due
primarily to increased television revenue. Cost of sales
increased due to the Simon Fuller profit share.
So You Think You Can Dance revenue declined
$1.9 million primarily due to a So You Think You Can
Dance Canadian tour in 2009. So You Think You Can Dance
television revenue increased $1.0 million due foreign
tapes sales from the additional broadcast season in the fourth
quarter of 2009 which partially offset a decline in commercial
revenue. Cost of sales declined due to the prior year tour costs.
If I Can Dream and other television productions revenue
decreased $9.7 million in 2010; $12.1 million of this
decrease represents Superstars of Dance, a limited run
program which aired 9 series hours on the NBC network in January
2009. Cost of sales declined $8.5 million primarily due to
the prior year broadcast of Superstars of Dance,
partially offset by development and launch costs for If I Can
Dream.
For U.S. music and artist management, revenue declined
$2.8 million from the prior year as sales by former
American Idol contestants were offset by the cyclical
recording schedule of the artist group. Cost of sales declined
$1.2 million due to reduced royalties paid to artists,
partially offset by Simon Fullers profit share.
Other revenue increased $1.8 million, including a
$1.2 million contribution from Storm, which was acquired in
August 2009.
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Table of Contents
Selling, general and administrative expenses increased by
$0.3 million. Other expense of $0.5 million and
$0.1 million for the three months ended March 31, 2010
and 2009, respectively, represent foreign exchange gains and
losses generated at 19 Entertainment. In 2009, the loss resulted
from transactions recorded in currencies other than the U.K.
pound sterling functional currency. In 2010, due to the change
in 19 Entertainments functional currency from U.K. pound
sterling to U.S. dollar, the loss results from transactions
in currencies other than the U.S. dollar, primarily U.K.
pound sterling.
Severance and other restructuring-related costs recorded by 19
Entertainment were $6.1 million in the three months ended
March 31, 2010. These costs primarily represent
$4.4 million of expenses related to the transaction with
Simon Fuller described above and $1.4 million of severance
costs recorded during the quarter.
The $2.2 million impairment charge is to fully reduce the
carrying amount of goodwill of one of its subsidiaries as the
Company has determined that this business will be closed.
Presley
Business Royalties and Licensing
The following table provides a breakdown of Presley
Business Royalties and Licensing revenue, cost of
sales, selling, general and administrative expenses and OIBDAN
for the three months ended March 31, 2010 and 2009:
Three Months |
Three Months |
|||||||||||
Ended |
Ended |
|||||||||||
March 31, |
March 31, |
|||||||||||
2010 | 2009 | Variance | ||||||||||
(In thousands) | ||||||||||||
Revenue
|
$ | 5,714 | $ | 12,463 | $ | (6,749 | ) | |||||
Cost of sales
|
(902 | ) | (234 | ) | (668 | ) | ||||||
Selling, general and administrative expense, excluding non-cash
compensation
|
(1,211 | ) | (1,002 | ) | (209 | ) | ||||||
OIBDAN
|
$ | 3,601 | $ | 11,227 | $ | (7,626 | ) | |||||
OIBDAN
|
$ | 3,601 | $ | 11,227 | (7,626 | ) | ||||||
Depreciation and amortization
|
(645 | ) | (645 | ) | | |||||||
Non-cash compensation
|
(16 | ) | (12 | ) | (4 | ) | ||||||
Operating income
|
$ | 2,940 | $ | 10,570 | $ | (7,630 | ) | |||||
The decrease in royalties and licensing revenue of
$6.7 million for three months ended March 31, 2010
compared to 2009 was due to the recognition of $9.0 million
of revenue related to the terminated FXRE license agreement in
2009 and lower sales in the current period of a limited edition
collectible DVD box set of Elvis movies launched in 2007 of
$0.2 million. The decrease was primarily offset by
$1.8 million of revenue related to the Viva ELVIS
Cirque du Soleil show in Las Vegas and higher net other
royalties of $0.7 million. Royalties and licensing cost of
sales increased $0.7 million primarily due to
$0.9 million of third party royalties for the Viva
ELVIS show offset by lower DVD box set sales in 2010.
Royalties and licensing selling, general and administrative
expenses increased by $0.2 million primarily due to higher
legal expenses.
29
Table of Contents
Presley
Business Graceland Operations
The following table provides a breakdown of the Presley
Business Graceland Operations revenue, cost of
sales, selling, general and administrative expenses and OIBDAN
for the three months ended March 31, 2010 and 2009:
Three Months |
Three Months |
|||||||||||
Ended |
Ended |
|||||||||||
March 31, |
March 31, |
|||||||||||
2010 | 2009 | Variance | ||||||||||
(In thousands) | ||||||||||||
Revenue
|
$ | 6,611 | $ | 6,126 | $ | 485 | ||||||
Cost of sales
|
(1,274 | ) | (885 | ) | (389 | ) | ||||||
Selling, general and administrative expense, excluding non-cash
compensation
|
(6,207 | ) | (6,214 | ) | 7 | |||||||
OIBDAN
|
$ | (870 | ) | $ | (973 | ) | $ | 103 | ||||
OIBDAN
|
$ | (870 | ) | $ | (973 | ) | 103 | |||||
Impairment charge
|
(2,639 | ) | | (2,639 | ) | |||||||
Depreciation and amortization
|
(592 | ) | (563 | ) | (29 | ) | ||||||
Non-cash compensation
|
(19 | ) | (21 | ) | 2 | |||||||
Operating income
|
$ | (4,120 | ) | $ | (1,557 | ) | $ | (2,563 | ) | |||
Graceland Operations revenue increased $0.5 million for
three months ended March 31, 2010 compared to 2009 due to
favorable results from retail operations offset by decreases in
tour and exhibit and other revenue. Tour and exhibit revenue of
$2.4 million for the three months ended March 31, 2010
decreased $0.1 million from the prior year period. This
decrease resulted from an 8.2% decrease in attendance to 87,026
in 2010 from 94,780 in 2009 offset by a 3.4% increase in per
visitor spending. Inclement regional and national winter weather
and lower tourist traffic in Memphis affected attendance in
2010. Retail operations revenue of $2.8 million for the
three months ended March 31, 2010 increased
$0.7 million compared to the prior year, due primarily to
merchandise sales from a one-time Elvis the Concert series
performed in Europe. Other revenue, primarily hotel room revenue
and ancillary real estate income of $1.4 million for the
three months ended March 31, 2010 was down
$0.1 million compared to the prior year. The decline was
primarily due to lower hotel occupancy and the lower rental
income from ancillary real estate.
Graceland Operations cost of sales increased by
$0.4 million in the three months ended March 31, 2010
compared to the prior year due to costs for merchandise for the
Elvis the Concert series. Graceland Operations selling, general
and administrative expenses were flat in the three months ended
March 31, 2010 primarily as the 2009 write-off of
$0.9 million of deferred costs related to preliminary
design work for the Graceland redevelopment initiative was
offset by professional and legal fees, including those related
to a renewed master plan initiative in 2010. Graceland
Operations recognized a non-cash impairment of $2.6 million
to reduce the carrying amount of buildings for a rental property
that it owns which began to wind-down operations in advance of
being prepared for an alternative use in the future.
Ali
Business
The Ali Business contributed $0.9 million and
$1.6 million of revenue for the three months ended
March 31, 2010 and 2009, respectively. The decrease is due
to the recognition of $1.0 million of revenue related to
the terminated FXRE license agreement in 2009, which is
partially offset by higher licensing fees in the first quarter
of 2010 as compared to the prior period. Operating expenses
decreased by $1.6 million for the three months ended
March 31, 2010 from the prior period primarily due to
severance costs of $1.4 million recorded in 2009 due to a
restructuring of the business. OIBDAN was $0.5 million in
2010 compared to a loss of $(0.3) million in the prior year
period.
30
Table of Contents
Corporate
and Other
Corporate
Expenses and Other Costs
The Company incurred corporate overhead expenses of
$5.3 million and $4.2 million for the three months
ended March 31, 2010 and 2009, respectively. The increase
of $1.1 million primarily reflects higher travel and
entertainment expenses, increased professional, director and
consulting costs and increased office-related costs, offset in
part by lower employee compensation costs.
During the three months ended March 31, 2009, the Company
incurred $1.5 million of acquisition-related costs,
consisting of third party due diligence costs for potential
acquisitions that were not consummated.
Impairment
Charges
In the three months ended March 31, 2010, the Company has
recognized a non-cash impairment of $2.6 million at the
Graceland Operations segment of the Presley Business to reduce
the carrying amount of buildings as the Company has begun
wind-down operations of a rental property in advance of being
prepared for an alternative use in the future. The Company has
recorded a non-cash impairment charge of $2.2 million as of
March 31, 2010 at 19 Entertainment to fully reduce the
carrying amount of goodwill of one of its subsidiaries as the
Company has determined that this business will be closed.
Interest
Income/Expense
The Company had interest expense of $0.9 million and
$1.1 million in the three months ended March 31, 2010
and 2009, respectively. The decrease in interest expense is
primarily due to a reduction in the average borrowing rate on
the revolving credit facility from 2.95% to 1.76%. The Company
wrote off $0.2 million of deferred financing fees to
interest expense in the three months ended March 31, 2010
to reflect the reduction in the maximum size of the Credit
Facility. The Company had interest income of $0.1 million
in the three months ended March 31, 2010 and 2009.
Income
Taxes
In calculating the provision for income taxes on an interim
basis, the Company uses an estimate of the annual effective tax
rate based upon the facts and circumstances known at the time.
The Companys effective tax rate is based on expected
income, statutory rates and permanent differences applicable to
the Company in the various jurisdictions in which the Company
operates.
For the three months ended March 31, 2010, the Company
recorded a provision for income taxes of $0.6 million,
reflecting the Companys estimated 2010 effective tax rate
of 31.8%, a one-time beneficial adjustment for converting the
U.K. branchs functional currency from the U.K. pound
sterling to the U.S. dollar and a one-time benefit
resulting from the reorganization of 19 Entertainment, offset by
a one-time detriment relating to the 2006 IRS audit which is
currently in process and a one-time detriment relating to tax
not receiving benefit of the impairment charges.
For the three months ended March 31, 2009, the Company
recorded a provision for income taxes of $9.3 million,
reflecting the Companys estimated 2009 effective tax rate
of 41.1%.
The decrease in the 2010 effective tax rate relates primarily to
the Company anticipating less annualized book income and having
less book-tax permanent adjustments.
The Companys tax balance sheet position is reflected in
net prepaid income taxes. The Companys uncertain tax
positions relate primarily to state, local and foreign tax
issues, as well as accounting method issues. The Companys
uncertain tax positions, including interest and penalties, are
reflected in net prepaid income taxes. The Company does not
expect any material changes to the estimated amount of liability
associated with its uncertain tax positions through
March 31, 2011.
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Table of Contents
The Company generally recognizes accrued interest and penalties
related to uncertain tax positions through income tax expense.
As of March 31, 2010, the Company had approximately
$0.6 million accrued for interest and penalties.
Open tax years related to federal, state and local filings are
for the years ended December 31, 2006, 2007, 2008 and 2009.
The Internal Revenue Service is in the process of auditing the
Companys tax year ended December 31, 2006. Two
foreign tax jurisdictions have commenced audits of the business
activities of 19 Entertainment Limited and Elvis Presley
Enterprises in their respective countries.
The United Kingdoms Revenue & Customs
(HMRC) has reviewed the historic 19 Entertainment
Ltd. UK group through December 2007 with the exception of a few
entities where their review deadlines have been routinely
extended into 2010. HMRC usually has 24 months from the end
of the accounting period to review and query each return.
Equity
in Earnings (Losses) of Affiliates
The Company recorded earnings (losses) of less than
$(0.1) million and $0.1 million from unconsolidated
affiliates for the three months ended March 31, 2010 and
2009, respectively, related to the Companys investment in
Beckham Brands Limited in 2010 and 2009 and the Cirque
partnership in 2010. The change is due primarily to
$0.5 million of losses associated with the opening of
Viva ELVIS in February, 2010, offset by an increase in
the earnings of Beckham Brands Limited.
The loss from the Viva Elvis investment during the first
quarter is primarily due to certain one-time costs associated
with the gala opening of the show in February 2010 without
offsetting revenue as a result of the limited number of
performances during the quarter. In addition, ticket sales
during the first quarter were weaker than expected due in large
part to low occupancy rates at the hotels within CityCenter,
where the theater is located. Management expects that ticket
sales will improve over the course of 2010 as marketing programs
for the show are fully implemented and hotel occupancy rates
rise as the newly opened CityCenter fully ramps up its
operations.
Noncontrolling
Interests
Net income (loss) attributable to noncontrolling interests of
$(0.2) million and $0.9 million for the three months
ended March 31, 2010 and 2009, respectively. Both periods
reflect shares in the net income of the Presley Business and the
Ali Business related to the equity interests retained by the
former owners and the loss in 2010 reflects the noncontrolling
interest for Storm.
Cash Flow
for the three months ended March 31, 2010 and
2009
Operating
Activities
Net cash used in operating activities was $9.6 million for
the three months ended March 31, 2010, reflecting a net
loss of $4.8 million, including depreciation and
amortization of $5.1 million, impairment charges of
$4.9 million and normal seasonal patterns in cash
collections and payments related to American Idol and
So You Think You Can Dance.
Net cash used in operating activities was $7.9 million for
the three months ended March 31, 2009, reflecting net
income available to CKX, Inc. of $13.4 million, which
includes depreciation and amortization of $4.4 million, and
the impact of the recognition of the previously deferred
licensing revenue, the timing of payments and receipts
associated with the production of So You Think You Can
Dance, American Idol and Superstars of Dance
and the impact of other seasonal changes in working capital
levels.
Investing
Activities
Net cash used in investing activities was $0.7 million for
the three months ended March 31, 2010, reflecting capital
expenditures of $0.7 million.
32
Table of Contents
Net cash used in investing activities was $3.9 million for
the three months ended March 31, 2009, primarily reflecting
the purchase of a fractional interest in a corporate airplane
and recurring capital expenditures at Graceland.
Financing
Activities
Cash used in financing activities was $0.9 million for the
three months ended March 31, 2010. The Company made
distributions of $0.4 million to noncontrolling interest
shareholders and principal payments on notes payable of
$0.5 million.
Cash used in financing activities was $2.3 million for the
three months ended March 31, 2009. The Company made
distributions of $1.3 million to noncontrolling interest
shareholders, principal payments on notes payable of
$0.5 million and dividend payments of $0.5 million to
the holder of the Series B Convertible Preferred Stock.
Uses
of Capital
At March 31, 2010, the Company had $100.6 million of
debt outstanding and $55.1 million in cash and cash
equivalents.
In March 2010, the Company entered into an amendment to its
revolving credit agreement with various lenders (the
Credit Facility). As a result of the amendment:
(i) the maximum size of the Credit Facility was reduced
from $141.7 million to $100.0 million, (ii) the
lenders agreed to remove a provision which tied an event of
default under the Credit Facility to a reduction in the
percentage of stock owned by Robert F.X. Sillerman, our then
Chairman and Chief Executive Officer, below a certain level and
(iii) the Company agreed to the removal of the
Incremental Facilities provision, which had provided
the Company with an option to seek additional term loan
commitments from the lenders in excess of the amount available
under the Credit Facility. As a result of this amendment and the
previous borrowings by the Company, there are no additional
borrowings available under the Credit Facility.
We believe that our current cash on hand together with cash flow
from operations will be sufficient to fund our current
operations, including payments of interest and principal due on
the Companys debt, dividends on our Series B
Convertible Preferred Stock, mandatory minimum distributions to
the noncontrolling shareholder in the each of the Presley
Business and Ali Business and capital expenditures.
Capital
Expenditures
We presently anticipate that our capital expenditures for 2010
will total approximately $4.0 million. We will also incur
additional expenditures to complete the development of the
Cirque du Soleil Viva ELVIS show. To date, the Company
has incurred expenditures for the development of the show of
$21.5 million. The Company expects to fund the remaining
$4.5 million in the second and third quarters of 2010.
We have announced preliminary plans to re-develop our Graceland
attraction including an expanded visitors center, developing new
attractions and merchandising shops and building a new boutique
convention hotel. This project is conditioned on a number of
factors, including obtaining necessary approvals and concessions
from local and state authorities. Although we have not yet
determined the exact scope, cost, financing plan and timing of
this project, we expect that the redevelopment of Graceland will
take several years and could require a substantial financial
investment by the Company. The Company remains committed to the
Graceland redevelopment and will continue to pursue
opportunities on its own or with third parties.
Future
Acquisitions
We intend to acquire additional businesses that fit our
strategic goals. We expect to finance our future acquisitions of
entertainment related businesses from cash on hand, possible new
credit facilities, additional debt and equity offerings,
issuance of our equity directly to sellers of businesses and
cash flow from operations. However, no assurance can be given
that we will be able to obtain adequate financing to complete
any potential future acquisitions we might identify.
33
Table of Contents
Dividends
Our Series B Convertible Preferred Stock requires payment
of a cash dividend of 8% per annum in quarterly installments. On
an annual basis, our total dividend payment on the Series B
Convertible Preferred Stock is $1.8 million. If we fail to
make our quarterly dividend payments to the holders of the
Series B Convertible Preferred Stock on a timely basis, the
dividend rate increases to 12% and all amounts owed must be paid
within three business days in shares of common stock valued at
the average closing price over the previous 30 consecutive
trading days. After such payment is made, the dividend rate
returns to 8%. All such dividend payments were made on a timely
basis.
We have no intention of paying any cash dividends on our common
stock for the foreseeable future.
Commitments
and Contingencies
There are various lawsuits and claims pending against us and
which we have initiated against others. We believe that any
ultimate liability resulting from these actions or claims will
not have a material adverse effect on our results of operations,
financial condition or liquidity.
Ryan
Seacrest Agreement
On July 7, 2009, the Company entered into two agreements
with Ryan Seacrest, the host of American Idol, and
certain of his affiliates to (i) ensure
Mr. Seacrests availability for three future seasons
of American Idol (years 2010, 2011 and 2012) and
acquire Mr. Seacrests prime time television network
exclusivity for future potential projects during the term of the
agreement, and (ii) obtain the right to use
Mr. Seacrests personal goodwill, merchandising
rights, rights to his name, voice and image, and rights of
publicity and promotion related to American Idol. Under
the terms of the agreements, the Company paid $22.5 million
upon execution of the agreements on July 7, 2009 and will
pay Mr. Seacrest an additional $22.5 million in
monthly installments during the term, for a total guaranteed
amount of $45 million. The Company is in the process of
negotiating with Fox and Fremantle for compensation related to
Mr. Seacrests services on American Idol. The
amounts paid by such parties will either be paid directly to the
Company or remitted to the Company by Mr. Seacrest. The
Company paid $26.9 million to Mr. Seacrest through
March 31, 2010. The Company will make payments to
Mr. Seacrest of $4.9 million over the remainder of
2010, $6.6 million in 2011 and $6.6 million in 2012.
Simon
Fuller Transaction
Pursuant to the consultancy agreement with Mr. Fuller, we
have engaged Mr. Fuller to provide services, including
executive producer services, in respect of our American
Idol, So You Think You Can Dance and If I Can
Dream programs. In consideration for providing these
services, Mr. Fuller will receive the Creative Consulting
Fee as described in Note 3. For calendar year 2010,
Mr. Fuller will receive $5.0 million as an advance
against the Creative Consulting Fee, $2.5 million of which
was paid in the three months ended March 31, 2010;
$1.25 million is due to be paid in each of the second and
third quarters of 2010. For each year after 2010, subject to
certain conditions, Mr. Fuller will receive, as an annual
advance against the Creative Consulting Fee, $3.0 million
if American Idol remains on the air and $2.0 million
if So You Think You Can Dance remains on the air. In
addition to the aforementioned payment, Mr. Fuller is
receiving an incremental £1.5 million
($2.3 million) in consideration for providing creative and
strategic advice with respect to the overall business of CKX for
the six-month period through July 13, 2010; as of
March 31, 2010, final payment of £0.5 million
($0.8 million) is due to be paid in the second quarter of
2010.
Television
Development Agreement
In March 2010, the Company entered into a three-year development
agreement with a current 19 Entertainment television executive
producer partner whereby the Company will pay advances of future
profits of $2.0 million per year; the 2010 advance was paid
in March 2010. Profits will be split evenly between the producer
and the Company. The agreement expires on December 31, 2012.
34
Table of Contents
Annual
Impairment Review
The Company has recorded a non-cash impairment charge of
$2.2 million as of March 31, 2010 at 19 Entertainment
to fully reduce the carrying amount of goodwill of one of its
subsidiaries as the Company has determined that this business
will be closed. In the three months ended March 31, 2010,
the Company has recognized a non-cash impairment of
$2.6 million at the Graceland Operations segment of the
Presley Business to reduce the carrying amount of buildings as
the Company began to wind-down mode operations of a rental
property in advance of being prepared for an alternative use in
the future.
The Company will perform its annual impairment analysis in the
fourth quarter. Management continues to review the businesses
currently conducted by 19 Entertainment in order to focus its
efforts on its established brands. Therefore, additional
impairment charges may be recorded in 2010. The amount of such
charges will depend on a number of factors including the final
determination of which businesses the Company will exit, the
amount, if any, of sales proceeds generated or liabilities
assumed as part of the sale or transfer of businesses and the
ultimate scope of the reductions in selling, general and
administrative expenses.
Critical
Accounting Policies
During the three months ended March 31, 2010, there have
been no significant changes related to the Companys
critical accounting policies and estimates as disclosed in the
Companys
Form 10-K
for the year ended December 31, 2009.
Impact
of Recently Issued Accounting Standards
In June 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of Financial Assets an
amendment of FASB No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, which was later superseded by the FASB
Codification and included in ASC 860. This standard amends the
criteria for a transfer of a financial asset to be accounted for
as a sale, redefines a participating interest for transfers of
portions of financial assets, eliminates the qualifying
special-purpose entity concept and provides for new disclosures.
This standard is effective for the Company beginning in 2010 and
has not had a material impact on the Companys financial
statements.
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R), which
was later superseded by the FASB Codification and included in
ASC 810. The provisions of ASC 810 amends the
consolidation guidance for variable interest entities
(VIE) by requiring an on-going qualitative
assessment of which entity has the power to direct matters that
most significantly impact the activities of a VIE and has the
obligation to absorb losses or benefits that could be
potentially significant to the VIE. This standard is effective
for the Company beginning in 2010 and has not had a material
impact on the Companys financial statements.
In October 2009, the FASB issued Accounting Standards Update
(ASU)
2009-13 on
multiple-deliverable revenue arrangements. ASU
2009-13
addresses the unit of accounting for arrangements involving
multiple deliverables and addresses how arrangement
consideration should be allocated to the separate units of
accounting. The ASU is effective for fiscal years beginning on
or after June 15, 2010; early adoption is permitted.
Entities can elect to apply the ASU prospectively to new or
materially modified arrangements after its effective date or
retrospectively for all periods presented. The Company does not
expect the adoption to have a material impact on the
Companys financial statements.
Off
Balance Sheet Arrangements
As of March 31, 2010, we did not have any off balance sheet
arrangements as defined in Item 303 (a)(4)(ii) of SEC
Regulation S-K.
Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
We are exposed to market risk arising from changes in market
rates and prices, including movements in foreign currency
exchange rates, interest rates and the market price of our
common stock. To mitigate these risks, we may
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utilize derivative financial instruments, among other
strategies. We do not use derivative financial instruments for
speculative purposes.
Interest
Rate Risk
We had $100.6 million of total debt outstanding at
March 31, 2010, of which $100.0 million was variable
rate debt.
Assuming a hypothetical increase in the Companys variable
interest rate of 100 basis points, our net loss for the
three months ended March 31, 2010 would have increased by
approximately $0.2 million.
Foreign
Exchange Risk
We have significant operations outside the United States,
principally in the United Kingdom. Some of our foreign
operations are conducted in local currencies. As a result, our
financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions
in foreign markets in which we operate.
Assuming a hypothetical weakening of the U.S. dollar
exchange rate with the U.K. pound sterling of 10%, our net loss
for the three months ended March 31, 2010 would have
increased by approximately $0.5 million, reflecting an
excess of U.K. pound sterling denominated operating expenses
over U.K. pound sterling denominated revenue.
As of March 31, 2010, we have not entered into any foreign
currency option contracts or other financial instruments
intended to hedge our exposure to changes in foreign exchange
rates. We intend to continue to monitor our operations outside
the United States and in the future may seek to reduce our
exposure to such fluctuations by entering into foreign currency
option contracts or other hedging arrangements.
19
Entertainment Put Option
In connection with the acquisition of 19 Entertainment, certain
sellers of 19 Entertainment entered into a Put and Call Option
Agreement (as amended on June 8, 2009) that provided
them with certain rights whereby, during a period of 20 business
days beginning March 17, 2011, the Company could exercise a
call right to purchase the common stock of such stockholders at
a price equal to $24.72 per share and these sellers could
exercise a put right to sell the common stock to the Company at
a price equal to $13.18 per share. As described in Exercise of
Amended Call Option above, 534,082 shares remain subject to
the Put and Call Option Agreement.
Item 4. | Controls and Procedures |
Evaluation
of Disclosure Controls and Procedures
Management, with the participation of the Companys senior
executive vice president and director of legal and governmental
affairs, Howard J. Tytel, and its chief financial officer,
Thomas P. Benson, has evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934
Rules 13a-15
(e) or
15d-15 (e))
as of March 31, 2010. Based on this evaluation, the Senior
Executive Vice President and Director of Legal and Governmental
Affairs and the Chief Financial Officer have concluded that, as
of that date, our disclosure controls and procedures were
effective.
Changes
in Internal Controls over Financial Reporting
No changes in internal control over financial reporting have
occurred during the three months ended March 31, 2010 that
have materially affected CKXs internal controls over
financial reporting.
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Table of Contents
Part II
Other Information
Item 1. | Legal Proceedings |
We are subject to certain claims and litigation in the ordinary
course of business. It is the opinion of management that the
outcome of such matters will not have a material adverse effect
on our consolidated financial position, results of operations or
cash flows.
Item 6. | Exhibits |
Exhibit |
||||
No. | Description | |||
31 | .1 | Certification of Principal Executive Officer (Filed herewith). | ||
31 | .2 | Certification of Principal Financial Officer (Filed herewith). | ||
32 | .1 | Section 1350 Certification of Principal Executive Officer (Filed herewith). | ||
32 | .2 | Section 1350 Certification of Principal Financial Officer (Filed herewith). |
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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.
CKX, Inc.
BY: |
/s/ Howard
J. Tytel
|
Name: | Howard J. Tytel |
Senior Executive Vice President, Director
of Legal and Governmental Affairs and
Member of the Office of the Chairman
(Principal Executive Officer)
BY: |
/s/ Thomas
P. Benson
|
Name: | Thomas P. Benson |
Chief Financial Officer, Executive
Vice President and Treasurer
(Principal Accounting Officer)
DATE: May 10, 2010
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INDEX TO
EXHIBITS
Exhibit |
||||
No. | Description | |||
31 | .1 | Certification of Principal Executive Officer. | ||
31 | .2 | Certification of Principal Financial Officer. | ||
32 | .1 | Section 1350 Certification of Principal Executive Officer. | ||
32 | .2 | Section 1350 Certification of Principal Financial Officer. |
39