UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2007, or |
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to . |
Commission File Number 1-32663
CLEAR CHANNEL OUTDOOR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 86-0812139 | |
(State of Incorporation) |
(I.R.S. Employer Identification No.) |
200 East Basse Road
San Antonio, Texas 78209
Telephone (210) 832-3700
(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Name of Exchange on Which Registered | |
Class A Common Stock, $.01 par value per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
As of June 30, 2007, the aggregate market value of the Common Stock beneficially held by non-affiliates of the registrant was approximately $1.1 billion based on the closing sales price as reported on the New York Stock Exchange. (For purposes hereof, directors, executive officers and 10% or greater shareholders have been deemed affiliates).
On February 13, 2008, there were 40,553,304 outstanding shares of Class A Common Stock, excluding 1,857 shares held in treasury, and 315,000,000 outstanding shares of Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Definitive Proxy Statement for the 2008 Annual Meeting, expected to be filed within 120 days of our fiscal year end, are incorporated by reference into Part III.
CLEAR CHANNEL OUTDOOR HOLDINGS, INC.
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PART I |
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PART II |
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk |
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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PART III |
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Item 10. Directors, Executive Officers and Corporate Governance |
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Item 13. Certain Relationships and Related Transactions, and Director Independence |
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PART IV |
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91 |
PART I
The Company
Clear Channel Outdoor Holdings, Inc. provides clients with advertising opportunities through billboards, street furniture displays, transit displays and other out-of-home advertising displays, such as wallscapes, spectaculars, neons and mall displays, which we own or operate in key markets worldwide. Our business consists of two reportable operating segments: Americas and International. As of December 31, 2007, we owned or operated approximately 897,000 advertising displays worldwide. For the year ended December 31, 2007, we generated revenue of approximately $3.3 billion, with $1.5 billion and $1.8 billion from our Americas and International segments, respectively.
Our History
In 1997, Clear Channel Communications, Inc., or Clear Channel Communications, our parent company, entered the outdoor advertising industry with its acquisition of Eller Media Company. In 1998, Clear Channel Communications acquired Universal Outdoor, giving Clear Channel Communications an outdoor presence in 33 major United States markets with over 88,000 displays. Also in 1998, Clear Channel Communications acquired More Group plc, a European-based company operating in 25 countries. In June 2002, Clear Channel Communications acquired The Ackerley Group, further increasing its market share.
On November 11, 2005, we became a publicly traded company through an initial public offering, or IPO, in which we sold 10%, or 35.0 million shares, of our Class A common stock. Prior to our initial public offering we were an indirect wholly-owned subsidiary of Clear Channel Communications. Clear Channel Communications currently owns all of our outstanding shares of Class B common stock representing approximately 89% of the outstanding shares of our common stock and approximately 99% of the total voting power of our common stock.
We entered into agreements with Clear Channel Communications that govern the relationship between Clear Channel Communications and us and provide for, among other things, the provision of services by Clear Channel Communications to us and the allocation of employee benefit, tax and other liabilities and obligations attributable to our operations. These agreements include, among others, a master agreement, corporate services agreement, registration rights agreement, tax matters agreement and employee matters agreement. All of the agreements relating to our ongoing relationship with Clear Channel Communications were made in the context of a parent-subsidiary relationship and the terms of these agreements may be more or less favorable to us than if they had been negotiated with unaffiliated third parties.
Clear Channel Communications has the right to terminate the Corporate Services Agreement, Employee Matters Agreement and Tax Matters Agreement in various circumstances. As of the date of the filing of this report, no notice of termination of any of these agreements has been received from Clear Channel Communications.
For as long as Clear Channel Communications is the owner of such number of shares representing more than 50% of the total voting power of our common stock, it will have the ability to direct the election of all of the members of our Board of Directors and to exercise a controlling influence over our business and affairs, including any determination with respect to mergers or other business combinations involving us, the acquisition or disposition of assets by us, the incurrence of indebtedness by us, the issuance of any additional common stock or other equity services by us, the repurchase or redemption of common stock or preferred stock by us and the payment of dividends by us. Similarly, Clear Channel Communications will have the power to determine or significantly influence the outcome of matters submitted to a vote of our shareholders, including the power to prevent an acquisition or any other change in control of us, and to take other actions that might be favorable to Clear Channel Communications.
Recent Developments
On November 16, 2006, Clear Channel Communications agreed to be acquired by a group of equity funds sponsored by Bain Capital Partners, LLC and Thomas H. Lee Partners, L.P. On September 25, 2007, Clear Channel
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Communications shareholders approved the Merger Agreement. The closing of the transaction is subject to customary closing conditions. Assuming satisfaction of the closing conditions, the parties expect to close the merger by the end of the first quarter of 2008.
On January 17, 2008, we entered into an agreement to sell our equity investment in Clear Channel Independent, an out-of-home advertising company headquartered in South Africa with operations in Angola, Botswana, Lesotho, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Uganda and Zambia. The closing of the transaction is subject to regulatory approval and other customary closing conditions.
You can find more information about us at our Internet website located at www.clearchanneloutdoor.com. Our filings are available free of charge via a link on our Internet website after we electronically file such material with the SEC.
Operating Segments
We have two reportable business segments: Americas and International.
| Americas. Our Americas business segment includes our operations in the United States, Canada and Latin America. We own or operate approximately 209,000 displays in our Americas segment. Our assets consist of billboards, street furniture and transit displays, airport displays, mall displays, and wallscapes and other spectaculars. We have operations in 49 of the top 50 markets in the United States, including all of the top 20 markets. For the year ended December 31, 2007, Americas represented 45% of our net revenue. |
| International. Our International business segment includes our operations in Africa, Asia, Australia and Europe. We own or operate approximately 687,000 displays in approximately 50 countries. Our International assets consist of billboards, street furniture displays, transit displays and other out-of-home advertising displays. Subsequent to December 31, 2007, we entered into an agreement to sell our operations in Africa. For the year ended December 31, 2007, International represented 55% of our net revenue. |
Our Strengths
Global Scale and Local Market Leadership
We own 897,000 advertising displays worldwide. We believe our global scale enables productive and cost-effective investment across our portfolio. Our outdoor advertising business is focused on urban markets with dense populations. Our real estate locations in these urban markets provide outstanding reach and frequency for our advertisers. In the United States, we operate in all of the top 20 markets. Internationally, we operate in France, Italy, Spain and the United Kingdom, as well as several attractive growth countries, including Australia and China. We have invested in real estate locations and new display technologies, such as digital billboards, which we believe will continue to support future revenue growth.
Attractive Out-of-home Industry Fundamentals
We believe outdoor advertising offers valuable out-of-home positions and compelling value propositions to advertisers.
| Audience Reach. 98% of Americans travel in a car each week as reported by the Arbitron National In-Car Study (July 2003). |
| Valuable Out-of-home Position. Outdoor media reaches potential consumers outside of the home, which we believe is a valuable position as it is closer to the purchase decision. Today, consumers spend a significant portion of their day out-of-home, while out-of-home media garner a disproportionately smaller share of media spending than in-home media. We believe this discrepancy represents an opportunity for growth. |
| Compelling Value Propositions. We believe outdoor media offers compelling value propositions to advertisers by providing cost effective media advertising outlets, as measured by persons reached per dollar invested. We believe the cost effectiveness of outdoor media provides opportunity for growth. |
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Consistent, Defensible Growth Profile
Outdoor advertising has demonstrated consistent growth over the last 40 years and is generally resilient in economic downturns. Outdoor advertising revenue has grown to approximately $7 billion in 2006, representing a 10% compound annual growth rate, or CAGR, since 1970. Growth has come via traditional billboards along highways and major roadways, as well as alternative advertising including transit displays, street furniture and mall displays. The outdoor industry has experienced only two negative growth years between 1970 and 2006, with the growth rate in the two years following an economic recession averaging 13%. We expect growth to be driven by increased share of media spending and rollout of digital billboards.
Business Diversity
Our business is comprised of numerous individual operating units in local markets throughout the United States and the rest of the world. We believe we offer advertisers a diverse platform of media assets across geographies and outdoor products. We enjoy substantial diversity in our outdoor business, with no market greater than 8% and no ad category greater than 8% of our 2007 revenue. We are able to reduce revenue volatility resulting from softness in any one advertising category or geographic market because of this diversity.
Experienced Management Team and Entrepreneurial Culture
We have an experienced management team from our senior executives to our local market managers. We also maintain an entrepreneurial culture empowering local market managers to operate their markets as separate profit centers, subject to centralized oversight. A portion of our managers compensation is dependent upon the financial success of their individual market. Our managers also have full access to our centralized resources, including sales training, research tools, shared best practices, global procurement and financial and legal support.
Our Strategy
We seek to capitalize on our global outdoor network and diversified product mix to maximize revenue. In addition, by sharing best practices among our business segments, we believe we can quickly and effectively replicate our successes throughout the markets in which we operate. Our diversified product mix and long-standing presence in many of our existing markets provide us with the platform to launch new products and test new initiatives in a reliable and cost-effective manner.
Drive Outdoor Media Spending
Outdoor advertising only represented 3.4% of total dollars spent on advertising in the United States in 2006 as reported by Veronis Suhler Stevenson Communications Industry Forecast. Given the attractive industry fundamentals of outdoor media and our depth and breadth of relationships with both local and national advertisers, we believe we can drive outdoor advertisings share of total media spending by highlighting the value of outdoor advertising relative to other media. We have made and continue to make investments in research tools that enable our clients to better understand how our displays can successfully reach their target audiences and promote their advertising campaigns. Also, we are working closely with clients, advertising agencies and other diversified media companies to develop more sophisticated systems that will provide improved demographic measurements of outdoor advertising. We believe that these measurement systems will further enhance the attractiveness of outdoor advertising for both existing clients and new advertisers and further foster outdoor media spending growth.
Increase Our Share of Outdoor Media Spending
We intend to continue to work toward ensuring that our customers have a superior experience by leveraging our presence in each of our markets and by increasing our focus on customer satisfaction and improved measurement systems. We believe our commitment to superior customer service, highlighted by our unique Proof of Performance system, and our superior products will lead to new advertisers and growth in existing advertising categories.
Digital Billboard Conversion Initiatives
Advances in electronic displays, including flat screens, LCDs and LEDs, allow us to provide these technologies as alternatives to traditional methods of outdoor advertising. These electronic displays may be linked
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through centralized computer systems to instantaneously and simultaneously change static advertisements on a large number of displays. These capabilities will allow us to transition from selling space on a display to a single advertiser to selling time on that display to multiple advertisers. We believe this transition will create new advertising opportunities for our existing clients and will attract new advertisers, such as certain retailers that desire to change advertisements frequently and on short notice. We recently began converting a limited number of vinyl boards to networked digital boards. We believe that the costs of digital upgrades will decrease over time as technologies improve and more digital boards come to market.
Achieve Operating Efficiencies
We intend to closely manage expense growth and to continue to focus on achieving operating efficiencies throughout our businesses. Within each of our operating segments, we share best practices across our markets and continually look for innovative ways to contain costs. We will continue to seek new ways of reducing costs across our global network.
Our Business Segments
Americas
Our Americas segment consists of our operations in the United States, Canada and Latin America, with approximately 93% of our 2007 revenue in this segment derived from the United States. The Americas segment includes advertising display faces which we own or operate under lease management agreements. Americas generated 45%, 46% and 46% of our consolidated net revenue in 2007, 2006 and 2005, respectively.
Sources of Revenue
Americas revenue is derived from the sale of advertising copy placed on our display inventory. Our display inventory consists primarily of billboards, street furniture displays and transit displays. The margins on our billboard contracts tend to be higher than those on contracts for other displays. The following table shows the approximate percentage of revenue derived from each category for our Americas advertising inventory:
Year Ended December 31, | |||||||||
2007 | 2006 | 2005 | |||||||
Billboards |
|||||||||
Bulletins (1) |
52 | % | 52 | % | 54 | % | |||
Posters |
16 | % | 18 | % | 19 | % | |||
Street furniture displays |
4 | % | 4 | % | 4 | % | |||
Transit displays |
16 | % | 14 | % | 11 | % | |||
Other displays (2) |
12 | % | 12 | % | 12 | % | |||
Total |
100 | % | 100 | % | 100 | % | |||
(1) | Includes digital displays. |
(2) | Includes spectaculars, mall displays and wallscapes. |
Our Americas segment generates revenues from local, regional and national sales. Our advertising rates are based on a number of different factors including location, competition, size of display, illumination, market and gross rating points. Gross ratings points is the total number of impressions delivered, expressed as a percentage of a market population, of a display or group of displays. The number of impressions delivered by a display is measured by the number of people passing the site during a defined period of time and, in some International markets, is weighted to account for such factors as illumination, proximity to other displays and the speed and viewing angle of approaching traffic. For all of our billboards in the United States, we use independent, third-party auditing companies to verify the number of impressions delivered by a display. Reach is the percent of a target audience exposed to an advertising message at least once during a specified period of time, typically during a period of four weeks. Frequency is the average number of exposures an individual has to an advertising message during a specified period of time. Out-of-home frequency is typically measured over a four-week period.
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While location, price and availability of displays are important competitive factors, we believe that providing quality customer service and establishing strong client relationships are also critical components of sales. In addition, we have long-standing relationships with a diversified group of local, regional and national advertising brands and agencies across the Americas.
Billboards
Our billboard inventory primarily includes bulletins and posters.
Bulletins. Bulletins vary in size, with the most common size being 14 feet high by 48 feet wide. Almost all of the advertising copy displayed on bulletins is computer printed on vinyl and transported to the bulletin where it is secured to the display surface. Because of their greater size and impact, we typically receive our highest rates for bulletins. Bulletins generally are located along major expressways, primary commuting routes and main intersections that are highly visible and heavily trafficked. Our clients may contract for individual bulletins or a network of bulletins, meaning the clients advertisements are rotated among bulletins to increase the reach of the campaign. Our client contracts for bulletins generally have terms ranging from one month to one year.
Posters. Posters are available in two sizes, 30-sheet and 8-sheet displays. The 30-sheet posters are approximately 11 feet high by 23 feet wide, and the 8-sheet posters are approximately 5 feet high by 11 feet wide. Advertising copy for posters is printed using silk-screen or lithographic processes to transfer the designs onto paper that is then transported and secured to the poster surfaces. Posters generally are located in commercial areas on primary and secondary routes near point-of-purchase locations, facilitating advertising campaigns with greater demographic targeting than those displayed on bulletins. Our poster rates typically are less than our bulletin rates, and our client contracts for posters generally have terms ranging from four weeks to one year. Two types of posters are premiere panels and squares. Premiere displays are innovative hybrids between bulletins and posters that we developed to provide our clients with an alternative for their targeted marketing campaigns. The premiere displays utilize one or more poster panels, but with vinyl advertising stretched over the panels similar to bulletins. Our intent is to combine the creative impact of bulletins with the additional reach and frequency of posters.
Street Furniture Displays
Our street furniture displays, marketed under our global Adshel brand, are advertising surfaces on bus shelters, information kiosks, public toilets, freestanding units and other public structures, and are primarily located in major metropolitan cities and along major commuting routes. Generally, we own the street furniture structures and are responsible for their construction and maintenance. Contracts for the right to place our street furniture displays in the public domain and sell advertising space on them are awarded by municipal and transit authorities in competitive bidding processes governed by local law. Generally, these contracts have terms ranging from 10 to 20 years. As compensation for the right to sell advertising space on our street furniture structures, we pay the municipality or transit authority a fee or revenue share that is either a fixed amount or a percentage of the revenue derived from the street furniture displays. Typically, these revenue sharing arrangements include payments by us of minimum guaranteed amounts. Client contracts for street furniture displays typically have terms ranging from four weeks to one year, and, similar to billboards, may be for network packages.
Transit Displays
Our transit displays are advertising surfaces on various types of vehicles or within transit systems, including on the interior and exterior sides of buses, trains, trams and taxis, and within the common areas of rail stations and airports. Similar to street furniture, contracts for the right to place our displays on such vehicles or within such transit systems and to sell advertising space on them generally are awarded by public transit authorities in competitive bidding processes or are negotiated with private transit operators. These contracts typically have terms of up to five years. Our client contracts for transit displays generally have terms ranging from four weeks to one year.
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Other Inventory
The balance of our display inventory consists of spectaculars, mall displays and wallscapes. Spectaculars are customized display structures that often incorporate video, multidimensional lettering and figures, mechanical devices and moving parts and other embellishments to create special effects. The majority of our spectaculars are located in Dundas Square in Toronto, Times Square and Penn Plaza in New York City, Fashion Show in Las Vegas, Sunset Strip in Los Angeles and across from the Target Center in Minneapolis. Client contracts for spectaculars typically have terms of one year or longer. We also own displays located within the common areas of malls on which our clients run advertising campaigns for periods ranging from four weeks to one year. Contracts with mall operators grant us the exclusive right to place our displays within the common areas and sell advertising on those displays. Our contracts with mall operators generally have terms ranging from five to ten years. Client contracts for mall displays typically have terms ranging from six to eight weeks. A wallscape is a display that drapes over or is suspended from the sides of buildings or other structures. Generally, wallscapes are located in high-profile areas where other types of outdoor advertising displays are limited or unavailable. Clients typically contract for individual wallscapes for extended terms.
Competition
The outdoor advertising industry in the Americas is fragmented, consisting of several larger companies involved in outdoor advertising, such as CBS and Lamar Advertising Company, as well as numerous smaller and local companies operating a limited number of display faces in a single or a few local markets. We also compete with other advertising media in our respective markets, including broadcast and cable television, radio, print media, the Internet and direct mail.
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Advertising Inventory and Markets
As of December 31, 2007, we owned or operated approximately 209,000 displays in our Americas segment. The following table sets forth certain selected information with regard to our Americas advertising inventory, with our markets listed in order of their designated market area (DMA® ) region ranking (DMA® is a registered trademark of Nielsen Media Research, Inc.):
DMA® Region Rank |
Markets |
Billboards | Street Furniture Displays |
Transit Displays |
Other Displays(1) |
Total Displays | ||||||||
Bulletins | Posters | |||||||||||||
United States |
||||||||||||||
1 | New York, NY |
· | · | · | · | · | 16,936 | |||||||
2 | Los Angeles, CA |
· | · | · | · | · | 11,583 | |||||||
3 | Chicago, IL |
· | · | · | · | · | 15,293 | |||||||
4 | Philadelphia, PA |
· | · | · | · | · | 6,618 | |||||||
5 | Dallas-Ft. Worth, TX |
· | · | · | · | · | 9,981 | |||||||
6 | San Francisco-Oakland-San Jose, CA |
· | · | · | · | · | 8,971 | |||||||
7 | Boston, MA (Manchester, NH) |
· | · | · | · | · | 7,219 | |||||||
8 | Atlanta, GA |
· | · | · | · | 3,091 | ||||||||
9 | Washington, DC (Hagerstown, MD) |
· | · | · | · | · | 3,403 | |||||||
10 | Houston, TX |
· | · | ·(2) | · | 4,542 | ||||||||
11 | Detroit, MI |
· | · | · | 606 | |||||||||
12 | Phoenix, AZ |
· | · | · | · | 2,155 | ||||||||
13 | Tampa-St. Petersburg (Sarasota), FL |
· | · | · | · | · | 2,428 | |||||||
14 | Seattle-Tacoma, WA |
· | · | · | · | 11,092 | ||||||||
15 | Minneapolis-St. Paul, MN |
· | · | · | · | 2,552 | ||||||||
16 | Miami-Ft. Lauderdale, FL |
· | · | · | · | · | 4,003 | |||||||
17 | Cleveland-Akron (Canton), OH |
· | · | · | · | 3,484 | ||||||||
18 | Denver, CO |
· | · | 861 | ||||||||||
19 | Orlando-Daytona Beach-Melbourne, FL |
· | · | · | · | 4,166 | ||||||||
20 | Sacramento-Stockton-Modesto, CA |
· | · | · | · | · | 1,509 | |||||||
21 | St. Louis, MO |
· | · | 279 | ||||||||||
22 | Pittsburgh, PA |
· | ·(2) | · | 674 | |||||||||
23 | Portland, OR |
· | · | · | · | 1,417 | ||||||||
24 | Baltimore, MD |
· | · | · | · | · | 2,533 | |||||||
25 | Charlotte, NC |
· | 12 | |||||||||||
26 | Indianapolis, IN |
· | · | · | · | 1,871 | ||||||||
27 | San Diego, CA |
· | · | · | · | 871 | ||||||||
28 | Raleigh-Durham (Fayetteville), NC |
· | 449 | |||||||||||
29 | Hartford-New Haven, CT |
·(2) | · | 374 | ||||||||||
30 | Nashville, TN |
· | · | · | 652 | |||||||||
31 | Kansas City, KS/MO |
·(2) | 324 | |||||||||||
32 | Columbus, OH |
· | · | · | · | 1,525 | ||||||||
33 | Cincinnati, OH |
· | · | 12 | ||||||||||
34 | Milwaukee, WI |
· | · | · | · | · | 5,838 | |||||||
35 | Salt Lake City, UT |
· | · | 66 | ||||||||||
36 | Greenville-Spartanburg, SC- Asheville, NC-Anderson, SC |
· | · | 88 |
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DMA® Region Rank |
Markets |
Billboards | Street Furniture Displays |
Transit Displays |
Other Displays(1) |
Total Displays | ||||||||
Bulletins | Posters | |||||||||||||
37 | San Antonio, TX | · | · | ·(2) | · | 3,799 | ||||||||
38 | West Palm Beach-Ft. Pierce, FL | · | · | · | · | 782 | ||||||||
39 | Grand Rapids-Kalamazoo-Battle Creek, MI | · | 100 | |||||||||||
41 | Harrisburg-Lancaster-Lebanon-York, PA | · | · | 171 | ||||||||||
42 | Norfolk-Portsmouth-Newport News, VA | · | · | · | · | 470 | ||||||||
43 | Las Vegas, NV | · | · | · | · | · | 13,362 | |||||||
44 | Albuquerque-Santa Fe, NM | · | · | · | 1,420 | |||||||||
45 | Oklahoma City, OK | · | 3 | |||||||||||
46 | Greensboro-High Point-Winston Salem, NC | · | 999 | |||||||||||
47 | Memphis, TN | · | · | · | · | · | 2,305 | |||||||
48 | Louisville, KY | · | · | 134 | ||||||||||
49 | Jacksonville, FL | · | · | · | · | 991 | ||||||||
50 | Buffalo, NY | · | 483 | |||||||||||
51-100 | Various U.S. Cities | · | · | ·(2) | · | 12,925 | ||||||||
101-150 | Various U.S. Cities | · | · | · | · | ·(2) | 5,491 | |||||||
151+ | Various U.S. Cities | · | · | · | · | 2,458 | ||||||||
Non-U.S. Markets | ||||||||||||||
n/a | Aruba | · | 213 | |||||||||||
n/a | Australia | · | 810 | |||||||||||
n/a | Barbados | · | 61 | |||||||||||
n/a | Bahamas | · | 194 | |||||||||||
n/a | Belize | · | 155 | |||||||||||
n/a | Brazil | · | · | · | 7,089 | |||||||||
n/a | Canada | · | · | · | 4,314 | |||||||||
n/a | Chile | · | · | 1,166 | ||||||||||
n/a | Costa Rica | · | 210 | |||||||||||
n/a | Dominican Republic | · | 285 | |||||||||||
n/a | Grenada | · | 155 | |||||||||||
n/a | Guam | · | 144 | |||||||||||
n/a | Jamaica | · | 213 | |||||||||||
n/a | Mexico | · | · | 5,016 | ||||||||||
n/a | Netherlands Antilles | · | 1,019 | |||||||||||
n/a | New Zealand | · | 1,392 | |||||||||||
n/a | Peru | · | · | · | · | · | 2,860 | |||||||
n/a | Saint Kitts and Nevis | · | 144 | |||||||||||
n/a | Saint Lucia | · | 100 | |||||||||||
n/a | Virgin Islands | · | 260 | |||||||||||
Total Americas Displays | 209,171 | |||||||||||||
(1) | Includes wallscapes, spectaculars, mall and digital displays. Our inventory includes other small displays not in the table since their contribution to our revenue is not material. |
(2) | We have access to additional displays through arrangements with local advertising and other companies. |
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Production
In a majority of our markets, our local production staff performs the full range of activities required to create and install advertising copy. Production work includes creating the advertising copy design and layout, coordinating its printing and installing the copy on displays. We provide creative services to smaller advertisers and to advertisers not represented by advertising agencies. National advertisers often use preprinted designs that require only installation. Our creative and production personnel typically develop new designs or adopt copy from other media for use on our inventory. Our creative staff also can assist in the development of marketing presentations, demonstrations and strategies to attract new clients.
Client Categories
In 2007, the top five client categories in our Americas segment, based on Americas revenue derived from these categories, were telecommunications, retail, automotive, banking and financial services, and amusements.
Construction and Operation
We typically own the physical structures on which our clients advertising copy is displayed. We build some of the structures at our billboard fabrication business in Illinois and erect them on sites we either lease or own or for which we have acquired permanent easements. The site lease terms generally range from 1 to 50 years. In addition to the site lease, we must obtain a permit to build the sign. Permits are typically issued in perpetuity by the state or local government and typically are transferable or renewable for a minimal, or no, fee. Bulletin and poster advertising copy is either printed with computer generated graphics on a single sheet of vinyl or placed on lithographed or silk-screened paper sheets supplied by the advertiser. These advertisements are then transported to the site and in the case of vinyl wrapped around the face, and in the case of paper pasted and applied like wallpaper. The operational process also includes conducting visual inspections of the inventory for display defects and taking the necessary corrective action within a reasonable period of time.
International
Our International segment consists of our advertising operations in Africa, Asia, Australia and Europe, with approximately half of our 2007 revenue in this segment derived from France and the United Kingdom. Subsequent to December 31, 2007, we entered into an agreement to sell our operations in Africa. The International segment includes advertising display faces which we own or operate under lease management agreements. Our International segment generated 55%, 54% and 54% of our consolidated net revenue in 2007, 2006 and 2005, respectively.
Sources of Revenue
International revenue is derived from the sale of advertising copy placed on our display inventory. Our International display inventory consists primarily of billboards, street furniture displays, transit displays and other out-of-home advertising displays, such as neon displays. The following table shows the approximate percentage of revenue derived from each category of our International segment:
Year Ended December 31, | |||||||||
2007 | 2006 | 2005 | |||||||
Billboards (1) |
39 | % | 41 | % | 44 | % | |||
Street furniture displays |
37 | % | 37 | % | 34 | % | |||
Transit displays (2) |
8 | % | 9 | % | 9 | % | |||
Other displays (3) |
16 | % | 13 | % | 13 | % | |||
Total |
100 | % | 100 | % | 100 | % | |||
(1) | Includes revenue from spectaculars and neon displays. |
(2) | Includes small displays. |
(3) | Includes advertising revenue from mall displays, other small displays, and non-advertising revenue from sales of street furniture equipment, cleaning and maintenance services and production revenue. |
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Our International segment generates revenues worldwide from local, regional and national sales. Similar to the Americas, advertising rates generally are based on the gross rating points of a display or group of displays. The number of impressions delivered by a display, in some countries, is weighted to account for such factors as illumination, proximity to other displays and the speed and viewing angle of approaching traffic.
While location, price and availability of displays are important competitive factors, we believe that providing quality customer service and establishing strong client relationships are also critical components of sales. In addition, we have long-standing relationships with a diversified group of advertising brands and agencies worldwide.
Billboards
The sizes of our International billboards are not standardized. The billboards vary in both format and size across our networks, with the majority of our International billboards being similar in size to our posters used in our Americas business (30-sheet and 8-sheet displays). Our International billboards are sold to clients as network packages with contract terms typically ranging from one to two weeks. Long-term client contracts are also available and typically have terms of up to one year. We lease the majority of our billboard sites from private landowners. Billboards include our spectacular and neon displays. DEFI, our International neon subsidiary, is a global provider of neon signs with approximately 400 displays in more than 15 countries worldwide. Client contracts for International neon displays typically have terms of approximately five years.
Street Furniture Displays
Our International street furniture displays are substantially similar to their Americas street furniture counterparts, and include bus shelters, freestanding units, public toilets, various types of kiosks and benches. Internationally, contracts with municipal and transit authorities for the right to place our street furniture in the public domain and sell advertising on such street furniture typically provide for terms ranging from 10 to 15 years. The major difference between our International and Americas street furniture businesses is in the nature of the municipal contracts. In our International business, these contracts typically require us to provide the municipality with a broader range of urban amenities such as public wastebaskets and lampposts, as well as space for the municipality to display maps or other public information. In exchange for providing such urban amenities and display space, we are authorized to sell advertising space on certain sections of the structures we erect in the public domain. Our International street furniture is typically sold to clients as network packages, with contract terms ranging from one to two weeks. Long-term client contracts are also available and typically have terms of up to one year.
Transit Displays
Our International transit display contracts are substantially similar to their Americas transit display counterparts, and typically require us to make only a minimal initial investment and few ongoing maintenance expenditures. Contracts with public transit authorities or private transit operators typically have terms ranging from three to seven years. Our client contracts for transit displays generally have terms ranging from one week to one year, or longer.
Other International Inventory and Services
The balance of our revenue from our International segment consists primarily of advertising revenue from mall displays, other small displays and non-advertising revenue from sales of street furniture equipment, cleaning and maintenance services and production revenue. Internationally, our contracts with mall operators generally have terms ranging from five to ten years and client contracts for mall displays generally have terms ranging from one to two weeks, but are available for up to six-month periods. Our International inventory includes other small displays that are counted as separate displays since they form a substantial part of our network and International revenue. Several of our International markets sell equipment or provide cleaning and maintenance services as part of a billboard or street furniture contract with a municipality. Production revenue relates to the production of advertising posters, usually for small customers.
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Competition
The International outdoor advertising industry is fragmented, consisting of several larger companies involved in outdoor advertising, such as CBS and JC Decaux, as well as numerous smaller and local companies operating a limited number of display faces in a single or a few local markets. We also compete with other advertising media in our respective markets, including broadcast and cable television, radio, print media, the Internet and direct mail.
Advertising Inventory and Markets
As of December 31, 2007, we owned or operated approximately 687,000 displays in our International segment. The following table sets forth certain selected information with regard to our International advertising inventory, which are listed in descending order according to 2007 revenue contribution:
International Markets |
Billboards(1) | Street Furniture Displays |
Transit Displays(2) |
Other Displays(3) |
Total Displays | |||||
France |
· | · | · | · | 162,386 | |||||
United Kingdom |
· | · | · | · | 69,418 | |||||
Italy |
· | · | 57,533 | |||||||
China |
· | · | · | · | 62,573 | |||||
Spain |
· | · | · | · | 34,474 | |||||
Australia/New Zealand |
· | · | 16,958 | |||||||
Sweden |
· | · | · | · | 111,479 | |||||
Switzerland |
· | · | · | 17,663 | ||||||
Belgium |
· | · | · | · | 23,486 | |||||
Norway |
· | · | · | 18,357 | ||||||
Ireland |
· | · | 7,581 | |||||||
Denmark |
· | · | · | · | 33,986 | |||||
Turkey |
· | · | · | · | 10,439 | |||||
India |
· | · | · | 695 | ||||||
Finland |
· | · | · | · | 23,031 | |||||
Poland |
· | · | · | 13,204 | ||||||
Holland |
· | · | 3,326 | |||||||
Baltic States/Russia |
· | · | 16,135 | |||||||
Greece |
· | · | 1,219 | |||||||
Singapore |
· | 3,847 | ||||||||
Japan |
· | 53 | ||||||||
Germany |
· | 53 | ||||||||
Hungary |
· | 30 | ||||||||
Austria |
· | 13 | ||||||||
United Arab Emirates |
· | 1 | ||||||||
Czech Republic |
· | 7 | ||||||||
Ukraine |
· | 2 | ||||||||
Indonesia |
· | 1 | ||||||||
Portugal |
· | 15 | ||||||||
Slovenia |
· | 1 | ||||||||
Total International Displays | 687,966 | |||||||||
(1) | Includes spectaculars and neon displays. |
(2) | Includes small displays. |
(3) | Includes mall displays and other small displays counted as separate displays in the table since they form a substantial part of our network and International revenue. |
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Equity Investments
In addition to the displays listed above, as of December 31, 2007, we had equity investments in various out-of-home advertising companies that operate in the following markets:
Market |
Company |
Equity Investment |
Billboards(1) | Street Furniture Displays |
Transit Displays | ||||||
Outdoor Advertising Companies |
|||||||||||
South Africa (2) | Clear Channel Independent |
50.0 | % | · | · | · | |||||
Italy | Alessi |
34.3 | % | · | · | · | |||||
Italy | AD Moving SpA |
17.5 | % | · | · | ||||||
Hong Kong | Buspak |
50.0 | % | · | · | ||||||
Spain | Clear Channel CEMUSA |
50.0 | % | · | |||||||
Thailand | Master & More |
32.5 | % | · | · | ||||||
Belgium | MTB |
49.0 | % | · | |||||||
Belgium | Streep |
25.0 | % | · | |||||||
Denmark | City Reklame |
45.0 | % | · | |||||||
Other Media Companies | |||||||||||
Norway | CAPA |
50.0 | % |
(1) | Includes spectaculars and neon displays. |
(2) | Clear Channel Independent is headquartered and has the majority of its operations in South Africa, but also operates in other African countries such as Angola, Botswana, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Swaziland, Tanzania, Uganda and Zambia. On January 17, 2008, we entered into an agreement to sell our investment in Clear Channel Independent. The closing of the transaction is subject to regulatory approval and other customary closing conditions. |
Production
The majority of our International clients are advertisers targeting national audiences whose business generally is placed with us through advertising agencies. These agencies often provide our International clients creative services to design and produce both the advertising copy and the physical printed advertisement. Advertising copy, both paper and vinyl, is shipped to centralized warehouses operated by us. The copy is then sorted and delivered to sites where it is installed on our displays.
Client Categories
In 2007, the top five client categories in our International segment, based on International revenue derived from these categories, were food and food products, retail, telecommunications, automotive and entertainment.
Construction and Operation
The International manufacturing process largely consists of two elements: the manufacture and installation of advertising structures and the weekly preparation of advertising posters for distribution throughout our networks. Generally, we outsource the manufacturing of advertising structures to third parties and regularly seek competitive bids. We use a wide range of suppliers, located in each of our markets. The design of street furniture structures (such as bus shelters, bicycle racks, kiosks and public toilets) is typically done in conjunction with a third party design or architectural firm. These street furniture designs then form the basis of a competitive bidding process to select a manufacturer. Our street furniture sites are posted by our own employees or subcontractors who also clean and maintain the sites. The decision to use our own employees or subcontractors is made on a market-by-market basis taking into consideration the mix of products in the market and local labor costs.
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Employees
As of February 13, 2008, we had approximately 2,400 United States employees and approximately 5,500 non-United States employees, of which approximately 160 were employed in corporate activities. Approximately 300 of our United States employees and approximately 220 of our non-United States employees are subject to collective bargaining agreements in their respective countries. There are numerous collective bargaining agreements, none of which represent a significant number of employees. We believe that our relationship with our employees is good.
Regulation of our Business
The outdoor advertising industry in the United States is subject to governmental regulation at the federal, state and local levels. These regulations may include, among others, restrictions on the construction, repair, maintenance, lighting, upgrading, height, size, spacing and location of and, in some instances, content of advertising copy being displayed on outdoor advertising structures. In addition, the outdoor advertising industry outside of the United States is subject to certain foreign governmental regulation.
Domestically, in recent years, outdoor advertising has become the subject of targeted state and municipal taxes and fees. These laws may affect prevailing competitive conditions in our markets in a variety of ways. Such laws may reduce our expansion opportunities, or may increase or reduce competitive pressure from other members of the outdoor advertising industry. No assurance can be given that existing or future laws or regulations, and the enforcement thereof, will not materially and adversely affect the outdoor advertising industry. However, we contest laws and regulations that we believe unlawfully restrict our constitutional or other legal rights and may adversely impact the growth of our outdoor advertising business.
Federal law, principally the Highway Beautification Act, or HBA, regulates outdoor advertising on Federal-Aid Primary and Interstate and National Highway Systems roads within the United States (controlled roads). The HBA regulates the size and placement of billboards, requires the development of state standards, mandates a states compliance program, promotes the expeditious removal of illegal signs and requires just compensation for takings.
To satisfy the HBAs requirements, all states have passed billboard control statutes and regulations which regulate, among other things, construction, repair, maintenance, lighting, height, size, spacing and the placement of outdoor advertising structures. We are not aware of any state which has passed control statutes and regulations less restrictive than the prevailing federal requirements, including the requirement that an owner remove any non-grandfathered non-compliant signs along the controlled roads, at the owners expense and without compensation. Local governments generally also include billboard control as part of their zoning laws and building codes regulating those items described above and include similar provisions regarding the removal of non-grandfathered structures that do not comply with certain of the local requirements.
As part of their billboard control laws, state and local governments regulate the construction of new signs. Some jurisdictions prohibit new construction, some jurisdictions allow new construction only to replace existing structures and some jurisdictions allow new construction subject to the various restrictions discussed above. In certain jurisdictions, restrictive regulations also limit our ability to relocate, rebuild, repair, maintain, upgrade, modify, or replace existing legal non-conforming billboards.
Federal law neither requires nor prohibits the removal of existing lawful billboards, but it does mandate the payment of compensation if a state or political subdivision compels the removal of a lawful billboard along the controlled roads. In the past, state governments have purchased and removed existing lawful billboards for beautification purposes using federal funding for transportation enhancement programs, and these jurisdictions may continue to do so in the future. From time to time, state and local government authorities use the power of eminent domain and amortization to remove billboards. Thus far, we have been able to obtain satisfactory compensation for our billboards purchased or removed as a result of these types of governmental action, although there is no assurance that this will continue to be the case in the future.
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Other important outdoor advertising regulations include the Intermodal Surface Transportation Efficiency Act of 1991 (currently known as SAFETEA-LU), the Bonus Act/Bonus Program, the 1995 Scenic Byways Amendment and various increases or implementations of property taxes, billboard taxes and permit fees. From time to time, legislation has been introduced in both the United States and foreign jurisdictions attempting to impose taxes on revenue from outdoor advertising. Several state and local jurisdictions have already imposed such taxes as a percentage of our outdoor advertising revenue in that jurisdiction. While these taxes have not had a material impact on our business and financial results to date, we expect state and local governments to continue to try to impose such taxes as a way of increasing revenue.
We have introduced and intend to expand the deployment of digital billboards that display static digital advertising copy from various advertisers that change up to several times per minute. We have encountered some existing regulations that restrict or prohibit these types of digital displays, but these regulations have not yet materially impacted our digital deployment. However, since digital technology for changing static copy has only recently been developed and introduced into the market on a large scale, existing regulations that currently do not apply to digital technology by their terms could be revised to impose greater restrictions. These regulations may impose greater restrictions on digital billboards due to alleged concerns over aesthetics or driver safety.
International regulation of the outdoor advertising industry varies by region and country, but generally limits the size, placement, nature and density of out-of-home displays. The significant international regulations include the Law of December 29, 1979 in France, the Town and Country Planning (Control of Advertisements) Regulations 1992 in the United Kingdom and Règlement Régional Urbain de lagglomération bruxelloise in Belgium. These laws define issues such as the extent to which advertisements can be erected in rural areas, the hours during which illuminated signs may be lit and whether the consent of local authorities is required to place a sign in certain communities. Other regulations may limit the subject matter and language of out-of-home displays.
NYSE Matters
The certifications of our Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report. Additionally, in 2007 our Chief Executive Officer submitted a Section 303A.12(a) CEO Certification to the New York Stock Exchange (NYSE) certifying that he was not aware of any violation by Clear Channel Outdoor Holdings of the NYSEs corporate governance listing standards.
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Risks Related to Our Business
Government regulation of outdoor advertising may restrict our outdoor advertising operations.
United States federal, state and local regulations have a significant impact on the outdoor advertising industry and our business. One of the seminal laws was the HBA, which regulates outdoor advertising on the 306,000 miles of Federal-Aid Primary, Interstate and National Highway Systems (controlled roads). The HBA regulates the size and location of billboards, mandates a state compliance program, requires the development of state standards, promotes the expeditious removal of illegal signs, and requires just compensation for takings. Construction, repair, maintenance, lighting, upgrading, height, size, spacing and the location of billboards and the use of new technologies for changing displays, such as digital displays, are regulated by federal, state and local governments. From time to time, states and municipalities have prohibited or significantly limited the construction of new outdoor advertising structures, and also permitted non-conforming structures to be rebuilt by third parties. Changes in laws and regulations affecting outdoor advertising at any level of government, including laws of the foreign jurisdictions in which we operate, could have a significant financial impact on us by requiring us to make significant expenditures or otherwise limiting or restricting some of our operations.
From time to time, certain state and local governments and third parties have attempted to force the removal of our displays under various state and local laws, including condemnation and amortization. Amortization is the attempted forced removal of legal but non-conforming billboards (billboards which conformed with applicable zoning regulations when built, but which do not conform to current zoning regulations) or the commercial advertising placed on such billboards after a period of years. Pursuant to this concept, the governmental body asserts that just compensation is earned by continued operation of the billboard over time. Amortization is prohibited along all controlled roads and generally prohibited along non-controlled roads. Amortization has, however, been upheld along non-controlled roads in limited instances where provided by state and local law. Other regulations limit our ability to rebuild, replace, repair, maintain and upgrade non-conforming displays. In addition, from time to time third parties or local governments assert that we own or operate displays that either are not properly permitted or otherwise are not in strict compliance with applicable law. Although we believe that the number of our billboards that may be subject to removal based on alleged noncompliance is immaterial, from time to time we have been required to remove billboards for alleged noncompliance. Such regulations and allegations have not had a material impact on our results of operations to date, but if we are increasingly unable to resolve such allegations or obtain acceptable arrangements in circumstances in which our displays are subject to removal, modification, or amortization, or if there occurs an increase in such regulations or their enforcement, our operating results could suffer.
A number of state and local governments have implemented or initiated legislative billboard controls, including taxes, fees and registration requirements in an effort to decrease or restrict the number of outdoor signs and/or to raise revenue. While these controls have not had a material impact on our business and financial results to date, we expect states and local governments to continue these efforts. The increased imposition of these controls and our inability to pass on the cost of these items to our clients could negatively affect our operating income.
International regulation of the outdoor advertising industry varies by region and country, but generally limits the size, placement, nature and density of out-of-home displays. Significant international regulations include the Law of December 29, 1979 in France, the Town and Country Planning (Control of Advertisements) Regulations 1992 in the United Kingdom, and Règlement Régional Urbain de lagglomération Bruxelloise in Belgium. These laws define issues such as the extent to which advertisements can be erected in rural areas, the hours during which illuminated signs may be lighted and whether the consent of local authorities is required to place a sign in certain communities. Other regulations limit the subject matter and language of out-of-home displays. For instance, the United States and most European Union countries, among other nations, have banned outdoor advertisements for tobacco products. Our failure to comply with these or any future international regulations could have an adverse impact on the effectiveness of our displays or their attractiveness to clients as an advertising medium and may require us to make significant expenditures to ensure compliance. As a result, we may experience a significant impact on our operations, revenue, International client base and overall financial condition.
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We face intense competition in the outdoor advertising industry that may adversely affect the advertising fees we can charge, and consequently lower our operating margins and profits.
We operate in a highly competitive industry, and we may not be able to maintain or increase our current advertising and sales revenues. Our advertising properties compete for audiences and advertising revenue with other outdoor advertising companies, as well as with other media, such as radio, newspapers, magazines, television, direct mail, satellite radio and Internet based media, within their respective markets. Market shares are subject to change, which could have the effect of reducing our revenue in that market. Our competitors may develop services or advertising media that are equal or superior to those we provide or that achieve greater market acceptance and brand recognition than we achieve. It is possible that new competitors may emerge and rapidly acquire significant market share in any of our business segments. An increased level of competition for advertising dollars may lead to lower advertising rates as we attempt to retain customers or may cause us to lose customers to our competitors who offer lower rates that we are unable or unwilling to match.
Our financial performance may be adversely affected by certain variables which are not in our control.
Certain variables that could adversely affect our financial performance by, among other things, leading to decreases in overall revenue, the numbers of advertising customers, advertising fees, or profit margins include:
| unfavorable shifts in population and other demographics which may cause us to lose advertising customers as people migrate to markets where we have a smaller presence, or which may cause advertisers to be willing to pay less in advertising fees if the general population shifts into a less desirable age or geographical demographic from an advertising perspective; |
| unfavorable fluctuations in operating costs which we may be unwilling or unable to pass through to our customers; |
| unfavorable changes in labor conditions which may require us to spend more to retain and attract key employees; and |
| changes in governmental regulations and policies and actions of federal regulatory bodies which could restrict the advertising media which we employ or restrict some or all of our customers that operate in regulated areas from using certain advertising media, or from advertising at all. |
Doing business in foreign countries creates certain risks not found in doing business in the United States.
Doing business in foreign countries carries with it certain risks that are not found in doing business in the United States. The risks of doing business in foreign countries that could result in losses against which we are not insured include:
| exposure to local economic conditions; |
| potential adverse changes in the diplomatic relations of foreign countries with the United States; |
| hostility from local populations; |
| the adverse effect of currency exchange controls; |
| restrictions on the withdrawal of foreign investment and earnings; |
| government policies against businesses owned by foreigners; |
| investment restrictions or requirements; |
| expropriations of property; |
| the potential instability of foreign governments; |
| the risk of insurrections; |
| risks of renegotiation or modification of existing agreements with governmental authorities; |
| foreign exchange restrictions; |
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| withholding and other taxes on remittances and other payments by subsidiaries; and |
| changes in taxation structure. |
Exchange rates may cause future losses in our International operations.
Because we own assets overseas and derive revenue from our International operations, we may incur currency translation losses due to changes in the values of foreign currencies and in the value of the United States dollar. We cannot predict the effect of exchange rate fluctuations upon future operating results. See Managements Discussion and Analysis of Financial Condition and Results of Operations Market Risk Management Foreign Currency Risk.
The success of our street furniture and transit products is dependent on our obtaining key municipal concessions, which we may not be able to obtain on favorable terms.
Our street furniture and transit products businesses require us to obtain and renew contracts with municipalities and other governmental entities. Many of these contracts require us to participate in competitive bidding processes, typically have terms ranging from 3 to 20 years and have revenue share or fixed payment components. Our inability to successfully negotiate, renew or complete these contracts due to governmental demands and delay and the highly competitive bidding processes for these contracts could affect our ability to offer these products to our clients, or to offer them to our clients at rates that are competitive to other forms of advertising, without adversely affecting our net income.
Future acquisitions could pose risks.
We may acquire outdoor advertising assets and other assets or businesses we believe will assist our customers in marketing their products and services. Our acquisition strategy involves numerous risks, including:
| certain of our acquisitions may prove unprofitable and fail to generate anticipated cash flows; |
| to successfully manage our large portfolio of outdoor advertising and other properties, we may need to: |
o | recruit additional senior management as we cannot be assured that senior management of acquired companies will continue to work for us and, in this highly competitive labor market, we cannot be certain that any of our recruiting efforts will succeed, and |
o | expand corporate infrastructure to facilitate the integration of our operations with those of acquired properties, because failure to do so may cause us to lose the benefits of any expansion that we decide to undertake by leading to disruptions in our ongoing businesses or by distracting our management; |
| entry into markets and geographic areas where we have limited or no experience; |
| we may encounter difficulties in the integration of operations and systems; |
| our managements attention may be diverted from other business concerns; and |
| we may lose key employees of acquired companies. |
We frequently evaluate strategic opportunities both within and outside our existing lines of business. We expect from time to time to pursue additional acquisitions and may decide to dispose of certain businesses. These acquisitions or dispositions could be material.
Antitrust regulations may limit future acquisitions.
Additional acquisitions by us may require antitrust review by federal antitrust agencies and may require review by foreign antitrust agencies under the antitrust laws of foreign jurisdictions. We can give no assurances the United States Department of Justice, or DOJ, the Federal Trade Commission or foreign antitrust agencies will not seek to bar us from acquiring additional outdoor advertising properties in any market where we already have a significant position. The DOJ actively reviews proposed acquisitions of outdoor advertising properties. In addition, the antitrust laws of foreign jurisdictions will apply if we acquire international outdoor advertising properties.
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Environmental, health, safety and land use laws and regulations may limit or restrict some of our operations.
As the owner or operator of various real properties and facilities, we must comply with various foreign, federal, state and local environmental, health, safety and land use laws and regulations. We and our properties are subject to such laws and regulations relating to the use, storage, disposal, emission and release of hazardous and non-hazardous substances and employee health and safety as well as zoning restrictions. Historically, we have not incurred significant expenditures to comply with these laws. However, additional laws which may be passed in the future, or a finding of a violation of or liability under existing laws, could require us to make significant expenditures and otherwise limit or restrict some of our operations.
The lack of availability of potential acquisitions at reasonable prices could harm our growth strategy.
We face stiff competition from other outdoor advertising companies for acquisition opportunities. If the prices sought by sellers of these companies were to rise, we may find fewer acceptable acquisition opportunities. In addition, the purchase price of possible acquisitions could require the incurrence of additional debt or equity financing on our part. Since the terms and availability of this financing depend to a large degree upon general economic conditions and third parties over which we have no control, we can give no assurance we will obtain the needed financing or we will obtain such financing on attractive terms. In addition, our ability to obtain financing depends on a number of other factors, many of which are also beyond our control, such as interest rates and national and local business conditions. If the cost of obtaining needed financing is too high or the terms of such financing are otherwise unacceptable in relation to the acquisition opportunity we are presented with, we may decide to forgo that opportunity. Additional indebtedness could increase our leverage and make us more vulnerable to economic downturns and may limit our ability to withstand competitive pressures. Additional equity financing could result in dilution to our shareholders.
We have substantial debt obligations that could restrict our operations and impair our financial condition.
At December 31, 2007, our total indebtedness for borrowed money was $2.7 billion, approximately $2.5 billion of which is indebtedness owed to Clear Channel Communications. As of December 31, 2007, approximately $87.1 million of such total indebtedness (excluding interest) is due in 2008, $91.9 million is due in 2009, $2.5 billion is due in 2010, $2.3 million is due in 2011 and $1.0 million thereafter. We may also incur additional substantial indebtedness in the future.
Our substantial indebtedness could have adverse consequences, including:
| increasing our vulnerability to adverse economic, regulatory and industry conditions; |
| limiting our ability to compete and our flexibility in planning for, or reacting to, changes in our business and the industry; |
| limiting our ability to borrow additional funds; and |
| requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for working capital, capital expenditures, acquisitions and other purposes. |
If our cash flow and capital resources are insufficient to service our debt obligations, we may be forced to sell assets, seek additional equity or debt capital or restructure our debt. However, these measures might be unsuccessful or inadequate in permitting us to meet scheduled debt service obligations. We may be unable to restructure or refinance our obligations and obtain additional equity financing or sell assets on satisfactory terms or at all. As a result, inability to meet our debt obligations could cause us to default on those obligations. A default under any debt instrument could, in turn, result in defaults under other debt instruments. Any such defaults could materially impair our financial condition and liquidity.
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To service our debt obligations and to fund potential capital expenditures, we will require a significant amount of cash to meet our needs, which depends on many factors beyond our control.
Our ability to service our debt obligations and to fund potential capital expenditures for display construction or renovation will require a significant amount of cash, which depends on many factors beyond our control. Our ability to make payments on and to refinance our debt will also depend on our ability to generate cash in the future. This, to an extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control.
We cannot assure our business will generate sufficient cash flow or that future borrowings will be available to us in an amount sufficient to enable us to pay our debt, including our debt to Clear Channel Communications, or to fund our other liquidity needs. If our future cash flow from operations and other capital resources are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional equity capital or restructure or refinance all or a portion of our debt, including the debt with Clear Channel Communications, on or before maturity. We cannot assure we will be able to refinance any of our debt, including the debt with Clear Channel Communications, on a timely basis or on satisfactory terms, if at all. In addition, the terms of our existing debt, including the debt with Clear Channel Communications, and other future debt may limit our ability to pursue any of these alternatives.
The $2.5 billion note and agreements with Clear Channel Communications impose restrictions on our ability to finance operations and capital needs, make acquisitions or engage in other business activities and requires prepayment from substantially all proceeds from debt or equity raised by us.
The $2.5 billion note and Master Agreement with Clear Channel Communications include restrictive covenants that, among other things, restrict our ability to:
| issue any shares of capital stock or securities convertible into capital stock; |
| incur additional debt; |
| pay dividends and make distributions; |
| make certain acquisitions and investments; |
| repurchase our stock; |
| create liens; |
| enter into transactions with affiliates; |
| enter into sale-leaseback transactions; |
| dispose of all or substantially all of our assets; and |
| merge or consolidate. |
The existence of these restrictions could limit our ability to grow and increase our revenue or respond to competitive changes.
In addition, the note with Clear Channel Communications requires us to prepay it in full upon a change of control (as defined in the note), and, upon our issuances of equity and incurrences of debt, subject to certain exceptions, to prepay the note in the amount of net proceeds received from such events. Our failure to comply with the terms and covenants in our indebtedness could lead to a default under the terms of those documents, which would entitle Clear Channel Communications or other holders to accelerate the indebtedness and declare all amounts owed due and payable.
Additional restrictions on outdoor advertising of tobacco, alcohol and other products may further restrict the categories of clients that can advertise using our products.
Out-of-court settlements between the major United States tobacco companies and all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and four other United States territories include a ban on the outdoor
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advertising of tobacco products. Other products and services may be targeted in the future, including alcohol products. Legislation regulating tobacco and alcohol advertising has also been introduced in a number of European countries in which we conduct business and could have a similar impact. Any significant reduction in alcohol-related advertising due to content-related restrictions could cause a reduction in our direct revenue from such advertisements and an increase in the available space on the existing inventory of billboards in the outdoor advertising industry.
We may be adversely affected by a general deterioration in economic conditions.
The risks associated with our businesses become more acute in periods of a slowing economy or recession, which may be accompanied by a decrease in advertising. A decline in the level of business activities of our advertisers could have an adverse effect on our revenue and profit margins. During economic slowdowns in the United States, many advertisers have reduced their advertising expenditures. The impact of slowdowns on our business is difficult to predict, but they may result in reductions in purchases of advertising. In addition, to the extent our street furniture and transit businesses rely on long-term guaranteed contracts with government entities, we may suffer losses on those contracts in times of economic slowdowns.
We may be adversely affected by the occurrence of extraordinary events, such as terrorist attacks.
The occurrence of extraordinary events, such as terrorist attacks, intentional or unintentional mass casualty incidents, or similar events may substantially decrease the use of and demand for advertising, which may decrease our revenue or expose us to substantial liability. The September 11, 2001 terrorist attacks, for example, caused a nationwide disruption of commercial activities. The occurrence of future terrorist attacks, military actions by the United States, contagious disease outbreaks, or similar events cannot be predicted, and their occurrence can be expected to further negatively affect the economies of the United States and other foreign countries where we do business generally, specifically the market for advertising.
Risks Related to Our Relationship with Clear Channel Communications
We have a short operating history as a publicly traded company and our historical financial information prior to the IPO is not necessarily representative of the results we would have achieved as an independent publicly traded company and may not be a reliable indicator of our future results.
The historical combined financial information prior to the IPO included in this Annual Report does not reflect the financial condition, results of operations or cash flows we would have achieved as an independent publicly traded company during the periods presented or those results we will achieve in the future. This is primarily a result of the following factors:
| Our historical combined financial results reflect allocations of corporate expenses from Clear Channel Communications. |
| Our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, historically have been satisfied as part of the corporate-wide cash management policies of Clear Channel Communications. Subsequent to the IPO, Clear Channel Communications is not required to provide us with funds to finance our working capital or other cash requirements. Without the opportunity to obtain financing from Clear Channel Communications, we may in the future need to obtain additional financing from banks, or through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements. We may have a lower credit rating than Clear Channel Communications and may incur debt on terms and at interest rates that will not be as favorable as those generally enjoyed by Clear Channel Communications. |
| Significant changes may occur in our cost structure, management, financing and business operations as a result of our operating as a publicly traded subsidiary of Clear Channel Communications. These changes could result in increased costs associated with reduced economies of scale, stand-alone costs for services currently provided by Clear Channel Communications, the need for additional personnel to perform services currently provided by Clear Channel Communications and the legal, accounting, |
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compliance and other costs associated with being a public company with equity securities listed on a national stock exchange. We are obligated to continue to use the services of Clear Channel Communications under the Corporate Services Agreement until such time as Clear Channel Communications owns less than 50% of the total voting power of our common stock, or longer for certain information technology services, and, in the event our Corporate Services Agreement with Clear Channel Communications terminates, we may not be able to replace the services Clear Channel Communications provides us until such time or in a timely manner or on comparable terms. |
| Pursuant to a cash management arrangement, substantially all of our cash generated from our domestic Americas operations is transferred daily by Clear Channel Communications into accounts where funds of ours and of Clear Channel Communications may be commingled. The amounts so held by Clear Channel Communications are evidenced in a cash management note issued by Clear Channel Communications to us. We do not have a commitment from Clear Channel Communications to advance funds to us, and we have no access to the cash transferred from our concentration account to the master account of Clear Channel Communications. If Clear Channel Communications were to become insolvent, we would be an unsecured creditor like other unsecured creditors of Clear Channel Communications and could experience a liquidity shortfall. |
Because Clear Channel Communications controls substantially all the voting power of our common stock, investors will not be able to affect the outcome of any shareholder vote.
As of December 31, 2007, Clear Channel Communications owned all of our outstanding shares of Class B common stock, representing approximately 89% of the outstanding shares of our common stock. Each share of our Class B common stock entitles its holder to 20 votes and each share of our Class A common stock entitles its holder to 1 vote on all matters on which shareholders are entitled to vote. As a result, Clear Channel Communications controlled approximately 99% of the total voting power of our common stock.
For so long as Clear Channel Communications continues to own shares of our common stock representing more than 50% of the total voting power of our common stock, it will have the ability to direct the election of all members of our Board of Directors and to exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations involving us, our acquisition or disposition of assets, our incurrence of indebtedness, our issuance of any additional common stock or other equity securities, our repurchase or redemption of common stock or preferred stock and our payment of dividends. Similarly, Clear Channel Communications will have the power to determine or significantly influence the outcome of matters submitted to a vote of our shareholders, including the power to prevent an acquisition or any other change in control of us. Because Clear Channel Communications interests as our controlling shareholder may differ from other shareholders interests, actions taken by Clear Channel Communications with respect to us may not be favorable to all shareholders.
We have entered into a master agreement, a corporate services agreement, a trademark license agreement and a number of other agreements with Clear Channel Communications setting forth various matters governing our relationship with Clear Channel Communications while it remains a significant shareholder in us. These agreements, along with the $2.5 billion note, govern our relationship with Clear Channel Communications and allow Clear Channel Communications to retain control over, among other things, the continued use of the trademark Clear Channel, the provision of corporate services to us and our ability to make certain acquisitions or to merge or consolidate or to sell all or substantially all our assets. The rights of Clear Channel Communications under these agreements may allow Clear Channel Communications to delay or prevent an acquisition of us that our other shareholders may consider favorable. We are not able to terminate these agreements or amend them in a manner we deem more favorable so long as Clear Channel Communications continues to own shares of our common stock representing more than 50% of the total voting power of our common stock.
Conflicts of interest may arise between Clear Channel Communications and us that could be resolved in a manner unfavorable to us.
Questions relating to conflicts of interest may arise between Clear Channel Communications and us in a number of areas relating to our past and ongoing relationships. Three of our directors continue to serve as directors of Clear Channel Communications. In addition, four of our executive officers continue to serve as executive officers
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of Clear Channel Communications. For as long as Clear Channel Communications continues to own shares of our common stock representing more than 50% of the total voting power of our common stock, it has the ability to direct the election of all the members of our Board of Directors and to exercise a controlling influence over our business and affairs.
Areas in which conflicts of interest between Clear Channel Communications and us could arise include, but are not limited to, the following:
| Cross officerships, directorships and stock ownership. The ownership interests of our directors or executive officers in the common stock of Clear Channel Communications or service as a director or officer of both Clear Channel Communications and us could create, or appear to create, conflicts of interest when directors and executive officers are faced with decisions that could have different implications for the two companies. For example, these decisions could relate to (i) the nature, quality and cost of services rendered to us by Clear Channel Communications, (ii) disagreement over the desirability of a potential acquisition opportunity, (iii) employee retention or recruiting or (iv) our dividend policy. |
| Intercompany transactions. From time to time, Clear Channel Communications or its affiliates may enter into transactions with us or our subsidiaries or other affiliates. Although the terms of any such transactions will be established based upon negotiations between employees of Clear Channel Communications and us and, when appropriate, subject to the approval of the independent directors on our Board or a committee of disinterested directors, there can be no assurance the terms of any such transactions will be as favorable to us or our subsidiaries or affiliates as may otherwise be obtained in arms length negotiations. |
| Intercompany agreements. We have entered into certain agreements with Clear Channel Communications pursuant to which it provides us certain management, administrative, accounting, tax, legal and other services, for which we reimburse Clear Channel Communications on a cost basis. In addition, we entered into a number of intercompany agreements covering matters such as tax sharing and our responsibility for certain liabilities previously undertaken by Clear Channel Communications for certain of our businesses. Pursuant to the corporate services agreement between Clear Channel Communications and us, we are contractually obligated to utilize the services of the chief executive officer of Clear Channel Communications as our Chief Executive Officer and the chief financial officer of Clear Channel Communications as our Chief Financial Officer until Clear Channel Communications owns less than 50% of the voting power of our common stock, or we provide Clear Channel Communications with six months prior written notice of termination. The terms of these agreements were established while we were a wholly owned subsidiary of Clear Channel Communications and were not the result of arms length negotiations. In addition, conflicts could arise in the interpretation or any extension or renegotiation of these existing agreements. |
If Clear Channel Communications engages in the same type of business we conduct or takes advantage of business opportunities that might be attractive to us, our ability to successfully operate and expand our business may be hampered.
Our amended and restated certificate of incorporation provides that, subject to any contractual provision to the contrary, Clear Channel Communications will have no obligation to refrain from:
| engaging in the same or similar business activities or lines of business as us; or |
| doing business with any of our clients, customers or vendors. |
In addition, the corporate opportunity policy set forth in our amended and restated certificate of incorporation addresses potential conflicts of interest between our company, on the one hand, and Clear Channel Communications and its officers and directors who are officers or directors of our company, on the other hand. The policy provides that if Clear Channel Communications acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both Clear Channel Communications and us, we will have renounced our interest in the corporate opportunity. It also provides that if one of our directors or officers who is also a director or officer of Clear Channel Communications learns of a potential transaction or matter that may be a corporate
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opportunity for both Clear Channel Communications and us, we will have renounced our interest in the corporate opportunity, unless that opportunity is expressly offered to that person in writing solely in his or her capacity as our director or officer.
If one of our officers or directors, who also serves as a director or officer of Clear Channel Communications, learns of a potential transaction or matter that may be a corporate opportunity for both Clear Channel Communications and us, our amended and restated certificate of incorporation provides that the director or officer will have no duty to communicate or present that corporate opportunity to us and will not be liable to us or our shareholders for breach of fiduciary duty by reason of Clear Channel Communications actions with respect to that corporate opportunity.
This policy could result in Clear Channel Communications having rights to corporate opportunities in which both we and Clear Channel Communications have an interest.
We are a controlled company within the meaning of the New York Stock Exchange rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements that may not provide as many protections as those afforded to shareholders of other companies.
Clear Channel Communications owns more than 50% of the total voting power of our common stock, and we are a controlled company under the NYSE corporate governance standards. As a controlled company, we may elect to utilize certain exemptions under the NYSE standards that free us from the obligation to comply with certain NYSE corporate governance requirements, including the requirements (i) that a majority of the Board of Directors consists of independent directors, (ii) that we have a Nominating and Governance Committee, and that such Committee be composed entirely of independent directors and governed by a written charter addressing the Committees purpose and responsibilities, (iii) that we have a Compensation Committee composed entirely of independent directors with a written charter addressing the Committees purpose and responsibilities and (iv) for an annual performance evaluation of the Compensation Committee. We intend to continue to utilize certain of these exemptions and, as a result, we may not create or maintain a Nominating and Governance Committee, and the Nominating and Governance Committee, if created, and the Compensation Committee may not consist entirely of independent directors, and our Board of Directors may not consist of a majority of independent directors. Accordingly, you may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.
We only have the right to use the Clear Channel brand name, logo and corporate name for so long as Clear Channel Communications owns at least 50% of the total voting power of our common stock. If Clear Channel Communications ownership falls below such 50% threshold and we fail to establish in a timely manner a new, independently recognized brand name with a strong reputation, our revenue and profitability could decline.
Our corporate name is Clear Channel Outdoor Holdings, Inc., and we and our subsidiaries currently use the Clear Channel brand name and logo in marketing our products and services. Pursuant to a trademark license agreement, Clear Channel Communications grants us the right to use the Clear Channel mark and logo in connection with our products and services and the right to use Clear Channel in our corporate name and the corporate names of our subsidiaries until 12 months after the date on which Clear Channel Communications owns less than 50% of the total voting power of our common stock. In the event our right to use the Clear Channel brand name and logo and corporate name expires, we will be required to conduct our business under a new brand name, which may not be immediately recognized by our clients and suppliers or by potential employees we are trying to recruit. We will need to expend significant time, effort and resources to establish a new brand name in the marketplace. We cannot guarantee this effort will ultimately be successful. If our effort to establish a new brand identity is unsuccessful, our business, financial condition and results of operations may suffer.
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Any future separation from Clear Channel Communications could adversely affect our business and profitability due to Clear Channel Communications strong brand and reputation.
As a subsidiary of Clear Channel Communications, our businesses marketed many of their products and services using the Clear Channel brand name and logo, and we believe the association with Clear Channel Communications has provided many benefits, including:
| a world-class brand associated with trust, integrity and longevity; |
| perception of high-quality products and services; |
| preferred status among our clients and employees; |
| strong capital base and financial strength; and |
| established relationships with U.S. federal and state regulators and non-U.S. regulators. |
Any future separation from Clear Channel Communications could adversely affect our ability to attract and retain highly qualified dedicated sales specialists for our products and services. We may be required to lower the prices of our products and services, increase our sales commissions and fees, change long-term advertising and marketing agreements and take other action to maintain our relationship with our clients, suppliers and dedicated sales specialists, all of which could have an adverse effect on our financial condition and results of operations. Any future separation from Clear Channel Communications also could cause some of our existing clients to choose to stop doing business with us, and could cause other potential clients to decide not to purchase our products and services because we are no longer part of Clear Channel Communications.
We cannot accurately predict the effect a separation from Clear Channel Communications would have on our sales, clients or employees. The risks relating to a separation from Clear Channel Communications could materialize at various times, including:
| if and when Clear Channel Communications reduces its ownership in our common stock to a level below 50% of the total voting power; and |
| if and when we are required to cease using the Clear Channel name and logo in our sales and marketing materials. |
We will not have control over our tax decisions and could be liable for income taxes owed by Clear Channel Communications.
For so long as Clear Channel Communications continues to own at least 80% of the total voting power and value of our common stock, we and certain of our subsidiaries will be included in Clear Channel Communications consolidated group for U.S. federal income tax purposes. In addition, we or one or more of our subsidiaries may be included in the combined, consolidated or unitary tax returns of Clear Channel Communications or one or more of its subsidiaries for foreign, state and local income tax purposes. Under the Tax Matters Agreement, we pay to Clear Channel Communications the amount of federal, foreign, state and local income taxes which we would be required to pay to the relevant taxing authorities if we and our subsidiaries filed combined, consolidated or unitary tax returns and were not included in the consolidated, combined or unitary tax returns of Clear Channel Communications or its subsidiaries. In addition, by virtue of its controlling ownership and the Tax Matters Agreement, Clear Channel Communications effectively controls all of our tax decisions. The Tax Matters Agreement provides that Clear Channel Communications has the sole authority to respond to and conduct all tax proceedings (including tax audits) relating to us, to file all income tax returns on our behalf and to determine the amount of our liability to (or entitlement to payment from) Clear Channel Communications under the Tax Matters Agreement. This arrangement may result in conflicts of interest between Clear Channel Communications and us. For example, under the Tax Matters Agreement, Clear Channel Communications is able to choose to contest compromise or settle any adjustment or deficiency proposed by the relevant taxing authority in a manner that may be beneficial to Clear Channel Communications and detrimental to us.
Moreover, notwithstanding the Tax Matters Agreement, federal law provides that each member of a consolidated group is liable for the groups entire tax obligation. Thus, to the extent Clear Channel Communications or other members of the group fail to make any United States federal income tax payments required by law, we
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would be liable for the shortfall. Similar principles may apply for foreign, state and local income tax purposes where we file combined, consolidated or unitary returns with Clear Channel Communications or its subsidiaries for federal, foreign, state and local income tax purposes.
If Clear Channel Communications spins off our Class B common stock to its shareholders, we have agreed in the Tax Matters Agreement to indemnify Clear Channel Communications for its tax-related liabilities in certain circumstances.
If Clear Channel Communications spins off our Class B common stock to its shareholders in a distribution intended to be tax-free under Section 355 of the Internal Revenue Code of 1986, as amended, which we refer to herein as the Code, we have agreed in the Tax Matters Agreement to indemnify Clear Channel Communications and its affiliates against any and all tax-related liabilities if such a spin-off fails to qualify as a tax-free distribution (including as a result of Section 355(e) of the Code) due to actions, events or transactions relating to our stock, assets or business, or a breach of the relevant representations or covenants made by us in the Tax Matters Agreement. If neither we nor Clear Channel Communications is responsible under the Tax Matters Agreement for any such spin-off not being tax-free under Section 355 of the Code, we and Clear Channel Communications have agreed to each be responsible for 50% of the tax-related liabilities arising from the failure of such a spin-off to so qualify.
Future sales or distributions of our shares by Clear Channel Communications could depress the market price for shares of our Class A common stock.
Clear Channel Communications may sell all or part of the shares of our common stock it owns or distribute those shares to its shareholders, including pursuant to demand registration rights described in the Registration Rights Agreement. Sales or distributions by Clear Channel Communications of substantial amounts of our common stock in the public market or to its shareholders could adversely affect prevailing market prices for our Class A common stock. Clear Channel Communications has advised us it currently intends to continue to hold all of our common stock it owns. However, Clear Channel Communications is not subject to any contractual obligation that would prohibit it from selling, spinning off, splitting off or otherwise disposing of any shares of our common stock. Consequently, we cannot assure you Clear Channel Communications will maintain its ownership of our common stock.
The terms of our arrangements with Clear Channel Communications may be more favorable than we will be able to obtain from an unaffiliated third party, and we may be unable to replace the services Clear Channel Communications provides us in a timely manner or on comparable terms.
We and Clear Channel Communications entered into a Corporate Services Agreement. Pursuant to the Corporate Services Agreement, Clear Channel Communications and its affiliates agree to provide us with corporate services, including treasury, payroll and other financial services, executive officer services, human resources and employee benefit services, legal services, information systems and network services and procurement and sourcing support.
We negotiated these arrangements with Clear Channel Communications in the context of a parent-subsidiary relationship. Although Clear Channel Communications is contractually obligated to provide us with services during the term of the Corporate Services Agreement, we cannot assure you these services will be sustained at the same level after the expiration of that agreement, or that we will be able to replace these services in a timely manner or on comparable terms. In addition, we cannot provide assurance that the amount we pay Clear Channel Communications for the services will be as favorable to us as that which may be available for comparable services provided by unrelated third parties. Other agreements with Clear Channel Communications also govern our relationship with Clear Channel Communications and provide for the allocation of employee benefit, tax and other liabilities and obligations attributable to our operations. The agreements also contain terms and provisions that may be more or less favorable than terms and provisions we might have obtained in arms length negotiations with unaffiliated third parties. If Clear Channel Communications ceases to provide services to us pursuant to those agreements, our costs of procuring those services from third parties may increase.
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The consummation of the merger between Clear Channel Communications and private equity funds sponsored by Bain Capital, LLC and Thomas H. Lee Partners L.P., or any deterioration in the financial condition of Clear Channel Communications, could adversely affect our access to the credit markets and increase our borrowing costs.
The consummation of the merger between Clear Channel Communications and private equity funds, or, for so long as Clear Channel Communications maintains a significant interest in us, a deterioration in the financial condition of Clear Channel Communications, could have the effect of increasing our borrowing costs or impairing our access to the capital markets because of our reliance on Clear Channel Communications for availability under its revolving credit facility. If the merger is consummated we may no longer be able to access Clear Channel Communications revolving credit facility, in which event we may enter into a new credit facility. We expect the interest rate associated with a new facility would be greater than the rate we currently are charged. In addition, the interest rate we pay on the $2.5 billion note is based on the weighted average cost of debt for Clear Channel Communications, which we expect to increase if the proposed merger transaction is consummated. If that cost increases, whether as a result of the consummation of the merger or a deterioration in the financial condition of Clear Channel Communications, our borrowing costs also will increase. To the extent we do not pass on our increased borrowing costs to our clients, our profitability, and potentially our ability to raise capital, could be materially affected. Also, until the first date Clear Channel Communications owns less than 50% of our voting stock, pursuant to the Master Agreement between us and Clear Channel Communications, as well as pursuant to the $2.5 billion note, Clear Channel Communications will have the ability to limit our ability to incur debt or issue equity securities, which could adversely affect our ability to meet our liquidity needs or to grow our business.
Risks Related to Our Class A Common Stock
Our stock ownership by Clear Channel Communications, provisions in our agreements with Clear Channel Communications and our corporate governance documents and Delaware law may delay or prevent an acquisition of us that our other shareholders may consider favorable, which could decrease the value of your shares of Class A common stock.
For as long as Clear Channel Communications continues to own shares of our common stock representing more than 50% of the total voting power of our common stock, it will have the ability to control decisions regarding an acquisition of us by a third party. As a controlled company, we are exempt from some of the corporate governance requirements of the NYSE, including the requirement that our board of directors be comprised of a majority of independent directors. In addition, our amended and restated certificate of incorporation, bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include restrictions on the ability of our shareholders to remove directors, supermajority voting requirements for shareholders to amend our organizational documents, restrictions on a classified board of directors and limitations on action by our shareholders by written consent. Some of these provisions, such as the limitation on shareholder action by written consent, only become effective once Clear Channel Communications no longer controls us. In addition, our board of directors has the right to issue preferred stock without shareholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law also imposes certain restrictions on mergers and other business combinations between any holder of 15% or more of our outstanding voting stock. These restrictions under Delaware law do not apply to Clear Channel Communications while it retains at least 15% or more of our Class B common stock. Although we believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics and thereby provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some shareholders.
If Clear Channel Communications spins off our high vote Class B common stock to its shareholders and such shares do not convert into Class A common stock upon a sale or other transfer subsequent to such distribution, the voting rights of our Class A common stock will continue to be disproportionately lower than the voting rights of our Class B common stock.
In connection with any distribution of shares of our Class B common stock to Clear Channel Communications common shareholders in a spin-off, Clear Channel Communications may elect in its sole discretion whether our Class B common stock so distributed will automatically convert into shares of Class A common stock upon a transfer or sale by the recipient subsequent to the spin-off or whether the Class B common stock will continue as high vote Class B common stock after the distribution. In the event the Class B common
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stock does not convert into Class A common stock upon a sale or transfer subsequent to a spin-off, the voting rights of Class A common stock will continue to be disproportionately lower than the voting rights of our Class B common stock. Therefore, the holders of our Class B common stock will continue to be able to direct the election of all the members of our board of directors and exercise a controlling influence over our business and affairs.
We currently do not intend to pay dividends on our Class A common stock.
We do not expect to pay dividends on our Class A common stock in the foreseeable future. We are a holding company with no independent operations and no significant assets other than the stock of our subsidiaries. We therefore are dependent upon the receipt of dividends or other distributions from our subsidiaries to pay dividends. In addition, pursuant to the covenants on the $2.5 billion note with Clear Channel Communications, our ability to pay dividends is restricted. Accordingly, if you purchase shares in us, the price of our Class A common stock must appreciate in order to realize a gain on your investment. This appreciation may not occur.
Caution Concerning Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. Except for the historical information, this report contains various forward-looking statements which represent our expectations or beliefs concerning future events, including the future levels of cash flow from operations. Management believes all statements expressing expectations and projections with respect to future matters, including the success of Clear Channel Communications Merger Agreement, our ability to negotiate contracts having more favorable terms and the availability of capital resources, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. We caution that these forward-looking statements involve a number of risks and uncertainties and are subject to many variables which could impact our financial performance. These statements are made on the basis of managements views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance, however, that managements expectations will necessarily come to pass.
A wide range of factors could materially affect future developments and performance, including:
| the impact of general economic and political conditions in the United States and in other countries in which we currently do business, including those resulting from recessions, political events and acts or threats of terrorism or military conflicts; |
| the impact of the geopolitical environment; |
| our ability to integrate the operations of recently acquired companies; |
| shifts in population and other demographics; |
| industry conditions, including competition; |
| fluctuations in operating costs; |
| technological changes and innovations; |
| changes in labor conditions; |
| fluctuations in exchange rates and currency values; |
| capital expenditure requirements; |
| the outcome of pending and future litigation settlements; |
| legislative or regulatory requirements; |
| interest rates; |
| the effect of leverage on our financial position and earnings; |
| taxes; |
| access to capital markets; and |
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| certain other factors set forth in our filings with the Securities and Exchange Commission. |
This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
Item 1B. Unresolved Staff Comments
Not Applicable.
Our worldwide corporate headquarters are in San Antonio, Texas. The headquarters of our Americas operations are in Phoenix, Arizona, and the headquarters of our International operations are in London, England. The types of properties required to support each of our advertising branches include offices, production facilities and structure sites. A branch and production facility is generally located in an industrial or warehouse district.
We own or have acquired permanent easements for relatively few parcels of real property that serve as the sites for our outdoor displays. Our remaining outdoor display sites are leased. Our leases generally range from month-to-month to year-to-year and can be for terms of ten years or longer, and many provide for renewal options.
There is no significant concentration of displays under any one lease or subject to negotiation with any one landlord. We believe an important part of our management activity is to negotiate suitable lease renewals and extensions.
From time to time, we are involved in legal proceedings arising in the ordinary course of business. Under our agreements with Clear Channel Communications, we have assumed and will indemnify Clear Channel Communications for liabilities related to our business. Other than as described below, we do not believe there is any litigation pending that would have, individually or in the aggregate, a material adverse effect on our financial position, results of operations or cash flows.
We are the defendant in a lawsuit filed October 20, 1998 by Jorge Luis Cabrera, Sr., and Martha Serrano, as personal representatives of the Estate of Jorge Luis Cabrera, Jr., in the 11th Judicial Circuit in and for Miami-Dade County, Florida. The plaintiff alleged we negligently constructed, installed or maintained the electrical system in a bus shelter, which resulted in the death of Jorge Luis Cabrera, Jr. Martha Serrano settled her claims with us. On June 24, 2005, the jury rendered a verdict in favor of the plaintiff, and awarded the plaintiff $4.1 million in actual damages and $61.0 million in punitive damages. The Company filed a motion to have the punitive damages award reduced. The trial judge granted the Companys motion. A final judgment in the amount of $4.1 million in compensatory damages and $12.3 million in punitive damages was signed on January 23, 2006. The Company has appealed the underlying judgment and the Plaintiff filed a cross-appeal. The Plaintiff seeks to reinstate the original award of punitive damages. We have insurance coverage for up to approximately $50.0 million in damages for this matter.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders in the fourth quarter of fiscal year 2007.
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PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class A common stock trades on the New York Stock Exchange under the symbol CCO. There were 104 shareholders of record as of February 13, 2008. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. The following table sets forth, for the calendar quarters indicated, the reported high and low sales price of our Class A common stock as reported on the NYSE:
Common Stock Market Price | ||||||
High | Low | |||||
2006 |
||||||
First Quarter |
$ | 23.95 | $ | 18.49 | ||
Second Quarter |
24.20 | 19.31 | ||||
Third Quarter |
21.26 | 18.66 | ||||
Fourth Quarter |
28.13 | 19.49 | ||||
2007 |
||||||
First Quarter |
$ | 31.14 | $ | 24.91 | ||
Second Quarter |
30.12 | 25.95 | ||||
Third Quarter |
29.24 | 22.81 | ||||
Fourth Quarter |
28.57 | 23.65 |
See Part III, Item 12 for information regarding securities authorized for issuance under our equity compensation plans.
Dividend Policy
To date, we have not paid dividends on our common stock and we do not anticipate paying any dividends on the shares of our common stock in the foreseeable future. Pursuant to the covenants on the $2.5 billion note with Clear Channel Communications, our ability to pay dividends is restricted. If cash dividends were to be paid on our common stock, holders of Class A common stock and Class B common stock would share equally, on a per share basis, in any such cash dividend.
Item 6. Selected Financial Data
We have prepared our consolidated and combined financial statements as if Clear Channel Outdoor had been in existence as a separate company throughout all relevant periods. The historical financial and other data prior to the IPO, which occurred on November 11, 2005, have been prepared on a combined basis from Clear Channel Communications consolidated financial statements using the historical results of operations and bases of the assets and liabilities of Clear Channel Communications Americas outdoor and International outdoor advertising businesses and give effect to allocations of expenses from Clear Channel Communications. Our historical financial data prior to the IPO may not necessarily be indicative of our future performance nor will such data reflect what our financial position and results of operations would have been had we operated as an independent publicly traded company during the periods shown.
The results of operations data, segment data and cash flow data for the years presented below were derived from our audited consolidated and combined financial statements.
You should read the information contained in this table in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations, and the historical audited consolidated and combined financial statements and the accompanying notes thereto included elsewhere in this Annual Report.
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(In thousands, except per share data) | Year Ended December 31, | |||||||||||||||||||
2007 (1) | 2006 (2) | 2005 | 2004 | 2003 | ||||||||||||||||
Results of Operations Data: |
||||||||||||||||||||
Revenue |
$ | 3,281,836 | $ | 2,897,721 | $ | 2,666,078 | $ | 2,447,040 | $ | 2,174,597 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Direct operating expenses |
1,734,845 | 1,514,842 | 1,405,758 | 1,322,488 | 1,185,401 | |||||||||||||||
Selling, general and administrative expenses |
537,994 | 486,994 | 478,343 | 439,286 | 404,878 | |||||||||||||||
Depreciation and amortization |
399,483 | 407,730 | 400,639 | 388,217 | 379,640 | |||||||||||||||
Corporate expenses |
66,080 | 65,542 | 61,096 | 53,770 | 54,233 | |||||||||||||||
Gain on disposition of assets net |
11,824 | 22,846 | 3,488 | 10,791 | 16,669 | |||||||||||||||
Operating income |
555,258 | 445,459 | 323,730 | 254,070 | 167,114 | |||||||||||||||
Interest expense on debt with Clear Channel Communications |
151,363 | 153,500 | 182,667 | 145,653 | 145,648 | |||||||||||||||
Interest expense |
6,518 | 9,083 | 15,687 | 14,177 | 14,201 | |||||||||||||||
Equity in earnings (loss) of nonconsolidated affiliates |
4,402 | 7,460 | 9,844 | (76 | ) | (5,142 | ) | |||||||||||||
Other income (expense) net |
10,113 | 331 | (12,291 | ) | (16,530 | ) | (21,358 | ) | ||||||||||||
Income (loss) before income taxes, minority interest and cumulative effect of a change in accounting principle |
411,892 | 290,667 | 122,929 | 77,634 | (19,235 | ) | ||||||||||||||
Income tax (expense) benefit: |
||||||||||||||||||||
Current |
(111,726 | ) | (82,553 | ) | (51,173 | ) | (23,422 | ) | 12,092 | |||||||||||
Deferred |
(34,915 | ) | (39,527 | ) | 5,689 | (39,132 | ) | (23,944 | ) | |||||||||||
Income tax (expense) benefit |
(146,641 | ) | (122,080 | ) | (45,484 | ) | (62,554 | ) | (11,852 | ) | ||||||||||
Minority interest expense net |
19,261 | 15,515 | 15,872 | 7,602 | 3,906 | |||||||||||||||
Income (loss) before cumulative effect of a change in accounting principle |
245,990 | 153,072 | 61,573 | 7,478 | (34,993 | ) | ||||||||||||||
Cumulative effect of a change in accounting principle, net of tax of $113,173 in 2004 (3) |
| | | (162,858 | ) | | ||||||||||||||
Net income (loss) |
$ | 245,990 | $ | 153,072 | $ | 61,573 | $ | (155,380 | ) | $ | (34,993 | ) | ||||||||
Net income (loss) per common share: |
||||||||||||||||||||
Basic: |
||||||||||||||||||||
Income (loss) before cumulative effect of a change in accounting principle |
$ | .69 | $ | .43 | $ | .19 | $ | .02 | $ | (.11 | ) | |||||||||
Cumulative effect of a change in accounting principle |
| | | (.52 | ) | | ||||||||||||||
Net income (loss) |
$ | .69 | $ | .43 | $ | .19 | $ | (.50 | ) | $ | (.11 | ) | ||||||||
Weighted average common shares |
354,838 | 352,155 | 319,890 | 315,000 | 315,000 | |||||||||||||||
Diluted: |
||||||||||||||||||||
Income (loss) before cumulative effect of a change in accounting principle |
$ | .69 | $ | .43 | $ | .19 | $ | .02 | $ | (.11 | ) | |||||||||
Cumulative effect of a change in accounting principle |
| | | (.52 | ) | | ||||||||||||||
Net income (loss) |
$ | .69 | $ | .43 | $ | .19 | $ | (.50 | ) | $ | (.11 | ) | ||||||||
Weighted average common shares |
355,806 | 352,262 | 319,921 | 315,000 | 315,000 |
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(In thousands) | As of December 31, | ||||||||||||||
2007 (1) | 2006 (2) | 2005 | 2004 | 2003 | |||||||||||
Balance Sheet Data: |
|||||||||||||||
Current assets |
$ | 1,607,107 | $ | 1,189,915 | $ | 1,050,180 | $ | 1,107,240 | $ | 958,669 | |||||
Property, plant and equipment net |
2,244,108 | 2,191,839 | 2,153,428 | 2,195,985 | 2,264,106 | ||||||||||
Total assets |
5,935,604 | 5,421,891 | 4,918,345 | 5,240,933 | 5,232,820 | ||||||||||
Current liabilities |
921,292 | 841,509 | 793,812 | 749,055 | 736,202 | ||||||||||
Long-term debt, including current maturities |
2,682,021 | 2,684,176 | 2,727,786 | 1,639,380 | 1,670,017 | ||||||||||
Shareholders/owners equity |
1,982,730 | 1,586,378 | 1,209,437 | 2,729,653 | 2,760,164 |
(1) | Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48. In accordance with the provisions of FIN 48, the effects of adoption were accounted for as a cumulative-effect adjustment recorded to the balance of retained earnings on the date of adoption. See Note J to the Companys financial statements. |
(2) | Effective January 1, 2006, the Company adopted FASB Statement No. 123(R), Share-Based Payment. In accordance with the provisions of Statement 123(R), the Company elected to adopt the standard using the modified prospective method. See Note K to the Companys financial statements. |
(3) | Cumulative effect of change in accounting principle for the year ended December 31, 2004 related to a non-cash charge recognized in accordance with the adoption of Topic D-108, Use of Residual Method to Value Acquired Assets other than Goodwill. |
The Selected Financial Data should be read in conjunction with Managements Discussion and Analysis.
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
Managements discussion and analysis of our financial condition and results of operations is provided as a supplement to the audited annual financial statements and accompanying notes thereto to help provide an understanding of our financial condition, changes in our financial condition and results of our operations. The information included herein should be read in conjunction with the annual financial statements and is organized as follows:
| Overview. This section provides a general description of our business, as well as other matters we believe are important in understanding our results of operations and financial condition and in anticipating future trends. |
| Results of operations. This section provides an analysis of our results of operations for the years ended December 31, 2007, 2006 and 2005. |
Our discussion is presented on both a consolidated and segment basis. Our reportable operating segments are Americas and International. Approximately 93% of our 2007 Americas revenue was derived from the United States, with the balance derived primarily from Canada and Latin America. Approximately half of our 2007 International revenue was derived from France and the United Kingdom.
We manage our segments primarily focusing on operating income. Corporate expenses, gain on disposition of asset net, interest expense, equity in earnings of nonconsolidated affiliates, other income (expense) net, income taxes and minority interest expense net are managed on a total company basis and are, therefore, included only in our discussion of consolidated results.
| Financial condition and liquidity. This section provides a discussion of our financial condition as of December 31, 2007, as well as an analysis of our cash flows for the years ended December 31, 2007, 2006 and 2005. The discussion of our financial condition and liquidity includes summaries of (i) our primary sources of liquidity, (ii) our key debt covenants and (iii) our outstanding debt and commitments (both firm and contingent) that existed as of December 31, 2007. |
| Seasonality and Market risk management. These sections discuss seasonality and how we manage exposure to potential losses arising from adverse changes in foreign currency exchange rates and interest rates. |
| Recent accounting pronouncements and Critical accounting estimates. These sections discuss accounting policies considered to be important to our financial condition and results of operations and which require significant judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note A to our consolidated and combined financial statements included elsewhere in this Annual Report. |
OVERVIEW
Description of Business
Our revenue is derived from selling advertising space on approximately 897,000 displays owned or operated as of December 31, 2007, consisting primarily of billboards, street furniture and transit displays. We own the majority of our advertising displays, which typically are located on sites that we either lease or own or for which we have acquired permanent easements. Our advertising contracts with clients typically outline the number of displays reserved, the duration of the advertising campaign and the unit price per display.
Our advertising rates are based on a number of different factors including location, competition, size of display, illumination, market and gross rating points. Gross ratings points is the total number of impressions delivered by a display or group of displays, expressed as a percentage of a market population. The number of impressions delivered by a display is measured by the number of people passing the site during a defined period of time and, in some International markets, is weighted to account for such factors as illumination, proximity to other
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displays and the speed and viewing angle of approaching traffic. Management typically monitors our business by reviewing the average rates, average revenue per display, or yield, occupancy and inventory levels of each of our display types by market. In addition, because a significant portion of our advertising operations are conducted in foreign markets, the largest being France and the United Kingdom, management reviews the operating results from our foreign operations on a constant dollar basis. A constant dollar basis allows for comparison of operations independent of foreign exchange movements.
The significant expenses associated with our operations include (i) direct production, maintenance and installation expenses, (ii) site lease expenses for land under our displays and (iii) revenue-sharing or minimum guaranteed amounts payable under our billboard, street furniture and transit display contracts. Our direct production, maintenance and installation expenses include costs for printing, transporting and changing the advertising copy on our displays, the related labor costs, the vinyl and paper costs and the costs for cleaning and maintaining our displays. Vinyl and paper costs vary according to the complexity of the advertising copy and the quantity of displays. Our site lease expenses include lease payments for use of the land under our displays, as well as any revenue-sharing arrangements or minimum guaranteed amounts payable we may have with the landlords. The terms of our site leases and revenue-sharing or minimum guaranteed contracts generally range from 1 to 20 years.
In our International business, market practices require us to sell billboards and street furniture as network packages with contract terms typically ranging from one to two weeks, compared to contract terms typically ranging from 4 weeks to one year in the United States. In addition, competitive bidding for street furniture and transit contracts, which constitute a larger portion of our International business, and a different regulatory environment for billboards, result in higher site lease cost in our International business compared to our Americas business. As a result, our margins are typically less in our International business than in the Americas.
Our street furniture and transit display contracts, the terms of which range from 3 to 20 years, generally require us to make upfront investments in property, plant and equipment. These contracts may also include upfront lease payments and/or minimum annual guaranteed lease payments. We can give no assurance that our cash flows from operations over the terms of these contracts will exceed the upfront and minimum required payments.
Our 2007 results of operations include a full year of the results of operations of Interspace Airport Advertising, or Interspace, and our results of operations for 2006 include a partial year of the results of operations of Interspace, which we acquired in July 2006.
Relationship with Clear Channel Communications
We became a publicly traded company on November 11, 2005, through an initial public offering, or IPO, in which we sold 10% of our common stock, or 35.0 million shares of our Class A common stock. Prior to our IPO we were an indirect wholly-owned subsidiary of Clear Channel Communications. Clear Channel Communications currently owns all of our outstanding shares of Class B common stock representing approximately 89% of the outstanding shares of our common stock and approximately 99% of the total voting power of our common stock.
On November 16, 2006, Clear Channel Communications agreed to be acquired by a group of equity funds sponsored by Bain Capital Partners, LLC and Thomas H. Lee Partners, L.P. On September 25, 2007, Clear Channel Communications shareholders approved the Merger Agreement. The closing of the transaction is subject to customary closing conditions. Assuming satisfaction of the closing conditions, the parties expect to close the merger by the end of the first quarter of 2008.
There are several agreements which govern our relationship with Clear Channel Communications including the Corporate Services Agreement, Employee Matters Agreement and Tax Matters Agreement. Clear Channel Communications has the right to terminate these agreements in various circumstances. As of the date of the filing of this report, no notice of termination of any of these agreements has been received from Clear Channel Communications.
In accordance with the Master Agreement, our branch managers follow a corporate policy allowing Clear Channel Communications to use, without charge, Americas displays they believe would otherwise be unsold. Our
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sales personnel receive partial revenue credit for that usage for compensation purposes. This partial revenue credit is not included in our reported revenue. Clear Channel Communications bears the cost of producing the advertising and we bear the costs of installing and removing this advertising. In 2007, we estimated this discounted revenue would have been less than 1% of our Americas revenue.
Basis of Presentation
Our combined financial statements for the periods prior to our IPO have been derived from the financial statements and accounting records of Clear Channel Communications, principally from the statements and records representing Clear Channel Communications Americas and International Outdoor segments, using the historical results of operations and historical bases of assets and liabilities of our business. The consolidated and combined statements of operations include expense allocations for certain corporate functions historically provided to us by Clear Channel Communications. These allocations were made on a specifically identifiable basis or using relative percentages of headcount as compared to Clear Channel Communications other businesses or other methods. We and Clear Channel Communications considered these allocations to be a reflection of the utilization of services provided.
Under the Corporate Services Agreement, Clear Channel Communications allocates to us our share of costs for services provided on our behalf based on actual direct costs incurred by Clear Channel Communications or an estimate of Clear Channel Communications expenses incurred on our behalf. For the years ended December 31, 2007, 2006 and 2005, we recorded approximately $20.3 million, $24.3 million and $16.0 million, respectively, as a component of corporate expenses for these services.
We believe the assumptions underlying the combined financial statements prior to the IPO are reasonable. However, the combined financial statements may not necessarily reflect our results of operations, financial position and cash flows in the future or what our results of operations, financial position and cash flows would have been had we operated as a separate, stand-alone company during the periods presented.
Share-Based Payments
We adopted FAS 123(R), Share-Based Payment, on January 1, 2006, under the modified-prospective approach which requires us to recognize employee compensation cost related to our stock option grants in the same line items as cash compensation for all options granted after the date of adoption as well as for any options that were unvested at adoption. Under the modified-prospective approach, no stock option expense attributable to these options is reflected in the financial statements for years prior to adoption. The amounts recorded as share-based payments in the financial statements during 2005 relate to the expense associated with restricted stock awards. As of December 31, 2007, there was $20.7 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of approximately three years.
The following table details compensation costs related to share-based payments for the years ended December 31, 2007 and 2006:
(In thousands) | Year Ended December 31, | |||||
2007 | 2006 | |||||
Direct operating expenses |
$ | 6,951 | $ | 4,328 | ||
Selling, general and administrative expenses |
2,682 | 1,683 | ||||
Corporate expenses |
538 | 88 | ||||
Total share-based payments |
$ | 10,171 | $ | 6,099 | ||
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RESULTS OF OPERATIONS
Consolidated and Combined Results of Operations
The following table summarizes our historical results of operations:
(In thousands) | Year Ended December 31, | % Change | ||||||||||||||||
2007 | 2006 | 2005 | 2007 v. 2006 |
2006 v. 2005 |
||||||||||||||
Revenue |
$ | 3,281,836 | $ | 2,897,721 | $ | 2,666,078 | 13 | % | 9 | % | ||||||||
Operating expenses: |
||||||||||||||||||
Direct operating expenses |
1,734,845 | 1,514,842 | 1,405,758 | 15 | % | 8 | % | |||||||||||
Selling, general and administrative expenses |
537,994 | 486,994 | 478,343 | 10 | % | 2 | % | |||||||||||
Depreciation and amortization |
399,483 | 407,730 | 400,639 | (2 | %) | 2 | % | |||||||||||
Corporate expenses |
66,080 | 65,542 | 61,096 | 1 | % | 7 | % | |||||||||||
Gain on disposition of assets net |
11,824 | 22,846 | 3,488 | (48 | %) | 555 | % | |||||||||||
Operating income |
555,258 | 445,459 | 323,730 | 25 | % | 38 | % | |||||||||||
Interest expense (including interest on debt with Clear Channel Communications) |
157,881 | 162,583 | 198,354 | |||||||||||||||
Equity in earnings of nonconsolidated affiliates |
4,402 | 7,460 | 9,844 | |||||||||||||||
Other income (expense) net |
10,113 | 331 | (12,291 | ) | ||||||||||||||
Income before income taxes and minority interest |
411,892 | 290,667 | 122,929 | |||||||||||||||
Income tax (expense) benefit: |
||||||||||||||||||
Current |
(111,726 | ) | (82,553 | ) | (51,173 | ) | ||||||||||||
Deferred |
(34,915 | ) | (39,527 | ) | 5,689 | |||||||||||||
Income tax (expense) benefit |
(146,641 | ) | (122,080 | ) | (45,484 | ) | ||||||||||||
Minority interest expense net |
19,261 | 15,515 | 15,872 | |||||||||||||||
Net income |
$ | 245,990 | $ | 153,072 | $ | 61,573 | ||||||||||||
Revenue
Our revenue increased approximately $384.1 million, or 13%, during 2007 as compared to 2006. Our International revenue increased $240.4 million, including approximately $133.3 million related to movements in foreign exchange and the remainder associated with growth across inventory categories. Our Americas revenue increased $143.7 million driven by increases in bulletin, street furniture, airports and taxi display revenues as well as $32.1 million from Interspace.
Our revenue increased approximately $231.6 million, or 9%, during 2006 as compared to 2005. Our Americas segments revenue increased $125.0 million from an increase in revenue across our displays as well as the acquisition of Interspace which contributed approximately $30.2 million to revenue in 2006. Our International segment contributed $106.7 million, which includes approximately $44.9 million during the first six months of 2006 related to our consolidation of Clear Media Limited, a Chinese outdoor advertising company. In July 2005, we increased our investment in Clear Media to a majority controlling interest. We previously accounted for this investment as an equity method investment. Increased street furniture revenue also contributed to our International revenue growth. Our 2006 revenue increased $17.4 million due to movements in foreign exchange.
Direct Operating Expenses
Direct operating expenses increased $220.0 million for 2007 compared to 2006. International direct operating expenses increased $163.8 million principally from $88.0 million related to movements in foreign exchange. Americas direct operating expenses increased $56.2 million primarily attributable to increased site lease expenses associated with new contracts and the increase in transit revenue as well as approximately $14.9 million from Interspace.
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Direct operating expenses increased $109.1 million for 2006 compared to 2005. Americas direct operating expenses increased $43.8 million driven by increased site lease expenses associated with the increase in revenue and the acquisition of Interspace which contributed $13.0 million to direct operating expenses in 2006. Our International segment contributed $65.2 million, of which $18.0 million during the first six months of 2006 related to our consolidation of Clear Media and the remainder was principally due to an increase in site lease expenses. Included in our direct operating expense growth was $10.6 million from increases in foreign exchange. Share-based payments included in direct operating expenses associated with the adoption of FAS 123(R) were $4.3 million for 2006.
Selling, General and Administrative Expenses (SG&A)
SG&A increased $51.0 million during 2007 compared to 2006. International SG&A expenses increased $31.9 million primarily related to movements in foreign exchange. Americas SG&A expenses increased $19.1 million mostly attributable to sales expenses associated with the increase in revenue and $6.7 million from Interspace.
SG&A increased $8.7 million during 2006 compared to 2005. SG&A increased $20.6 million in our Americas segment principally related to an increase in bonus and commission expenses associated with the increase in revenue. Our International SG&A expenses declined $11.9 million primarily attributable to a $9.8 million reduction recorded in 2006 as a result of the favorable settlement of a legal proceeding, as well as $26.6 million related to restructuring our businesses in France recorded in the third quarter of 2005. Partially offsetting this decline in our International SG&A was $9.5 million from our consolidation of Clear Media. Included in our SG&A expense growth in 2006 was $3.9 million from increases in foreign exchange. Share-based payments included in SG&A associated with the adoption of FAS 123(R) were $1.7 million for 2006.
Depreciation and Amortization
Depreciation and amortization decreased $8.2 million in 2007 as compared to 2006. The decrease was primarily due to a reduction in amortization from International contracts, partially offset by an increase from Interspace and the effects of foreign exchange.
Depreciation and amortization increased $7.1 million in 2006 as compared to 2005. The increase is primarily attributable to the consolidation of Clear Media and the acquisition of Interspace, partially offset by a decrease in depreciation as a result of fewer display removals in 2006 which resulted in less accelerated depreciation.
Corporate Expenses
Corporate expenses were comparable in 2007 as compared to 2006. Corporate expenses increased $4.4 million in 2006 as compared to 2005. The increase was a result of higher performance related bonus expense and additional outside professional services primarily from costs related to the first full year as a public Company.
Clear Channel Communications provides management services to us, which include, among other things, (i) treasury, payroll and other financial related services, (ii) executive officer services, (iii) human resources and employee benefits services, (iv) legal, public affairs and related services, (v) information systems, network and related services, (vi) investment services, (vii) procurement and sourcing support services, and (viii) other general corporate services. These services are allocated to us based on actual direct costs incurred or on Clear Channel Communications estimate of expenses relative to a seasonally adjusted headcount. For the years ended December 31, 2007, 2006, and 2005, we recorded approximately $20.3 million, $24.3 million, and $16.0 million, respectively, as a component of corporate expenses for these services.
Gain on the Disposition of Assets Net
The gain on disposition of assets net of $11.8 million for the year ended December 31, 2007, primarily related to an $8.9 million gain from the sale of street furniture assets and land in our International segment.
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The gain on disposition of assets net of $22.8 million for the year ended December 31, 2006, primarily related to a $13.2 million gain in our Americas segment from the exchange of assets in one of our markets for the assets of a third party located in a different market.
Interest Expense (Including Interest on Debt with Clear Channel Communications)
Interest expense decreased $4.7 million during 2007 as compared to 2006, primarily as a result of a decline in the average debt balance during the period.
Interest expense decreased $35.8 million during 2006 as compared to 2005, primarily as a result of a decrease in average debt outstanding. Prior to the IPO, we had two fixed principal and interest rate notes in place. The first note, in the original principal amount of approximately $1.4 billion, accrued interest at 10% per annum. The second note, in the original principal amount of $73.0 million, accrued interest at 9% per annum. We used all of the net proceeds from the IPO, along with our balance in the Due from Clear Channel Communications account, to repay a portion of the outstanding balances of the $1.4 billion and $73.0 million notes. The remaining balance of $393.7 million was recorded as a capital contribution pursuant to the Master Agreement between us and Clear Channel Communications.
If the proposed merger transaction between Clear Channel Communications and private equity funds sponsored by Bain Capital Partners, LLC and Thomas H. Lee Partners L.P. is consummated, we expect interest expense will increase.
Other Income (Expense) Net
Other income net of $10.1 million and $0.3 million for the years ended December 31, 2007 and 2006, respectively, relates primarily to foreign exchange gains.
Income Taxes
Our operations are included in a consolidated income tax return filed by Clear Channel Communications. However, for our financial statements, our provision for income taxes was computed on the basis that we file separate consolidated federal income tax returns with our subsidiaries.
Our effective tax rate for the year ended December 31, 2007 was 36%. The increase in current tax expense of $29.2 million for the year ended December 31, 2007 over 2006 was due primarily to an increase in Income before income taxes and minority interest of $121.2 million. Deferred tax expense decreased $4.6 million for the year ended December 31, 2007 compared to 2006 primarily due to additional deferred tax expense of approximately $12.8 recorded in 2006 related to the filing of an amended tax return. The amendment was mainly due to a revised tax loss on the like kind exchange of certain assets. In addition, the company recorded deferred tax expense of approximately $16.7 million in 2006 related to the uncertainty of our ability to utilize certain tax losses in the future for certain international operations. The changes noted above were partially offset by additional deferred tax expense of approximately $19.8 million recorded in 2007 as a result of tax depreciation expense related to capital expenditures in certain foreign jurisdictions.
Our effective tax rate for the year ended December 31, 2006 was 42%. The increase in current tax expense of $31.4 million for the year ended December 31, 2006 over 2005 was due primarily to an increase in Income before income taxes and minority interest of $167.7 million. This increase was partially offset by current tax benefits of approximately $20.4 million recorded in 2006 related to tax losses on the disposition of certain operating assets and the filing of an amended tax return. The amendment primarily related to a revised tax loss on the like kind exchange of certain outdoor assets. Deferred tax expense increased by $45.2 million for the year ended December 31, 2006 over 2005 primarily due to the tax losses on the disposition of certain operating assets and the filing of the amended tax return mentioned above. In addition, foreign deferred tax expense increased by $25.9 million for the year ended December 31, 2006 primarily due to (i) the reversal of deferred tax assets related to tax losses in certain foreign jurisdictions and the uncertainty of the ability to utilize those tax losses in the future and (ii) increased deferred tax benefits in 2005 due to a change in the carrying value of certain deferred tax liabilities as a result of certain local country law and tax rate changes.
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Our effective tax rate for the year ended December 31, 2005 was 37%. During 2005, the company recorded a current tax benefit of approximately $8.0 million due to the favorable resolution of certain tax contingencies in 2005.
Americas Results of Operations
(In thousands) | Year Ended December 31, | % Change | |||||||||||||
2007 | 2006 | 2005 | 2007 v. 2006 |
2006 v. 2005 |
|||||||||||
Revenue |
$ | 1,485,058 | $ | 1,341,356 | $ | 1,216,382 | 11 | % | 10 | % | |||||
Direct operating expenses |
590,563 | 534,365 | 490,519 | 11 | % | 9 | % | ||||||||
Selling, general and administrative expenses |
226,448 | 207,326 | 186,749 | 9 | % | 11 | % | ||||||||
Depreciation and amortization |
189,853 | 178,970 | 180,559 | 6 | % | (1 | %) | ||||||||
Operating income |
$ | 478,194 | $ | 420,695 | $ | 358,555 | 14 | % | 17 | % | |||||
2007 v. 2006
Americas revenue increased $143.7 million, or 11%, during 2007 as compared to 2006 with Interspace contributing approximately $32.1 million to the increase. The growth occurred across our inventory, including bulletins, street furniture, airports and taxi displays. The revenue growth was primarily driven by bulletin revenue attributable to increased rates and airport revenue which had both increased rates and occupancy. Leading advertising categories during the year were telecommunications, retail, automotive, financial services and amusements. Revenue growth occurred across our markets, led by Los Angeles, New York, Washington/Baltimore, Atlanta, Boston, Seattle and Minneapolis.
Our Americas direct operating expenses increased $56.2 million primarily from an increase of $46.6 million in site lease expenses associated with new contracts and the increase in airport, street furniture and taxi revenues. Interspace contributed $14.9 million to the increase. Our SG&A expenses increased $19.1 million primarily from bonus and commission expenses associated with the increase in revenue and from Interspace, which contributed approximately $6.7 million to the increase.
Depreciation and amortization increased $10.9 million during 2007 compared to 2006 primarily associated with $5.9 million from Interspace.
2006 v. 2005
Our Americas revenue increased 10% during 2006 as compared to 2005 from revenue growth across our inventory. We experienced rate increases on most of our inventory while occupancy remained essentially unchanged during 2006 as compared to 2005. Our airport revenue increased $44.8 million in 2006 as compared to 2005 primarily related to $30.2 million from our acquisition of Interspace in July 2006. Revenue growth occurred across both our large and small markets such as Miami, San Antonio, Sacramento, Albuquerque and Des Moines.
Direct operating expenses increased $43.8 million in 2006 as compared to 2005 primarily from an increase in site lease expenses of approximately $30.2 million as well as $3.4 million related to the adoption of FAS 123(R). Interspace contributed $13.0 million to direct operating expenses in 2006. Our SG&A expenses increased $20.6 million in 2006 over 2005 primarily from an increase in bonus and commission expenses of $7.6 million related to the increase in revenue, $6.2 million from Interspace and $1.3 million of share-based payments related to the adoption of FAS 123(R).
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International Results of Operations
(In thousands) | Year Ended December 31, | % Change | |||||||||||||
2007 | 2006 | 2005 | 2007 v. 2006 |
2006 v. 2005 |
|||||||||||
Revenue |
$ | 1,796,778 | $ | 1,556,365 | $ | 1,449,696 | 15 | % | 7 | % | |||||
Direct operating expenses |
1,144,282 | 980,477 | 915,239 | 17 | % | 7 | % | ||||||||
Selling, general and administrative expenses |
311,546 | 279,668 | 291,594 | 11 | % | (4 | %) | ||||||||
Depreciation and amortization |
209,630 | 228,760 | 220,080 | (8 | %) | 4 | % | ||||||||
Operating income |
$ | 131,320 | $ | 67,460 | $ | 22,783 | 95 | % | 196 | % | |||||
2007 v. 2006
International revenue increased $240.4 million, or 15%, in 2007 as compared to 2006. Included in the increase was approximately $133.3 million related to movements in foreign exchange. Revenue growth occurred across inventory categories including billboards, street furniture and transit, driven by both increased rates and occupancy. Growth was led by increased revenues in France, Italy, Australia, Spain and China.
Our International direct operating expenses increased approximately $163.8 million in 2007 compared to 2006. Included in the increase was approximately $88.0 million related to movements in foreign exchange. The remaining increase in direct operating expenses was primarily attributable to an increase in site lease expenses associated with the increase in revenue. SG&A expenses increased $31.9 million in 2007 over 2006 from approximately $23.4 million related to movements in foreign exchange and an increase in selling expenses associated with the increase in revenue. Additionally, we recorded a $9.8 million reduction to SG&A in 2006 as a result of the favorable settlement of a legal proceeding.
Depreciation and amortization decreased $19.1 million in 2007 as compared to 2006 principally from contracts which were recorded at fair value in purchase accounting in prior years and became fully amortized at December 31, 2006.
2006 v. 2005
Revenue in our International segment increased 7% in 2006 as compared to 2005. The increase includes approximately $44.9 million during the first six months of 2006 related to our consolidation of Clear Media, which we began consolidating in July 2005. Also contributing to the increase was approximately $25.9 million from growth in street furniture revenue and $11.9 million related to movements in foreign exchange, partially offset by a decline in billboard revenue for 2006 as compared to 2005.
Direct operating expenses increased $65.2 million during 2006 as compared to 2005. The increase was primarily attributable to $18.0 million during the first six months of 2006 related to our consolidation of Clear Media, as well as an increase in site lease expenses of approximately $37.7 million and approximately $7.7 million related to movements in foreign exchange. Also included in the increase was $0.9 million related to the adoption of FAS 123(R). Our SG&A expenses declined $11.9 million primarily attributable a $9.8 million reduction recorded in 2006 as the result of a favorable settlement of a legal proceeding as well as $26.6 million related to restructuring our businesses in France recorded in the third quarter of 2005. Partially offsetting this decline was $9.5 million from our consolidation of Clear Media and $2.9 from movements in foreign exchange.
Depreciation and amortization increased $8.7 million in 2006 as compared to 2005. The increase is primarily attributable to the consolidation of Clear Media.
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Reconciliation of Segment Operating Income (Loss)
(In thousands) | Year Ended December 31, | |||||||||||
2007 | 2006 | 2005 | ||||||||||
Americas |
$ | 478,194 | $ | 420,695 | $ | 358,555 | ||||||
International |
131,320 | 67,460 | 22,783 | |||||||||
Corporate |
(66,080 | ) | (65,542 | ) | (61,096 | ) | ||||||
Gain on disposition of assets net |
11,824 | 22,846 | 3,488 | |||||||||
Consolidated and combined operating income |
$ | 555,258 | $ | 445,459 | $ | 323,730 | ||||||
FINANCIAL CONDITION AND LIQUIDITY
Clear Channel Communications Agreement and Plan of Merger
Clear Channel Communications capitalization, liquidity and capital resources will change substantially if their Agreement and Plan of Merger is consummated. Upon the closing of the merger, Clear Channel Communications will be highly leveraged. A deterioration in the financial condition of Clear Channel Communications could increase our borrowing costs or impair our access to the capital markets because of our reliance on Clear Channel Communications for availability under its revolving credit facility. If the merger is consummated we may no longer be able to access Clear Channel Communications revolving credit facility, in which event we may enter into a new credit facility. Under our Master Agreement with Clear Channel Communications and the $2.5 billion note payable to Clear Channel Communications, we are limited in our borrowing from third parties to no more than $400.0 million. We expect the interest rate associated with a new facility would be greater than the rate we currently are charged. In addition, the interest rate we pay on our $2.5 billion promissory note is based on the weighted average cost of debt for Clear Channel Communications which we expect to increase if the proposed merger transaction is consummated. If that cost increases, whether as a result of the consummation of the merger or a deterioration in the financial condition of Clear Channel Communications, our borrowing costs also will increase. To the extent we cannot pass on our increased borrowing costs to our clients, our profitability, and potentially our ability to raise capital, could be materially affected.
Also, so long as Clear Channel Communications maintains a significant interest in us, pursuant to the Master Agreement between Clear Channel Communications and us, Clear Channel Communications will have the ability to limit our ability to incur debt or issue equity securities, which could adversely affect our ability to meet our liquidity needs.
Cash Flows
The following table summarizes our historical cash flows:
(In thousands) | Year Ended December 31, | |||||||||||
2007 | 2006 | 2005 | ||||||||||
Cash provided by (used in): |
||||||||||||
Operating activities |
$ | 694,430 | $ | 538,541 | $ | 510,088 | ||||||
Investing activities |
$ | (356,368 | ) | $ | (489,010 | ) | $ | (361,371 | ) | |||
Financing activities |
$ | (305,751 | ) | $ | (53,165 | ) | $ | (77,550 | ) |
Operating Activities
2007
Net cash flow from operating activities of $694.4 million for 2007 primarily reflects net income of $246.0 million and depreciation and amortization of $399.5 million. Net cash flows from operating activities also reflects an increase of $137.3 million in accounts receivable as a result of the increase in revenue and an increase of $93.4 million in accounts payable, accrued expenses and other liabilities.
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2006
Net cash flow from operating activities of $538.5 million for 2006 principally reflects net income of $153.1 million and depreciation and amortization of $407.7 million. Net cash flows from operating activities also reflects an increase of $101.3 million in accounts receivable as a result of the increase in revenue and an increase of $65.4 million in accounts payable, accrued expenses and other liabilities.
2005
Net cash flow from operating activities of $510.1 million for the year ended December 31, 2005 principally reflects net income of $61.6 million and depreciation and amortization of $400.6 million. Net cash flows from operating activities also reflects decreases in other current assets, accounts payable and deferred income. These decreases were partially offset by increases in accounts receivable, prepaid expenses and accrued income taxes.
Investing Activities
2007
Net cash used in investing activities of $356.4 million for 2007 is primarily related to capital expenditures of $275.7 million related to purchases of property, plant and equipment and $69.1 million related to acquisitions of operating assets.
2006
Net cash used in investing activities of $489.0 million for 2006 principally reflects capital expenditures of $233.9 million related to purchases of property, plant and equipment and $242.4 million related to acquisitions of operating assets.
2005
Net cash used in investing activities of $361.4 million for the year ended December 31, 2005 principally reflects capital expenditures of $208.2 million related to purchases of property, plant and equipment and $99.6 million related to acquisitions of operating assets.
Financing Activities
2007
Net cash used in financing activities of $305.8 million for 2007 is primarily related to the net transfer of cash to Clear Channel Communications of $302.9 million.
2006
Net cash used in financing activities of $53.2 million for 2006 principally reflects net reductions in debt of $59.7 million.
2005
Net cash used in financing activities was $77.6 million for the year ended December 31, 2005. Included in cash flow from financing activities are changes in the Due from Clear Channel Communications account which relates to cash transfers between our Americas operations and Clear Channel Communications. For the year ended December 31, 2005, we had a net transfer of cash to Clear Channel Communications of approximately $70.0 million. Also included in cash used in financing activities is the $600.6 million in proceeds received from the IPO which was used, along with the balance outstanding in the Due from Clear Channel Communications account, to pay off a portion of the $1.4 billion and $73.0 million intercompany notes with Clear Channel Communications.
Anticipated Cash Requirements
We expect to fund anticipated cash requirements (including payments of principal and interest on outstanding indebtedness and commitments, acquisitions and anticipated capital expenditures) for the foreseeable
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future with cash flows from operations, borrowing under the cash management note with Clear Channel Communications, and various externally generated funds.
LIQUIDITY
SOURCES OF CAPITAL
As of December 31, 2007 and 2006, we had the following debt outstanding, cash and cash equivalents and amounts due to and due from Clear Channel Communications:
(In millions) | Year Ended December 31, | |||||
2007 | 2006 | |||||
Bank credit facility |
$ | 80.0 | $ | 23.5 | ||
Debt with Clear Channel Communications |
2,500.0 | 2,500.0 | ||||
Other long-term debt |
102.0 | 160.7 | ||||
Due to Clear Channel Communications |
| 4.2 | ||||
Total debt |
2,682.0 | 2,688.4 | ||||
Less: Cash and cash equivalents |
134.9 | 105.4 | ||||
Less: Due from Clear Channel Communications |
265.4 | | ||||
$ | 2,281.7 | $ | 2,583.0 | |||
Bank Credit Facility
In addition to net cash flows from operations, another source of liquidity is through borrowings under a $150.0 million sub-limit included in Clear Channel Communications five-year, multicurrency $1.75 billion revolving credit facility. Certain of our International subsidiaries may borrow under the sub-limit to the extent Clear Channel Communications has not already borrowed against this capacity and is in compliance with its covenants under the credit facility. The interest rate on outstanding balances under the credit facility is based upon LIBOR or, for Euro denominated borrowings, EURIBOR, plus, in each case, a margin. At December 31, 2007 and February 13, 2008, the outstanding balance on the sub-limit was approximately $80.0 million, and approximately $70.0 million was available for future borrowings, with the entire balance to be paid on July 12, 2009. At December 31, 2007, the interest rate on borrowings under this credit facility was 5.0%.
Debt with Clear Channel Communications
As part of the day-to-day cash management services provided by Clear Channel Communications, we maintain accounts that represent net amounts, up to a maximum of $1.0 billion, due to or from Clear Channel Communications, which is recorded as Due from Clear Channel Communications or Due to Clear Channel Communications on the consolidated balance sheets. The accounts represent the revolving promissory note issued by us to Clear Channel Communications and the revolving promissory note issued by Clear Channel Communications to us. The accounts accrue interest pursuant to the Master Agreement based upon LIBOR plus a margin and are generally payable on demand. Included in the accounts are the net activities resulting from day-to-day cash management services provided by Clear Channel Communications. As a part of these services, we maintain collection bank accounts swept daily by Clear Channel Communications. In return, Clear Channel Communications funds our controlled disbursement accounts as checks or electronic payments are presented for payment. At December 31, 2007, the balance of $265.4 million was a receivable recorded in Due from Clear Channel Communications on the consolidated balance sheet. At December 31, 2006, the balance of $4.2 million was a liability recorded in Due to Clear Channel Communications on the consolidated balance sheet. The net interest income for the years ended December 31, 2007, 2006 and 2005 was $3.7 million, $0.4 million and $0.1 million, respectively. At December 31, 2007, the interest rate on the Due from Clear Channel Communications account was 2.9%.
Unlike the management of cash from our U.S. based operations, the amount of cash, if any, which is transferred from our foreign operations to Clear Channel Communications is determined on a basis mutually
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agreeable to us and Clear Channel Communications, and not on a pre-determined basis. In arriving at such mutual agreement, the reasonably foreseeable cash needs of our foreign operations are evaluated before a cash amount is considered as an excess or surplus amount for transfer to Clear Channel Communications.
On August 2, 2005, we distributed a note in the original principal amount of $2.5 billion to Clear Channel Communications as a dividend. This note matures on August 2, 2010 and may be prepaid in whole or in part at any time. The note accrues interest at a variable per annum rate equal to the weighted average cost of debt for Clear Channel Communications, calculated on a monthly basis. This note is mandatorily payable upon a change of control of us and, subject to certain exceptions, all proceeds from debt or equity raised by us must be used to prepay such note. At December 31, 2007, the interest rate on the $2.5 billion note was 6.0%.
Our working capital requirements and capital for general corporate purposes, including acquisitions and capital expenditures, may be provided to us by Clear Channel Communications, in its sole discretion, pursuant to a cash management note issued by us to Clear Channel Communications. Without the opportunity to obtain financing from Clear Channel Communications, we may need to obtain additional financing from banks, or through public offerings or private placements of debt, strategic relationships or other arrangements at some future date. Management currently believes we could raise the funds if needed given our credit profile. Additionally, management believes our publicly traded stock could be used as a source to raise capital through public or private placements of our equity securities.
As long as Clear Channel Communications maintains a significant interest in us, pursuant to the Master Agreement between Clear Channel Communications and us, Clear Channel Communications will have the ability to limit our ability to incur debt or issue equity securities, which could adversely affect our ability to meet our liquidity needs. In addition, the $2.5 billion note requires us to prepay it in full upon a change of control (as defined in the note), and, upon our issuances of equity and incurrence of debt, subject to certain exceptions, to prepay the note in the amount of net proceeds received from such events. Under the Master Agreement with Clear Channel Communications and the $2.5 billion note, we are limited in our borrowing from third parties to no more than $400.0 million.
Other long-term debt
Other long-term debt consists primarily of loans with international banks and other types of debt. At December 31, 2007, approximately $102.0 million was outstanding as other long-term debt.
Covenant Compliance
The $2.5 billion note requires us to comply with various negative covenants, including restrictions on the following activities: incurring consolidated funded indebtedness (as defined in the note), excluding intercompany indebtedness, in a principal amount in excess of $400.0 million at any one time outstanding; creating liens; making investments; entering into sale and leaseback transactions (as defined in the note), which when aggregated with consolidated funded indebtedness secured by liens, will not exceed an amount equal to 10% of our total consolidated shareholders equity (as defined in the note) as shown on our most recently reported annual audited consolidated financial statements; disposing of all or substantially all of our assets; entering into mergers and consolidations; declaring or making dividends or other distributions; repurchasing our equity; and entering into transactions with our affiliates.
In addition, the note requires us to prepay it in full upon a change of control. The note defines a change of control to occur when Clear Channel Communications ceases to control (i) directly or indirectly, more than 50% of the aggregate voting equity interests of us, our operating subsidiary or our respective successors or assigns, or (ii) the ability to elect a majority of the Board of Directors of us, our operating subsidiary or our respective successors or assigns. Upon our issuances of equity and incurrences of debt, subject to certain exceptions, we are also required to prepay the note in the amount of the net proceeds received by us from such events.
The significant covenants contained in the Clear Channel Communications $1.75 billion revolving credit facility relate to leverage and interest coverage (as defined in the credit facility). The leverage ratio covenant requires Clear Channel Communications to maintain a ratio of consolidated funded indebtedness to operating cash flow (as defined by the credit facility) of less than 5.25x. The interest coverage covenant requires Clear Channel
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Communications to maintain a minimum ratio of operating cash flow to interest expense (as defined by the credit facility) of 2.50x. At December 31, 2007, Clear Channel Communications leverage and interest coverage ratios were 3.0x and 5.1x.
There are no significant covenants or events of default contained in the cash management note issued by Clear Channel Communications to us or the cash management note issued by us to Clear Channel Communications.
At December 31, 2007, we and Clear Channel Communications were in compliance with all debt covenants.
USES OF CAPITAL
Acquisitions
During the year ended December 31, 2007, our Americas segment paid $39.5 million in cash, primarily to acquire display faces in the United States. In addition, our International segment paid $29.6 million, primarily related to the acquisition of an outdoor advertising business in Romania, additional equity interests in outdoor companies and the acquisition of advertising structures.
Capital Expenditures
Our capital expenditures have consisted of the following:
(In millions) | Year Ended December 31, | ||||||||
2007 | 2006 | 2005 | |||||||
Non-revenue producing |
$ | 81.4 | $ | 80.0 | $ | 78.1 | |||
Revenue producing |
194.3 | 153.9 | 130.1 | ||||||
Total capital expenditures |
$ | 275.7 | $ | 233.9 | $ | 208.2 | |||
We define non-revenue producing capital expenditures as those expenditures required on a recurring basis. Revenue producing capital expenditures are discretionary capital investments for new revenue streams, similar to an acquisition. Capital expenditures increased $41.8 million in 2007 as compared to 2006 primarily due to the installation of digital displays in various markets across the United States. Capital expenditures increased $25.7 million in 2006 as compared to 2005. The consolidation of Clear Media in 2005 contributed $13.7 million to the increase.
Part of our long-term strategy is to pursue the technology of electronic displays, including flat screens, LCDs and LEDs, as alternatives to traditional methods of displaying our clients advertisements. We are currently installing these technologies in certain markets. We believe cash flow from operations will be sufficient to fund these expenditures because we expect enhanced margins through: (i) lower cost of production as the advertisements will be digital and controlled by a central computer network, (ii) decreased down time on displays because the advertisements will be digitally changed rather than manually posted paper or vinyl on the face of the display, and (iii) incremental revenue through more targeted and time specific advertisements.
Commitments, Contingencies and Guarantees
Our short and long term cash requirements include minimum annual guarantees for our street furniture contracts and operating leases. Minimum annual guarantees and operating lease requirements are included in our direct operating expenses, which historically have been satisfied by cash flows from operations. For 2008, we are committed to $480.1 million and $270.3 million for minimum annual guarantees and operating leases, respectively. Our long-term commitments for minimum annual guarantees, operating leases and capital expenditure requirements are included in Contractual and Other Obligations, below.
Certain agreements relating to acquisitions provide for purchase price adjustments and other future contingent payments based on the financial performance of the acquired company generally over a one to five year period. We will continue to accrue additional amounts related to such contingent payments if and when it is
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determinable that the applicable financial performance targets will be met. The aggregate of these contingent payments, if performance targets are met, would not significantly impact our financial position or results of operations.
Contractual and Other Obligations
Firm Commitments
In addition to the scheduled maturities on our debt, we have future cash obligations under various types of contracts. We lease office space, certain equipment and the majority of the land occupied by our advertising structures under long-term operating leases. Some of our lease agreements contain renewal options and annual rental escalation clauses (generally tied to the consumer price index), as well as provisions for our payment of utilities and maintenance.
We have minimum franchise payments associated with noncancelable contracts that enable us to display advertising on such media as buses, taxis, trains, bus shelters and terminals. The majority of these contracts contain rent provisions calculated as the greater of a percentage of the relevant advertising revenue or a specified guaranteed minimum annual payment.
The scheduled maturities of our credit facility, other long-term debt outstanding, future minimum rental commitments under noncancelable lease agreements, minimum payments under other noncancelable contracts, minimum annual guarantees, capital expenditures commitments and other long-term obligations as of December 31, 2007, are as follows:
(In thousands) | Payments Due by Period | ||||||||||||||
Total | 2008 | 2009-2010 | 2011-2012 | 2013 and Thereafter | |||||||||||
Long-term Debt |
|||||||||||||||
Revolving credit facility |
$ | 80,000 | $ | | $ | 80,000 | $ | | $ | | |||||
Debt with Clear Channel Communications |
2,500,000 | | 2,500,000 | | | ||||||||||
Other long-term debt |
102,021 | 87,099 | 11,972 | 2,250 | 700 | ||||||||||
Interest payments on long-term debt(1) |
406,389 | 155,346 | 250,999 | 44 | | ||||||||||
Minimum annual guarantees |
2,450,067 | 480,107 | 679,624 | 542,374 | 747,962 | ||||||||||
Noncancelable operating leases |
1,984,319 | 270,283 | 447,318 | 327,652 | 939,066 | ||||||||||
Capital expenditure commitments |
159,573 | 106,187 | 45,930 | 7,224 | 232 | ||||||||||
Noncancelable contracts |
9,718 | 5,395 | 4,286 | 37 | | ||||||||||
Other long-term obligations(2) |
113,010 | | 1,659 | 1,427 | 109,924 | ||||||||||
Total (3) |
$ | 7,805,097 | $ | 1,104,417 | $ | 4,021,788 | $ | 881,008 | $ | 1,797,884 | |||||
(1) | Interest payments on long-term debt consist primarily of interest on our $2.5 billion variable rate note to Clear Channel Communications which is estimated using the interest rate as of December 31, 2007, of 6.0%. The debt with Clear Channel Communications accrues interest at a variable per annum rate equal to the weighted average cost of debt for Clear Channel Communications, calculated on a monthly basis. At December 31, 2007, 20% of Clear Channel Communications debt was variable based on market interest rates. Each 50 basis point increase or decrease in interest rates would increase or decrease our interest expense and cash outlay for each year by approximately $3.1 million. This potential increase or decrease is based on the simplified assumption that the level of floating rate debt remains constant with an immediate across-the-board increase or decrease as of December 31, 2007, with no subsequent change in rates for the remainder of the period. This potential increase or decrease does not include any adjustment for a change in the fixed rate debt of Clear Channel Communications, which currently constitutes 80% of its total debt. The weighted average cost of debt of Clear Channel Communications is likely to increase in the event of the consummation of the currently pending merger which would increase our interest expense on our $2.5 billion of debt with Clear Channel Communications. |
(2) | Other long-term obligations consist of $70.5 million related to asset retirement obligations, recorded pursuant to Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, which assumes the |
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underlying assets will be removed at some period over the next 50 years. Also included in the table is $34.6 million related to retirement plans and $7.9 million related to other long-term obligations with a specific maturity. |
(3) | Excluded from the table is $107.8 million related to various obligations with no specific contractual commitment or maturity, $60.8 million of which relates to unrecognized tax benefits recorded pursuant to FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. |
SEASONALITY
Typically, both our Americas and International segments experience their lowest financial performance in the first quarter of the calendar year, with International typically experiencing a loss from operations in this period. Our Americas segment typically experiences consistent performance in the remainder of our calendar year. Our International segment typically experiences its strongest performance in the second and fourth quarters of our calendar year. We expect this trend to continue in the future.
MARKET RISK MANAGEMENT
We are exposed to market risks arising from changes in market rates and prices, including movements in interest rates and foreign currency exchange rates.
Interest Rate Risk
We had approximately $2.7 billion total debt outstanding as of December 31, 2007, $2.5 billion of which is debt with Clear Channel Communications, $153.3 million is variable based on market interest rates and the remainder is fixed rate debt. The debt with Clear Channel Communications accrues interest at a variable per annum rate equal to the weighted average cost of debt for Clear Channel Communications, calculated on a monthly basis. At December 31, 2007, 20% of Clear Channel Communications debt was variable based on market interest rates. Each 50 basis point increase or decrease in interest rates would increase or decrease our interest expense and cash outlay for the year ended December 31, 2007, by approximately $3.1 million. This potential increase or decrease is based on the simplified assumption that the level of floating rate debt remains constant with an immediate across-the-board increase or decrease as of December 31, 2007, with no subsequent change in rates for the remainder of the period. This potential increase or decrease does not include any adjustment for a change in the fixed rate debt of Clear Channel Communications, which currently constitutes 80% of its total debt. The cost of Clear Channel Communications fixed rate debt is likely to increase in the event of the consummation of the currently pending merger which would increase our interest expense on our $2.5 billion of debt with Clear Channel Communications.
Foreign Currency Risk
We have operations in countries throughout the world. The financial results of our foreign operations are measured in their local currencies, except in the hyperinflationary countries in which we operate. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we operate. We believe we mitigate a small portion of our exposure to foreign currency fluctuations with a natural hedge through borrowings in currencies other than the U.S. dollar. Our foreign operations reported net income of $83.6 million for the year ended December 31, 2007. We estimate a 10% change in the value of the U.S. dollar relative to foreign currencies would have changed our net income for the year ended December 31, 2007, by approximately $8.4 million.
This analysis does not consider the implication such currency fluctuations could have on the overall economic activity that could exist in such an environment in the United States or the foreign countries or on the results of operations of these foreign entities.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair Value Measurements (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements for fair value measurements. Statement 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. Statement 157 does not expand the use of fair value in any new circumstances. Companies will need to apply the recognition and disclosure provisions of
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Statement 157 for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually effective January 1, 2008. The effective date in Statement 157 is delayed for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Excluded from the scope of Statement 157 are certain leasing transactions accounted for under FAS 13, Accounting for Leases. The exclusion does not apply to fair value measurements of assets and liabilities recorded as a result of a lease transaction but measured pursuant to other pronouncements within the scope of Statement 157. We are currently evaluating the impact of adopting FAS 157 on our financial position or results of operations.
Statement of Financial Accounting Standards No. 141(R), Business Combinations (Statement 141(R)), was issued in December 2007. Statement 141(R) requires that upon initially obtaining control, an acquirer will recognize 100% of the fair values of acquired assets, including goodwill, and assumed liabilities, with only limited exceptions, even if the acquirer has not acquired 100% of its target. Additionally, contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration and transaction costs will be expensed as incurred. Statement 141(R) also modifies the recognition for preacquisition contingencies, such as environmental or legal issues, restructuring plans and acquired research and development value in purchase accounting. Statement 141(R) amends Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. Statement 141(R) is effective for fiscal years beginning after December 15, 2008. Adoption is prospective and early adoption is not permitted. We expect to adopt Statement 141(R) on January 1, 2009. Statement 141(R)s impact on accounting for business combinations is dependent upon acquisitions at that time.
Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilitiesincluding an amendment of FASB Statement No. 115 (Statement 159), was issued in February 2007. Statement 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Statement 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Statement 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. Statement 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in Statements No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair Value of Financial Instruments. Statement 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. We adopted Statement 159 on January 1, 2008 and do not anticipate adoption to materially impact our financial position or results of operations.
Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (Statement 160), was issued in December 2007. Statement 160 clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. Under Statement 160 noncontrolling interests are considered equity and should be reported as an element of consolidated equity, net income will encompass the total income of all consolidated subsidiaries and there will be separate disclosure on the face of the income statement of the attribution of that income between the controlling and noncontrolling interests, and increases and decreases in the noncontrolling ownership interest amount will be accounted for as equity transactions. Statement 160 is effective for the first annual reporting period beginning on or after December 15, 2008, and earlier application is prohibited. Statement 160 is required to be adopted prospectively, except for reclassify noncontrolling interests to equity, separate from the parents shareholders equity, in the consolidated statement of financial position and recasting consolidated net income (loss) to include net income (loss) attributable to both the controlling and noncontrolling interests, both of which are required to be adopted retrospectively. We expect to adopt Statement 160 on January 1, 2009 and are currently assessing the potential impact that the adoption could have on our financial statements.
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CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in conformity with generally accepted accounting principles requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. On an ongoing basis, we evaluate our estimates based on historical experience and on various other assumptions believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses not readily apparent from other sources. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such difference could be material. Our significant accounting policies are discussed in Note A to our consolidated and combined financial statements included elsewhere in this Annual Report. Management believes the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require managements most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. The following narrative describes these critical accounting estimates, the judgments and assumptions and the effect if actual results differ from these assumptions.
Allowance for Doubtful Accounts
We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customers inability to meet its financial obligations, we record a specific reserve to reduce the amounts recorded to what we believe will be collected. For all other customers, we recognize reserves for bad debt based on historical experience of bad debts as a percentage of revenue for each business unit, adjusted for relative improvements or deteriorations in the agings and changes in current economic conditions.
If our agings were to improve or deteriorate resulting in a 10% change in our allowance, we estimated our bad debt expense for the year ended December 31, 2007, would have changed by approximately $3.0 million and our net income for the same period would have changed by approximately $1.8 million.
Long-lived Assets
Long-lived assets, such as property, plant and equipment are reviewed for impairment when events and circumstances indicate that depreciable and amortizable long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. When specific assets are determined to be unrecoverable, the cost basis of the asset is reduced to reflect the current fair market value.
We use various assumptions in determining the current fair market value of these assets, including future expected cash flows and discount rates, as well as future salvage values. Our impairment loss calculations require management to apply judgment in estimating future cash flows, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.
Using the impairment review described, we found no impairment change required for the year ended December 31, 2007. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to future impairment losses that could be material to our results of operations.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. We review goodwill for potential impairment annually using the income approach to determine the fair value of our reporting units. The fair value of our reporting units is used to apply value to the net assets of each reporting unit. To the extent the carrying amount of net assets would exceed the fair value, an impairment charge may be required to be recorded.
The income approach we use for valuing goodwill involves estimating future cash flows expected to be generated from the related assets, discounted to their present value using a risk-adjusted discount rate. Terminal
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values are also estimated and discounted to their present value. In accordance with Financial Accounting Standards Statement 142, Goodwill and Other Intangible Assets, or Statement 142, we performed our annual impairment tests as of October 1, 2005, 2006 and 2007 on goodwill. No impairment charges resulted from these tests. We may incur impairment charges in future periods under Statement 142 to the extent we do not achieve our expected cash flow growth rates, and to the extent market values decrease and long-term interest rates increase.
Indefinite-lived Assets
Indefinite-lived assets such as our billboard permits are reviewed annually for possible impairment using the direct method as prescribed in SEC Staff Announcement No. D-108, Use of the Residual Method to Value Acquired Assets Other Than Goodwill. Under the direct method, it is assumed that rather than acquiring indefinite-lived intangible assets as part of a going concern business, the buyer hypothetically obtains indefinite-lived intangible assets and builds a new operation with similar attributes from scratch. Thus, the buyer incurs start-up costs during the build-up phase which are normally associated with going concern value. Initial capital costs are deducted from the discounted cash flows model which results in value that is directly attributable to the indefinite-lived intangible assets.
Our key assumptions using the direct method are market revenue growth rates, market share, profit margin, duration and profile of the build-up period, estimated start-up capital costs and losses incurred during the build-up period, the risk-adjusted discount rate and terminal values. This data is populated using industry normalized information representing an average permit within a market. Our annual impairment test was performed as of October 1, 2007, which resulted in no impairment. If actual results are not consistent with our assumptions and estimates, we may be exposed to impairment charges in the future.
Asset Retirement Obligations
Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, requires us to estimate our obligation upon the termination or nonrenewal of a lease, to dismantle and remove our billboard structures from the leased land and to reclaim the site to its original condition. We record the present value of obligations associated with the retirement of tangible long-lived assets in the period in which they are incurred. The liability is capitalized as part of the related long-lived assets carrying amount. Over time, accretion of the liability is recognized as an operating expense and the capitalized cost is depreciated over the expected useful life of the related asset.
Due to the high rate of lease renewals over a long period of time, our calculation assumes all related assets will be removed at some period over the next 50 years. An estimate of third-party cost information is used with respect to the dismantling of the structures and the reclamation of the site. The interest rate used to calculate the present value of such costs over the retirement period is based on an estimated risk-adjusted credit rate for the same period. If our assumption of the risk-adjusted credit rate used to discount current year additions to the asset retirement obligation decreased approximately 1%, our liability as of December 31, 2007, would increase approximately $1.5 million. Similarly, if our assumption of the risk-adjusted credit rate increased approximately 1%, our liability would decrease approximately $1.4 million.
Stock Based Compensation
We adopted FAS 123(R), Share-Based Payment on January 1, 2006, using the modified-prospective-transition method. Under the fair value recognition provisions of this statement, stock based compensation cost is measured at the grant date based on the value of the award and is recognized as expense on a straight-line basis over the vesting period. Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility and forfeiture rates, among other factors. If actual results differ significantly from these estimates, our results of operations could be materially impacted.
Tax Accruals
The IRS and other taxing authorities routinely examine our tax returns we file as part of the consolidated income tax returns filed by Clear Channel Communications. From time to time, the IRS challenges certain of our tax positions. We believe our tax positions comply with applicable tax law and we would vigorously defend these positions if challenged. The final disposition of any positions challenged by the IRS could require us to make
- 51 -
additional tax payments. We believe that we have adequately accrued for any foreseeable payments resulting from tax examinations and consequently do not anticipate any material impact upon their ultimate resolution.
Our estimates of income taxes and the significant items giving rise to the deferred assets and liabilities are shown in Note J to our financial statements and reflect our assessment of actual future taxes to be paid on items reflected in the financial statements, giving consideration to both timing and probability of these estimates. Actual income taxes could vary from these estimates due to future changes in income tax law or results from the final review of our tax returns by federal, state or foreign tax authorities.
We have considered these potential changes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48, which requires us to record reserves for estimates of probable settlements of federal and state audits. We adopted FIN 48 on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements. FIN 48 prescribes a recognition threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken within an income tax return. The adoption of FIN 48 resulted in an increase of $8.1 million to the January 1, 2007 balance of retained earnings, a decrease of $6.0 million in liabilities for unrecognized tax benefits and an increase of $27.2 million in deferred tax assets.
Inflation
Inflation has affected our performance in terms of higher costs for wages, salaries and equipment. Although the exact impact of inflation is indeterminable, we believe we have offset these higher costs by increasing the effective advertising rates of most of our display faces.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Required information is within Item 7.
- 52 -
Item 8. Financial Statements and Supplementary Data
MANAGEMENTS REPORT ON FINANCIAL STATEMENTS
The consolidated financial statements and notes related thereto were prepared by and are the responsibility of management. The financial statements and related notes were prepared in conformity with U.S. generally accepted accounting principles and include amounts based upon managements best estimates and judgments.
It is managements objective to ensure the integrity and objectivity of its financial data through systems of internal controls designed to provide reasonable assurance that all transactions are properly recorded in our books and records, that assets are safeguarded from unauthorized use and that financial records are reliable to serve as a basis for preparation of financial statements.
The financial statements have been audited by our independent registered public accounting firm, Ernst & Young LLP, to the extent required by auditing standards of the Public Company Accounting Oversight Board (United States) and, accordingly, they have expressed their professional opinion on the financial statements in their report included herein.
The Board of Directors meets with the independent registered public accounting firm and management periodically to satisfy itself that they are properly discharging their responsibilities. The independent registered public accounting firm has unrestricted access to the Board, without management present, to discuss the results of their audit and the quality of financial reporting and internal accounting controls.
/s/ Mark P. Mays |
Chief Executive Officer |
/s/ Randall T. Mays |
Chief Financial Officer |
/s/ Herbert W. Hill, Jr. |
Senior Vice President/Chief Accounting Officer |
- 53 -
Report of Independent Registered Public Accounting Firm
THE BOARD OF DIRECTORS AND SHAREHOLDERS
CLEAR CHANNEL OUTDOOR HOLDINGS, INC.
We have audited the accompanying consolidated balance sheets of Clear Channel Outdoor Holdings, Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated and combined statements of operations, shareholders/owners equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the index as Item 15(a)2. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Clear Channel Outdoor Holdings, Inc. and subsidiaries at December 31, 2007 and 2006, and the consolidated and combined results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note J to the consolidated financial statements, in 2007 the Company changed its method of accounting for income taxes.
As discussed in Note A to the consolidated financial statements, in 2006 the Company changed its method of accounting for stock-based compensation.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 14, 2008 expressed an unqualified opinion thereon.
/S/ ERNST & YOUNG LLP
San Antonio, Texas
February 14, 2008
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CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
Year Ended December 31, | ||||||
2007 | 2006 | |||||
Current Assets |
||||||
Cash and cash equivalents |
$ | 134,897 | $ | 105,395 | ||
Accounts receivable, less allowance of $29,741 in 2007 and $24,827 in 2006 |
927,694 | 798,980 | ||||
Due from Clear Channel Communications |
265,448 | | ||||
Prepaid expenses |
85,519 | 91,256 | ||||
Other current assets |
193,549 | 194,284 | ||||
Total Current Assets |
1,607,107 | 1,189,915 | ||||
Property, Plant And Equipment |
||||||
Land, buildings and improvements |
368,321 | 343,690 | ||||
Structures |
3,901,940 | 3,601,653 | ||||
Furniture and other equipment |
258,536 | 238,340 | ||||
Construction in progress |
74,553 | 60,332 | ||||
4,603,350 | 4,244,015 | |||||
Less accumulated depreciation |
2,359,242 | 2,052,176 | ||||
2,244,108 | 2,191,839 | |||||
Intangible Assets |
||||||
Definite-lived intangibles, net |
254,487 | 292,426 | ||||
Indefinite-lived intangibles permits |
251,095 | 260,949 | ||||
Goodwill |
1,162,589 | 1,092,927 | ||||
Other Assets |
||||||
Notes receivable |
3,426 | 3,192 | ||||
Investments in, and advances to, nonconsolidated affiliates |
108,007 | 97,352 | ||||
Deferred tax asset |
186,167 | 199,918 | ||||
Other assets |
118,618 | 93,373 | ||||
Total Assets |
$ | 5,935,604 | $ | 5,421,891 | ||
See Notes to Consolidated and Combined Financial Statements
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LIABILITIES AND SHAREHOLDERS EQUITY
(In thousands, except share data)
Year Ended December 31, | |||||||
2007 | 2006 | ||||||
Current Liabilities |
|||||||
Accounts payable |
$ | 138,290 | $ | 121,578 | |||
Accrued expenses |
536,022 | 494,744 | |||||
Due to Clear Channel Communications |
| 4,190 | |||||
Accrued interest |
1,074 | 3,621 | |||||
Accrued income taxes |
33,154 | 31,259 | |||||
Deferred income |
121,558 | 96,421 | |||||
Current portion of long-term debt |
87,099 | 86,293 | |||||
Deferred tax liabilities |
4,095 | 3,403 | |||||
Total Current Liabilities |
921,292 | 841,509 | |||||
Long-term debt |
94,922 | 97,883 | |||||
Debt with Clear Channel Communications |
2,500,000 | 2,500,000 | |||||
Other long-term liabilities |
220,796 | 214,220 | |||||
Minority interest |
215,864 | 181,901 | |||||
Commitments and contingent liabilities (Note H) |
|||||||
Shareholders Equity |
|||||||
Preferred stock, $.01 par value, 150,000,000 shares authorized, no shares issued and outstanding |
| | |||||
Class A common stock, $.01 par value, 750,000,000 shares authorized, 40,494,873 and 39,565,191 shares issued in 2007 and 2006, respectively |
405 | 396 | |||||
Class B common stock, $.01 par value, 600,000,000 shares authorized, 315,000,000 shares issued and outstanding |
3,150 | 3,150 | |||||
Additional paid-in capital |
1,304,359 | 1,279,079 | |||||
Retained earnings |
427,391 | 173,277 | |||||
Accumulated other comprehensive income |
247,478 | 130,476 | |||||
Cost of shares (1,857 in 2007) held in treasury |
(53 | ) | | ||||
Total Shareholders Equity |
1,982,730 | 1,586,378 | |||||
Total Liabilities and Shareholders Equity |
$ | 5,935,604 | $ | 5,421,891 | |||
See Notes to Consolidated and Combined Financial Statements
- 56 -
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Revenue |
$ | 3,281,836 | $ | 2,897,721 | $ | 2,666,078 | ||||||
Operating expenses: |
||||||||||||
Direct operating expenses (includes share-based payments of $6,951, $4,328 and $846 in 2007, 2006 and 2005, respectively, and excludes depreciation and amortization) |
1,734,845 | 1,514,842 | 1,405,758 | |||||||||
Selling, general and administrative expenses (includes share-based payments of $2,682, $1,683 and $0 in 2007, 2006 and 2005, respectively, and excludes depreciation and amortization) |
537,994 | 486,994 | 478,343 | |||||||||
Depreciation and amortization |
399,483 | 407,730 | 400,639 | |||||||||
Corporate expenses (includes share-based payments of $538, $88 and $0 in 2007, 2006 and 2005, respectively, and excludes depreciation and amortization) |
66,080 | 65,542 | 61,096 | |||||||||
Gain on disposition of assets net |
11,824 | 22,846 | 3,488 | |||||||||
Operating income |
555,258 | 445,459 | 323,730 | |||||||||
Interest expense on debt with Clear Channel Communications |
151,363 | 153,500 | 182,667 | |||||||||
Interest expense |
6,518 | 9,083 | 15,687 | |||||||||
Equity in earnings of nonconsolidated affiliates |
4,402 | 7,460 | 9,844 | |||||||||
Other income (expense) net |
10,113 | 331 | (12,291 | ) | ||||||||
Income before income taxes and minority interest |
411,892 | 290,667 | 122,929 | |||||||||
Income tax (expense) benefit: |
||||||||||||
Current |
(111,726 | ) | (82,553 | ) | (51,173 | ) | ||||||
Deferred |
(34,915 | ) | (39,527 | ) | 5,689 | |||||||
Income tax (expense) benefit |
(146,641 | ) | (122,080 | ) | (45,484 | ) | ||||||
Minority interest expense net |
19,261 | 15,515 | 15,872 | |||||||||
Net income |
245,990 | 153,072 | 61,573 | |||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||
Foreign currency translation adjustments |
117,002 | 133,383 | (76,315 | ) | ||||||||
Comprehensive income (loss) |
$ | 362,992 | $ | 286,455 | $ | (14,742 | ) | |||||
Net income per common share: |
||||||||||||
Basic |
$ | .69 | $ | .43 | $ | .19 | ||||||
Weighted average common shares outstanding Basic |
354,838 | 352,155 | 319,890 | |||||||||
Diluted |
$ | .69 | $ | .43 | $ | .19 | ||||||
Weighted average common shares outstanding Diluted |
355,806 | 352,262 | 319,921 |
See Notes to Consolidated and Combined Financial Statements
- 57 -
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS/OWNERS EQUITY
(In thousands, except share data)
Class A Common Shares Issued |
Class B Common Shares Issued |
Common Stock |
Owners Net Investment |
Additional Paid-in Capital |
Retained Earnings (Deficit) |
Accumulated Other Comprehensive Income (loss) |
Treasury Stock |
Total | ||||||||||||||||||||||||
Balances at December 31, 2004 |
| | $ | | $ | 6,679,664 | $ | | $ | (4,250,222 | ) | $ | 300,211 | $ | | $ | 2,729,653 | |||||||||||||||
Net income, pre IPO |
41,368 | 41,368 | ||||||||||||||||||||||||||||||
Currency translation adjustment, pre IPO |
(78,787 | ) | (78,787 | ) | ||||||||||||||||||||||||||||
Dividend to Clear Channel Communications |
(2,500,000 | ) | (2,500,000 | ) | ||||||||||||||||||||||||||||
Contribution |
315,000,000 | 3,150 | (4,179,664 | ) | 189,084 | 4,208,854 | (221,424 | ) | | |||||||||||||||||||||||
Distribution from Clear Channel Communications |
393,717 | 393,717 | ||||||||||||||||||||||||||||||
IPO proceeds, net of offering costs |
35,000,000 | 350 | 600,292 | 600,642 | ||||||||||||||||||||||||||||
Net income, post IPO |
20,205 | 20,205 | ||||||||||||||||||||||||||||||
Currency translation adjustment, post IPO |
2,472 | 2,472 | ||||||||||||||||||||||||||||||
Exercise of stock options and other |
236,819 | 2 | 12 | 14 | ||||||||||||||||||||||||||||
Share-based payments |
153 | 153 | ||||||||||||||||||||||||||||||
Balances at December 31, 2005 |
35,236,819 | 315,000,000 | 3,502 | | 1,183,258 | 20,205 | 2,472 | | 1,209,437 | |||||||||||||||||||||||
Common stock issued for a business acquisition |
4,249,990 | 43 | 89,037 | 89,080 | ||||||||||||||||||||||||||||
Net income |
153,072 | 153,072 | ||||||||||||||||||||||||||||||
Currency translation adjustment and other |
128,004 | 128,004 | ||||||||||||||||||||||||||||||
Exercise of stock options and other |
78,382 | 1 | 1,488 | 1,489 | ||||||||||||||||||||||||||||
Share-based payments |
5,296 | 5,296 | ||||||||||||||||||||||||||||||
Balances at December 31, 2006 |
39,565,191 | 315,000,000 | 3,546 | | 1,279,079 | 173,277 | 130,476 | | 1,586,378 | |||||||||||||||||||||||
Cumulative effect of FIN 48 adoption |
8,124 | 8,124 | ||||||||||||||||||||||||||||||
Common stock issued for a business acquisition |
191,287 | 2 | 5,084 | 5,086 | ||||||||||||||||||||||||||||
Net income |
245,990 | 245,990 | ||||||||||||||||||||||||||||||
Currency translation adjustment and other |
117,002 | 117,002 | ||||||||||||||||||||||||||||||
Exercise of stock options and other |
738,395 | 7 | 10,826 | (53 | ) | 10,780 | ||||||||||||||||||||||||||
Share-based payments |
9,370 | 9,370 | ||||||||||||||||||||||||||||||
Balances at December 31, 2007 |
40,494,873 | 315,000,000 | $ | 3,555 | $ | | $ | 1,304,359 | $ | 427,391 | $ | 247,478 | $ | (53 | ) | $ | 1,982,730 | |||||||||||||||
See Notes to Consolidated and Combined Financial Statements
- 58 -
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Cash flows provided by (used in) operating activities: |
||||||||||||
Net income |
$ | 245,990 | $ | 153,072 | $ | 61,573 | ||||||
Reconciling items: |
||||||||||||
Depreciation |
346,298 | 322,208 | 311,376 | |||||||||
Amortization |
53,185 | 85,522 | 89,263 | |||||||||
Deferred taxes |
34,915 | 39,527 | (5,689 | ) | ||||||||
Share-based compensation |
9,370 | 5,296 | 153 | |||||||||
Provision for doubtful accounts |
10,525 | 8,571 | 11,583 | |||||||||
(Gain) loss on sale of operating and fixed assets |
(11,824 | ) | (22,846 | ) | 5,513 | |||||||
Equity in earnings of nonconsolidated affiliates |
(4,402 | ) | (7,460 | ) | (9,844 | ) | ||||||
Minority interest expense net |
19,261 | 15,515 | 15,872 | |||||||||
Increase (decrease) other, net |
2,314 | (6,137 | ) | (153 | ) | |||||||
Changes in operating assets and liabilities, net of effects of acquisitions: |
||||||||||||
Decrease (increase) in accounts receivable |
(137,341 | ) | (101,340 | ) | (22,217 | ) | ||||||
Decrease (increase) in prepaid expenses |
5,737 | (20,797 | ) | (10,859 | ) | |||||||
Decrease (increase) in other current assets |
1,247 | (9,443 | ) | 59,214 | ||||||||
Increase (decrease) in accounts payable, accrued expenses and other liabilities |
93,383 | 65,381 | (13,300 | ) | ||||||||
Increase (decrease) in accrued interest |
(2,535 | ) | 1,154 | 1,908 | ||||||||
Increase (decrease) in deferred income |
25,840 | (2,493 | ) | (12,512 | ) | |||||||
Increase (decrease) in accrued income taxes |
2,467 | 12,811 | 28,207 | |||||||||
Net cash provided by operating activities |
694,430 | 538,541 | 510,088 |
- 59 -
Year Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Cash flows provided by (used in) investing activities: |
||||||||||||
Decrease (increase) in notes receivable, net |
(234 | ) | 2,366 | 420 | ||||||||
Decrease (increase) in investments in, and advances to nonconsolidated affiliates net |
962 | 7,292 | 951 | |||||||||
Purchase of other investments |
(659 | ) | | (99 | ) | |||||||
Purchases of property, plant and equipment |
(275,690 | ) | (233,882 | ) | (208,156 | ) | ||||||
Proceeds from disposal of assets |
17,321 | 15,451 | 920 | |||||||||
Acquisition of operating assets, net of cash acquired |
(69,059 | ) | (242,418 | ) | (99,605 | ) | ||||||
Decrease (increase) in other net |
(29,009 | ) | (37,819 | ) | (55,802 | ) | ||||||
Net cash used in investing activities |
(356,368 | ) | (489,010 | ) | (361,371 | ) | ||||||
Cash flows provided by (used in) financing activities: |
||||||||||||
Draws on credit facilities |
106,772 | 118,867 | 108,601 | |||||||||
Payments on credit facilities |
(76,614 | ) | (100,076 | ) | (113,193 | ) | ||||||
Proceeds from long-term debt |
22,483 | 37,235 | | |||||||||
Payments on long-term debt |
(66,290 | ) | (115,694 | ) | (3,118 | ) | ||||||
Payments on long-term debt with Clear Channel Communications |
| | (600,642 | ) | ||||||||
Net transfers (to) from Clear Channel Communications |
(302,882 | ) | 4,327 | (70,006 | ) | |||||||
Proceeds from exercise of stock options |
10,780 | 2,176 | 166 | |||||||||
Proceeds from initial public offering |
| | 600,642 | |||||||||
Net cash used in financing activities |
(305,751 | ) | (53,165 | ) | (77,550 | ) | ||||||
Effect of exchange rate changes on cash |
(2,809 | ) | 385 | (471 | ) | |||||||
Net increase (decrease) in cash and cash equivalents |
29,502 | (3,249 | ) | 70,696 | ||||||||
Cash and cash equivalents at beginning of year |
105,395 | 108,644 | 37,948 | |||||||||
Cash and cash equivalents at end of year |
$ | 134,897 | $ | 105,395 | $ | 108,644 | ||||||
Supplemental disclosure: |
||||||||||||
Cash paid during the year for interest |
$ | 165,730 | $ | 165,764 | $ | 195,350 | ||||||
Cash paid during the year for taxes |
$ | 43,003 | $ | 52,479 | $ | 38,493 |
See Notes to Consolidated and Combined Financial Statements
- 60 -
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Clear Channel Outdoor Holdings, Inc. (the Company) is an outdoor advertising company which owns or operates advertising display faces domestically and internationally. Prior to November 11, 2005, the Company was a wholly-owned subsidiary of Clear Channel Communications, Inc. (Clear Channel Communications), a diversified media company with operations in radio broadcasting and outdoor advertising. In preparation for the initial public offering (IPO), Clear Channel Communications and its subsidiaries contributed and transferred to the Company all of the assets and liabilities of the outdoor advertising businesses (the Contribution). The net assets were transferred at Clear Channel Communications historical cost basis. The Company completed the Contribution just prior to the IPO, which was effective on November 11, 2005. Pursuant to the IPO registration statement on Form S-1, the Company sold 35.0 million shares of its Class A common stock at a price of $18.00 per share, for net proceeds of $600.6 million after deducting underwriting discounts and offering expenses. Clear Channel Communications holds all of the 315.0 million Class B shares of common stock outstanding, representing approximately 89% of the shares outstanding and approximately 99% of the voting power. The holders of Class A common stock and Class B common stock have identical rights, except holders of Class A common stock are entitled to 1 vote per share while holders of Class B common stock are entitled to 20 votes per share. The Class B shares of common stock are convertible, at the option of the holder at any time or upon any transfer, into shares of Class A common stock on a one-for-one basis, subject to certain limited exceptions.
Nature of Business
The Company operates in the outdoor advertising industry by selling advertising on billboards, street furniture displays, transit displays and other advertising displays. The Company has two reportable business segments: Americas and International. The Americas segment primarily includes operations in the United States, Canada and Latin America; and the International segment includes operations in Europe, Asia, Africa and Australia.
Principles of Consolidation and Combination
The combined financial statements include amounts prior to the IPO derived from Clear Channel Communications consolidated financial statements using the historical results of operations and bases of the assets and liabilities of Clear Channel Communications outdoor advertising businesses and give effect to allocations of expenses from Clear Channel Communications. These allocations were made on a specifically identifiable basis or using relative percentages of headcount or other methods management considered to be a reasonable reflection of the utilization of services provided. The Companys historical financial data may not be indicative of its future performance nor will such data reflect what its financial position and results of operations would have been had it operated as an independent publicly traded company during all of 2005. Significant intercompany accounts have been eliminated in consolidation. Investments in nonconsolidated affiliates are accounted for using the equity method of accounting.
Certain Reclassifications
The Company has reclassified certain selling, general and administrative expenses to direct operating expenses in 2006 and 2005 to conform to current year presentation.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less.
Allowance for Doubtful Accounts
The Company evaluates the collectibility of its accounts receivable based on a combination of factors. In circumstances where it is aware of a specific customers inability to meet its financial obligations, it records a specific reserve to reduce the amounts recorded to what it believes will be collected. For all other customers, it recognizes reserves for bad debt based on historical experience of bad debts as a percent of revenue for each business unit, adjusted for relative improvements or deteriorations in the agings and changes in current economic
- 61 -
conditions. The Company believes the credit risk with respect to trade receivables is limited due to the large number and the geographic diversification of its customers.
Land Leases and Other Structure Licenses
Most of the Companys advertising structures are located on leased land. Americas land rents are typically paid in advance for periods ranging from 1 to 12 months. International land rents are paid both in advance and in arrears, for periods ranging from 1 to 12 months. Most International street furniture display faces are operated through contracts with the municipalities for up to 20 years. The street furniture contracts often include a percent of revenue to be paid along with a base rent payment. Prepaid land leases are recorded as an asset and expensed ratably over the related rental term and license and rent payments in arrears are recorded as an accrued liability.
Purchase Accounting
The Company accounts for its business acquisitions under the purchase method of accounting. The total cost of acquisitions is allocated to the underlying identifiable net assets based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires managements judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items. In addition, reserves have been established on the Companys balance sheet related to acquired liabilities and qualifying restructuring costs and contingencies based on assumptions made at the time of acquisition. The Company evaluates these reserves on a regular basis to determine the adequacies of the amounts. Various acquisition agreements may include contingent purchase consideration based on performance requirements of the investee. The Company accrues these payments under the guidance in Emerging Issues Task Force (EITF) issue 95-8: Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination, after the contingencies have been resolved.
Asset Retirement Obligation
Statement of Financial Accounting Standards (FAS) No. 143, Accounting for Asset Retirement Obligations, requires the Company to estimate its obligation upon the termination or non-renewal of a lease to dismantle and remove its advertising structures from the leased land and to reclaim the site to its original condition. The Companys asset retirement obligation is reported in Other long-term liabilities. The Company records the present value of obligations associated with the retirement of its advertising structures in the period in which the obligation is incurred. The liability is capitalized as part of the related advertising structures carrying amount. Over time, accretion of the liability is recognized as an operating expense and the capitalized cost is depreciated over the expected useful life of the related asset.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method at rates that, in the opinion of management, are adequate to allocate the cost of such assets over their estimated useful lives, which are as follows:
Buildings and improvements 10 to 39 years
Structures 5 to 40 years
Furniture and other equipment 3 to 20 years
Leasehold improvements shorter of economic life or lease term assuming renewal periods, if appropriate
For assets associated with a lease or contract, the assets are depreciated at the shorter of the economic life or the lease or contract term, assuming renewal periods, if appropriate. Expenditures for maintenance and repairs are charged to operations as incurred, whereas expenditures for renewal and betterments are capitalized.
The Company tests for possible impairment of property, plant, and equipment whenever events or changes in circumstances, such as a reduction in operating cash flow or a dramatic change in the manner the asset is intended to be used indicate the carrying amount of the asset may not be recoverable. If indicators exist, the Company compares the estimated undiscounted future cash flows related to the asset to the carrying value of the asset. If the carrying
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value is greater than the estimated undiscounted future cash flow amount, an impairment charge is recorded in depreciation and amortization expense in the statement of operations for amounts necessary to reduce the carrying value of the asset to fair value. The impairment loss calculations require management to apply judgment in estimating future cash flows and the discount rates that reflects the risk inherent in future cash flows.
Intangible Assets
The Company classifies intangible assets as definite-lived, indefinite-lived, or goodwill. Definite-lived intangibles include primarily transit and street furniture contracts and other contractual rights, all of which are amortized over the shorter or either the respective lives of the agreements or over the period of time the assets are expected to contribute to the Companys future cash flows, typically 5 to 15 years. The Company periodically reviews the appropriateness of the amortization periods related to its definite-lived assets. These assets are stated at cost. Indefinite-lived intangibles include billboard permits. The excess cost over fair value of net assets acquired is classified as goodwill. The indefinite-lived intangibles and goodwill are not subject to amortization, but are tested for impairment at least annually.
The Company tests for possible impairment of definite-lived intangible assets whenever events or changes in circumstances, such as a reduction in operating cash flow or a dramatic change in the manner the asset is intended to be used indicate the carrying amount of the asset may not be recoverable. If indicators exist, the Company compares the estimated undiscounted future cash flows related to the asset to the carrying value of the asset. If the carrying value is greater than the estimated undiscounted future cash flow amount, an impairment charge is recorded in depreciation and amortization expense in the statement of operations for amounts necessary to reduce the carrying value of the asset to fair value.
The Company performs its annual impairment test for its permits using a direct valuation technique as prescribed by the EITF Topic D-108, Use of the Residual Method to Value Acquired Assets Other Than Goodwill (D-108). Certain assumptions are used under the Companys direct valuation technique, including market revenue growth rates, market share, profit margin, duration and profile of the build-up period, estimated start-up cost and losses incurred during the build-up period, the risk adjusted discount rate and terminal values. The Company utilizes Mesirow Financial Consulting, LLC, a third party valuation firm, to assist the Company in the development of these assumptions and the Companys determination of the fair value of its permits. Impairment charges are recorded in depreciation and amortization expense on the statement of operations.
At least annually, the Company performs its impairment test for each reporting units goodwill using a discounted cash flow model to determine if the carrying value of the reporting unit, including goodwill, is less than the fair value of the reporting unit. The Company identified its reporting units under the guidance in FAS No. 142, Goodwill and Other Intangible Assets (Statement 142) and EITF Topic D-101, Clarification of Reporting Unit Guidance in Paragraph 30 of FASB Statement No. 142. The Companys reporting unit for Americas is the reportable segment. The Company determined that each country in its International segment constitutes a reporting unit and therefore tests goodwill for impairment at the country level. Certain assumptions are used in determining the fair value, including assumptions about future cash flows, discount rates, and terminal values. If the fair value of the Companys reporting unit is less than the carrying value of the reporting unit, the Company reduces the carrying amount of goodwill. Impairment charges are recorded in depreciation and amortization expense on the statement of operations.
Nonconsolidated Affiliates
In general, investments in which the Company owns 20 percent to 50 percent of the common stock or otherwise exercises significant influence over the investee are accounted for under the equity method. The Company does not recognize gains or losses upon the issuance of securities by any of its equity method investees. The Company reviews the value of equity method investments and records impairment charges in the statement of operations for any decline in value determined to be other-than-temporary.
Financial Instruments
Due to their short maturity, the carrying amounts of accounts and notes receivable, accounts payable, accrued liabilities and short-term borrowings approximated their fair values at December 31, 2007 and 2006. Additionally,
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as predominantly all of the Companys debt is not publicly traded, the carrying amounts of long-term debt approximated their fair values at December 31, 2007 and 2006.
Income Taxes
The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting bases and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Deferred tax assets are reduced by valuation allowances if the Company believes it is more likely than not some portion or all of the asset will not be realized. As all earnings from the Companys foreign operations are permanently reinvested and not distributed, the Companys income tax provision does not include additional U.S. taxes on foreign operations. It is not practical to determine the amount of federal income taxes, if any, that might become due in the event the earnings were distributed.
The operations of the Company are included in a consolidated federal income tax return filed by Clear Channel Communications, Inc. However, for financial reporting purposes, the Companys provision for income taxes has been computed on the basis that the Company files separate consolidated federal income tax returns with its subsidiaries.
Revenue Recognition
The Companys advertising contracts typically cover periods of up to three years and are generally billed monthly. Revenue for advertising space rental is recognized ratably over the term of the contract. Advertising revenue is reported net of agency commissions. Agency commissions are calculated based on a stated percentage applied to gross billing revenue for the Companys operations. Payments received in advance of being earned are recorded as deferred income.
Stock Based Compensation
Prior to January 1, 2006, the Company accounted for share-based payments under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations, as permitted by FAS No. 123, Accounting for Stock Based Compensation (Statement 123). Under that method, when options were granted with a strike price equal to or greater than market price on date of issuance, there was no impact on earnings either on the date of grant or thereafter, absent certain modifications to the options. The Company adopted FAS No. 123(R), Share-Based Payment (Statement 123(R)), on January 1, 2006, using the modified-prospective-transition method. Under the fair value recognition provisions of this statement, stock based compensation cost is measured at the grant date based on the value of the award and is recognized as expense on a straight-line basis over the vesting period. Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility and forfeiture rates, among other factors. If actual results differ significantly from these estimates, our results of operations could be materially impacted.
Foreign Currency
Results of operations for foreign subsidiaries and foreign equity investees are translated into U.S. dollars using the average exchange rates during the year. The assets and liabilities of those subsidiaries and investees, other than those of operations in highly inflationary countries, are translated into U.S. dollars using the exchange rates at the balance sheet date. The related translation adjustments are recorded in a separate component of shareholders equity, Accumulated other comprehensive income. Foreign currency transaction gains and losses, as well as gains and losses from translation of financial statements of subsidiaries and investees in highly inflationary countries, are included in operations.
Advertising Expense
The Company records advertising expense as it is incurred. Advertising expenses of $14.8 million, $10.4 million and $16.1 million were recorded during the years ended December 31, 2007, 2006 and 2005, respectively, as a component of selling, general and administrative expenses.
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Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, judgments, and assumptions that affect the amounts reported in the financial statements and accompanying notes including, but not limited to, legal, tax and insurance accruals. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair Value Measurements (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements for fair value measurements. Statement 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. Statement 157 does not expand the use of fair value in any new circumstances. Companies will need to apply the recognition and disclosure provisions of Statement 157 for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually effective January 1, 2008. The effective date in Statement 157 is delayed for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Excluded from the scope of Statement 157 are certain leasing transactions accounted for under FAS 13, Accounting for Leases. The exclusion does not apply to fair value measurements of assets and liabilities recorded as a result of a lease transaction but measured pursuant to other pronouncements within the scope of Statement 157. The Company is currently evaluating the impact of adopting FAS 157 on its financial position or results of operations.
FAS 141(R), Business Combinations (Statement 141(R)), was issued in December 2007. Statement 141(R) requires that upon initially obtaining control, an acquirer will recognize 100% of the fair values of acquired assets, including goodwill, and assumed liabilities, with only limited exceptions, even if the acquirer has not acquired 100% of its target. Additionally, contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration and transaction costs will be expensed as incurred. Statement 141(R) also modifies the recognition for preacquisition contingencies, such as environmental or legal issues, restructuring plans and acquired research and development value in purchase accounting. Statement 141(R) amends Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. Statement 141(R) is effective for fiscal years beginning after December 15, 2008. Adoption is prospective and early adoption is not permitted. The Company expects to adopt Statement 141(R) on January 1, 2009. Statement 141(R)s impact on accounting for business combinations is dependent upon acquisitions at that time.
FAS 159, The Fair Value Option for Financial Assets and Financial Liabilitiesincluding an amendment of FASB Statement No. 115 (Statement 159), was issued in February 2007. Statement 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Statement 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Statement 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. Statement 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FAS 157, Fair Value Measurements, and FAS 107, Disclosures about Fair Value of Financial Instruments. Statement 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. The Company will adopt Statement 159 on January 1, 2008, and does not anticipate adoption to materially impact its financial position or results of operations.
FAS 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (Statement 160), was issued in December 2007. Statement 160 clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. Under Statement 160 noncontrolling interests are considered equity and should be reported as an element of consolidated equity, net income will
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encompass the total income of all consolidated subsidiaries and there will be separate disclosure on the face of the income statement of the attribution of that income between the controlling and noncontrolling interests, and increases and decreases in the noncontrolling ownership interest amount will be accounted for as equity transactions. Statement 160 is effective for the first annual reporting period beginning on or after December 15, 2008, and earlier application is prohibited. Statement 160 is required to be adopted prospectively, except for reclassify noncontrolling interests to equity, separate from the parents shareholders equity, in the consolidated statement of financial position and recasting consolidated net income (loss) to include net income (loss) attributable to both the controlling and noncontrolling interests, both of which are required to be adopted retrospectively. The Company expects to adopt Statement 160 on January 1, 2009 and is currently assessing the potential impact that the adoption could have on its financial statements.
Note B INTANGIBLE ASSETS AND GOODWILL
Definite-lived Intangibles
The Company has definite-lived intangible assets which consist primarily of transit and street furniture contracts and other contractual rights. Definite lived intangible assets are amortized over the shorter of either the respective lives of the agreements or over the period of time the assets are expected to contribute to the Companys future cash flows. The following table presents the gross carrying amount and accumulated amortization for each major class of definite-lived intangible assets at December 31, 2007 and 2006:
(In thousands) | 2007 | 2006 | ||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization | |||||||||
Transit, street furniture, and other contractual rights |
$ | 867,283 | $ | 613,897 | $ | 821,364 | $ | 530,063 | ||||
Other |
10,719 | 9,618 | 41,544 | 40,419 | ||||||||
Total |
$ | 878,002 | $ | 623,515 | $ | 862,908 | $ | 570,482 | ||||
Total amortization expense from definite-lived intangible assets for the years ended December 31, 2007, 2006 and 2005 was $53.2 million, $85.5 million and $89.3 million, respectively. The following table presents the Companys estimate of amortization expense for each of the five succeeding fiscal years for definite-lived intangible assets:
(In thousands) | |||
2008 |
$ | 48,190 | |
2009 |
45,479 | ||
2010 |
33,948 | ||
2011 |
25,235 | ||
2012 |
18,342 |
As acquisitions and dispositions occur in the future and as purchase price allocations are finalized, amortization expense may vary.
Indefinite-lived Intangibles
The Companys indefinite-lived intangibles consist of billboard permits acquired primarily in business combinations. The Companys billboard permits are issued in perpetuity by state and local governments and are transferable or renewable at little or no cost. Permits typically include the location which allows the Company the right to operate an advertising structure. The Companys permits are located on either owned or leased land. In cases where the Companys permits are located on leased land, the leases are typically from 10 to 20 years and renew indefinitely, with rental payments generally escalating at an inflation based index. If the Company loses its lease, the Company will typically obtain permission to relocate the permit or bank it with the municipality for future use.
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The Company does not amortize its billboard permits. The Company tests these indefinite-lived intangible assets for impairment at least annually using a direct method. This direct method assumes that rather than acquiring indefinite-lived intangible assets as a part of a going concern business, the buyer hypothetically obtains indefinite-lived intangible assets and builds a new operation with similar attributes from scratch. Thus, the buyer incurs start-up costs during the build-up phase which are normally associated with going concern value. Initial capital costs are deducted from the discounted cash flows model which results in value that is directly attributable to the indefinite-lived intangible assets.
Under the direct method, the Company aggregates its indefinite-lived intangible assets at the market level for purposes of impairment testing as prescribed by EITF 02-07, Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets. The Companys key assumptions using the direct method are market revenue growth rates, market share, profit margin, duration and profile of the build-up period, estimated start-up capital costs and losses incurred during the build-up period, the risk-adjusted discount rate and terminal values. This data is populated using industry normalized information.
The carrying amounts for billboard permits at December 31, 2007 and 2006 were $251.1 million and $260.9 million, respectively.
Goodwill
The Company tests goodwill for impairment using a two-step process. The first step, used to screen for potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. The second step, used to measure the amount of the impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The Companys reporting unit for Americas is the reportable segment. The Company determined that each country in its International segment constitutes a reporting unit and therefore tests goodwill for impairment at the country level. The following table presents the changes in the carrying amount of goodwill in each of the Companys reportable segments for the years ended December 31, 2007 and 2006:
(In thousands) | Americas | International | Total | |||||||||
Balance as of December 31, 2005 |
$ | 405,275 | $ | 343,611 | $ | 748,886 | ||||||
Acquisitions |
249,527 | 42,222 | 291,749 | |||||||||
Dispositions |
(1,913 | ) | | (1,913 | ) | |||||||
Foreign currency translation |
14,085 | 40,109 | 54,194 | |||||||||
Adjustments |
323 | (312 | ) | 11 | ||||||||
Balance as of December 31, 2006 |
667,297 | 425,630 | 1,092,927 | |||||||||
Acquisitions |
20,361 | 13,733 | 34,094 | |||||||||
Foreign currency translation |
78 | 35,430 | 35,508 | |||||||||
Adjustments |
600 | (540 | ) | 60 | ||||||||
Balance as of December 31, 2007 |
$ | 688,336 | $ | 474,253 | $ | 1,162,589 | ||||||
Included in the Americas acquisitions amount above in 2006 is $148.6 million related to the acquisition of Interspace, all of which is expected to be deductible for tax purposes.
Note C BUSINESS ACQUISITIONS
2007 Acquisitions:
During 2007, the Companys Americas segment paid $39.5 million in cash, primarily to acquire display faces in the United States. In addition, the Companys International segment paid $29.6 million, which includes the acquisition of an outdoor advertising business in Romania, additional equity interests in outdoor companies and the acquisition of advertising structures.
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2006 Acquisitions:
The Company completed the acquisition of Interspace on July 1, 2006. The acquisition was valued at approximately $207.5 million based on the Companys common shares issued of $94.2 million, the net cash consideration paid of $88.2 million, which includes subsequent earnouts and working capital settlements and $25.1 million in estimated earnouts to be paid in 2008.
In addition to the Interspace acquisition, during 2006 the Companys Americas segment acquired display faces for $55.4 million in cash. The Company exchanged assets in one of its Americas markets for assets located in a different market and recognized a gain of $13.2 million in Gain on disposition of assets net. In addition, the Companys International segment acquired display faces and additional equity interests in outdoor companies for $105.7 million, including the acquisition of an outdoor advertising business in the United Kingdom.
2005 Acquisitions:
During 2005 the Company acquired Americas display faces for $113.3 million in cash. The Companys International segment acquired display faces for $17.1 million and increased its investment to a controlling majority interest in Clear Media Limited for $8.9 million. Clear Media is a Chinese outdoor advertising company and as a result of consolidating its operations during the third quarter of 2005, the acquisition resulted in an increase in the Companys cash of $39.7 million.
Acquisition Summary
The following is a summary of the assets and liabilities acquired and the consideration given for all acquisitions made during 2007 and 2006. Due to the timing of certain acquisitions, the purchase price allocation is preliminary pending completion of third-party appraisals and other fair value analysis of assets and liabilities.
(In thousands) | ||||||||
2007 | 2006 | |||||||
Cash |
$ | | $ | 5,591 | ||||
Accounts receivable |
| 13,665 | ||||||
Property, plant and equipment |
29,654 | 46,401 | ||||||
Permits |
13,634 | 20,963 | ||||||
Definite-lived intangibles |
3,014 | 105,909 | ||||||
Goodwill |
34,094 | 210,077 | ||||||
Other assets |
1,453 | 4,147 | ||||||
81,849 | 406,753 | |||||||
Other liabilities |
(11,347 | ) | (39,286 | ) | ||||
Minority interests |
101 | 5,224 | ||||||
Deferred tax |
(1,544 | ) | (7,571 | ) | ||||
Common stock issued |
| (89,037 | ) | |||||
(12,790 | ) | (130,670 | ) | |||||
Less fair value of assets exchanged |
| 28,074 | ||||||
Total cash consideration |
69,059 | 248,009 | ||||||
Less cash received |
| 5,591 | ||||||
Net cash paid for acquisitions |
$ | 69,059 | $ | 242,418 | ||||
The Company has entered into certain agreements relating to acquisitions that provide for purchase price adjustments and other future contingent payments based on the financial performance of the acquired company. The Company will continue to accrue additional amounts related to such contingent payments if and when it is determinable that the applicable financial performance targets will be met. The aggregate of these contingent payments, if performance targets were met, would not significantly impact the Companys financial position or results of operations.
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Note D RESTRUCTURING
The following table summarizes the activities related to the Companys restructuring accruals:
(In thousands) | 2007 | 2006 | 2005 | |||||||||
Balance at January 1 |
$ | 12,537 | $ | 23,221 | $ | 6,867 | ||||||
Estimated costs charged to restructuring accrual |
| | 26,576 | |||||||||
Adjustments to restructuring accrual |
42 | 1,826 | (1,281 | ) | ||||||||
Payments charged against restructuring accrual |
(10,134 | ) | (12,510 | ) | (8,941 | ) | ||||||
Balance at December 31 |
$ | 2,445 | $ | 12,537 | $ | 23,221 | ||||||
In the third quarter of 2005, the Companys International segment restructured its operations in France. As a result, the Company recorded $26.6 million in restructuring costs as a component of selling, general and administrative expenses; $22.5 million was related to severance costs and $4.1 million was related to other costs. During the year ended December 31, 2007, $9.8 million was paid and charged to the France restructuring. As of December 31, 2007, the balance of the France restructuring was $1.3 million, comprised primarily of severance, which is expected to be paid over the next two years.
The Company restructured its operations in Spain during 2004 and France during 2003. The remainders of these accruals were utilized in 2005. In addition, the Company has a restructuring liability related to Clear Channel Communications merger with Ackerley in June 2002. At December 31, 2007, the remaining accrual was immaterial.
Note E INVESTMENTS
The Companys most significant investments in nonconsolidated affiliates are listed below:
Clear Channel Independent
The Company owns a 50% interest in Clear Channel Independent (CCI), formerly known as Corp Comm, a South African outdoor advertising company.
Alessi
The Company owns a 34.3% interest in Alessi, an Italian outdoor advertising company.
Summarized Financial Information
The following table summarizes the Companys investments in these nonconsolidated affiliates:
(In thousands) | CCI | Alessi | All Others |
Total | |||||||||||
Balance as of December 31, 2006 |
$ | 46,150 | $ | 27,234 | $ | 23,968 | $ | 97,352 | |||||||
Acquisition (disposition) of investments |
| | (46 | ) | (46 | ) | |||||||||
Equity in net earnings (loss) |
2,546 | (349 | ) | 2,205 | 4,402 | ||||||||||
Other, net |
3,871 | (442 | ) | (569 | ) | 2,860 | |||||||||
Foreign currency translation adjustments |
1,644 | 1,036 | 759 | 3,439 | |||||||||||
Balance as of December 31, 2007 |
$ | 54,211 | $ | 27,479 | $ | 26,317 | $ | 108,007 | |||||||
The investments in the table above are not consolidated, but are accounted for under the equity method of accounting, whereby the Company records its investments in these entities in the balance sheet as Investments in, and advances to, nonconsolidated affiliates. The Companys interests in their operations are recorded in the statement of operations as Equity in earnings of nonconsolidated affiliates. The accumulated undistributed
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earnings included in retained earnings for these investments were $10.1 million, $7.3 million and $2.7 million as of December 31, 2007, 2006 and 2005, respectively.
Note F ASSET RETIREMENT OBLIGATION
The Company has an asset retirement obligation of $70.5 million and $59.3 million as of December 31, 2007 and 2006, respectively, which is reported in Other long-term liabilities. The liability relates to the Companys obligation to dismantle and remove its advertising displays from leased land and to reclaim the site to its original condition upon the termination or non-renewal of a lease. The liability is capitalized as part of the related long-lived assets carrying value. Due to the high rate of lease renewals over a long period of time, the calculation assumes all related assets will be removed at some period over the next 50 years. An estimate of third-party cost information is used with respect to the dismantling of the structures and the reclamation of the site. The interest rate used to calculate the present value of such costs over the retirement period is based on an estimated risk adjusted credit rate for the same period.
The following table presents the activity related to the Companys asset retirement obligation:
(In thousands) | 2007 | 2006 | ||||||
Balance at January 1 |
$ | 59,280 | $ | 49,807 | ||||
Adjustment due to change in estimate of related costs |
8,958 | 7,581 | ||||||
Accretion of liability |
4,236 | 3,539 | ||||||
Liabilities settled |
(1,977 | ) | (1,647 | ) | ||||
Balance at December 31 |
$ | 70,497 | $ | 59,280 | ||||
Note G LONG-TERM DEBT
Long-term debt at December 31, 2007 and 2006 consisted of the following:
December 31, | ||||||
(In thousands) | 2007 | 2006 | ||||
Debt with Clear Channel Communications |
$ | 2,500,000 | $ | 2,500,000 | ||
Bank credit facility |
80,000 | 23,488 | ||||
Other long-term debt |
102,021 | 160,688 | ||||
2,682,021 | 2,684,176 | |||||
Less: current portion |
87,099 | 86,293 | ||||
Total long-term debt |
$ | 2,594,922 | $ | 2,597,883 | ||
Debt with Clear Channel Communications
On August 2, 2005, the Company distributed a note in the original principal amount of $2.5 billion to Clear Channel Communications as a dividend. This note matures on August 2, 2010, may be prepaid in whole at any time, or in part from time to time. The note accrues interest at a variable per annum rate equal to the weighted average cost of debt for Clear Channel Communications, calculated on a monthly basis. This note is mandatorily payable upon a change of control and, subject to certain exceptions, all proceeds from debt or equity raised by the Company must be used to prepay such note. At December 31, 2007, the interest rate on the $2.5 billion note was 6.0%.
Bank Credit Facility
On July 13, 2004, Clear Channel Communications entered into a five-year, multi-currency revolving credit facility in the amount of $1.75 billion. Certain of the Companys International subsidiaries may borrow under a $150.0 million sub-limit within this $1.75 billion credit facility, to the extent Clear Channel Communications has not already borrowed under this capacity and is in compliance with its covenants under the credit facility. This sub-limit
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allows for borrowings in various foreign currencies, which are used to hedge net assets in those currencies and provide funds to the Companys International operations for certain working capital needs. Certain of the Companys International subsidiary borrowings under this sub-limit are guaranteed by Clear Channel Communications. The interest rate is based upon LIBOR or, in the case of Euro denominated borrowings, EURIBOR, plus a margin. At December 31, 2007, the interest rate on this bank credit facility was 5.0%. At December 31, 2007, the outstanding balance on the $150.0 million sub-limit was $80.0 million and $70.0 million was available for future borrowings, with the entire balance to be repaid on July 12, 2009.
Debt Covenants
The $2.5 billion note requires the Company to comply with various negative covenants, including restrictions on the following activities: incurring consolidated funded indebtedness (as defined in the note), excluding intercompany indebtedness, in a principal amount in excess of $400.0 million at any one time outstanding; creating liens; making investments; entering into sale and leaseback transactions (as defined in the note), which when aggregated with consolidated funded indebtedness secured by liens, will not exceed an amount equal to 10% of the Companys total consolidated shareholders equity (as defined in the note) as shown on its most recently reported annual audited consolidated financial statements; disposing of all or substantially all of the Companys assets; entering into mergers and consolidations; declaring or making dividends or other distributions; repurchasing its equity; and entering into transactions with its affiliates.
In addition, the note requires the Company to prepay it in full upon a change of control. The note defines a change of control to occur when Clear Channel Communications ceases to control (i) directly or indirectly, more than 50% of the aggregate voting equity interests of the Company, its operating subsidiary or its respective successors or assigns, or (ii) the ability to elect a majority of the Board of Directors of the Company, its operating subsidiary or its respective successors or assigns. Upon the Companys issuances of equity and incurrences of debt, subject to certain exceptions, it is also required to prepay the note in the amount of the net proceeds received by it from such events.
Clear Channel Communications significant covenants on its $1.75 billion five-year, multi-currency revolving credit facility relate to leverage and interest coverage (as defined in the credit facility). The leverage ratio covenant requires Clear Channel Communications to maintain a ratio of consolidated funded indebtedness to operating cash flow (as defined by the credit facility) of less than 5.25x. The interest coverage covenant requires Clear Channel Communications to maintain a minimum ratio of operating cash flow (as defined by the credit facility) to interest expense of 2.50x. In the event Clear Channel Communications does not meet these covenants, it is considered to be in default on the credit facility at which time the credit facility, including the $150.0 sub-limit utilized by certain of the Companys International subsidiaries, may become immediately due. At December 31 2007, Clear Channel Communications leverage and interest coverage ratios were 3.0x and 5.1x, respectively.
There are no significant covenants or events of default contained in the cash management note issued by Clear Channel Communications to us or the cash management note issued by us to Clear Channel Communications.
At December 31, 2007, the Company and Clear Channel Communications were in compliance with all debt covenants.
Other Debt
Other debt includes various borrowings and capital leases utilized for general operating purposes. Included in the $102.0 million balance at December 31, 2007 is $87.1 million that matures in less than one year.
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Debt Maturities
Future maturities of long-term debt at December 31, 2007, are as follows:
(In thousands) | |||
2008 |
$ | 87,099 | |
2009 |
91,895 | ||
2010 |
2,500,077 | ||
2011 |
2,250 | ||
2012 |
| ||
Thereafter |
700 | ||
Total |
$ | 2,682,021 | |
Note H COMMITMENTS AND CONTINGENCIES
The Company leases office space, equipment and the majority of the land occupied by its advertising structures under long-term operating leases. Some of the lease agreements contain renewal options and annual rental escalation clauses (generally tied to the consumer price index), as well as provisions for the payment of utilities and maintenance by the Company.
The Company has minimum franchise payments associated with non-cancelable contracts that enable it to display advertising on such media as buses, taxis, trains, bus shelters and terminals, as well as other similar type surfaces. The majority of these contracts contain rent provisions calculated as either the greater of a percentage of the relevant advertising revenue or a specified guaranteed minimum annual payment. In addition, the Company has commitments relating to required purchases of property, plant, and equipment under certain street furniture contracts.
The Company accounts for its rentals that include renewal options, annual rent escalation clauses, minimum franchise payments and maintenance related to displays under the guidance in EITF 01-8, Determining Whether an Arrangement Contains a Lease (EITF 01-8), FAS 13, Accounting for Leases, FAS 29, Determining Contingent Rentals an amendment of FASB Statement No. 13 (Statement 29) and FASB Technical Bulletin 85-3, Accounting for Operating Leases with Scheduled Rent Increases (FTB 85-3).
The Company considers its non-cancelable contracts that enable it to display advertising on buses, taxis, trains, bus shelters, etc. to be leases in accordance with the guidance in EITF 01-8. These contracts may contain minimum annual franchise payments which generally escalate each year. The Company accounts for these minimum franchise payments on a straight-line basis in accordance with FTB 85-3. If the rental increases are not scheduled in the lease, for example an increase based on the CPI, those rents are considered contingent rentals and are recorded as expense when accruable. Other contracts may contain a variable rent component based on revenue. The Company accounts for these variable components as contingent rentals under Statement 29, and records these payments as expense when accruable.
The Company accounts for annual rent escalation clauses included in the lease term on a straight-line basis under the guidance in FTB 85-3. The Company considers renewal periods in determining its lease terms if at inception of the lease there is reasonable assurance the lease will be renewed. Expenditures for maintenance are charged to operations as incurred, whereas expenditures for renewal and betterments are capitalized.
Most of the Companys advertising structures are on leased land. In addition, the Company leases certain facilities and equipment. The Company accounts for these leases in accordance with the policies described above.
The Companys contracts with municipal bodies or private companies relating to street furniture, billboard, transit and malls generally require the Company to build bus stops, kiosks and other public amenities or advertising structures during the term of the contract. The Company owns these structures and is generally allowed to advertise on them for the remaining term of the contract. Once the Company has built the structure, the cost is capitalized and expensed over the shorter of the economic life of the asset or the remaining life of the contract.
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Certain of the Companys contracts contain penalties for not fulfilling its commitments related to its obligations to build bus stops, kiosks and other public amenities or advertising structures. Historically, any such penalties have not materially impacted the Companys financial position or results of operations.
As of December 31, 2007, the Companys future minimum rental commitments under non-cancelable operating lease agreements with terms in excess of one year, minimum payments under non-cancelable contracts in excess of one year, and capital expenditure commitments consist of the following:
(In thousands) | Non-Cancelable Operating Leases |
Non-Cancelable Contracts |
Capital Expenditures | ||||||
2008 |
$ | 270,283 | $ | 480,107 | $ | 106,187 | |||
2009 |
236,710 | 353,656 | 33,171 | ||||||
2010 |
210,608 | 325,968 | 12,759 | ||||||
2011 |
173,376 | 292,287 | 5,483 | ||||||
2012 |
154,276 | 250,087 | 1,741 | ||||||
Thereafter |
939,066 | 747,962 | 232 | ||||||
Total |
$ | 1,984,319 | $ | 2,450,067 | $ | 159,573 | |||
Rent expense charged to operations for 2007, 2006 and 2005 was $1.1 billion, $961.3 million and $876.5 million, respectively.
The Company is currently involved in certain legal proceedings and, as required, has accrued its estimate of the probable costs for the resolution of these claims. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in the Companys assumptions or the effectiveness of its strategies related to these proceedings.
The Company is the defendant in a lawsuit filed October 20, 1998 by Jorge Luis Cabrera, Sr., and Martha Serrano, as personal representatives of the Estate of Jorge Luis Cabrera, Jr., in the 11th Judicial Circuit in and for Miami-Dade County, Florida. The plaintiff alleged the Company negligently constructed, installed or maintained the electrical system in a bus shelter, which resulted in the death of Jorge Luis Cabrera, Jr. Martha Serrano settled her claims with the Company. On June 24, 2005, the jury rendered a verdict in favor of the plaintiff, and awarded the plaintiff $4.1 million in actual damages and $61.0 million in punitive damages. The Company filed a motion to have the punitive damages award reduced. The trial judge granted the Companys motion. A final judgment in the amount of $4.1 million in compensatory damages and $12.3 million in punitive damages was signed on January 23, 2006. The Company has appealed the underlying judgment and the Plaintiff filed a cross-appeal. The Plaintiff seeks to reinstate the original award of punitive damages. The Company has insurance coverage for up to approximately $50.0 million in damages for this matter.
In various areas in which the Company operates, outdoor advertising is the object of restrictive and, in some cases, prohibitive zoning and other regulatory provisions, either enacted or proposed. The impact to the Company of loss of displays due to governmental action has been somewhat mitigated by federal and state laws mandating compensation for such loss and constitutional restraints.
Certain acquisition agreements include deferred consideration payments based on performance requirements by the seller, generally over a one to five year period. Contingent payments based on performance requirements by the seller typically involve the completion of a development or obtaining appropriate permits that enable the Company to construct additional advertising displays. At December 31, 2007, the Company believes its maximum aggregate contingency, which is subject to performance requirements by the seller, is approximately $35.0 million. As the contingencies have not been met or resolved as of December 31, 2007, these amounts are not recorded. If future payments are made, amounts will be recorded as additional purchase price.
The Company has various investments in nonconsolidated affiliates subject to agreements that contain provisions that may result in future additional investments to be made by the Company. The put values are contingent upon the financial performance of the investee and are typically based on the investee meeting certain EBITDA targets, as
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defined in the agreement. The Company will continue to accrue additional amounts related to such contingent payments if and when it is determinable that the applicable financial performance targets will be met. The aggregate of these contingent payments, if performance targets are met, would not significantly impact the financial position or results of operations of the Company.
Note I RELATED PARTY TRANSACTIONS
The Company records net amounts due to or from Clear Channel Communications as Due from/to Clear Channel Communications on the consolidated balance sheets. The accounts represent the revolving promissory note issued by us to Clear Channel Communications and the revolving promissory note issued by Clear Channel Communications to us, up to a maximum of $1.0 billion. The accounts accrue interest pursuant to the Master Agreement based upon LIBOR plus a margin and are generally payable on demand. Included in the accounts are the net activities resulting from day-to-day cash management services provided by Clear Channel Communications. As a part of these services, the Company maintains collection bank accounts swept daily by Clear Channel Communications. In return, Clear Channel Communications funds the Companys controlled disbursement accounts as checks or electronic payments are presented for payment. The Companys claim in relation to cash transferred from its concentration account is on an unsecured basis and is limited to the balance of the Due from Clear Channel Communications account. At December 31, 2007, the balance of $265.4 million was an asset recorded in Due from Clear Channel Communications on the consolidated balance sheet. At December 31, 2006, the balance of $4.2 million was a liability recorded in Due to Clear Channel Communications on the consolidated balance sheet. The net interest income for the years ended December 31, 2007, 2006 and 2005 was $3.7 million, $0.4 million and $0.1 million, respectively. At December 31, 2007, the interest rate on the Due from Clear Channel Communications account was 2.9%.
The Company has a note in the original principal amount of $2.5 billion to Clear Channel Communications. This note is further disclosed in Note G. This note matures on August 2, 2010, and may be prepaid in whole at any time, or in part from time to time. This note accrues interest at a variable per annum rate equal to the weighted average cost of debt for Clear Channel Communications, calculated on a monthly basis. This note is mandatorily payable upon a change of control of the Company and, subject to certain exceptions, all proceeds from debt or equity raised by the Company must be used to prepay such note. At December 31, 2007, the interest rate on the $2.5 billion note was 6.0%.
Clear Channel Communications has a five-year, multi-currency revolving credit facility in the amount of $1.75 billion. This note is further disclosed in Note G. Certain of the Companys International subsidiaries may borrow under a $150.0 million sub-limit within this credit facility to the extent Clear Channel Communications has not already borrowed against this capacity. This sub-limit allows for borrowings in various foreign currencies, which are used to hedge net assets in those currencies and provides funds to the Companys International operations for certain working capital needs. Certain of the Companys International subsidiary borrowings under this sub-limit are guaranteed by Clear Channel Communications. The interest rate is based upon LIBOR or, for Euro denominated borrowings, EURIBOR, plus a margin. At December 31, 2007, the interest rate on this bank credit facility was 5.0%. At December 31, 2007, the outstanding balance on the $150.0 million sub-limit was $80.0 million and $70.0 million was available for future borrowings, with the entire balance to be paid on July 12, 2009.
The Company provides advertising space on its billboards for radio stations owned by Clear Channel Communications. For the years ended December 31, 2007, 2006 and 2005, the Company recorded $13.8 million, $10.6 million, and $10.0 million, respectively, in revenue for these advertisements.
Under the Corporate Services Agreement between Clear Channel Communications and the Company, Clear Channel Communications provides management services to the Company, which include, among other things: (i) treasury, payroll and other financial related services; (ii) executive officer services; (iii) human resources and employee benefits services; (iv) legal and related services; (v) information systems, network and related services; (vi) investment services; (vii) procurement and sourcing support services; and (viii) other general corporate services. These services are charged to the Company based on actual direct costs incurred or allocated by Clear Channel Communications based on headcount, revenue or other factors on a pro rata basis. For the years ended December
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31, 2007, 2006 and 2005, the Company recorded $20.3 million, $24.3 million, and $16.0 million, respectively, as a component of corporate expenses for these services.
Clear Channel Communications owns the trademark and trade names used by the Company. Beginning January 1, 2003, Clear Channel Communications began charging the Company a royalty fee based on annual revenue for use of the Clear Channel trademark name. Clear Channel Communications used a third party valuation firm to assist in the calculation of the royalty fee. For the year ended December 31, 2005, the Company recorded $14.8 million of royalty fees in Other income (expense)net. The royalty fee was discontinued on January 1, 2006.
Pursuant to the Tax Matters Agreement between Clear Channel Communications and the Company, the operations of the Company are included in a consolidated federal income tax return filed by Clear Channel Communications. The Companys provision for income taxes has been computed on the basis that the Company files separate consolidated federal income tax returns with its subsidiaries. Tax payments are made to Clear Channel Communications on the basis of the Companys separate taxable income. Tax benefits recognized on the Companys employee stock options exercises are retained by the Company.
The Company computes its deferred income tax provision using the liability method in accordance with Statement of FAS 109, Accounting for Income Taxes, as if the Company was a separate taxpayer. Deferred tax assets and liabilities are determined based on differences between financial reporting bases and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Deferred tax assets are reduced by valuation allowances if the Company believes it is more likely than not some portion or all of the asset will not be realized. The Companys provision for income taxes is further disclosed in Note J.
Pursuant to the Employee Matters Agreement, the Companys employees participate in Clear Channel Communications employee benefit plans, including employee medical insurance and a 401(k) retirement benefit plan. These costs are recorded as a component of selling, general and administrative expenses and were approximately $10.4 million, $9.3 million, and $9.1 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Note J INCOME TAXES
The operations of the Company are included in a consolidated federal income tax return filed by Clear Channel Communications, Inc. However, for financial reporting purposes, the Companys provision for income taxes has been computed on the basis that the Company files separate consolidated federal income tax returns with its subsidiaries.
Significant components of the provision for income tax expense (benefit) are as follows:
(In thousands) | 2007 | 2006 | 2005 | |||||||||
Current federal |
$ | 61,460 | $ | 34,255 | $ | 2,280 | ||||||
Current foreign |
42,984 | 40,056 | 48,037 | |||||||||
Current state |
7,282 | 8,242 | 856 | |||||||||
Total current |
111,726 | 82,553 | 51,173 | |||||||||
Deferred federal |
32,241 | 43,117 | 26,007 | |||||||||
Deferred foreign |
(1,400 | ) | (9,134 | ) | (35,040 | ) | ||||||
Deferred state |
4,074 | 5,544 | 3,344 | |||||||||
Total deferred |
34,915 | 39,527 | (5,689 | ) | ||||||||
Income tax expense (benefit) |
$ | 146,641 | $ | 122,080 | $ | 45,484 | ||||||
The increase in current tax expense of $29.2 million for the year ended December 31, 2007 over 2006 was due primarily to an increase in Income before income taxes and minority interest of $121.2 million. Deferred tax expense decreased $4.6 million for the year ended December 31, 2007 compared to 2006, primarily due to
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additional deferred tax expense of approximately $12.8 recorded in 2006 related to the filing of an amended tax return. The amendment was mainly due to a revised tax loss on the like kind exchange of certain assets. In addition the company recorded deferred tax expense of approximately $16.7 million in 2006 related to the uncertainty of our ability to utilize certain tax losses in the future for certain international operations. These amounts were partially offset by additional deferred tax expense of approximately $19.8 recorded in 2007 as a result of the utilization of deferred tax assets related to capital expenditures in certain foreign jurisdictions.
The increase in current tax expense of $31.4 million for the year ended December 31, 2006 over 2005 was due primarily to an increase in Income before income taxes and minority interest of $167.7 million. This increase was partially offset by current tax benefits of approximately $20.4 million recorded in 2006 related to tax losses on the disposition of certain operating assets and the filing of an amended tax return. The amendment primarily related to a revised tax loss on the like kind exchange of certain outdoor assets. Deferred tax expense increased by $45.2 million for the year ended December 31, 2006 over 2005 primarily due to the tax losses on the disposition of certain operating assets and the filing of the amended tax return mentioned above. In addition, foreign deferred tax expense increased by $25.9 million for the year ended December 31, 2006 over 2005 primarily due to (i) the reversal of deferred tax assets related to tax losses in certain foreign jurisdictions and the uncertainty of the ability to utilize those tax losses in the future and (ii) increased deferred tax benefits in 2005 due to a change in the carrying value of certain deferred tax liabilities as a result of certain local country law and tax rate changes.
Significant components of the Companys deferred tax liabilities and assets as of December 31, 2007 and 2006 are as follows:
(In thousands) | 2007 | 2006 | ||||||
Deferred tax liabilities: |
||||||||
Foreign |
$ | 991 | $ | | ||||
Accrued expenses |
656 | 130 | ||||||
Deferred income |
5,769 | 5,181 | ||||||
Other |
917 | 1,337 | ||||||
Total deferred tax liabilities |
8,333 | 6,648 | ||||||
Deferred tax assets: |
||||||||
Intangibles and fixed assets |
173,181 | 192,958 | ||||||
Accrued expenses |
5,847 | | ||||||
Equity in earnings |
2,235 | 2,145 | ||||||
Net operating loss carryforwards |
52 | 449 | ||||||
Bad debt reserves |
3,225 | 2,922 | ||||||
Foreign |
| 2,111 | ||||||
Other |
5,865 | 2,578 | ||||||
Total deferred tax assets |
190,405 | 203,163 | ||||||
Net deferred tax assets |
182,072 | 196,515 | ||||||
Less: current portion |
(4,095 | ) | (3,403 | ) | ||||
Long-term net deferred tax assets |
$ | 186,167 | $ | 199,918 | ||||
At December 31, 2007, net deferred tax assets include a deferred tax asset of $5.6 million relating to stock-based compensation expense under FAS 123(R). Full realization of this deferred tax asset requires stock options to be exercised at a price equaling or exceeding the sum of the grant price plus the fair value of the option at the grant date and restricted stock to vest at a price equaling or exceeding the fair market value at the grant date. The provisions of FAS 123(R), however, do not allow a valuation allowance to be recorded unless the companys future taxable income is expected to be insufficient to recover the asset. Accordingly, there can be no assurance that the stock price of our Common Stock will rise to levels sufficient to realize the entire tax benefit currently reflected in our balance sheet. See Note K for additional discussion of FAS 123(R).
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The deferred tax asset associated with intangibles and fixed assets primarily relates to the difference in book and tax basis of acquired permits and tax deductible goodwill created from the Companys various stock acquisitions. In accordance with Statement No. 142, the Company no longer amortizes its book basis in permits. As the Company continues to amortize its tax basis in its permits and tax deductible goodwill, the deferred tax asset will decrease over time.
The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax expense is:
(In thousands) | 2007 | 2006 | 2005 | |||||||||
Income tax expense at statutory rates |
$ | 144,162 | $ | 101,733 | $ | 43,025 | ||||||
State income taxes, net of federal tax benefit |
11,356 | 13,786 | 4,200 | |||||||||
Foreign taxes |
(8,791 | ) | 6,390 | 4,816 | ||||||||
Nondeductible items |
760 | 709 | 597 | |||||||||
Tax contingencies |
6,882 | (891 | ) | (7,074 | ) | |||||||
Other, net |
(7,728 | ) | 353 | (80 | ) | |||||||
Income tax expense |
$ | 146,641 | $ | 122,080 | $ | 45,484 | ||||||
During 2007, the Company recorded tax expense of approximately $146.6 million on income before income taxes and minority interest of $411.9 million. Foreign income before income taxes was approximately $143.9 million for 2007. The 2007 income tax expense and 36% effective tax rate were impacted by a favorable foreign income tax rate on the Companys mix of earnings within its international operations.
During 2006, the Company recorded tax expense of approximately $122.1 million on income before income taxes and minority interest of $290.7 million. Foreign income before income taxes was approximately $70.1 million for 2006. The 2006 income tax expense and 42% effective tax rate were impacted as a result of the Company not recording a tax benefit on certain tax losses in its foreign operations due to the uncertainty of the ability to utilize those tax losses in the future.
During 2005, the Company recorded tax expense of approximately $45.5 million on income before income taxes and minority interest of $122.9 million. Foreign income before income taxes was approximately $23.4 million for 2005. The 2005 income tax expense and 37% effective tax rate were impacted as a result of the Company recording a current tax benefit of approximately $8.0 million due to the favorable resolution of certain tax contingencies in 2005. These tax contingencies primarily associated with tax planning related to the Companys foreign operations that was reviewed and not adjusted by the taxing authorities during 2005. The tax contingencies were originally recorded through the income statement by increasing current tax expense in earlier years when the planning was implemented and therefore, when the contingencies were settled favorably the amounts were reversed in the income statement as a current tax benefit in the current year. This benefit was partially offset by the Company not recording a tax benefit on certain tax losses in its foreign operations due to the uncertainty of the ability to utilize those tax losses in the future.
All tax liabilities owed by the Company are paid by the Company or on behalf of the Company by Clear Channel Communications through an operating account that represents net amounts due to or from Clear Channel Communications.
The Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements. FIN 48 prescribes a recognition threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken within an income tax return. The adoption of FIN 48 resulted in an increase of $8.1 million to the January 1, 2007 balance of retained earnings, a decrease of $6.0 million in liabilities for unrecognized tax benefits and an increase of $27.2 million in deferred tax assets. The total amount of unrecognized tax benefits at January 1, 2007, was $31.7 million, inclusive of $6.5 million for interest. Of this total, $15.3 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods.
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The Company continues to record interest and penalties related to unrecognized tax benefits in current income tax expense. The total amount of interest accrued at December 31, 2007, was $5.8 million. The total amount of unrecognized tax benefits and accrued interest and penalties at December 31, 2007, was $60.8 million and is recorded in Other long-term liabilities on the Companys consolidated balance sheet. Of this total, $58.0 million represents the amount of unrecognized tax benefits and accrued interest and penalties that, if recognized, would favorably affect the effective income tax rate in future periods.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(In thousands) | Unrecognized Tax Benefits |
Accrued Interest and Penalties |
Gross Unrecognized Tax Benefits |
|||||||||
Balance at January 1, 2007 |
$ | 25,182 | $ | 6,507 | $ | 31,689 | ||||||
Increases due to tax positions taken during 2007 |
13,533 | | 13,533 | |||||||||
Increases due to tax positions taken in previous years |