Attached files
file | filename |
---|---|
EX-31.2 - EX-31.2 - CKX, Inc. | y91184exv31w2.htm |
EX-32.1 - EX-32.1 - CKX, Inc. | y91184exv32w1.htm |
EX-31.1 - EX-31.1 - CKX, Inc. | y91184exv31w1.htm |
EX-32.2 - EX-32.2 - CKX, Inc. | y91184exv32w2.htm |
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2011 | ||
OR
|
||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File
No. 001-34794
CKX, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 27-0118168 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
650 Madison Avenue
New York, New York 10022
(Address of principal executive offices and Zip Code)
Registrants Telephone Number, Including Area Code:
(212) 838-3100
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
|
o | Accelerated filer | þ | |||||
Non-accelerated filer
|
o | (Do not check if a smaller reporting company) | Smaller reporting company | o |
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 5, 2011 there were 92,613,473 shares of the
registrants common stock outstanding.
TABLE OF
CONTENTS
PART I
|
FINANCIAL INFORMATION
|
|||||||
Item 1
|
Financial Statements
|
|||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
19 | ||||||||
31 | ||||||||
32 | ||||||||
PART II | ||||||||
33 | ||||||||
33 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
CKX,
INC.
(amounts
in thousands, except share data)
March 31, |
December 31, |
|||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 98,034 | $ | 109,457 | ||||
Receivables, net of allowance for doubtful accounts of $1,215 at
March 31, 2011 and $1,102 at December 31, 2010
|
46,635 | 32,335 | ||||||
Inventories, net of allowance for obsolescence of $603 at
March 31, 2011 and $590 at December 31, 2010
|
1,680 | 1,689 | ||||||
Prepaid expenses and other current assets
|
22,687 | 25,282 | ||||||
Deferred tax assets
|
2,195 | 2,477 | ||||||
Total current assets
|
171,231 | 171,240 | ||||||
Property and equipment net
|
46,419 | 45,035 | ||||||
Receivables
|
986 | 2,074 | ||||||
Other assets
|
35,909 | 37,881 | ||||||
Goodwill
|
111,374 | 111,374 | ||||||
Other intangible assets net
|
84,537 | 88,136 | ||||||
Deferred tax assets
|
5,165 | 5,093 | ||||||
TOTAL ASSETS
|
$ | 455,621 | $ | 460,833 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 21,278 | $ | 22,174 | ||||
Accrued expenses
|
19,494 | 25,615 | ||||||
Current portion of long-term debt
|
100,132 | 100,515 | ||||||
Income tax payable
|
1,324 | 741 | ||||||
Deferred revenue
|
15,937 | 13,138 | ||||||
Total current liabilities
|
158,165 | 162,183 | ||||||
Long-term liabilities:
|
||||||||
Long-term debt
|
| 131 | ||||||
Deferred revenue
|
1,590 | 2,062 | ||||||
Other long-term liabilities
|
2,524 | 2,502 | ||||||
Deferred tax liabilities
|
13,151 | 13,856 | ||||||
Total liabilities
|
175,430 | 180,734 | ||||||
Redeemable restricted common stock
537,208 shares outstanding at December 31, 2010
|
| 7,347 | ||||||
Commitments and contingencies (see note 15)
|
||||||||
CKX, Inc. stockholders equity:
|
||||||||
Preferred stock, $0.01 par value, authorized
75,000,000 shares:
|
||||||||
Series B 1,491,817 shares outstanding
|
22,825 | 22,825 | ||||||
Series C 1 share outstanding
|
| | ||||||
Common stock, $0.01 par value: authorized
200,000,000 shares, 97,453,529 shares issued at
March 31, 2011 and 96,898,206 issued at December 31,
2010
|
975 | 969 | ||||||
Additional
paid-in-capital
|
405,894 | 398,257 | ||||||
Accumulated deficit
|
(92,384 | ) | (99,573 | ) | ||||
Common stock in treasury 5,014,646 shares at
March 31, 2011 and 4,477,438 shares at
December 31, 2010
|
(29,727 | ) | (22,647 | ) | ||||
Accumulated other comprehensive loss
|
(32,796 | ) | (32,968 | ) | ||||
CKX, Inc. stockholders equity
|
274,787 | 266,863 | ||||||
Noncontrolling interests
|
5,404 | 5,889 | ||||||
Total equity
|
280,191 | 272,752 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
$ | 455,621 | $ | 460,833 | ||||
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Table of Contents
CKX,
INC.
(amounts
in thousands, except share and per share data)
Three Months |
Three Months |
|||||||
Ended |
Ended |
|||||||
March 31, 2011 | March 31, 2010 | |||||||
Revenue
|
$ | 53,292 | $ | 66,647 | ||||
Operating expenses:
|
||||||||
Cost of sales
|
25,267 | 29,621 | ||||||
Selling, general and administrative expenses
|
10,258 | 18,331 | ||||||
Corporate expenses
|
4,487 | 5,333 | ||||||
Depreciation and amortization
|
4,331 | 5,143 | ||||||
Impairment charges
|
| 4,853 | ||||||
Provision for severance and other restructuring-related costs
|
| 6,118 | ||||||
Other (income) expense
|
(83 | ) | 538 | |||||
Total operating expenses
|
44,260 | 69,937 | ||||||
Operating income (loss)
|
9,032 | (3,290 | ) | |||||
Interest income
|
31 | 50 | ||||||
Interest expense
|
(644 | ) | (867 | ) | ||||
Income (loss) before income taxes and equity in losses of
affiliates
|
8,419 | (4,107 | ) | |||||
Income tax expense
|
757 | 636 | ||||||
Income (loss) before equity in losses of affiliates
|
7,662 | (4,743 | ) | |||||
Equity in losses of affiliates
|
(88 | ) | (12 | ) | ||||
Net income (loss)
|
7,574 | (4,755 | ) | |||||
Dividends on preferred stock
|
(456 | ) | (456 | ) | ||||
Net income (loss) available to CKX, Inc.
|
7,118 | (5,211 | ) | |||||
Net loss attributable to noncontrolling interests
|
71 | 178 | ||||||
Net income (loss) attributable to CKX, Inc.
|
$ | 7,189 | $ | (5,033 | ) | |||
Income (loss) per share:
|
||||||||
Basic income (loss) per share
|
$ | 0.08 | $ | (0.05 | ) | |||
Diluted income (loss) per share
|
$ | 0.08 | $ | (0.05 | ) | |||
Average number of common shares outstanding:
|
||||||||
Basic
|
92,922,323 | 92,882,596 | ||||||
Diluted
|
92,922,324 | 92,882,596 |
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
Table of Contents
CKX,
INC
(amounts
in thousands)
Three Months |
Three Months |
|||||||
Ended |
Ended |
|||||||
March 31, 2011 | March 31, 2010 | |||||||
Cash flows from operating activities:
|
||||||||
Net income (loss)
|
$ | 7,574 | $ | (4,755 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
||||||||
Depreciation and amortization
|
4,331 | 5,143 | ||||||
Impairment charges
|
| 4,853 | ||||||
Non-cash provision for severance and other restructuring-related
costs
|
| 552 | ||||||
Unrealized foreign currency losses (gains)
|
(49 | ) | 292 | |||||
Share-based payments
|
293 | 564 | ||||||
Equity in losses of affiliates, net of cash received
|
88 | 12 | ||||||
Deferred income taxes
|
(517 | ) | (439 | ) | ||||
Amortization of deferred financing fees
|
178 | 359 | ||||||
Provision for accounts receivable allowance
|
122 | (3 | ) | |||||
Provision for inventory allowance
|
21 | 22 | ||||||
Changes in operating assets and liabilities:
|
||||||||
Receivables
|
(11,833 | ) | (9,536 | ) | ||||
Prepaid income taxes
|
| (2,136 | ) | |||||
Other assets
|
205 | 10,918 | ||||||
Accounts payable and accrued expenses
|
(7,017 | ) | (15,990 | ) | ||||
Deferred revenue
|
2,327 | 1,787 | ||||||
Income taxes payable
|
583 | | ||||||
Other
|
2,605 | (1,222 | ) | |||||
Net cash used in operating activities
|
(1,089 | ) | (9,579 | ) | ||||
Cash flows from investing activities:
|
||||||||
Purchases of property and equipment
|
(1,951 | ) | (659 | ) | ||||
Net cash used in investing activities
|
(1,951 | ) | (659 | ) | ||||
Cash flows from financing activities:
|
||||||||
Purchase of redeemable restricted common stock
|
(7,081 | ) | | |||||
Distributions to noncontrolling interest shareholders
|
(425 | ) | (425 | ) | ||||
Principal payments on debt
|
(515 | ) | (483 | ) | ||||
Dividends paid on preferred stock
|
(456 | ) | | |||||
Net cash used in financing activities
|
(8,477 | ) | (908 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents
|
94 | (389 | ) | |||||
Net decrease in cash and cash equivalents
|
(11,423 | ) | (11,535 | ) | ||||
Cash and cash equivalents beginning of period
|
109,457 | 66,587 | ||||||
Cash and cash equivalents end of period
|
$ | 98,034 | $ | 55,052 | ||||
Supplemental cash flow data:
|
||||||||
Cash paid during the period for:
|
||||||||
Interest
|
$ | 482 | $ | 561 | ||||
Income taxes, net of refunds received
|
1,024 | 3,094 | ||||||
Supplemental Cash Flow Information
|
||||||||
The Company had the following non-cash investing and financing
activities:
|
||||||||
Accrued but unpaid Series B Convertible Preferred Stock
Dividends
|
$ | 456 | $ | 456 | ||||
Accrued but unpaid deferred financing fees
|
936 | |
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
Table of Contents
CKX,
INC.
FINANCIAL
STATEMENTS
1. | Overview |
General
CKX, Inc. (the Company or CKX) is
engaged in the ownership, development and commercial utilization
of entertainment content. As more fully described below, our
primary assets and operations include:
| 19 Entertainment Limited (19 Entertainment), which owns proprietary rights to the IDOLS and So You Think You Can Dance television brands, both of which air in the United States, and, together with local adaptations of the format, around the world; | |
| An 85% ownership interest in Elvis Presley Enterprises (the Presley Business or EPE), which owns the rights to the name, image and likeness of Elvis Presley, certain music and other intellectual property created by or related to Elvis Presley and the operations of Graceland and has partnered with Cirque du Soleil for the Viva ELVIS show in Las Vegas, Nevada; and | |
| An 80% ownership interest in Muhammad Ali Enterprises (the Ali Business), which owns the rights to the name, image and likeness of, as well as certain trademarks and other intellectual property related to Muhammad Ali. |
The owners of the noncontrolling interests in Elvis Presley
Enterprises and Muhammad Ali Enterprises are entitled to certain
future distributions and have other contractual rights.
The Companys existing properties generate recurring
revenue across multiple entertainment platforms, including music
and television; licensing and merchandising; talent management;
themed attractions and touring/live events.
The financial information in this report for the three months
ended March 31, 2011 and 2010 and as of March 31, 2011
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, 2011 and 2010 are not necessarily indicative of
the results to be expected for the full year due to the seasonal
nature of some of the Companys businesses. The financial
statements included herein should be read in conjunction with
the financial statements and notes included in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2010 filed with the
Securities and Exchange Commission on March 9, 2011.
Certain reclassifications have been made to the prior
periods consolidated financial statements to conform to
the current year presentation.
First
Quarter 2010 Adjustment
In preparing its consolidated financial statements for the
quarter ended June 30, 2010, the Company identified an
over-accrual of its first quarter 2010 revenue. The over-accrual
of revenue resulted from a misinterpretation of the contractual
terms related to season 9 of American Idol. Management
recorded an adjustment to reverse the over-accrual of revenue
from the first quarter of 2010 in its financial results for the
second quarter of 2010. The adjustment recorded during the
second quarter resulted in; (a) reduction of revenue of
$2.3 million, (b) a reduction of cost of sales by
$0.2 million, (c) reductions in operating income,
EBITDA and pre-tax income of $2.1 million and
(d) reduction in net income of $1.4 million. The
impact of this adjustment was determined not to have a material
impact on either the first quarter or second quarter reported
financial results.
2. | Accounting Policies |
During the three months ended March 31, 2011, there have
been no significant changes to the Companys accounting
policies and estimates as disclosed in the Companys
Form 10-K
for the year ended December 31, 2010.
6
Table of Contents
Recently
Issued Accounting Standards
In October 2009 the Financial Accounting Standards Board
(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 was effective for fiscal years beginning on
or after June 15, 2010; early adoption was permitted. This
standard was effective for the Company beginning in 2011 and did
not have a material impact on the Companys financial
statements.
3. | Transactions with Simon Fuller and Restructuring of 19 Entertainment |
On January 13, 2010, the Company entered into a series of
agreements with Simon Fuller securing Mr. Fullers
long-term creative services as a consultant and agreeing to the
termination of Mr. Fullers employment with
19 Entertainment. Upon entering into these agreements,
Mr. Fuller resigned as a director of CKX and as
Chief Executive Officer of 19 Entertainment and received
certain associated cash and non-cash separation payments of
$5.6 million, $4.4 million of which was included in
the provision for severance and other restructuring-related
charges recorded in the three months ended March 31, 2010.
In consideration for providing consulting services,
Mr. Fuller receives 10% of the Companys net profits
from each of the Companys IDOLS and So You Think
You Can Dance programs for the life of the programs as long
as Mr. Fuller continues to provide consulting services with
respect to such programs. For calendar year 2010,
Mr. Fuller received $5.0 million as an advance against
the consulting fee, which was paid in the year ended
December 31, 2010; a balance for 2010 of $4.1 million
which was accrued for at December 31, 2010 was paid in
April 2011. For each year after 2010, subject to certain
conditions, Mr. Fuller will receive, as an annual advance
against the 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 within each year from the consulting fee payable to
Mr. Fuller. For the three months ended March 31, 2011
and 2010, the Company recorded $1.9 million and
$2.7 million, respectively, of the consulting fee to cost
of sales.
In connection with the transaction with Simon Fuller described
above, management undertook a review of each of the businesses
conducted by 19 Entertainment and is now focusing its efforts
principally around its established IDOLS and So You
Think You Can Dance brands. Following this review,
management exited most of the other businesses within 19
Entertainment in 2010, including several businesses that were
sold to XIX Management Limited, a company owned and controlled
by Mr. Fuller.
In connection with the actions described above, for the three
months ended March 31, 2010, the Company incurred severance
and other restructuring-related costs of $1.7 million,
including charges related to the closure of several offices. The
Company recorded a total of $19.3 million of severance and
restructuring-related costs for the full year ended
December 31, 2010, including the costs for the separation
with Simon Fuller other than the ongoing consulting fee. Certain
management, legal and accounting functions at 19 Entertainment
were absorbed by the Companys corporate staff.
7
Table of Contents
The following table outlines the details of the components of
the restructuring charges, including costs for the transaction
with Simon Fuller, and the payments made in the three months
ended March 31, 2010:
Payments/Vesting |
||||||||||||
Provision for the |
During the Three |
|||||||||||
Three Months Ended |
Months Ended |
Net Liability as of |
||||||||||
March 31, 2010 | March 31, 2010 | March 31, 2010 | ||||||||||
Severance and other employee-related termination costs
|
$ | 1,369 | $ | (68 | ) | $ | 1,301 | |||||
Costs associated with transaction with Simon Fuller
|
4,417 | (4,794 | ) | (377 | ) | |||||||
Costs associated with termination of leases related to office
closures
|
129 | | 129 | |||||||||
Other
|
203 | (126 | ) | 77 | ||||||||
$ | 6,118 | $ | (4,988 | ) | $ | 1,130 | ||||||
The Company did not record any restructuring charges in the
three months ended March 31, 2011. The following table
details the payments and adjustments made in the three months
ended March 31, 2011 and the balances included in accrued
expenses in the accompanying condensed consolidated balance
sheet as of March 31, 2011:
Payments/Adjustments |
||||||||||||
Liability as of |
During the Three |
|||||||||||
Year Ended |
Months Ended |
Net Liability as of |
||||||||||
January 1, 2011 | March 31, 2011 | March 31, 2011 | ||||||||||
Severance and other employee-related termination costs
|
$ | 406 | $ | 103 | $ | 509 | ||||||
Costs associated with termination of leases related to office
closures
|
1,522 | (631 | ) | 891 | ||||||||
Costs associated with termination of projects and ventures
|
151 | (107 | ) | 44 | ||||||||
Other
|
97 | (74 | ) | 23 | ||||||||
$ | 2,176 | $ | (709 | ) | $ | 1,467 | ||||||
4. | Exercise of Amended 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 held by 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 1,675,296 of the shares issued in
connection with the 19 Entertainment acquisition, 1,507,135 of
which were owned by Simon Fuller.
Immediately following execution of the amendment to the Put and
Call Option Agreement noted above, the Company exercised its
call option with respect to 1,138,088 shares at a reduced
call price of $13.18 per share and paid to Mr. Fuller a
gross purchase price of $15.0 million. Following this
transaction, 537,208 shares remained subject to the Put and
Call Option Agreement; the sellers exercised their put option on
March 25, 2011 with respect to the remaining shares subject
to the Put and Call Option Agreement and the Company paid to the
sellers a gross purchase price of $7.1 million.
8
Table of Contents
5. | Executive Separation Costs |
Robert F.X. Sillerman resigned as Chairman and Chief Executive
Officer of the Company and from the Companys board of
directors, effective as of May 6, 2010. In connection with
his resignation, Mr. Sillerman and the Company entered into
a separation and consulting agreement under which
Mr. Sillerman received a cash severance payment of
$3.4 million.
Mr. Sillerman and the Company also entered into a
non-exclusive consulting arrangement whereby Mr. Sillerman
receives a consulting fee of $1.0 million in consideration
for his continued availability to promote the best interests of
the Company and its subsidiaries on a monthly basis for a
one-year period ending on May 30, 2011. In addition to the
consulting fee, Mr. Sillerman is being reimbursed for the
monthly cost of certain business expenses through
December 31, 2011. The Company also recorded
$0.9 million in 2010 related to a consulting agreement with
a former executive as the Company has determined that it will
not require any services in the future under this agreement. The
Company recorded a total of $7.7 million of executive
separation costs for the full year ended December 31, 2010.
The following table outlines the details of the balances of the
executive separation costs included in accrued expenses in the
accompanying condensed consolidated balance sheets and the
payments made in the three months ended March 31, 2011:
Payments |
||||||||||||
During the Three |
||||||||||||
Liability as of |
Months Ended |
Liability as of |
||||||||||
January 1, 2011 | March 31, 2011 | March 31, 2011 | ||||||||||
Consulting costs
|
$ | 1,153 | $ | (338 | ) | $ | 815 | |||||
Office and other administrative costs
|
300 | (75 | ) | 225 | ||||||||
Health insurance costs
|
186 | (8 | ) | 178 | ||||||||
$ | 1,639 | $ | (421 | ) | $ | 1,218 | ||||||
6. | Elvis Presley Cirque du Soleil Show |
Together with Cirque du Soleil and MGM MIRAGE, the Company
launched Viva ELVIS, a permanent live theatrical Cirque
du Soleil show based on the life and music of Elvis Presley. The
show, which is being presented at the ARIA Resort and Casino in
CityCenter on the strip in Las Vegas, Nevada, opened in February
2010. The show was developed and is operated in a partnership
jointly owned by Cirque du Soleil and the Company which has been
determined by the Company to be a variable interest entity. The
Company is not, for accounting purposes, the primary beneficiary
of the partnership because it does not have the power to direct
the activities of the partnership that most significantly impact
its economic performance and therefore accounts for its
investment under the equity method of accounting. The
Companys maximum exposure to loss as a result of its
involvement with the partnership is its funding for the show,
which is its investment in the partnership. The Company and
Cirque du Soleil each paid one-half ($26.4 million) of the
creative development and production costs of the show. These
development costs are being amortized over five years by the
partnership.
Additionally, another entity was created by Cirque du Soleil and
the Company to hold the intellectual property related to the
show, to collect royalty-related revenue based on the
profitability of the show and to distribute royalty payments to
the various rights holders of the shows intellectual
property. The Company licenses the Elvis Presley intellectual
property to this partnership. 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 also recognized 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 $1.4 million and
$1.8 million, respectively, and cost of sales of
$0.8 million and $0.9 million, respectively, in the
three months ended March 31, 2011 and 2010 related to
royalties on the Companys intellectual property from the
partnership with Cirque du Soleil for Viva ELVIS. The
Company recorded
9
Table of Contents
a loss of $0.1 million from unconsolidated affiliates for
the three months ended March 31, 2011 and a loss of
$0.5 million from unconsolidated affiliates for the three
months ended March 31, 2010 related to the Companys
investment in the Cirque du Soleil operating partnership.
Additionally, the Company recorded a return of production
capital of $1.5 million and $1.8 million,
respectively, in the three months ended March 31, 2011 and
2010. The Companys net investment in the partnership with
Cirque du Soleil of $19.1 million at March 31, 2011 is
recorded in the Presley Business Royalties and
Licensing segment within other assets on the accompanying
condensed consolidated balance sheet.
7. | Comprehensive Income (Loss) |
The following table is a reconciliation of the Companys
net income (loss) to comprehensive income (loss) for the three
months ended March 31, 2010 (in thousands):
Three Months Ended |
||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net income (loss)
|
$ | 7,574 | $ | (4,755 | ) | |||
Foreign currency translation adjustments
|
172 | (200 | ) | |||||
7,746 | (4,955 | ) | ||||||
Net loss attributable to noncontrolling interests
|
71 | 178 | ||||||
Comprehensive income (loss)
|
$ | 7,817 | $ | (4,777 | ) | |||
In the three months ended March 31, 2011 and 2010, foreign
currency adjustments resulted primarily from foreign currency
movements related to a subsidiary at 19 Entertainment which
operates in the U.K. and uses U.K. sterling as its functional
currency.
8. | Earnings Per Share/Common Shares Outstanding |
Basic earnings per share is calculated by dividing net income
attributable to CKX, Inc. before dividends on preferred stock by
the weighted-average number of shares outstanding during the
period. Diluted earnings per share includes the determinants of
basic earnings per share and, in addition, gives effect to
potentially dilutive common shares, including one incremental
share for the assumed exercise of the Companys
series C preferred stock. The diluted earnings per share
calculations exclude the impact of the conversion of
1,491,817 shares of Series B Convertible Preferred
shares and the impact of employee share-based stock plan awards
that would be anti-dilutive. 2,901,000 shares were excluded
from the calculation of diluted earnings per share for the three
months ended March 31, 2011 due to stock plan awards that
were anti-dilutive. For the three months ended March 31,
2010, diluted earnings per share is the same as basic earnings
per share as a result of the Companys net loss in the
prior period.
The following table shows the reconciliation of the
Companys basic common shares outstanding to the
Companys diluted common shares outstanding for the three
months ended March 31, 2011:
Weighted average basic common shares outstanding
|
92,922,323 | |||
Incremental shares for assumed exercise of Series C
preferred stock, restricted stock and stock options
|
1 | |||
Weighted average diluted common shares outstanding
|
92,922,324 | |||
10
Table of Contents
9. | Intangible Assets and Goodwill |
Indefinite lived intangible assets as of March 31, 2011 and
December 31, 2010 consist of (dollar amounts in thousands):
Presley trademarks, publicity rights and other intellectual
property
|
$ | 38,165 | ||
Ali trademarks, publicity rights and other intellectual property
|
11,700 | |||
$ | 49,865 | |||
Definite lived intangible assets as of March 31, 2011
consist of (dollar amounts in thousands):
Weighted |
||||||||||||||||
Average |
||||||||||||||||
Remaining |
Gross |
Net |
||||||||||||||
Useful Life |
Carrying |
Accumulated |
Carrying |
|||||||||||||
(in years) | Amount | Amortization | Amount | |||||||||||||
Presley record, music publishing, film and video rights
|
8.8 | $ | 28,900 | $ | (11,728 | ) | $ | 17,172 | ||||||||
Other Presley intangible assets
|
10.9 | 13,622 | (8,128 | ) | 5,494 | |||||||||||
19 Entertainment IDOLS television programming, merchandising and
sponsorship relationships
|
1.0 | 64,517 | (55,141 | ) | 9,376 | |||||||||||
19 Entertainment other artist management, recording,
merchandising, sponsorship and model relationships
|
1.3 | 18,116 | (15,883 | ) | 2,233 | |||||||||||
MBST artist contracts, profit participation rights and other
intangible assets
|
2.4 | 4,270 | (3,873 | ) | 397 | |||||||||||
$ | 129,425 | $ | (94,753 | ) | $ | 34,672 | ||||||||||
The gross carrying amount of intangible assets of
$129.4 million as of March 31, 2011 in the table above
differs from the amount of $129.3 million as of
December 31, 2010 in the table below due to foreign
currency movements.
Definite lived intangible assets as of December 31, 2010
consist of (dollar amounts in thousands):
Gross |
Net |
|||||||||||
Carrying |
Accumulated |
Carrying |
||||||||||
Amount | Amortization | Amount | ||||||||||
Presley record, music publishing, film and video rights
|
$ | 28,900 | $ | (11,242 | ) | $ | 17,658 | |||||
Other Presley intangible assets
|
13,622 | (7,812 | ) | 5,810 | ||||||||
19 Entertainment IDOLS television programming, merchandising and
sponsorship relationships
|
64,517 | (52,798 | ) | 11,719 | ||||||||
19 Entertainment other artist management, recording,
merchandising, sponsorship and model relationships
|
17,954 | (15,313 | ) | 2,641 | ||||||||
MBST artist contracts, profit participation rights and other
intangible assets
|
4,270 | (3,827 | ) | 443 | ||||||||
$ | 129,263 | $ | (90,992 | ) | $ | 38,271 | ||||||
Amortization expense for definite lived intangible assets was
$3.7 million and $4.4 million for the three months
ended March 31, 2011 and 2010, respectively. At
March 31, 2011, the projected future amortization expense
for
11
Table of Contents
definite lived intangible assets, assuming no further
acquisitions or dispositions, is as follows (dollar amounts in
thousands):
For the nine months ending December 31, 2011
|
$ | 10,200 | ||
For the years ending December 31, 2012
|
5,800 | |||
2013
|
3,100 | |||
2014
|
2,900 | |||
2015
|
2,100 |
Goodwill as of March 31, 2011 and December 31, 2010
consists of (dollar amounts in thousands):
Presley royalties and licensing
|
$ | 14,413 | ||
Presley Graceland operations
|
10,166 | |||
19 Entertainment
|
86,795 | |||
Total
|
$ | 111,374 | ||
Following a review of each of the businesses conducted by 19
Entertainment in 2010, the Company determined to focus its
efforts principally around its established IDOLS and
So You Think You Can Dance brands and to exit most of the
other businesses within 19 Entertainment. These actions were a
triggering event and the Company therefore evaluated the 19
Entertainment goodwill and intangible assets for impairment. As
a result of this review, a non-cash impairment charge of
$2.2 million was recognized in the three months ended
March 31, 2010 to fully reduce the carrying amount of
goodwill of one of its subsidiaries that was closed. No other 19
Entertainment goodwill and intangible assets were impaired.
Additionally, the Company performed annual impairment
assessments of the carrying values of indefinite-lived
intangible assets and goodwill, on October 1, 2010. As a
result, non-cash impairment charges of $17.6 million were
recognized to reduce the carrying amount of the Ali Business
trademarks by $16.5 million and goodwill by
$1.1 million in the year ended December 31, 2010.
Additionally, a non-cash impairment charge of $2.2 million
was recognized to write-off MBSTs remaining goodwill in
the year ended December 31, 2010.
10. | Debt |
At March 31, 2011, the Company had borrowings of
$100.0 million under its revolving credit agreement with
various lenders (the Credit Facility). The Company
had no additional borrowing capacity under the Credit Facility.
Under the Credit Facility, the Company may make Eurodollar
borrowings or base rate borrowings. The $100.0 million
outstanding at March 31, 2011 bears interest at the
Eurodollar rate resulting in an effective annual interest rate
at March 31, 2011 of 1.81% based upon a margin of
150 basis points. The Company was required to repay the
Credit Facility in full on or before May 24, 2011;
therefore, the outstanding principal amount was classified as a
current liability in the accompanying condensed consolidated
balance sheets at March 31, 2011 and December 31,
2010. The Credit Facility was amended and restated on
April 15, 2011 (Amended Credit
Facility see below).
The Credit Facility contains covenants that regulate the
Companys and its subsidiaries incurrence of debt,
disposition of property, acquisitions and joint ventures,
payment of cash dividends and capital expenditures. The Company
and its subsidiaries were in compliance with all financial and
non-financial loan covenants as of March 31, 2011.
The fair value of the Companys debt at March 31, 2011
approximates the carrying value.
Amended
Credit Facility
Upon execution of the Amended Credit Facility on April 15,
2011, the Company was required to pay down a permanent reduction
of commitments in an aggregate principal amount of
$40.0 million, which reduced the total outstanding balance
and maximum borrowing capacity to $60.0 million. The
Amended Credit Facility also extends the maturity date of the
loans thereunder such that the Company will be required to repay
in full all amounts
12
Table of Contents
outstanding under the Amended Credit Facility on or before
September 30, 2012. Under the terms of the Amended Credit
Facility, the Company is also required to make quarterly
principal payments of $2.0 million beginning on
June 30, 2011, with the remaining $50.0 million to be
repaid on or before September 30, 2012. Eurodollar loans
under the Amended Credit Facility bear interest at a rate of
LIBOR, plus a margin of 300 basis points. Alternatively,
base rate loans under the Amended Credit Facility bear interest
at a rate equal to the greater of (i) the prime rate,
(ii) the federal funds rate, plus 50 basis points or
(iii) the Eurodollar rate for a Eurodollar loan with a
one-month interest period plus 100 basis points, in each
case, plus a margin of 200 basis points. The interest rates
in the Amended Credit Facility were increased from those in the
original credit facility, reflecting changes in market
conditions. The effective annual interest rate as of
April 15, 2011 under the Amended Credit Facility is 3.28%.
The Amended Credit Facility contains certain financial
covenants, including a maximum Leverage Ratio of 2.0 to 1.0,
which is more restrictive than the ratio contained in the
original credit facility, and a minimum EBITDA (as defined in
the Amended Credit Facility) to interest expense ratio. The
Amended Credit Facility contains affirmative and negative
covenants applicable to the Company and its subsidiaries,
including but not limited to restrictions on incurrence of debt,
liens, assets sales and other dispositions, acquisitions,
investments and joint ventures, payments of cash dividends on
common stock and capital expenditures.
Deferred financing fees for the new Amended Credit Facility of
$0.9 million are included in other assets on the
accompanying condensed consolidated balance sheet at
March 31, 2011 and are being amortized through
September 30, 2012, the expiration date of the Amended
Credit Facility.
11. | Equity |
Changes in stockholders equity attributable to CKX, Inc.
and noncontrolling interests for the three months ended
March 31, 2011 and 2010 are as follows (in thousands):
Noncontrolling |
||||||||||||
CKX, Inc. | Interests | Total | ||||||||||
Balance at January 1, 2011
|
$ | 266,863 | $ | 5,889 | $ | 272,752 | ||||||
Net income (loss)
|
7,645 | (71 | ) | 7,574 | ||||||||
Distributions to noncontrolling interest shareholders
|
| (425 | ) | (425 | ) | |||||||
Series B preferred dividends
|
(456 | ) | | (456 | ) | |||||||
Other comprehensive income
|
172 | | 172 | |||||||||
Non-cash compensation and other
|
563 | 11 | 574 | |||||||||
Balance at March 31, 2011
|
$ | 274,787 | $ | 5,404 | $ | 280,191 | ||||||
Noncontrolling |
||||||||||||
CKX, Inc. | Interests | Total | ||||||||||
Balance at January 1, 2010
|
$ | 278,734 | $ | 6,241 | $ | 284,975 | ||||||
Net loss
|
(4,577 | ) | (178 | ) | (4,755 | ) | ||||||
Distributions/distributions payable to noncontrolling interest
shareholders
|
| (425 | ) | (425 | ) | |||||||
Series B preferred dividends
|
(456 | ) | | (456 | ) | |||||||
Other comprehensive loss
|
(200 | ) | | (200 | ) | |||||||
Non-cash compensation and other
|
1,083 | (36 | ) | 1,047 | ||||||||
Balance at March 31, 2010
|
$ | 274,584 | $ | 5,602 | $ | 280,186 | ||||||
12. | Share-Based Payments |
Share-based compensation expense was $0.3 million and
$0.6 million for the three months ended March 31, 2011
and 2010, respectively.
During the three months ended March 31, 2011, the Company
granted 320,000 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
13
Table of Contents
the date of grant and were granted with an exercise price equal
to the weighted average share price of the underlying common
stock on the date of grant ($3.61). The weighted average fair
value of the grants was $1.79 per option. Compensation expense
is being recognized ratably over the vesting period, assuming
25%-40% of the options granted will not vest. The vesting
assumption depends on the specific employee or group of
employees granted options. The following assumptions were used
in valuing the stock options granted during the three months
ended March 31, 2011:
Weighted average risk-free average interest rate
|
2.7 | % | ||
Volatility
|
46.6 | % | ||
Expected life (years)
|
6.5 | |||
Dividend yield
|
0.0 | % |
The Company estimates forfeitures based on managements
experience. Due to the Companys short operating history of
approximately six years, the expected volatility is based on the
Companys historical share price volatility, and an
analysis of comparable public companies operating in our
industry. Also due to the Companys short operating
history, the Company estimates the expected life of each option
granted by taking the average of the minimum and maximum life
for each vesting tranche. The Company calculated a risk-free
rate based upon the rates on five and ten year treasury notes at
the dates of grant.
13. | Income Taxes |
In calculating the provision for income taxes on an interim
basis, the Company uses an estimate of the annual effective tax
rate based upon the facts and circumstances known at the time.
The Companys effective tax rate is based on expected
income, statutory rates and permanent differences applicable to
the Company in the various jurisdictions in which the Company
operates.
For the three months ended March 31, 2011, the Company
recorded a provision for income taxes of $0.8 million,
reflecting the Companys estimated 2011 effective tax rate
of 27.3%, offset by a one-time beneficial adjustment for the
finalization of the 2010
U.S.-U.K.
transfer pricing methodology.
For the three months ended March 31, 2010, the Company
recorded a provision for income taxes of $0.6 million,
reflecting the Companys estimated 2010 effective tax rate
of 31.8%, a one-time beneficial adjustment for converting the
U.K. branchs functional currency from the U.K. pound
sterling to the U.S. dollar and a one-time benefit
resulting from the reorganization of 19 Entertainment, offset by
a one-time detriment relating to the 2006 IRS audit and a
one-time detriment relating to tax not receiving benefit of the
impairment charges.
The decrease in the 2011 effective tax rate relates primarily to
the Company utilizing some of its foreign tax credit
carryforwards, which are fully reserved.
The Companys uncertain tax positions relate primarily to
state, local and foreign tax issues, as well as accounting
method issues. The Companys uncertain tax positions,
including interest and penalties, are reflected in net income
taxes payable. The Company does not expect any material changes
to the estimated amount of liability associated with its
uncertain tax positions through March 31, 2012.
The Company generally recognizes accrued interest and penalties
related to uncertain tax positions through income tax expense.
As of March 31, 2011, the Company had approximately
$1.3 million accrued for interest and penalties.
Open tax years related to federal, state and local filings are
for the years ended December 31, 2007, through 2010. The
Internal Revenue Service is in the process of auditing the
Companys tax year ended December 31, 2007. France is
in the process of auditing the business activities of 19
Entertainment Limited for the years ending December 31,
2003 through December 31, 2008. The United Kingdoms
Revenue & Customs is in the process of reviewing the
19 Entertainment Ltd. UK groups tax year ended
December 31, 2008.
14
Table of Contents
14. | Property and Equipment Impairment |
The Presley Business recognized a non-cash impairment of
$2.6 million in the three months ended March 31, 2010
to reduce the carrying amount of buildings for a rental property
that it owns which began wind-down operations in advance of
being prepared for an alternative use in the future. The charge
is recorded in the Graceland Operations operating segment.
15. | Commitments and Contingencies |
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. Under the terms of the agreements,
the Company paid $22.5 million upon execution of the
agreements on July 7, 2009 and is paying Mr. Seacrest
an additional $22.5 million in monthly installments during
the term, for a total guaranteed amount of $45.0 million.
The Company and Fox agreed to a fee arrangement of
$5.0 million for Mr. Seacrests services as host
of American Idol for each of the 2010, 2011 and 2012
seasons. The Company therefore expects to be responsible for a
net amount of $30.0 million of the original
$45.0 million guaranteed amount. The Company expects to
receive payment for compensation related to the 2011 season in
the first half of 2011 and has recognized $3.1 million of
revenue in the first quarter of 2011 and will recognize
$1.9 million of revenue in the second quarter of 2011 based
upon the hours broadcast over the course of the broadcast
season. The Company received payment for compensation related to
the 2010 season in November 2010 and recognized
$5.0 million as revenue during the first and second
quarters of 2010.
As of March 31, 2011, the Company has paid
$33.5 million of the total amount due to Mr. Seacrest
with the remaining $11.5 million to be paid in equal
monthly installments through December 2012.
Simon
Fuller Transaction
See Note 3 for a description of commitments under the Simon
Fuller transaction.
Executive
Separation Costs
See Note 5 for a description of commitments related to the
agreements with Robert F.X. Sillerman.
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 2011 advance was paid
in January 2011 and will be expensed over the year in 2011 and
the 2010 advance was paid in March 2010 and expensed in 2010.
After the Company recoups its investment, profits will be split
evenly between the producer and the Company. The agreement
expires on December 31, 2012. The Company also pays certain
operating costs.
MBST
In connection with the acquisition of MBST, the sellers were
entitled to receive an additional 150,000 shares of common
stock upon satisfaction of certain performance thresholds over
the five-year period ending August 9, 2010 which the
business did not meet. In connection with an extension of the
employment agreements of the sellers/principals of MBST in the
third quarter of 2010, the terms of the escrow of such shares
were amended to provide that from August 10, 2010 through
August 9, 2013, such shares may be released upon a
change of control of the Company or upon a
termination without cause of one of the
sellers/principals.
Contingencies
There are various lawsuits and claims pending against the
Company. The Company believes that any ultimate liability
resulting from these actions or claims will not have a material
adverse effect on the Companys results of operations,
financial condition or liquidity.
15
Table of Contents
16. | Segment Information |
The Company currently has four reportable segments: Presley
Business Royalties and Licensing, Presley
Business Graceland Operations, 19 Entertainment and
the Ali Business. These designations have been made as the
discrete operating results of these segments are reviewed by the
Companys chief operating decision maker to assess
performance and make operating decisions.
The Company evaluates its operating performance based on several
factors, including a financial measure of operating income
before non-cash depreciation of tangible assets and non-cash
amortization of intangible assets and non-cash compensation
(which the Company refers to as EBITDA). The Company
considers EBITDA to be an important indicator of the operational
strengths and performance of its businesses and the critical
measure the chief operating decision maker (CEO) uses to manage
and evaluate the Companys businesses, including the
ability to provide cash flows to service debt. However, a
limitation of the use of EBITDA as a performance measure is that
it does not reflect the periodic costs of certain capitalized
tangible and intangible assets used in generating revenue in the
Companys businesses or stock-based compensation expense.
Accordingly, EBITDA 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 EBITDA is not a GAAP equivalent measurement.
Presley Business | ||||||||||||||||||||||||
Royalties and |
Graceland |
19 |
||||||||||||||||||||||
Segment Information | Licensing | Operations | Entertainment | Ali Business | Corporate | Total | ||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Three months ended March 31, 2011:
|
||||||||||||||||||||||||
Revenue
|
$ | 4,441 | $ | 5,151 | $ | 42,843 | $ | 857 | $ | | $ | 53,292 | ||||||||||||
Operating income (loss)
|
$ | 1,334 | $ | (1,743 | ) | $ | 13,775 | $ | 349 | $ | (4,683 | ) | $ | 9,032 | ||||||||||
Depreciation and amortization
|
$ | 642 | $ | 593 | $ | 3,021 | $ | 10 | $ | 65 | $ | 4,331 | ||||||||||||
EBITDA
|
$ | 1,990 | $ | (1,133 | ) | $ | 16,854 | $ | 359 | $ | (4,414 | ) | $ | 13,656 | ||||||||||
Three months ended March 31, 2010:
|
||||||||||||||||||||||||
Revenue
|
$ | 5,714 | $ | 6,611 | $ | 53,440 | $ | 882 | $ | | $ | 66,647 | ||||||||||||
Operating income (loss)
|
$ | 2,940 | $ | (4,120 | ) | $ | 2,841 | $ | 530 | $ | (5,481 | ) | $ | (3,290 | ) | |||||||||
Depreciation and amortization
|
$ | 645 | $ | 592 | $ | 3,749 | $ | 9 | $ | 148 | $ | 5,143 | ||||||||||||
EBITDA
|
$ | 3,601 | $ | (870 | ) | $ | 9,479 | $ | 539 | $ | (4,927 | ) | $ | 7,822 | ||||||||||
Asset Information:
|
||||||||||||||||||||||||
Segment assets at March 31, 2011
|
$ | 94,297 | $ | 72,982 | $ | 161,357 | $ | 13,386 | $ | 113,599 | $ | 455,621 | ||||||||||||
Segment assets at December 31, 2010
|
$ | 96,703 | $ | 71,295 | $ | 158,727 | $ | 13,739 | $ | 120,369 | $ | 460,833 | ||||||||||||
16
Table of Contents
Below is a reconciliation of the Companys EBITDA to net
income (loss):
Three Months Ended |
||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(Amounts in thousands) | ||||||||
EBITDA
|
$ | 13,656 | $ | 7,822 | ||||
Depreciation and amortization
|
(4,331 | ) | (5,143 | ) | ||||
Impairment charges
|
| (4,853 | ) | |||||
Non-cash compensation included in severance and other
restructuring-related costs
|
| (552 | ) | |||||
Non-cash compensation
|
(293 | ) | (564 | ) | ||||
Interest income
|
31 | 50 | ||||||
Interest expense
|
(644 | ) | (867 | ) | ||||
Equity in losses of affiliates
|
(88 | ) | (12 | ) | ||||
Income tax expense
|
(757 | ) | (636 | ) | ||||
Net income (loss)
|
$ | 7,574 | $ | (4,755 | ) | |||
17. | Related Party Transactions |
Please see Note 3, Transactions with Simon Fuller and
Restructuring of 19 Entertainment.
Please see Note 5, Executive Separation Costs.
On February 7, 2005, EPE and EPE Holding Corporation, a
wholly-owned subsidiary of the Company, entered into a
consulting agreement with Priscilla Presley securing
Ms. Presleys consulting services in connection with
promotion of the Presley Business. Pursuant to the terms of the
consulting agreement, as amended on July 12, 2010,
Ms. Presley receives an annual consulting fee of $800,000.
The Company subleases from a third party 24,546 square
feet, comprising the entire 15th and 16th 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 Circle
Entertainment, Inc. (formerly known as FX Real Estate and
Entertainment Inc.) (Circle Entertainment),
companies which are affiliated with Robert F.X. Sillerman, the
Companys former Chairman and Chief Executive Officer. CKX
is responsible for payment of the full rental amount each month
to the sublandlord, and each of Flag Anguilla, Flag Luxury
Properties and Circle Entertainment pay its pro rata share of
the rent for the space it occupies to CKX. As of March 31,
2011 and through April 2011, Flag Anguilla, Flag Luxury
Properties and Circle Entertainment were each current on all
rent payments.
18. | Subsequent Events |
See note 10 for a discussion of the Companys Amended
Credit Facility transaction on April 15, 2011.
The Company evaluated subsequent events through this filing.
* * * * * * * * *
17
Table of Contents
FORWARD
LOOKING STATEMENTS
In addition to historical information, this
Form 10-Q
(this Quarterly Report) contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking
statements are those that predict or describe future events or
trends and that do not relate solely to historical matters. You
can generally identify forward-looking statements as statements
containing the words believe, expect,
will, anticipate, intend,
estimate, project, assume or
other similar expressions, although not all forward-looking
statements contain these identifying words. All statements in
this Quarterly Report regarding our future strategy, future
operations, projected financial position, estimated future
revenue, projected costs, future prospects, and results that
might be obtained by pursuing managements current plans
and objectives are forward-looking statements. You should not
place undue reliance on our forward-looking statements because
the matters they describe are subject to known and unknown
risks, uncertainties and other unpredictable factors, many of
which are beyond our control. Our forward-looking statements are
based on the information currently available to us and speak
only as of the date on which this Quarterly Report was filed
with the Securities and Exchange Commission (SEC).
We expressly disclaim any obligation to issue any updates or
revisions to our forward-looking statements, even if subsequent
events cause our expectations to change regarding the matters
discussed in those statements. Over time, our actual results,
performance or achievements will likely differ from the
anticipated results, performance or achievements that are
expressed or implied by our forward-looking statements, and such
difference might be significant and materially adverse to our
stockholders.
18
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Managements discussion and analysis of financial
condition and results of operations should be read in
conjunction with the historical financial statements and
footnotes of the registrant included in its Annual Report on
Form 10-K
for the year ended December 31, 2010. Our future results of
operations may change materially from the historical results of
operations reflected in our historical financial statements.
General
We are engaged in the ownership, development and commercial
utilization of entertainment content. As more fully described
below, our primary assets and operations include:
| 19 Entertainment Limited, which owns, among other properties, proprietary rights to the IDOLS and So You Think You Can Dance television brands, both of which air in the United States, and, together with local adaptations of the format, around the world; | |
| An 85% ownership interest in Elvis Presley Enterprises, which owns the rights to the name, image and likeness of Elvis Presley, certain music and other intellectual property created by or related to Elvis Presley and the operations of Graceland and has partnered with Cirque du Soleil for the creation of Elvis Presley-themed shows and projects around the world, including the recently opened Viva ELVIS in Las Vegas, Nevada; and | |
| An 80% ownership interest in Muhammad Ali Enterprises, which owns the rights to the name, image and likeness of, as well as certain trademarks and other intellectual property related to Muhammad Ali. |
Our existing properties generate recurring revenue across
multiple entertainment platforms, including music and
television; licensing and merchandising; talent management;
themed attractions and touring/live events.
The owners of the noncontrolling interests in Elvis Presley
Enterprises and Muhammad Ali Enterprises are entitled to certain
future distributions and have other contractual rights.
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
label. 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 former global record label partners Ronagold for
seasons American Idol 1 through American Idol 4
and Simco Limited for seasons American Idol 4 through
American Idol 9, and with our current global record label
partner Universal Music Group commencing with the 2011 season of
American Idol. 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 our record label partner have the right, but not the
obligation, to have 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
19
Table of Contents
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 significant portion
of our revenue from the American Idol series is dependent
upon the number of hours of programming we deliver. The Fox
network aired 34.0 hours during the first quarter of 2011
and we expect to air 20.5 hours in the second quarter for a
total of 54.5 hours. In 2010, we aired 36.5 hours and
19.5 hours during the first and second quarters,
respectively, for a total of 56.0 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 guaranteed production through
the 2011 season of American Idol. 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 through
2011. The Company anticipates that we will enter into
discussions with Fox and FremantleMedia during the second
quarter of 2011 for the economic terms of the 2012 season of
American Idol and beyond.
19 Entertainments revenue is seasonal in nature,
reflecting the timing of our television shows and tours in
various markets. Historically, 19 Entertainment generated higher
revenue during the first three quarters of the calendar year,
which corresponds to the dates on Fox in the United States our
American Idol show is broadcast (the first and second
quarters) and the dates our So You Think You Can Dance
series airs (the second and third quarters).
Our significant costs to operate 19 Entertainment include
salaries and other compensation, royalties, tour expenses, rents
and general overhead costs. Our discretionary costs include
salary and overhead costs incurred in the development of new
entertainment content.
Presley
Business
The Presley Business consists of entities that own
and/or
control the commercial utilization of the name, image and
likeness of Elvis Presley, the operation of the Graceland museum
and related attractions, as well as revenue derived from Elvis
Presleys television specials, films and certain of his
recorded musical works. The Presley Business consists of two
reportable segments: Royalties and Licensing
intellectual property, including the licensing of the name,
image, likeness and trademarks associated with Elvis Presley, as
well as other owned
and/or
controlled intellectual property and the collection of royalties
from certain motion pictures, television specials and recorded
musical works and music compositions; and Graceland
Operations the operation of the Graceland museum and
related attractions and retail establishments, including Elvis
Presleys Heartbreak Hotel and other ancillary real estate
assets.
The Royalties and Licensing segment generates revenue from the
exploitation of the name, image and likeness of Elvis Presley,
including physical and intellectual property owned or created by
Elvis Presley during his life. The primary revenue source of
this segment comes from licensing Elvis Presleys name and
likeness for consumer products, commercials and other uses and
royalties and other income derived from intellectual property
created by Elvis Presley 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 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 Companys maximum exposure to
loss as a result of its involvement with the partnership is its
funding for the show, which is its investment in the
partnership.
20
Table of Contents
The Company and Cirque du Soleil each paid one-half of the
creative development and production costs of the show and the
cost of the show is being amortized over five years by the
partnership.
Additionally, another partnership was created by Cirque du
Soleil and the Company to hold the intellectual property related
to the show, to collect royalty-related revenue based on the
profitability of the show and to distribute royalty payments to
the various rights holders of the shows intellectual
property. The Company licenses the Elvis Presley intellectual
property to this partnership. 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 expense. The Company also recognizes as revenue a
management fee it receives from the operating partnership to
cover any operational expenses incurred to support the
partnership.
The agreement with MGM MIRAGE provides for an initial term of
ten (10) years from the soft opening date
(December 18, 2009), subject to certain extension rights
held by the parties. Neither party can terminate the agreement
prior to the third anniversary of the soft opening date
(December 18, 2012).
The Presley Business began reporting results from the Cirque du
Soleil Viva ELVIS show in Las Vegas in the first quarter
of 2010. 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 cots including royalties and rent,
which are based on occupancy.
The Graceland Operations segment generates its primary revenue
from ticket and merchandise sales and related income from public
tours of Graceland as well as from the operation of Elvis
Presleys Heartbreak Hotel and the other ancillary real
estate assets. Revenue from Graceland has historically been
seasonal with sharply higher numbers of visitors during the late
spring and summer seasons as compared to the fall and winter
seasons.
Most of the Presley Business revenue sources are dependent
upon the publics continued interest in Elvis Presley and
the intellectual property he created.
Our significant costs to operate the Presley Business include
salaries, rent and other general overhead costs. Most of our
costs do not vary significantly with our revenue. Our
discretionary costs are generally in our marketing and
promotions department which we primarily incur to maintain
and/or
increase the number of visitors to Graceland. We also incur
expenses in exploring additional opportunities to bring Elvis
Presley-related attractions to strategic locations throughout
the world.
Ali
Business
The Ali Business consists of the commercial exploitation of the
name, image, likeness and intellectual property of Muhammad Ali,
primarily through endorsement and licensing arrangements.
The primary revenue source comes from licensing Muhammad
Alis name and likeness for consumer products, commercials
and other uses. Licensing revenue is primarily derived from
long-term agreements with terms of one to five years. Although
we seek to obtain significant minimum guarantees, our licensing
revenue varies based on the actual product sales generated by
licensees. The intellectual property that is owned by the
Company is licensed to third parties for commercial exploitation
under long-term agreements. Although we maintain certain
controls over the use of this content and, in certain cases,
have rights to terminate these agreements if the third party
fails to perform, our revenue from this intellectual property is
highly dependent upon the ability of third parties to
successfully market the content. Most of our revenue sources are
dependent upon the publics continued interest in Muhammad
Ali and associated intellectual property. The Ali Business also
generates revenue from sports memorabilia signings performed by
Mr. Ali.
Our significant costs to operate the Ali Business include
commissions, salaries and other general overhead costs. With the
exception of commissions, most of our costs do not vary
significantly with our revenue.
21
Table of Contents
Transactions
with Simon Fuller and Restructuring of 19
Entertainment
On January 13, 2010, the Company entered into a series of
agreements with Simon Fuller securing Mr. Fullers
long-term creative services as a consultant and agreeing to the
termination of Mr. Fullers employment with
19 Entertainment. Upon entering into these agreements,
Mr. Fuller resigned as a director of CKX and as Chief
Executive Officer of 19 Entertainment and received certain
associated cash and non-cash separation payments of
$5.6 million, $4.4 million of which were included in
the provision for severance and other restructuring-related
charges recorded in the three months ended March 31, 2010.
In consideration for providing consulting services,
Mr. Fuller receives 10% of the Companys net profits
from each of the Companys IDOLS and So You Think
You Can Dance programs for the life of the programs as long
as Mr. Fuller continues to provide consulting services with
respect to such programs. For calendar year 2010,
Mr. Fuller received $5.0 million as an advance against
the consulting fee, which was paid in the year ended
December 31, 2010; a balance for 2010 of $4.1 million
which was accrued for at December 31, 2010 was paid in
April 2011. For each year after 2010, subject to certain
conditions, Mr. Fuller will receive, as an annual advance
against the 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 within each year from the consulting fee payable to
Mr. Fuller. For the three months ended March 31, 2011
and 2010, the Company recorded $1.9 million and
$2.7 million, respectively, of the consulting fee to cost
of sales.
In connection with the transaction with Simon Fuller described
above, management undertook a review of each of the businesses
conducted by 19 Entertainment and is now focusing its efforts
principally around its established IDOLS and So You
Think You Can Dance brands. Following this review,
management exited most of the other businesses within 19
Entertainment in 2010, including several businesses that were
sold to XIX Management Limited, a company owned and controlled
by Mr. Fuller.
In connection with the actions described above, for the three
months ended March 31, 2010, the Company incurred severance
and other restructuring-related costs of $1.7 million,
including charges related to the closure of several offices. The
Company recorded a total of $19.3 million of severance and
restructuring-related costs for the full year ended
December 31, 2010, including the costs for the separation
with Simon Fuller other than the ongoing consulting fee. Certain
management, legal and accounting functions at 19 Entertainment
were absorbed by the Companys corporate staff.
Exercise
of Amended 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. The put and call rights
applied to 1,675,296 of the shares issued in connection with the
19 Entertainment acquisition, 1,507,135 of which were owned by
Simon Fuller.
Immediately following execution of the amendment to the Put and
Call Option Agreement, the Company exercised its call option
with respect to 1,138,088 shares at a reduced call price of
$13.18 per share and paid to Mr. Fuller a gross purchase
price of $15.0 million. Following this transaction,
537,208 shares remained subject to the Put and Call Option
Agreement; the sellers exercised their put option on
March 25, 2011 with respect to the remaining shares subject
to the Put and Call Option Agreement and the Company paid to the
sellers a gross purchase price of $7.1 million.
Executive
Separation Costs
Robert F.X. Sillerman resigned as Chairman and Chief Executive
Officer of the Company and from the Companys board of
directors, effective as of May 6, 2010. In connection with
his resignation, Mr. Sillerman and the Company entered into
a separation and consulting agreement under which
Mr. Sillerman received a cash severance payment of
$3.4 million.
22
Table of Contents
Mr. Sillerman and the Company also entered into a
non-exclusive consulting arrangement whereby Mr. Sillerman
receives a consulting fee of $1.0 million in consideration
for his continued availability to promote the best interests of
the Company and its subsidiaries on a monthly basis for a
one-year period ending on May 30, 2011. In addition to the
consulting fee, Mr. Sillerman is being reimbursed for the
monthly cost of certain business expenses through
December 31, 2011. The Company also recorded
$0.9 million in 2010 related to a consulting agreement with
a former executive as the Company has determined that it will
not require any services in the future under this agreement. The
Company recorded a total of $7.7 million of executive
separation costs for the full year ended December 31, 2010.
Use of
EBITDA
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 EBITDA). The Company considers
EBITDA 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 EBITDA 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, EBITDA 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 EBITDA is not
a GAAP equivalent measurement.
We have reconciled EBITDA to operating income in the following
consolidated operating results table for the Company for the
three months ended March 31, 2011 and 2010.
Consolidated
Operating Results Three Months Ended March 31,
2011
Compared to Three Months Ended March 31, 2010
Three Months |
Three Months |
|||||||||||
Ended |
Ended |
|||||||||||
March 31, 2011 | March 31, 2010 | Variance | ||||||||||
(In thousands) | ||||||||||||
Revenue
|
$ | 53,292 | $ | 66,647 | $ | (13,355 | ) | |||||
Operating expenses
|
44,260 | 69,937 | (25,677 | ) | ||||||||
Operating income (loss)
|
9,032 | (3,290 | ) | 12,322 | ||||||||
Income tax expense
|
757 | 636 | 121 | |||||||||
Net income (loss) attributable to CKX, Inc.
|
7,189 | (5,033 | ) | 12,222 | ||||||||
Operating income (loss)
|
$ | 9,032 | $ | (3,290 | ) | $ | 12,322 | |||||
Impairment charge
|
| 4,853 | (4,853 | ) | ||||||||
Depreciation and amortization
|
4,331 | 5,143 | (812 | ) | ||||||||
Non-cash provision for severance and other restructuring-related
costs
|
| 552 | (552 | ) | ||||||||
Non-cash compensation
|
293 | 564 | (271 | ) | ||||||||
EBITDA
|
$ | 13,656 | $ | 7,822 | $ | 5,834 | ||||||
Revenue decreased $13.4 million in 2011 due primarily to
lower revenue from music and artist management and businesses
divested or shut down at 19 Entertainment and lower revenue at
the Presley Business. Lower operating expenses of
$25.7 million for the three months ended March 31,
2011 resulted from $6.1 million in severance and other
restructuring-related costs at 19 Entertainment in 2010 and
$4.9 million of impairment charges at 19 Entertainment
and the Presley Business in 2010 and cost savings realized in
2011 from the restructuring at 19 Entertainment.
23
Table of Contents
19
Entertainment
The following tables provide a breakdown of 19
Entertainments revenue, cost of sales, selling, general
and administrative expenses and other costs, EBITDA and
operating income for the three months ended March 31, 2011
and 2010 (all amounts reflected for 2010 have been recasted to
conform to the 2011 presentation):
Three Months Ended March 31, 2011 | Revenue | Cost of Sales | ||||||||||
(In thousands) | ||||||||||||
American Idol (including television production, foreign
syndication, sponsorship, merchandise and touring)
|
$ | 28,432 | $ | (14,843 | ) | $ | 13,589 | |||||
Other IDOLS television programs (including license fees
and sponsorship)
|
4,878 | (503 | ) | 4,375 | ||||||||
So You Think You Can Dance
|
1,674 | (1,163 | ) | 511 | ||||||||
Music and artist management
|
7,794 | (6,268 | ) | 1,526 | ||||||||
Other television productions
|
65 | (747 | ) | (682 | ) | |||||||
$ | 42,843 | $ | (23,524 | ) | $ | 19,319 | ||||||
Selling, general and administrative expenses, excluding non-cash
compensation
|
(2,679 | ) | ||||||||||
Other income
|
214 | |||||||||||
EBITDA
|
$ | 16,854 | ||||||||||
EBITDA
|
$ | 16,854 | ||||||||||
Depreciation and amortization
|
(3,021 | ) | ||||||||||
Non-cash compensation
|
(58 | ) | ||||||||||
Operating income
|
$ | 13,775 | ||||||||||
Three Months Ended March 31, 2010 | Revenue | Cost of Sales | ||||||||||
(In thousands) | ||||||||||||
American Idol (including television production, foreign
syndication, sponsorship, merchandise and touring)
|
$ | 29,100 | $ | (12,663 | ) | $ | 16,437 | |||||
Other IDOLS television programs (including license fees
and sponsorship)
|
4,140 | (485 | ) | 3,655 | ||||||||
So You Think You Can Dance
|
1,621 | (1,354 | ) | 267 | ||||||||
Music and artist management
|
12,994 | (5,036 | ) | 7,958 | ||||||||
Other television productions
|
1,052 | (826 | ) | 226 | ||||||||
Businesses divested or shut down
|
4,533 | (6,977 | ) | (2,444 | ) | |||||||
$ | 53,440 | $ | (27,341 | ) | $ | 26,099 | ||||||
Selling, general and administrative expenses, excluding non-cash
compensation
|
(10,520 | ) | ||||||||||
Provision for severance and other restructuring-related costs
(excluding non-cash compensation for accelerated vesting)
|
(5,566 | ) | ||||||||||
Other expense
|
(534 | ) | ||||||||||
EBITDA
|
$ | 9,479 | ||||||||||
EBITDA
|
$ | 9,479 | ||||||||||
Impairment charge
|
(2,214 | ) | ||||||||||
Depreciation and amortization
|
(3,749 | ) | ||||||||||
Non-cash provision for severance and restructuring-related
charges
|
(552 | ) | ||||||||||
Non-cash compensation
|
(123 | ) | ||||||||||
Operating income
|
$ | 2,841 | ||||||||||
24
Table of Contents
The revenue decline of $10.6 million reflects reduced music
revenue, the loss of revenue from businesses divested or shut
down in 2010 and fewer hours of American Idol broadcast
in the 2011 period.
American Idol 10 aired 34 series hours in the
U.S. in 2011 while American Idol 9 aired 36.5 series
hours in the U.S. in 2010. American Idol revenue
decreased by $0.7 million as the decrease of 2.5 hours
of programming was partially offset by increases in sponsorship
revenue and reimbursable producer costs. Cost of sales for
American Idol increased $2.2 million due to higher
producer costs partially offset by a reduction in the Simon
Fuller consulting fee. The 2010 results included an over-accrual
of $2.3 million of revenue and $0.2 million of cost of
sales which were recorded in the first quarter of 2010 and
subsequently reversed in the second quarter of 2010. The results
for the three months ended March 31, 2010 included herein
have not been adjusted for this over-accrual.
Other IDOLS revenue increased $0.7 million due to
increased television and ancillary revenue. Cost of sales was
flat.
So You Think You Can Dance revenue was flat with the
prior year period as unfavorable timing of foreign tape sales
was offset by tour merchandise sales from the fall 2010 tour
being reported in the current year results.
Music and artist management revenue declined $5.2 million
from the prior year primarily due to the expiration of our
long-term contract with Sony Music Entertainment
(Sony) as our record partner for American Idol
following the 2010 broadcast season. Fox paid 19
Entertainment an annual $5.0 million non-recoupable fee
during each year of the Sony agreement including
$5.0 million related to the 2010 broadcast season which was
recorded as revenue in the first quarter of 2010. The Company
has entered into a new long-term contract with Universal Music
Group (UMG) to serve as the record partner for
American Idol beginning with the 2011 season. Although
the Company will no longer receive a $5.0 million annual
payment from Fox, the new agreement with UMG provides for a
significantly higher per unit payment on each record sold. Cost
of sales increased by $1.2 million due to the recording of
$1.8 million of costs associated with employees dedicated
to the business in 2011 which were recorded in selling, general
and administrative expenses in 2010, offset in part by reduced
artist royalties and lower Simon Fuller consulting fee expense
in 2011.
Revenue from businesses divested or shut down was
$4.5 million and related cost of sales was
$7.0 million in the three months ended March 31, 2010.
Selling, general and administrative expenses declined
$7.8 million from the prior year as a result of savings
from restructuring initiatives and the recording of
$1.8 million in costs associated with employees dedicated
to the music and artist management businesses to cost of sales
in 2011 that were recorded in selling, general and
administrative expenses in 2010.
The 2010 results included a provision for severance and
restructuring of $6.1 million, including $0.6 million
of non-cash compensation for accelerated vesting. Other income
of $0.2 million in 2011 and other expense of
$0.5 million in 2010, respectively, represent foreign
exchange gains and losses generated at 19 Entertainment from
transactions in currencies other than the U.S. dollar,
primarily the U.K. pound.
25
Table of Contents
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 EBITDA
for the three months ended March 31, 2011 and 2010:
Three Months |
Three Months |
|||||||||||
Ended |
Ended |
|||||||||||
March 31, |
March 31, |
|||||||||||
2011 | 2010 | Variance | ||||||||||
(In thousands) | ||||||||||||
Revenue
|
$ | 4,441 | $ | 5,714 | $ | (1,273 | ) | |||||
Cost of sales
|
(829 | ) | (902 | ) | 73 | |||||||
Selling, general and administrative expense, excluding non-cash
compensation
|
(1,622 | ) | (1,211 | ) | (411 | ) | ||||||
EBITDA
|
$ | 1,990 | $ | 3,601 | $ | (1,611 | ) | |||||
EBITDA
|
$ | 1,990 | $ | 3,601 | $ | (1,611 | ) | |||||
Depreciation and amortization
|
(642 | ) | (645 | ) | 3 | |||||||
Non-cash compensation
|
(14 | ) | (16 | ) | 2 | |||||||
Operating income
|
$ | 1,334 | $ | 2,940 | $ | (1,606 | ) | |||||
The decrease in royalties and licensing revenue of
$1.3 million for three months ended March 31, 2011 was
due to $0.4 million of lower revenue related to the Viva
ELVIS Cirque du Soleil show in Las Vegas, $0.6 million
of royalties from a one-time Elvis the Concert series performed
in Europe in 2010 and lower merchandise licensing revenue.
Royalties and licensing cost of sales decreased
$0.1 million due to lower third party royalties for the
Viva ELVIS show in 2011. Royalties and licensing selling,
general and administrative expenses increased by
$0.4 million primarily due to higher legal and professional
fees incurred in pursuing a copyright infringement matter in the
United Kingdom.
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 EBITDA
for the three months ended March 31, 2011 and 2010:
Three Months |
Three Months |
|||||||||||
Ended |
Ended |
|||||||||||
March 31, |
March 31, |
|||||||||||
2011 | 2010 | Variance | ||||||||||
(In thousands) | ||||||||||||
Revenue
|
$ | 5,151 | $ | 6,611 | $ | (1,460 | ) | |||||
Cost of sales
|
(774 | ) | (1,274 | ) | 500 | |||||||
Selling, general and administrative expense, excluding non-cash
compensation
|
(5,510 | ) | (6,207 | ) | 697 | |||||||
EBITDA
|
$ | (1,133 | ) | $ | (870 | ) | $ | (263 | ) | |||
EBITDA
|
$ | (1,133 | ) | $ | (870 | ) | $ | (263 | ) | |||
Impairment charge
|
| (2,639 | ) | 2,639 | ||||||||
Depreciation and amortization
|
(593 | ) | (592 | ) | (1 | ) | ||||||
Non-cash compensation
|
(17 | ) | (19 | ) | 2 | |||||||
Operating income
|
$ | (1,743 | ) | $ | (4,120 | ) | $ | 2,377 | ||||
The decrease in Graceland Operations revenue of
$1.5 million for three months ended March 31, 2011 was
due
26
Table of Contents
to lower attendance in 2011 and a one-time concert series in
2010. Tour and exhibit revenue was $2.2 million for the
three months ended March 31, 2011, a decrease of
$0.2 million from the prior year period. This decrease
resulted from a 7.5% decrease in attendance to 80,524 in 2011
from 87,026 in 2010. Lower tourist traffic due to inclement
regional and national winter weather and a later Easter holiday
affected attendance in 2011. Retail operations revenue of
$2.0 million for the three months ended March 31, 2011
decreased $0.9 million compared to the prior year, due
primarily to merchandise sales from the one-time Elvis the
Concert series performed in Europe in 2010 and lower attendance
in 2011. Other revenue, primarily hotel room revenue and
ancillary real estate income of $0.9 million for the three
months ended March 31, 2011 was down $0.4 million
compared to the prior year. The decline was primarily due to a
decrease in rental income from ancillary real estate as a result
of a former rental property being prepared for an alternative
use in the future and lower hotel occupancy at the Heartbreak
Hotel.
Graceland Operations cost of sales decreased by
$0.5 million in the three months ended March 31, 2011
due to incremental costs incurred in 2010 for the Elvis the
Concert series merchandise. Graceland Operations selling,
general and administrative expenses decreased $0.7 million
in the three months ended March 31, 2011 primarily due to
higher professional and legal fees in 2010, including those
related to a renewed master plan initiative that has been
postponed.
Ali
Business
The Ali Business contributed $0.9 million of revenue for
the three months ended March 31, 2011 and 2010 as licensing
fees and revenue related to memorabilia signings were flat in
the first quarter of 2011 as compared to the prior period.
Operating expenses increased by $0.2 million for the three
months ended March 31, 2011 from the prior period. EBITDA
was $0.4 million in 2011 compared to $0.5 million in
the prior year period.
Corporate
and Other
Corporate
Expenses and Other Costs
The Company incurred corporate overhead expenses of
$4.5 million and $5.3 million for the three months
ended March 31, 2011 and 2010, respectively. The decrease
of $0.8 million primarily reflects decreases in
travel related costs, consulting fees and non-cash
employee compensation costs.
Impairment
Charges
In the three months ended March 31, 2010, the Company
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 wind-down
operations of a rental property in advance of being prepared for
an alternative use in the future. The Company 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 $0.6 million and
$0.9 million in the three months ended March 31, 2011
and 2010, respectively. The decrease in interest expense is
primarily due the write-off of $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, partially offset by an increase in the
average borrowing rate on the revolving credit facility from
1.76% to 1.81%. The Company had interest income of less than
$0.1 million and $0.1 million in the three months
ended March 31, 2011 and 2010, respectively.
Income
Taxes
In calculating the provision for income taxes on an interim
basis, the Company uses an estimate of the annual effective tax
rate based upon the facts and circumstances known at the time.
The Companys effective tax rate is based on expected
income, statutory rates and permanent differences applicable to
the Company in the various jurisdictions in which the Company
operates.
27
Table of Contents
For the three months ended March 31, 2011, the Company
recorded a provision for income taxes of $0.8 million,
reflecting the Companys estimated 2011 effective tax rate
of 27.3%, offset by a one-time beneficial adjustment for the
finalization of the 2010 U.S-U.K. transfer pricing methodology.
For the three months ended March 31, 2010, the Company
recorded a provision for income taxes of $0.6 million,
reflecting the Companys estimated 2010 effective tax rate
of 31.8%, a one-time beneficial adjustment for converting the
U.K. branchs functional currency from the U.K. pound
sterling to the U.S. dollar and a one-time benefit
resulting from the reorganization of 19 Entertainment, offset by
a one-time detriment relating to the 2006 IRS audit and a
one-time detriment relating to tax not receiving benefit of the
impairment charges.
The decrease in the 2011 effective tax rate relates primarily to
the Company utilizing some of its foreign tax credit
carryforwards, which are fully reserved.
The Companys uncertain tax positions relate primarily to
state, local and foreign tax issues, as well as accounting
method issues. The Companys uncertain tax positions,
including interest and penalties, are reflected in net income
taxes payable. The Company does not expect any material changes
to the estimated amount of liability associated with its
uncertain tax positions through March 31, 2012.
The Company generally recognizes accrued interest and penalties
related to uncertain tax positions through income tax expense.
As of March 31, 2011, the Company had approximately
$1.3 million accrued for interest and penalties.
Open tax years related to federal, state and local filings are
for the years ended December 31, 2007, through 2010. The
Internal Revenue Service is in the process of auditing the
Companys tax year ended December 31, 2007. France is
in the process of auditing the business activities of 19
Entertainment Limited for the years ending December 31,
2003 through December 31, 2008. The United Kingdoms
Revenue & Customs is in the process of reviewing the
19 Entertainment Ltd. UK groups tax year ended
December 31, 2008.
Equity
in Losses of Affiliates
The Company recorded losses of $0.1 million and less than
$0.1 million from unconsolidated affiliates for the three
months ended March 31, 2011 and 2010, respectively, related
to the Companys investment in the Cirque partnership in
2010 and 2011 and Beckham Brands Limited in 2010. The loss in
2010 included $0.5 million of losses associated with the
opening of Viva ELVIS in February, 2010 offset by the
earnings of Beckham Brands Limited.
The higher loss from the VIVA ELVIS investment during the
first quarter of 2010 was primarily due to certain one-time
costs associated with the gala opening of the show in February
2010 and lower revenue as a result of the limited number of
performances during that quarter.
Noncontrolling
Interests
Net losses attributable to noncontrolling interests were
$0.1 million and $0.2 million for the three months
ended March 31, 2011 and 2010, respectively. Both periods
reflect shares in the net income (loss) of the Presley Business,
the Ali Business and Storm related to the equity interests
retained by the former owners.
Cash Flow
for the three months ended March 31, 2011 and
2010
Operating
Activities
Net cash used in operating activities was $1.1 million for
the three months ended March 31, 2011, reflecting net
income of $7.6 million, which includes depreciation and
amortization of $4.3 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 $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.
28
Table of Contents
Investing
Activities
Net cash used in investing activities was $2.0 million for
the three months ended March 31, 2011, reflecting capital
expenditures.
Net cash used in investing activities was $0.7 million for
the three months ended March 31, 2010, reflecting capital
expenditures.
Financing
Activities
Cash used in financing activities was $8.5 million for the
three months ended March 31, 2011. The Company made
payments of $7.1 million related to the purchase of
restricted redeemable common stock. The Company also made
distributions of $0.4 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.
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.
Uses
of Capital
At March 31, 2011, the Company had $100.1 million of
debt outstanding and $98.0 million in cash and cash
equivalents.
At March 31, 2011, the Company had borrowings of
$100.0 million under its revolving credit agreement with
various lenders (the Credit Facility). The Company
had no additional borrowing capacity under the Credit Facility.
Under the Credit Facility, the Company may make Eurodollar
borrowings or base rate borrowings. The $100.0 million
outstanding at March 31, 2011 bears interest at the
Eurodollar rate resulting in an effective annual interest rate
at March 31, 2011 of 1.81% based upon a margin of
150 basis points. The Company was required to repay the
Credit Facility in full on or before May 24, 2011;
therefore, the outstanding principal amount has been classified
as a current liability in the condensed consolidated balance
sheets at March 31, 2011 and December 31, 2010. The
Credit Facility was amended and restated on April 15, 2011
(Amended Credit Facility see below).
The Credit Facility contains covenants that regulate the
Companys and its subsidiaries incurrence of debt,
disposition of property, acquisitions and joint ventures,
payment of cash dividends and capital expenditures. The Company
and its subsidiaries were in compliance with all financial and
non-financial loan covenants as of March 31, 2011.
Amended
Credit Facility
Upon execution of the Amended Credit Facility on April 15,
2011, the Company was required to pay down a permanent reduction
of commitments in an aggregate principal amount of
$40.0 million, which reduced the total outstanding balance
and maximum borrowing capacity to $60.0 million. The
Amended Credit Facility also extends the maturity date of the
loans thereunder such that the Company will be required to repay
in full all amounts outstanding under the Amended Credit
Facility on or before September 30, 2012. Under the terms
of the Amended Credit Facility, the Company is also required to
make quarterly principal payments of $2.0 million beginning
on June 30, 2011, with the remaining $50.0 million to
be repaid on or before September 30, 2012. Eurodollar loans
under the Amended Credit Facility bear interest at a rate of
LIBOR, plus a margin of 300 basis points. Alternatively,
base rate loans under the Amended Credit Facility bear interest
at a rate equal to the greater of (i) the prime rate,
(ii) the federal funds rate, plus 50 basis points or
(iii) the Eurodollar rate for a Eurodollar loan with a
one-month interest period plus 100 basis points, in each
case, plus a margin of 200 basis points. The interest rates
in the Amended Credit Facility were increased from those in the
original credit facility, reflecting changes in market
conditions. The effective annual interest rate as of
April 15, 2011 under the Amended Credit Facility is 3.28%.
The Amended Credit Facility contains certain financial
covenants, including a maximum Leverage Ratio of 2.0 to 1.0,
which is more restrictive than the ratio contained in the
original credit facility, and a minimum EBITDA (as
29
Table of Contents
defined in the Amended Credit Facility) to interest expense
ratio. The Amended Credit Facility contains affirmative and
negative covenants applicable to the Company and its
subsidiaries, including but not limited to restrictions on
incurrence of debt, liens, assets sales and other dispositions,
acquisitions, investments and joint ventures, payments of cash
dividends on common stock and capital expenditures.
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 on our
debt, dividends on our Series B Convertible Preferred
Stock, mandatory minimum distributions to the non-controlling
shareholders in the Presley Business and the Ali business and
capital expenditures.
Capital
Expenditures
We presently anticipate that our capital expenditures for 2011
will total approximately $3.0 million.
We have previously announced preliminary plans to re-develop our
Graceland attraction to include an expanded visitors center, new
attractions and merchandising shops and potentially a new
boutique convention hotel. Although we continue to consider the
exact scope, cost, financing plan and timing of such a project,
we expect that the redevelopment of Graceland, if and when
pursued, would take several years and could require a
substantial financial investment by the Company. In addition,
our ability to pursue such a project would be conditioned on a
number of factors, including but not limited to general economic
conditions, the availability of capital and obtaining necessary
approvals and concessions from local and state authorities. The
Company remains committed to the growth and vitality of the
Graceland property and its surroundings and will continue to
study the opportunity for redevelopment on its own or together
with third parties.
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. In addition, the terms of our
existing credit facility restrict the payment of cash dividends
on our common stock.
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. Under the terms of the agreements,
the Company paid $22.5 million upon execution of the
agreements on July 7, 2009 and is paying Mr. Seacrest
an additional $22.5 million in monthly installments during
the term, for a total guaranteed amount of $45.0 million.
The Company and Fox agreed to a fee arrangement of
$5.0 million for Mr. Seacrests services as host
of American Idol for each of the 2010, 2011 and 2012
seasons. The Company therefore expects to be responsible for a
net amount of $30.0 million of the original
$45.0 million guaranteed amount. The Company expects to
receive payment for compensation related to the 2011 season in
the first half of 2011 and has recognized $3.1 million of
revenue in the first quarter of 2011 and will recognize
$1.9 million of revenue in the second quarter of 2011 based
upon the hours broadcast over the course of the broadcast
season. The Company received payment for compensation related to
the 2010 season in November 2010 and recognized
$5.0 million as revenue during the first and second
quarters of 2010.
30
Table of Contents
As of March 31, 2011, the Company has paid
$33.5 million of the total amount due to Mr. Seacrest
with the remaining $11.5 million to be paid in equal
monthly installments through December 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
and So You Think You Can Dance programs. In
consideration for providing these services, Mr. Fuller will
receive the consulting fee as described above. For calendar year
2011, Mr. Fuller will receive $5.0 million as an
advance against the consulting fee, $2.5 million of which
was paid in the three months ended March 31, 2011;
$2.5 million is due to be paid in the second and third
quarters of 2011. For each year after 2011, subject to certain
conditions, Mr. Fuller will receive, as an annual advance
against the 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.
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 2011 advance was paid
in January 2011 and will be expensed over the year and the 2010
advance was paid in March 2010. After the Company recoups its
investment, profits will be split evenly with the producer. The
agreement expires on December 31, 2012. The Company also
funds certain operating costs.
Critical
Accounting Policies
During the three months ended March 31, 2011, there have
been no significant changes related to the Companys
critical accounting policies and estimates as disclosed in the
Companys
Form 10-K
for the year ended December 31, 2010.
Impact
of Recently Issued Accounting Standards
In October 2009 the Financial Accounting Standards Board
(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 was effective for fiscal years beginning on
or after June 15, 2010; early adoption was permitted. This
standard was effective for the Company beginning in 2011 and did
not have a material impact on the Companys financial
statements.
Off
Balance Sheet Arrangements
As of March 31, 2011, we did not have any off balance sheet
arrangements as defined in Item 303 (a)(4)(ii) of SEC
Regulation S-K.
Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
We are exposed to market risk arising from changes in market
rates and prices, including movements in foreign currency
exchange rates, interest rates and the market price of our
common stock. To mitigate these risks, we may utilize derivative
financial instruments, among other strategies. We do not use
derivative financial instruments for speculative purposes.
Interest
Rate Risk
We had $100.1 million of total debt outstanding at
March 31, 2011, of which $100.0 million was variable
rate debt.
Assuming a hypothetical increase in the Companys variable
interest rate of 100 basis points, our net income for the
three months ended March 31, 2011 would have decreased by
approximately $0.2 million.
31
Table of Contents
Item 4. | Controls and Procedures |
Evaluation
of Disclosure Controls and Procedures
Management, with the participation of the Companys chief
executive officer, Michael G. Ferrel, and its chief financial
officer, Thomas P. Benson, has evaluated the effectiveness of
the Companys disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934
Rules 13a-15
(e) or
15d-15 (e))
as of March 31, 2011. Based on this evaluation, the chief
executive officer and the chief financial officer have concluded
that, as of that date, the Companys disclosure controls
and procedures were effective.
Changes
in Internal Controls over Financial Reporting
As of December 31, 2010, the Company determined that its
internal control over financial reporting was not effective.
A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the Companys financial statements will not
be prevented or detected on a timely basis. In conjunction with
the 2010 audit, the Company identified a material weakness in
its process of accounting for income taxes. Specifically, the
Company did not maintain an adequate review process for the
accounting for income taxes during the year ended
December 31, 2010 that would have identified material
misstatements in the underlying calculations during the
Companys income tax closing process.
There have not been any changes in the Companys internal
control over financial reporting (as defined in
Rule 13a-15
(f) under the Securities Exchange Act of 1934, as amended)
during the three months ended March 31, 2011 that have
materially affected, or are reasonably likely to materially
affect, CKXs internal controls over financial reporting.
However, in light of the continuing material weakness in
accounting for income taxes, the Company is undertaking several
remedial steps to enhance controls including expanding technical
resources in the income tax accounting function and implementing
income tax accounting software solutions.
32
Table of Contents
Part II
Other Information
Item 1. | Legal Proceedings |
We are subject to certain claims and litigation in the ordinary
course of business. It is the opinion of management that the
outcome of such matters will not have a material adverse effect
on our consolidated financial position, results of operations or
cash flows.
Item 6. | Exhibits |
Exhibit |
||||
No. | Description | |||
31 | .1 | Certification of Principal Executive Officer (Filed herewith). | ||
31 | .2 | Certification of Principal Financial Officer (Filed herewith). | ||
32 | .1 | Section 1350 Certification of Principal Executive Officer (Filed herewith). | ||
32 | .2 | Section 1350 Certification of Principal Financial Officer (Filed herewith). |
33
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CKX, Inc.
BY: |
/s/ Michael
G. Ferrel
|
Name: | Michael G. Ferrel |
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
BY: |
/s/ Thomas
P. Benson
|
Name: | Thomas P. Benson |
Chief Financial Officer, Executive
Vice President and Treasurer
(Principal Financial and Accounting
Officer)
DATE: May 9, 2011
34
Table of Contents
INDEX TO
EXHIBITS
Exhibit |
||||
No. | Description | |||
31 | .1 | Certification of Principal Executive Officer. | ||
31 | .2 | Certification of Principal Financial Officer. | ||
32 | .1 | Section 1350 Certification of Principal Executive Officer. | ||
32 | .2 | Section 1350 Certification of Principal Financial Officer. |
35