UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

Commission File No. 000-17436

 

CKX, INC.

(Exact name of Registrant as specified in its charter)

 

 

650 Madison Avenue

New York, New York 10022

(Address of Principal Executive Offices and Zip Code)

 

Registrant’s 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):

 

(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 registrant’s common stock outstanding.

 

 

TABLE OF CONTENTS

 

CKX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

CKX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(amounts in thousands, except share and per share data)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

CKX, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

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:

 

 

The Company’s 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 Company’s businesses. The financial statements included herein should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on March 16, 2010.

 

 

During the three months ended March 31, 2010, there have been no significant changes to the Company’s accounting policies and estimates as disclosed in the Company’s 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 Company’s 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 Company’s 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 Company’s financial statements.

 

 

On January 13, 2010, the Company entered into a series of agreements with Simon Fuller (i) securing Mr. Fuller’s 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. Fuller’s 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 Company’s 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 Company’s 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 CKX’s option to invest in Mr. Fuller’s 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.

 

 

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. Fuller’s new entertainment venture, XIX Entertainment. These changes are expected to substantially reduce 19 Entertainment’s 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 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:

 

 

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.

 

 

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 CKX’s 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 Company’s historical transactions with FXRE can be found in the Company’s 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

 

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 Company’s revenue recognition policy.

 

As a result of the termination of the license agreements on March 9, 2009, following FXRE’s 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.

 

 

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 Company’s 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 show’s 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 Company’s 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 Company’s 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 Company’s 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.

 

 

 

The following table is a reconciliation of the Company’s net income (loss) to comprehensive income (loss) for the three months ended March 31, 2010 (in thousands):

 

 

In 2009 and prior years, foreign currency translation adjustments resulted from the conversion of 19 Entertainment’s 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 Entertainment’s 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 Company’s Form 10-K.

 

 

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 Company’s 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 Company’s 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.

 

The following table shows the reconciliation of the Company’s basic common shares outstanding to the Company’s diluted common shares outstanding for the three months ended March 31, 2009:

 

 

 

Indefinite lived intangible assets as of March 31, 2010 and December 31, 2009 consist of (dollar amounts in thousands):

 

 

Definite lived intangible assets as of March 31, 2010 consist of (dollar amounts in thousands):

 

 

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.

 

Definite lived intangible assets as of December 31, 2009 consist of (dollar amounts in thousands):

 

 

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):

 

 

Goodwill as of March 31, 2010 consists of (dollar amounts in thousands):

 

 

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.

 

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 Fuller’s 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.

 

 

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 Company’s 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 Company’s 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 Company’s 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.

 

 

 

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):

 

 

 

 

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:

 

 

The Company estimates forfeitures based on management’s experience. Due to the Company’s short operating history, the expected volatility is based on the Company’s historical share price volatility, and an analysis of comparable public companies operating in our industry. Also due to the Company’s 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.

 

 

 

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 Company’s 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 Company’s estimated 2010 effective tax rate of 31.8%, a one-time beneficial adjustment for converting the U.K. branch’s 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 Company’s 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 Company’s tax balance sheet position is reflected in net prepaid income taxes. The Company’s uncertain tax positions relate primarily to state, local and foreign tax issues, as well as accounting method issues. The Company’s 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 Company’s 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 Kingdom’s 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.

 

 

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.

 

 

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

 

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. Fuller’s 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. Seacrest’s availability for three future seasons of American Idol (years 2010, 2011 and 2012) and acquire Mr. Seacrest’s prime time television network exclusivity for future potential projects during the term of the agreement, and (ii) obtain the right to use Mr. Seacrest’s 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. Seacrest’s 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 Company’s results of operations, financial condition or liquidity.

 

 

 

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 Company’s 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 Company’s 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.

 

 

Below is a reconciliation of the Company’s OIBDAN to net income (loss):

 

 

 

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. Fuller’s 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. Fuller’s 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

 

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 vendor’s 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.

 

 

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 Company’s 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 management’s 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.

 

 

Management’s 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:

 

 

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. Fuller’s 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. Fuller’s 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 Company’s 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 Company’s 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 CKX’s option to invest in Mr. Fuller’s 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 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. Fuller’s new entertainment venture, XIX Entertainment. These changes are expected to substantially reduce 19 Entertainment’s 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 Entertainment’s 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 CKX’s 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.

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 FXRE’s 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.

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. Seacrest’s availability for three future seasons of American Idol (years 2010, 2011 and 2012) and acquire Mr. Seacrest’s prime time television network exclusivity for future potential projects during the term of the agreement, and (ii) obtain the right to use Mr. Seacrest’s 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. Seacrest’s 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 Entertainment’s 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 Presley’s 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 Presley’s 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

operated in a partnership jointly owned by Cirque du Soleil and the Company. The Company’s 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 show’s 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 Presley’s 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 public’s 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 Ali’s 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 public’s 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

Entertainment’s 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 Company’s 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 Entertainment’s 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

 

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 Entertainment’s 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):

 

 

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 Fuller’s 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 Fuller’s profit share.

 

Other revenue increased $1.8 million, including a $1.2 million contribution from Storm, which was acquired in August 2009.

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 Entertainment’s 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:

 

 

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.

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:

 

 

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.

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 Company’s 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 Company’s estimated 2010 effective tax rate of 31.8%, a one-time beneficial adjustment for converting the U.K. branch’s 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 Company’s 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 Company’s tax balance sheet position is reflected in net prepaid income taxes. The Company’s uncertain tax positions relate primarily to state, local and foreign tax issues, as well as accounting method issues. The Company’s 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 Company’s 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 Kingdom’s 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 Company’s 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.

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 Company’s 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.

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. Seacrest’s availability for three future seasons of American Idol (years 2010, 2011 and 2012) and acquire Mr. Seacrest’s prime time television network exclusivity for future potential projects during the term of the agreement, and (ii) obtain the right to use Mr. Seacrest’s 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. Seacrest’s 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.

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 Company’s critical accounting policies and estimates as disclosed in the Company’s 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 Company’s 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 Company’s 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 Company’s 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.

 

 

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

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 Company’s 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.

 

 

Evaluation of Disclosure Controls and Procedures

 

Management, with the participation of the Company’s 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 Company’s 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 CKX’s internal controls over financial reporting.

 

 

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.

 

 

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.

 

Senior Executive Vice President, Director

of Legal and Governmental Affairs and

Member of the Office of the Chairman

(Principal Executive Officer)

 

Chief Financial Officer, Executive

Vice President and Treasurer

(Principal Accounting Officer)

 

DATE: May 10, 2010

INDEX TO EXHIBITS