10-K 1 y50437e10vk.htm FORM 10-K 10-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
     
þ
  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
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to
 
Commission File No. 000-17436
 
CKX, INC.
(Exact name of Registrant as specified in its charter)
 
     
Delaware   27-0118168
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)
650 Madison Avenue
New York, New York 10022
(Address of Principal Executive Offices and Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (212) 838-3100
 
Securities Registered Pursuant to Section 12(b) of the Act: None
 
Securities Registered Pursuant to Section 12(g) of the Act:
 
Common Stock, Par Value $0.01 Per Share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes o     No þ
 
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark 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 the registrant’s 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.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o
                                        (Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates, based on the closing sales price of the company’s common stock as of June 30, 2007, was $574,079,773.
 
As of February 28, 2008 there were 97,231,842 shares of the registrant’s common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the issuer’s definitive proxy statement to be filed in connection with its 2008 Annual Meeting of Stockholders are incorporated by reference into Part II, Item 5 and Part III, Items 9, 10, 11, 12 and 14 .
 


 

 
CKX, Inc.
 
Annual Report on Form 10-K
 
December 31, 2007
 
                 
        Page
 
      Business     1  
      Risk Factors     17  
      Unresolved Staff Comments     25  
      Properties     25  
      Legal Proceedings     25  
      Submission of Matters to a Vote of Security Holders     26  
 
PART II
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities     27  
      Selected Financial Data     28  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     31  
      Quantitative and Qualitative Disclosures About Market Risk     57  
      Financial Statements and Supplementary Data     59  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     102  
      Controls and Procedures     102  
      Other Information     102  
 
PART III
      Directors, Executive Officers and Corporate Governance     103  
      Executive Compensation     103  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     103  
      Certain Relationships, Related Transactions, and Director Independence     103  
      Principal Accounting Fees and Services     103  
 
PART IV
      Exhibits and Financial Statement Schedules     104  
 EX-10.11: AMENDED AND RESTATED EMPLOYMENT AGREEMENT WITH ROBERT F.X. SILLERMAN
 EX-10.14: AMENDED AND RESTATED EMPLOYMENT AGREEMENT WITH THOMAS P. BENSON
 EX-10.29: AMENDMENT NO. 1 TO THE ELVIS PRESLEY ENTERPRISES, INC. LICENSE AGREEMENT
 EX-10.31: AMENDMENT NO. 1 TO THE MUHAMMAD ALI ENTERPRISES LLC LICENSE AGREEMENT
 EX-21.1: LIST OF SUBSIDIARIES
 EX-23.1: CONSENT OF DELOITTE & TOUCHE LLP RELATING TO CKX, INC.
 EX-23.2: CONSENT OF DELOITTE & TOUCHE LLP RELATING TO THE PRESLEY BUSINESS
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32.1: CERTIFICATION
 EX-32.2: CERTIFICATION


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PART I
 
ITEM 1.   BUSINESS
 
CKX, Inc., together with its subsidiaries and predecessor, will be referred to in this Annual Report on Form 10-K by terms such as “we,” “us,” “our,” “CKX,” the “registrant” and the “Company,” unless the context otherwise requires.
 
Overview
 
We are engaged in the ownership, development and commercial utilization of entertainment content. Our primary assets and operations include the rights to the name, image and likeness of Elvis Presley and the operations of Graceland, the rights to the name, image and likeness of Muhammad Ali and proprietary rights to the IDOLS television brand, including the American Idol series in the United States and local adaptations of the IDOLS television show format which, collectively with American Idol, air in over 100 countries around the world. Our existing properties generate recurring revenues across multiple entertainment platforms, including music and television; licensing and merchandising; artist management; themed attractions and touring/live events. We, through two of our subsidiaries, have granted exclusive licenses to FX Luxury Realty, LLC, a subsidiary of FX Real Estate and Entertainment Inc., to utilize Elvis Presley-related intellectual property and Muhammad Ali-related intellectual property in connection with the development, ownership and operation of Elvis Presley-themed and Muhammad Ali-themed real estate and attraction based properties around the world.
 
Merger Transaction
 
On June 1, 2007, we entered into an Agreement and Plan of Merger (as amended on August 1, 2007, September 27, 2007 and January 23, 2008, the “Merger Agreement”) with 19X, Inc., a Delaware corporation (“19X” or “Parent”), and 19X Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”). 19X was initially formed for an unrelated purpose and has had no operations or business other than as contemplated by the Merger Agreement, including the related financings. Robert F.X. Sillerman, Chairman and Chief Executive Officer of CKX, and Simon R. Fuller, a director of CKX and the Chief Executive Officer of 19 Entertainment Limited, a wholly owned subsidiary of CKX, are the sole current stockholders of 19X.
 
Description of Merger Offer
 
Pursuant to the terms of the Merger Agreement, Merger Sub will be merged with and into CKX, and as a result, CKX will continue as the surviving corporation and as a wholly owned subsidiary of Parent (the “Merger”).
 
If the Merger is completed, each share of CKX common stock will be converted into the right to receive a maximum of $13.75 in cash, without interest, subject to adjustment based on the average trading price of shares of common stock of FX Real Estate and Entertainment Inc. (“FXRE”) as described below (the “Merger Consideration”).
 
Prior to and as a condition to the Merger, we distributed to our stockholders two shares of common stock of FXRE for every 10 shares of CKX common stock or preferred stock owned on the record date for the distribution. The distribution of these shares of common stock of FXRE took place on January 10, 2008. The $13.75 per share cash purchase price to be paid by 19X to CKX stockholders at the closing of the Merger will be reduced by an amount equal to 7.5% of the average of the last reported sales price of FXRE’s common stock on 20-trading days (which need not be consecutive) between February 8, 2008 and April 1, 2008, which have been selected blindly and at random by a Special Committee of CKX’s Board of Directors. The 20-trading days selected as described above will be held in escrow by an independent third party and not disclosed to any party until the close of trading on The NASDAQ Global Market on April 1, 2008, at which time the final adjustment to the cash purchase price for the merger will be calculated and disclosed publicly.
 
In no event will the per share purchase price for the Merger be reduced by an amount greater than $2.00 so that the minimum per share cash purchase price for each share of CKX common stock will be $11.75. The adjustment to the per share cash purchase price will only take place if FXRE’s common stock is listed and trading during the entire


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period from February 8, 2008 through April 1, 2008 on a national securities exchange. Shares of FXRE are listed on The NASDAQ Global Market under the symbol “FXRE.”
 
On February 4, 2008, FXRE filed a registration statement with the Securities and Exchange Commission with respect to an offer to its stockholders of the right to purchase one share of FXRE common stock at a price of $10 per share for every two shares of FXRE common stock held on a to-be-determined record date. FXRE’s stockholders who received their shares from Flag Luxury Properties, LLC have waived their right to participate in this rights offering. In the event that FXRE completes the rights offering at the $10 per share price and for total proceeds of not less than $90.0 million, under the terms of the merger agreement the minimum reduction to the $13.75 per share cash purchase price for the merger will be $0.75 per share regardless of the average trading price of the FXRE common stock over the 20 randomly selected trading days described above. FXRE has entered into agreements with Mr. Sillerman and The Huff Alternative Fund, L.P. and The Huff Alternative Parallel Fund, L.P., principal stockholders of FXRE, for them to purchase shares in the rights offering that are not otherwise subscribed for by FXRE’s other stockholders at the same $10 per share price offered to other stockholders, which, in conjunction with their exercise of their own rights, would result in gross proceeds to FXRE in excess of the $90 million threshold described above.
 
The foregoing summary of the Merger Agreement, and the transactions contemplated thereby, does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, which is incorporated herein as Exhibits 2.1, 2.2, 2.3 and 2.4.
 
Under the terms of the Merger Agreement, the “outside date” for completion of the Merger is June 1, 2008. The Merger Agreement provides that upon termination of the Merger due to a breach of any representation, warranty, covenant or agreement on the part of 19X which prevents the Merger from closing by the “outside date” or a failure by 19X to obtain the necessary financing by the outside date, subject to certain limitations, 19X must pay CKX a termination fee of $37 million, payable at the option of 19X in cash or CKX common stock valued at a price of $12.00 per share. Robert F.X. Sillerman has guaranteed payment of the termination fee described above, should such amount become payable by 19X. Failure to obtain committed financing does not excuse 19X from payment of the termination fee. If the failure by 19X to obtain financing is due to pending litigation with respect to the transaction and all other closing conditions have been satisfied, the “outside date” may be extended to July 31, 2008.
 
Affiliated Elements of Transaction
 
As described above, 19X is owned and controlled by Robert F.X. Sillerman, our Chairman and Chief Executive Officer, and Simon R. Fuller, a director of CKX and the Chief Executive Officer of 19 Entertainment Limited, a wholly owned subsidiary of CKX. Mr. Sillerman is also the Chairman and Chief Executive Officer of FXRE.
 
Approval Process
 
Our Board of Directors, acting upon the unanimous recommendation of a special committee comprised entirely of independent directors (the “Special Committee”), has (except for directors affiliated with 19X, who abstained) unanimously approved the Merger Agreement and recommended that our stockholders adopt the Merger Agreement and approve the Merger. The Special Committee engaged Houlihan, Lokey, Howard & Zukin, Inc. (“Houlihan Lokey”) to serve as independent financial advisor to the Special Committee. On June 1, 2007, Houlihan Lokey delivered an opinion to the Special Committee and the Board of Directors that as of the date of the opinion, the Merger Consideration to be received by holders of the Company’s Common Stock is fair from a financial point of view to such holders (other than holders of Common Stock that are affiliated with Parent). On September 27, 2007, Houlihan Lokey delivered another opinion to the Special Committee and the Board of Directors that as of the date of the opinion, the revised Merger Consideration to be received by holders of CKX’s common stock is fair from a financial point of view to such holders (other than holders of common stock that are affiliated with Parent).
 
Presley Business
 
We own an 85% interest in the entities which own and/or control the commercial utilization of the name, image and likeness of Elvis Presley, the operation of the Graceland museum and related attractions, as well as revenue derived from Elvis Presley’s television specials, films and certain of his recorded musical works (the “Presley


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Business”). The Presley Business consists primarily of two components: first, intellectual property, including the licensing of the name, image, likeness and trademarks associated with Elvis Presley, as well as other owned and/or controlled intellectual property and the collection of royalties from certain motion pictures, television specials and recorded musical works and music compositions; and second, the operation of the Graceland museum and related attractions and retail establishments, including Elvis Presley’s Heartbreak Hotel and other ancillary real estate assets.
 
We believe the name, image and likeness of Elvis Presley, as well as related intellectual property assets, are prime examples of the type of content that offers opportunities to generate increased revenues from diverse platforms and distribution channels. Elvis is the best-selling solo musical recording artist in U.S. history, having sold more than one billion albums and singles worldwide and having set records for the most albums and singles that have been certified Gold® and Platinum® by the Recording Industry Association of America. Over the past five years, more than fifteen million Elvis albums have been sold worldwide and more than 600,000 people visited Graceland in 2007.
 
While, to date, the Presley Business has been successful in accomplishing its primary goal of protecting and preserving the legacy of Elvis Presley, we believe there is a significant opportunity to further enhance the image of Elvis Presley and develop commercial opportunities for the Presley Business. For example, we have entered into an exclusive arrangement with Cirque du Soleil for the creation, development, production and promotion of Elvis Presley-themed projects, featuring touring and permanent shows, as well as multimedia interactive “Elvis Experiences,” throughout the world. In addition, together with Cirque Du Soleil, we have reached an agreement with MGM MIRAGE to create, produce and present a permanent live theatrical Vegas-style Cirque du Soleil show based on the life, times and music of Elvis Presley. The show, which is expected to open in November 2009, will be presented at the CityCenter hotel/casino, currently under construction on the strip in Las Vegas, Nevada. We have also entered into a license agreement with FXRE which, in consideration for annual license payments, grants FXRE the exclusive right to utilize Elvis Presley-related intellectual property in connection with the development and operation of Elvis Presley-themed hotels, casinos and certain other real estate-based projects and attractions around the world.
 
Licensing and Intellectual Property
 
Music Rights
 
We own co-publishing rights to approximately 650 music compositions, most of which were recorded by Elvis Presley. Cherry Lane Music Publishing Company administers our company’s share of these compositions, along with the shares of our co-publishers under an administration agreement. More than 46% of our publishing income from these compositions for 2007 originated outside the United States. The public performance rights for these compositions are administered by The American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI), the two largest U.S. based companies which license and distribute royalties for the non-dramatic public performances of copyrighted musical works in the United States.
 
We also own rights to receive royalties from sales of certain Elvis records. Under Elvis’ recording contract with RCA (now part of Sony BMG Music Entertainment), he was entitled to receive an artist’s royalty on record sales. In March 1973, Elvis sold his ongoing record royalty rights on everything he had recorded up to that time for a lump sum payment from RCA. We continue to receive royalties on sales of records Elvis recorded after March 1973 and a marketing royalty in exchange for the right to use Elvis’ name, image and likeness in connection with the sale and marketing of certain newly released compilation records that include music Elvis recorded before March 1973.
 
Sony BMG Music Entertainment (as RCA’s successor) (“Sony BMG”) generally does not have the right to license master recordings featuring Elvis’ musical performances for any commercial use other than the sale of records. We negotiate, together with Sony BMG, when requests are received for the use of these masters in a commercial setting. In addition, we retain the right to approve remixes and edits of any of the master recordings.


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Name, Image and Likeness
 
We own the name, image and likeness of Elvis Presley as well as trademarks in various names and images associated with Elvis. We license to others the right to use this intellectual property for merchandising and other commercial exploitation. In addition, we enter into licenses for the use of video and audio clips of Elvis from various motion pictures in which he starred and the television programs which we own.
 
We believe that our experience and our infrastructure for exploiting the name, image and likeness of Elvis Presley provide a strong base upon which to expand our business. We are presently exploring various methods of expanding this business which might include purchasing additional name and likeness rights or entering into agreements to manage name and likeness rights.
 
Television/Video
 
We own the rights to two of Elvis’ television specials: “’68 Special” (1968) and “Aloha From Hawaii” (1973) and, as a result of this ownership, we have the right to negotiate for revenues associated with the use of footage from these specials in other media and formats. We own the rights to “Elvis by the Presleys” (2005), a two-hour documentary and four-hour DVD based on and including rare archival footage, home movies and photos, and interviews with Elvis, his friends and relatives, including Lisa Marie Presley and Priscilla Presley. We also own the rights to “Elvis:Viva Las Vegas” (2007), a two-hour television special examining Elvis’ influence on Las Vegas, incorporating rarely seen footage of Elvis performing in Las Vegas, revealing interviews with those closest to him, and special performances from some of today’s top recording stars singing Elvis’ Las Vegas classics.
 
Motion Pictures
 
Elvis starred in 31 feature films as an actor and two theatrically released concert documentary films. Elvis had, and we are entitled to receive, participation royalties in 24 of these films. We have the right to receive royalties, but do not own the films themselves or control the content or distribution of such films.
 
In addition, we have the rights to and negotiate for revenues associated with the use of Elvis’ images as extracted from these films and embodied in other media and formats.
 
Licensing
 
In addition to our own merchandising efforts, our licensing division is charged with the responsibility of protecting and preserving the integrity of Elvis Presley’s image, Graceland and other related properties. We seek to accomplish this through the pursuit of appropriate commercial opportunities that advance and complement our financial strategies while maintaining the desired branding and positioning for “Elvis” and our other properties. We currently have over 100 licensing arrangements. Examples of our licensed products and services (and the corresponding licensees) include: greeting cards (American Greetings Corporation); slot machines (IGT); satellite radio (Sirius Satellite Radio, Inc.); limited edition wines (Signature Wines); collectible figures (McFarlane Toys); calendars and stationary (Mead Corporation); and coffee (Ugly Mug Coffee Company).
 
FX Real Estate and Entertainment License Agreement
 
We recently entered into a license agreement with FXRE, which grants FXRE the right to use the intellectual property and certain other assets associated with Elvis Presley in the development of real estate and other entertainment attraction based projects.
 
Grant of Rights
 
FXRE has the exclusive right to use Elvis Presley-related intellectual property in connection with designing, constructing, operating, and promoting Elvis Presley-themed real estate and attraction based properties, including Elvis Presley-themed hotels, casinos, theme parks and lounges (subject to certain restrictions, including, but not limited to, certain approval rights of Elvis Presley Enterprises). The license also grants FXRE the non-exclusive right to use Elvis Presley-related intellectual property in connection with designing, constructing, operating and


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promoting Elvis Presley-themed restaurants. If FXRE has not opened an Elvis Presley-themed restaurant, theme park and/or lounge within 10 years, then the rights for the category that it has not exploited revert to us.
 
Elvis Presley Experiences
 
Under the terms of the license agreement, FXRE is granted the right to participate, under certain circumstances, in our development of any “Elvis Presley Experience,” defined as any permanent, non-touring interactive entertainment, educational and retail experiences incorporating music, artifacts, and audiovisual works focusing on the life and times of Elvis Presley. As defined in the license agreement, an Elvis Presley Experience does not include a permanent live show of the type that is being created and produced with Cirque du Soleil and performed at MGM’s CityCenter. FXRE has no ownership, economic interest or other participation in such show.
 
If we intend to create an Elvis Presley Experience in collaboration with a third party, FXRE has the right to invest in up to 50% of the economic and beneficial interests owned by us in such project. If we desire to create an Elvis Presley Experience without third party collaboration, FXRE has the right to participate in such project such that (i) we shall bear the initial production costs (until opening) of such Elvis Presley Experience, (ii) FXRE shall provide and construct the premises or venue for the public presentation of such Elvis Presley Experience and shall be entitled to a rental payment to be negotiated by the parties in good faith, and (iii) we shall each own and share in 50% of the profits and losses of such Elvis Presley Experience.
 
In all cases, if FXRE requests that we create an Elvis Presley Experience at one of its properties, provided that we have the right to do so,we shall use reasonable best efforts to create such Elvis Presley Experience at FXRE’s requested property.
 
Royalty Payments and Minimum Guarantees
 
FXRE is required to pay us an amount equal to 3% of gross revenues generated at any Elvis Presley-themed property (including gross revenues derived from lodging, entertainment attractions, ticket sales, sale of food and beverages, and rental space, but excluding gambling if payment of percentage of gambling royalty revenues would be contrary to law or require Elvis Presley Enterprises to be licensed) and 10% of gross revenues with respect to the sale of merchandise. In addition, FXRE must pay us a set dollar amount per square foot of casino floor space at each Elvis Presley-themed property where percentage royalties are not paid on gambling revenues.
 
FXRE is required to pay a guaranteed minimum royalty payment (against royalties payable for the year in question) to Elvis Presley Enterprises of $9 million in each of 2007, 2008 and 2009, $18 million each of 2010, 2011 and 2012, $22 million in each of 2013, 2014, 2015 and 2016, and increasing by 5% for each year thereafter. The initial payments under the license agreements were due on December 1, 2007. As the initial payments will be made after December 1, 2007, however, FXRE will be required to pay us interest at the then current prime rate as quoted in the Wall Street Journal plus 3% if the payment is made from December 1, 2007 through December 31, 2007, plus 3.5% if paid from January 1, 2008 through January 31, 2008, plus 4.0% if paid from February 1, 2008 through February 29, 2008 or plus 4.5% if paid from and after March 1, 2008. The 2007 royalty amount of $9 million has not yet been paid to the Company and the revenue was not recognized in 2007 because under the Company’s revenue recognition policy, revenue from licensing activities is recognized only when all of the conditions of a multiple-element arrangement are met.
 
Beginning on the date of the agreement and ending on the eighth anniversary of the opening of the first Elvis Presley-themed hotel, FXRE has the right to buy out all remaining royalty payment obligations due to us under the license agreement by paying us $450 million.
 
Graceland Operations
 
Graceland
 
Graceland, the 13.5 acre estate which served as the primary residence of Elvis Presley from 1957 until his passing in 1977, is located in Memphis, Tennessee. Graceland was first opened to public tours in 1982. Over the past five years, Graceland has averaged approximately 574,000 visitors per year.


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We operate Graceland under the terms of a 90-year lease with The Promenade Trust, under which 87 years remain. We prepaid approximately $3.0 million of rent at closing of the acquisition of the Presley Business, and will make monthly payments of $1.00 per month during the term of the lease. We own all worldwide rights, title and interest in and to the name “Graceland,” which name may be used at additional themed locations as well as in Memphis, Tennessee.
 
The focal point of the Graceland business is a guided mansion tour, which includes a walk through the historic residence, as well as an extensive display of Elvis’ gold records and awards, career mementos, stage costumes, jewelry, photographs and more. The tour also includes a visit to the Meditation Garden, where Elvis and members of his family have been laid to rest.
 
In addition to the mansion, the Graceland operations include access to an automobile museum featuring vehicles owned and used by Elvis, the “Sincerely Elvis” and “Elvis After Dark” museums, which feature changing exhibits of Elvis Presley memorabilia, a movie theater showing movies starring Elvis, an aviation exhibition featuring the airplanes on which Elvis traveled while on tour, restaurants, a wedding chapel, ticketing and parking. We also own and operate retail stores at Graceland offering Elvis Presley-themed merchandise and produce exclusive licensed merchandise for visitors to Graceland.
 
Adjacent to the Graceland real property is the Meadow Oaks Apartments, a 270-unit apartment complex that we own and operate as a result of our acquisition of the Presley Business. We also own and operate the Graceland RV Park and Campground, an 18.9 acre site located directly across from the mansion, which we acquired in 2006 in connection with our plans to expand the Graceland experience.
 
Elvis Presley’s Heartbreak Hotel
 
Adjacent to the mansion and related attractions, we have, since 1998, operated Elvis Presley’s Heartbreak Hotel, which is marketed primarily to visitors to Graceland. Elvis Presley’s Heartbreak Hotel is a 128-room boutique hotel premised on the legendary hospitality and personal style for which Elvis Presley was known. The hotel had an average occupancy rate of approximately 82% during the year ended December 31, 2007.
 
Graceland Expansion
 
We have held meetings with government officials in Memphis, Tennessee regarding preliminary plans to redevelop and expand the Graceland attraction as the centerpiece of the Whitehaven section of Memphis. In April 2006, we commissioned Robert A.M. Stern Architects to develop a master plan for Graceland and the surrounding properties that we own. The master plan incorporates approximately 104 acres surrounding and contiguous to the Graceland mansion property. We have also engaged Economics Research Associates to provide an analysis of the economic potential of the redevelopment. The master plan is expected to include a new visitor center, exhibition space, retail, hotel, convention facilities, public open space and parking on both sides of Elvis Presley Boulevard. Although we have not yet determined the exact scope, cost, financing plan and timing of this project, we expect that the re-development of Graceland will take several years and will require a substantial financial investment by the Company.
 
In furtherance of these expansion plans, in 2007 and early 2008 we acquired an aggregate of 30.8 acres of additional land in the area immediately surrounding Graceland, including the Craft Manor Apartments, consisting of 24 residential apartment buildings sitting on a total of 16.1 acres and the Forest View Apartment Complex, consisting of 76 units (most of which are currently vacant) sitting on a total of 5.2 acres of land. The newly acquired acreage is included in the 104 acres described above.
 
We will continue to operate the Craft Manor Apartments in a manner consistent with historical use until such time as we commence our expansion of the Graceland property and experience.
 
Under the terms of our license agreement with FXRE described above, FXRE has the option to construct and operate one or more of the hotels to be developed as part of the master plan for Graceland. If FXRE elects to pursue this development, we are required to either grant to FXRE a fee title to the land for the first such hotel, or if such fee title cannot be transferred, grant to FXRE a long term lease, with a term of not less than 99 years, at de minimus annual cost. FXRE will pay to us a royalty of 3% of gross revenue derived from any hotel it constructs at Graceland.


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FXRE has notified us of its intention to construct the first hotel as part of the master plan redevelopment. If the construction of the first hotel has not begun by the later of (i) June 1, 2009, or (ii) twelve (12) months after we have made the land available for development of the first hotel, FXRE will lose the right to construct the first hotel.
 
Elvis.com
 
We own and operate the official Elvis Presley website, www.elvis.com. The website, which currently receives an average of 500,000 unique visitors each month, includes a detailed history of Elvis Presley and the Presley Business, including biographical information, information about Elvis Presley’s awards and achievements, information about Elvis’ friends and family and interesting facts about the life and times of Elvis Presley. The website also offers exclusive downloads such as e-cards, games and on-line tours, as well as direct access to shopelvis.com, our official online store selling Elvis-branded merchandise. Visitors to the website can also access Elvis Insiders, the official Presley sponsored affinity group where fans pay an annual fee for an “inside” look at Elvis and Graceland.
 
Seasonality
 
Graceland’s business has historically been seasonal with sharply higher numbers of visitors during the late spring and summer seasons as compared to the fall and winter seasons.
 
Partnership with Cirque du Soleil
 
Global Projects
 
In May 2006, we entered into an exclusive arrangement with Cirque du Soleil for the creation, development, production and promotion of “Elvis Presley Projects,” featuring touring and permanent shows, as well as multimedia interactive “Elvis Experiences,” throughout the world. The projects consist of:
 
  •  Touring shows that will be produced by Cirque du Soleil and incorporate the name, image, likeness and music of Elvis Presley.
 
  •  Permanent shows at fixed locations that will be produced by Cirque du Soleil and incorporate the name, image, likeness and music of Elvis Presley.
 
  •  Multimedia interactive entertainment “Elvis Experiences” that incorporate the music, memorabilia, audiovisual works, and the life and times of Elvis Presley.
 
CKX and Cirque du Soleil will each own 50 percent of each project, sharing equally in the costs of creating, developing, building and producing each project and in the profits and losses from each project. CKX will also receive royalty payments on various aspects of its intellectual property used in the projects.
 
Las Vegas Show
 
We, together with Cirque Du Soleil, have entered into an agreement with MGM MIRAGE to create a permanent Elvis Presley show at the CityCenter hotel/casino, which is currently under construction in Las Vegas. The show is expected to open with the hotel in November 2009. The show will consist of a creative combination of live musicians and singers, projections, dance and the latest in multimedia sound and lighting technology intended to offer an emotional bond with the audience.
 
Elvis Presley Enterprises and Cirque du Soleil have formed two joint venture entities, Cirque EPE Partnership and Cirque EPE Las Vegas, LLC, for the purpose of developing the show. Under the terms of the joint venture agreements, the EPE and Cirque joint venture entities will share the costs and expenses associated with developing and producing the Elvis show. In addition, CKX and its affiliates will provide certain corporate services and license Elvis Presley related intellectual property, and Cirque and its affiliates will provide creative input, conceptual guidance and related development experience, to the joint venture, in each case in return for agreed upon royalties and other consideration.


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Under the terms of the agreement between the Cirque EPE Partnership and MGM, MGM has agreed to fund the development of the theater at the MGM CityCenter in return for a portion of the ticket sales, show merchandise and other revenues related to the Elvis show. Remaining ticket sales, show merchandise and other revenues not allocated to MGM will be shared by the CKX and Cirque joint venture entities and their respective affiliates.
 
CKX expects its portion of the investment to be approximately $24 million, with the largest amount expected to be funded in the later stages of development. CKX expects to incur expenses of approximately $5.0 million in connection with the show in 2008.
 
The joint venture agreements also provide for the joint venture’s possible commercial exploitation of the Elvis show and associated intellectual property throughout the world.
 
19 Entertainment
 
Overview
 
Through our subsidiary, 19 Entertainment Limited (“19 Entertainment”), we own proprietary rights to the IDOLS television brand, including the American Idol series in the United States and local adapations of the IDOLS television format which, collectively with American Idol, air in over 100 countries around the world. 19 Entertainment’s strategy is to create and retain an ownership interest in entertainment content and to seek to enhance the value of its content through the control of multiple complementary revenue streams including, for example, television, music, sponsorship and merchandising, touring and artist management. 19 Entertainment has a long-term employment agreement with Simon Fuller, its founder and the creative force behind its most successful projects. In addition to overseeing the operations of 19 Entertainment and its subsidiaries, Mr. Fuller is a member of our Board of Directors and plays a key role in planning and implementing our overall creative direction.
 
IDOLS Brand
 
19 Entertainment’s multi-platform approach to the commercial utilization of its entertainment properties is best illustrated by the example of the IDOLS brand. In 1998, 19 Entertainment created what was to become the concept for “Pop Idol,” a televised talent contest for musical artists that allowed the viewing audience to participate in and ultimately select the winning performer via text messaging and telephone voting. The audience participation generates a pre-established market for the winning artists and other finalists who 19 Entertainment then has the right to represent with respect to artist management and merchandising. In the United States and United Kingdom, 19 Entertainment also enters into exclusive recording agreements with the winning artists and other finalists. The first television program based on this concept was Pop Idol, first broadcast in the United Kingdom in 2001 and in the United States, under the name American Idol in 2002. American Idol and/or local adaptations of the IDOLS television show format now collectively air in over 100 countries around the world. The popularity of the IDOLS brand around the world, most notably the American Idol series in the United States, has generated substantial revenue across multiple media platforms, in all of which 19 Entertainment retains a substantial ownership and/or economic interest.
 
FremantleMedia Limited (together with its affiliate, FremantleMedia North America, Inc., “FremantleMedia”), the content business production arm of the RTL Group, Europe’s largest television and radio broadcast company, is 19 Entertainment’s global television production and distribution partner for IDOLS programming and Sony BMG is 19 Entertainment’s record label partner with respect to IDOLS artists in most major territories around the world.
 
Though 19 Entertainment is a party to a variety of commercial relationships with its television and record label production and distribution partners to produce, broadcast, distribute and finance shows based on the IDOLS brand, 19 Entertainment retains a substantial interest in all aspects of such shows and their multiple revenue streams through its wholly owned operating subsidiaries both in the United States and the United Kingdom. 19 Entertainment’s principal operational and ownership interests are structured as follows:
 
  •  19 TV Limited owns two-thirds of the IDOLS brand and co-produces the show in the United States with its partner, FremantleMedia, which owns the other one-third of the IDOLS brand.


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  •  19 TV Limited receives certain fees and revenues relating to the sublicensing of the brand and production and marketing of the shows based on the IDOLS brand around the world, including licensing and producer fees.
 
  •  19 TV Limited shares a percentage of the revenues FremantleMedia derives from on-air sponsorships and sales of IDOLS branded merchandise.
 
  •  19 Recordings Limited has the right to sign recording contracts with the finalists from the American Idol series in the United States.
 
  •  19 Management Limited has the right to manage the finalists.
 
  •  19 Touring Limited has the right to produce IDOLS tours.
 
  •  19 Merchandising Limited has the licensing and merchandising rights for the IDOLS tours and in the United States and United Kingdom is jointly responsible for off-air sponsorship of the televised programs.
 
Television
 
The typical model for a 19 Entertainment television project thus far, as demonstrated by the roll out of the IDOLS brand, has been the development of a compelling music themed television show that is capable of being broadcast on a global basis. Through the initial programming, 19 Entertainment is able to generate a significant fan base and, ultimately, build substantial ancillary revenue streams.
 
19 Entertainment created and co-produces the television show So You Think You Can Dance, which was initially broadcast in the United States on the Fox Broadcasting Network (“Fox”) in the summer of 2005 and aired its second and third seasons in the summer of 2006 and 2007. The show is scheduled for a fourth season in 2008. In addition to television shows based on the IDOLS format and So You Think You Can Dance, 19 Entertainment, in the ordinary course of its business, continually develops new concepts for television projects and currently has several new television projects in various stages of development, in both the United States and the United Kingdom. For example, 19 Entertainment created and produced The Next Great American Band, which aired on Fox in the fall of 2007.
 
19 TV Limited/FremantleMedia Agreement
 
19 Entertainment, through its wholly owned subsidiary, 19 TV Limited, has entered into a worldwide partnership arrangement with FremantleMedia for the production and distribution of the IDOLS brand, which gives FremantleMedia the exclusive right to produce (or sublicense production) and distribute IDOLS programs and series throughout the world except in the United States, where 19 TV Limited co-produces the American Idol series. In the United States, the American Idol series airs on Fox, under an agreement between 19 TV Limited, FremantleMedia and Fox, as more fully described below under “Fox Agreement.”
 
Under the terms of the 19 TV Limited/FremantleMedia agreement, the IDOLS brand, together with all domain names and trademarks relating thereto are owned jointly by the parties, two-thirds by 19 TV Limited and one-third by FremantleMedia. In addition to its joint ownership of the IDOLS brand, 19 TV Limited has the right to receive certain fees and revenues relating to the sublicensing of the IDOLS brand and the production of television shows based on the IDOLS brand and format around the world. Specifically, 19 TV Limited receives:
 
  •  a percentage of the “Format Fee,” which is a percentage of the gross fees received by a local production company from a local broadcaster for production and transmission of the IDOLS series;
 
  •  a percentage of revenues derived from distribution of IDOLS series and programs after a deduction of a percentage of gross revenues and other deductions;
 
  •  a percentage of the net revenue derived from program sponsorship and program merchandising; and
 
  •  a percentage of the net revenue derived from local merchandising and management deals (outside the United States and the United Kingdom). 19 Entertainment and its affiliates retain 100% of artist management and artist merchandising income from the United States and the United Kingdom.


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Fox Agreement
 
19 Entertainment, Fox and FremantleMedia have entered into a series of agreements, the most recent of which was entered into in November 2005, which together encompass the terms under which Fox is granted the right to air American Idol in the United States. Fox has been granted a perpetual and exclusive license, including the right of first negotiation and last refusal, to broadcast any non-scripted television programs featuring the American Idol brand or based on the American Idol format, or featuring contestants who appear in their roles as American Idol winners, intended for broadcast within the United States and its territories. Under the terms of the 2005 amendment, Fox has guaranteed production of at least two more seasons of American Idol (2008 and 2009), with an automatic renewal for up to two additional seasons upon the show achieving certain minimum ratings in 2009 and potentially 2010.
 
Fox pays FremantleMedia a flat, non-auditable license fee per episodic hour, as well as a premium license fee for each hour in excess of the initial season order. These fees are used by FremantleMedia to fund American Idol series production costs, excluding the fees of the judges and host, which are paid directly by Fox, over and above the license fees. FremantleMedia retains the balance of the Fox license fees minus production costs, and pays 50% of the balance directly to 19 TV Limited. Under the terms of the 2005 amendment, beginning with American Idol 5 (which aired in 2006), Fox pays an additional license fee directly to 19 TV Limited and FremantleMedia.
 
In addition to license fees, Fox also pays bonus fees depending on where the American Idol series is rated and ranked in the 18-49 age demographic. 19 TV Limited and FremantleMedia each receive 50% of the ratings/rankings bonus, with 19 TV Limited receiving its share directly from Fox. Fox also pays an executive producer fee per episodic hour, and a format fee equal to a percentage of the approved production budget, of which 19 TV Limited receives 50% and 40%, respectively.
 
Recorded Music
 
19 Entertainment has the exclusive right to select the record company entitled to sign contestants on television shows based on the IDOLS brand to long-term recording contracts. In the United States and the United Kingdom, 19 Entertainment typically options the recording rights to the top 24 finalists of each series of each television show based on the IDOLS brand, and then enters into recording agreements with each of the winners and certain finalists. 19 Entertainment is currently a party to long-term recording agreements with numerous best-selling former IDOLS contestants, including:
 
     
Artist
  Idol Season
 
Kelly Clarkson
  American Idol 1 - Winner
Ruben Studdard
  American Idol 2 - Winner
Clay Aiken
  American Idol 2 - Runner-Up
Fantasia Barrino
  American Idol 3 - Winner
Carrie Underwood
  American Idol 4 - Winner
Chris Daughtry
  American Idol 5 - Finalist
Kellie Pickler
  American Idol 5 - Finalist
Jordin Sparks
  American Idol 6 - Winner
Blake Lewis
  American Idol 6 - Runner-Up
Will Young
  Pop Idol 1 - Winner
 
The American Idol and Pop Idol winners and finalists listed above collectively have sold more than 37 million albums in the United States and United Kingdom alone.
 
Sony BMG is 19 Entertainment’s partner with respect to IDOLS-based recorded music in most major territories around the world. Ronagold Limited, a subsidiary of Sony BMG (“Ronagold”), is entitled to select the record company (which must be a Sony BMG group record company) in territories outside the United States and the United Kingdom which will sign the contestant-artists. In the United States and the United Kingdom, 19 Entertainment, through its wholly-owned subsidiary 19 Recordings Limited (“19 Recordings”) enters into recording agreements with the finalists and then grants an optional exclusive license to a Sony BMG affiliate


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to select a Sony BMG record company to handle the marketing, manufacturing and distribution of the records throughout the world. For the first four series of American Idol in the United States, RCA was the designated Sony BMG affiliate. 19 Entertainment’s agreement with Ronagold with respect to American Idol in the United States expired following American Idol 4, which completed its run in May 2005.
 
In November 2005, 19 Recordings entered into a new agreement with Sony BMG, extending its rights to serve as the recording partner with respect to American Idol artists and designating Simco Limited, a wholly-owned subsidiary of Sony BMG (“Simco”), as the new record partner for seasons subsequent to American Idol 4. In the United States, Simco was granted five successive options to acquire the rights to participate as 19 Recording’s record partner, after which it can require 19 Entertainment to select a designated SonyBMG record label in the United States to act as licensee. Each option during the five year period is contingent upon Simon Cowell acting as on-air judge for the subject season. The new agreement with Sony BMG and Simco lasts through American Idol 9.
 
In the United States and the United Kingdom, the SonyBMG record company that licenses the winning artist and/or any of the finalists pays to 19 Recordings a recoupable advance, out of which 19 Recordings funds an advance to the finalists/artists. Outside the United States and the United Kingdom, the designated SonyBMG record company licenses the winning artist and/or any of the finalists directly and pays to them advances and royalties commensurate with the terms of SonyBMG’s usual exclusive recording agreements for artists with one Platinum selling album prior to signature in the relevant country.
 
In further consideration for 19 Recordings designating SonyBMG as the continuing record label for American Idol artists, Fox agreed to pay to 19 Recordings a non-recoupable annual fee for each of the fifth through ninth seasons of American Idol.
 
Internet and Telephony
 
19 Entertainment, together with FremantleMedia and Fox, is working to extend the reach of the American Idol brand across additional media platforms and distribution channels, starting with the development of an expanded presence on the Internet. Under the terms of the 2005 Fox amendment, Fox has agreed, at its own expense, to build and host www.americanidol.com, which serves as the show’s official website. 19 TV Limited, FremantleMedia and Fox have agreed to work together to develop content for the website. Fox pays 19 TV Limited/ FremantleMedia two-thirds of net Internet revenue generated by Fox above certain thresholds on the primary site for each season through American Idol 10. In addition to developing content with Fox for the primary site, 19 TV Limited and FremantleMedia retain their right to offer premium services on the website and retain 100% of the income generated from such premium services.
 
Additionally, 19 TV Limited and FremantleMedia have granted to Fox certain wireless telephony rights, including show-related or inspired ringtones, realtones and video footage. Fox will pay 19 TV Limited/FremantleMedia 50% of telephony revenues generated by Fox above certain thresholds for each season through American Idol 10. In addition to plans to offer show-related music and video content for use on telephones and other mobile devices.
 
Sponsorship/Merchandising/Marketing
 
19 Entertainment’s sponsorship and merchandising revenues are driven primarily by the IDOLS brand franchise. Fox has exclusive responsibility for selling on-air media on behalf of the American Idol series. However, to the extent that media buyers seek any off-air promotional tie-ins or in program identification rights, these rights can only be sold with the consent of 19 Entertainment/FremantleMedia. With respect to IDOLS tours, 19 Entertainment’s staff solicits sponsors directly and exclusively.
 
19 Entertainment also options the merchandising rights for the top ten contestants for each American Idol program and typically signs long-term exclusive merchandising contracts with the winner and certain runners-up. As noted above, all merchandising and licensing associated with the American Idol series is handled by FremantleMedia on a world-wide basis, though 19 Entertainment receives 50% of net merchandising revenue.


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19 Entertainment seeks to leverage its experience in building brands and generating sponsorship opportunities as it develops marketing relationships with new partners in diverse areas of media and entertainment. For example:
 
  •  In January 2006, 19 Entertainment entered into a three-year agreement with Honda Racing to generate sponsorships for and to market and promote the Honda Formula One racing team around the world.
 
  •  In July 2006, 19 Entertainment formed and obtained a 50% interest in 1966 Entertainment Limited, a sports-based talent management company which has reached an agreement to manage the commercial interest for Team England Football and its players, including full representation of the squad, and the management of the players’ program and relationship with the Football Association and its commercial partners. The results of 1966 Entertainment Limited are consolidated in our financial statements.
 
  •  In September 2006, the company announced the formation of 19 RM Limited, a joint venture with internationally renowned designer Roland Mouret. Mr. Mouret has signed an employment agreement with 19 RM Limited with an initial term of five years. All designs created by Mr. Mouret during this five year period will be exclusively owned, marketed and sold by 19 RM Limited. The results of 19 RM Limited are consolidated in our financial statements.
 
Touring
 
With the success of the IDOLS brand, touring has become an additional source of revenue for 19 Entertainment. As discussed above, when the number of contestants on American Idol has been narrowed down to the final ten contestants, 19 Entertainment engages the finalists as talent for American Idol branded tours produced by 19 Entertainment. In April 2006, 19 Entertainment entered into an agreement with AEG Live, the Anschutz Entertainment Group’s concert promotion division, to operate the American Idol Summer Concert Tours through and including the summer of 2008. In the summer of 2007, the American Idol tour, featuring the finalists from the show’s sixth season, played 59 dates in cities and venues across the United States and Canada.
 
Following on the success of the 2006 tour, in September 2007, 19 Entertainment launched its second So You Think You Can Dance tour featuring contestants from the show’s then just completed third season. The tour played 50 dates in cities and venues across the United States and Canada.
 
Artist Management
 
19 Entertainment continues to represent its historical roster of clients, including David and Victoria Beckham (see below under “Beckham Relationship”), Annie Lennox and Cathy Dennis. In addition, 19 Entertainment options the right to manage the final contestants in each series of the IDOLS brand broadcasts in the United States, United Kingdom, France, Germany and Canada.
 
Beckham Relationship
 
19 Entertainment has developed a number of relationships in which it retains an ownership position and which it expects to result in the creation of valuable properties and projects. For example, 19 Entertainment manages Victoria Beckham, a fashion and lifestyle personality as well as David Beckham, a globally recognized soccer player who commenced playing for the Los Angeles Galaxy of United States-based Major League Soccer in July 2007. 19 Entertainment represents Mr. Beckham in all of his commercial activities including advertising, sponsorship and endorsement activities. In addition, David and Victoria Beckham have agreed to pursue the development and exploitation of projects relating to merchandising, products and skills (that do not, with certain exceptions, include the name “Beckham”) exclusively through a joint venture vehicle, Beckham Brand Limited (“BBL”), which is owned one-third by each of David Beckham, Victoria Beckham, and a subsidiary of 19 Entertainment. The exclusive arrangement between the Beckhams and BBL has recently been extended through the end of 2011.
 
BBL, together with the Anschutz Entertainment Group, has developed, owns and operates The David Beckham Academy in London. The soccer academy features multiple soccer fields, classrooms, training rooms and other facilities and provides a fun and interactive experience for children, both boys and girls, of all skill levels. BBL and Anschutz operate a sister academy hosted at the the Home Depot Center in Los Angeles. In addition, BBL


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recently announced plans for the development of The David Beckham World of Sport, a world class sporting facility to be built in Brazil. The center, which is expected to feature eight soccer fields, a 10,000-seat stadium and facilities for golf and tennis among others, is expected to be built near the northeastern city of Natal. The center is also expected to host the latest David Beckham Academy and will offer a scholarship program run for Brazilian children, which will incorporate schools in the region.
 
Victoria and David, through the BBL venture, recently launched their “his and hers” perfumes “Intimately Beckham” under their agreement with Coty Inc., the world’s largest fragrance house. Victoria has also recently launched a new denim collection under her DVB Style brand and a DVB line of eyewear.
 
In addition to the projects described above, we believe BBL is positioned to exploit a multitude of opportunities in the United States and worldwide resulting from from Mr. and Mrs. Beckham’s arrival in the United States, the commencement and continuation of Mr. Beckham’s career with the L.A. Galaxy and the increased exposure for Mrs. Beckham as a result of the recent Spice Girls reunion tour.
 
Spice Girls
 
19 Entertainment played a pivotal role in the decision by the Spice Girls to reunite and undertake a live worldwide tour. Under 19 Entertainment’s management, the Spice Girls recorded two new tracks for their greatest hits album and sold out venues across the United States, Canada, Europe and the United Kingdom.
 
Seasonality
 
19 Entertainment’s revenue is seasonal in nature, reflecting the timing of our television shows and tours in various markets. Historically, 19 Entertainment has generated higher revenue during the first three quarters of the calendar year, which corresponds to the dates our American Idol and So You Think You Can Dance series air on Fox in the United States and the timing of the related live tours.
 
Ali Business
 
We own an 80% interest in the name, image, likeness and all other rights of publicity of Muhammad Ali, certain trademarks and copyrights owned by Mr. Ali and his affiliates and the rights to all existing Muhammad Ali license agreements (the “Ali Business”). The Ali Business consists of the commercial exploitation of the name, image, likeness and intellectual property of Muhammad Ali, primarily through endorsement and licensing arrangements.
 
The primary revenue source comes from licensing Muhammad Ali’s name and likeness for consumer products, commercials and other uses. Licensing revenue is primarily derived from long-term contracts with terms of one to five years. The intellectual property that is owned by the Company is licensed to third parties for commercial exploitation under long-term agreements. The Ali Business also generates revenue from sports memorabilia signings performed by Mr. Ali.
 
We recently entered into a license agreement with FXRE, which grants FXRE the right to use the intellectual property and certain other assets associated with Muhammad Ali in the development of real estate and other entertainment attraction based projects. Under the terms of the agreement, FXRE has the exclusive right to use Muhammad Ali-related intellectual property in connection with designing, constructing, operating, and promoting Muhammad Ali-themed real estate and attraction based properties, including Muhammad Ali-themed hotels and retreat centers, subject to certain restrictions, including, but not limited to, certain approval rights of Muhammad Ali Enterprises.
 
FXRE is required to pay us an amount equal to 3% of gross revenues generated at any Muhammad Ali property including gross revenues derived from lodging, entertainment attractions, ticket sales, sale of food and beverages and rental space, and 10% of gross revenues with respect to the sale of merchandise. FXRE is required to pay a guaranteed minimum royalty payment (against royalties payable for the year in question) to us of $1 million in each of 2007, 2008 and 2009, $2 million each of 2010, 2011 and 2012, $23 million in each of 2013, 2014, 2015 and 2016, and increasing by 5% for each year thereafter. The initial payments under the license agreements were due on December 1, 2007. As the initial payments will be made after December 1, 2007, however, FXRE will be required to


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pay us interest at the then current prime rate as quoted in the Wall Street Journal plus 3% if the payment is made from December 1, 2007 through December 31, 2007, plus 3.5% if paid from January 1, 2008 through January 31, 2008, plus 4.0% if paid from February 1, 2008 through February 29, 2008 or plus 4.5% if paid from and after March 1, 2008. The 2007 royalty amount of $1 million has not yet been paid to the Company and the revenue was not recognized in 2007 because under the Company’s revenue recognition policy, revenue from licensing activities is recognized only when all of the conditions of a multiple-element arrangement are met.
 
In 2007, we launched the official Muhammad Ali website at www.ali.com. The website includes a detailed history of Muhammad Ali, including biographical information, information about Muhammad Ali’s awards and achievements, and information about Muhammad Ali’s boxing career. The website also offers exclusive access to our official online store selling authentic autographed and licensed products.
 
MBST
 
We own Morra, Brezner, Steinberg & Tenenbaum Entertainment, Inc. (“MBST”), a leading manager of comedic talent and producer of motion pictures and television programming, and entered into long-term employment agreements with the principals of MBST, Larry Brezner, David Steinberg and Steve Tenenbaum, who continue to oversee the day-to-day operations of MBST.
 
MBST is a full service management company with a roster of more than 30 clients, representing an array of Oscar®, Tony®, Emmy® and Grammy® winning artists including Robin Williams, Billy Crystal and Woody Allen for more than 25 years each, jazz legend John Pizzarelli for more than 10 years, comedian Jim Norton and Emmy award winning director Bob Weide, each for more than 3 years. MBST also has had an advisory relationship with Alain Boublil, the author of the Tony® award winning Les Miserables, for more than 15 years. In addition to its management activities, MBST or its senior executives have been responsible for the production of numerous motion pictures and television productions over the years, including Arthur, Good Morning Vietnam, The Vanishing, The Greatest Game Ever Played and Match Point.
 
MBST earns revenue through arrangements with artists that result in MBST receiving a percentage of the artists’ revenue, from consulting fees paid by advisory clients and from participations in and fees from films it has produced. In addition, MBST, its executives and other employees utilize their experience in sourcing and structuring deals for its historical roster of clients to develop and implement revenue enhancement opportunities for the Company’s other entertainment content and divisions.
 
International Operations
 
Approximately $31.7 million, or 12%, of our revenue for the year ended December 31, 2007 was attributable to sales outside the United States.
 
Segment Information
 
The Company currently has four reportable segments: Presley Business — Royalties and Licensing, Presley Business — Graceland Operations, 19 Entertainment and the Ali Business. These designations have been made as the discrete operating results of these segments are reviewed by the Company’s chief operating decision maker to assess performance and make operating decisions. The operating results of MBST are reported as part of Corporate and Other for segment purposes. All inter-segment transactions have been eliminated in the consolidated financial statements. The results of FXRE, including the Metroflag Entities, which were previously reflected in equity of earnings of affiliates from the date of the Company’s investment (June 1, 2007) through July 5, 2007 and included in FXRE’s consolidated results after FXRE’s purchase of the remaining 50% interest in the Metroflag Entities on July 6, 2007 through September 26, 2007, are reflected as part of discontinued operations, (see Note 4 within the consolidated financial statements). Subsequent to September 26, 2007, the Company accounted for it’s 2% investment in FXRE under the cost method. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and footnote 14 in the accompanying consolidated financial statements for financial information about the Company’s segments.


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Regulation
 
Our businesses are regulated by governmental authorities in the jurisdictions in which we operate. Because of our international operations, we must comply with diverse and evolving regulations. Regulation relates to, among other things, management, licensing, foreign investment, use of confidential customer information and content. Our failure to comply with all applicable laws and regulations could result in, among other things, regulatory actions or legal proceedings against us, the imposition of fines, penalties or judgments against us or significant limitations on our activities. In addition, the regulatory environment in which we operate is subject to change. New or revised requirements imposed by governmental authorities could have adverse effects on us, including increased costs of compliance. Changes in the regulation of our operations or changes in interpretations of existing regulations by courts or regulators or our inability to comply with current or future regulations could adversely affect us by reducing our revenues, increasing our operating expenses and exposing us to significant liabilities.
 
Intellectual Property
 
Our business involves the ownership and distribution of intellectual property. Such intellectual property includes copyrights, trademarks and service marks in names, domain names, logos and characters, rights of publicity, patents or patent applications for inventions related to our products and services, and licenses of intellectual property rights of various kinds.
 
Our intellectual property, including the rights to the names, images, and likenesses of Elvis Presley and Muhammad Ali, and the name, trademark and service mark of American Idol, is material to our operations. If we do not or cannot protect our material intellectual property rights against infringement or misappropriation by third parties, (whether for legal reasons or for business reasons relating, for example, to the cost of litigation), our revenues may be materially adversely affected.
 
We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright, rights of publicity, and other laws, as well as licensing agreements and third party nondisclosure and assignment agreements. Because of the differences in foreign trademark, patent and other laws concerning proprietary rights, and various foreign and U.S. state laws concerning publicity rights, our intellectual property rights may not receive the same degree of protection in one jurisdiction as in another. Although we believe that our intellectual property is enforceable in most jurisdictions, we cannot guarantee such validity or enforceability. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, financial condition and results of operations.
 
We rely on trademarks, trade names, and brand names to distinguish our products from those of our competitors, and have registered or applied to register some of these trademarks in jurisdictions around the world. In addition, FremantleMedia has registered some of these trademarks, including the trademark American Idol and its logo, on our behalf. With respect to applications to register trademarks that have not yet been accepted, we cannot assure you that such applications will be approved. Third parties may oppose the trademark applications, seek to cancel existing registrations or otherwise challenge our use of the trademarks. If they are successful, we could be forced to re-brand our products and services, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. We also grant third parties the right to use our trademarks. In an effort to preserve trademark rights, we enter into license agreements with these third parties which govern the use of the trademarks, and which require our licensees to abide by quality control standards with respect to the goods and services that they provide under the trademarks. Although we make efforts to police the use of the trademarks by our licensees, we cannot make assurances that these efforts will be sufficient to ensure that our licensees abide by the terms of their licenses. In the event that our licensees fail to do so, the trademark rights could be diluted, or subject to challenge or invalidation.
 
Although we rely on copyright laws to protect the works of authorship created by us or transferred to us via assignment or by operation of law as work made for hire, we do not typically register our works. Copyrights in works of U.S. origin authored after January 1, 1978, exist as soon as the works are authored and fixed in a tangible medium; however, the works must be registered before the copyright owners may bring an infringement action in the United States. Furthermore, if a copyrighted work of U.S. origin is not registered within three months of publication of the underlying work or before the act of infringement, the copyright owner cannot recover statutory


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damages or attorneys’ fees in any U.S. enforcement action; rather, the owner must prove he suffered actual damages or lost profits. Accordingly, if one of our unregistered works of U.S. origin is infringed by a third party, we will need to register the work before we can file an infringement suit in the United States, and our remedies in any such infringement suit could be limited. Furthermore, copyright laws vary from country to country. Although copyrights that arise under U.S. law will be recognized in most other countries (as most countries are signatories of the Berne Convention and the Universal Copyright Convention), we cannot guarantee that courts in other jurisdictions will afford our copyrights with the same treatment as courts in the United States.
 
In addition to copyright and trademark protection, we rely on the rights of publicity to prevent others from commercially exploiting each of Elvis Presley’s and Muhammad Ali’s name, image and likeness. At this time, there is no federal statute protecting our rights of publicity to Elvis Presley’s and Muhammad Ali’s names, images and likenesses. As a result, we must rely on state law to protect these rights. Although most states have recognized the rights of publicity to some extent, not all 50 states have expressly done so through their statutes or their respective common law. Thus, there is no guarantee that the rights of publicity are enforceable in every state. Additionally, many countries outside of the United States do not recognize the rights of publicity at all or do so in a more limited manner. Thus, there is no guarantee that we will be able to enforce our rights of publicity in these countries.
 
As we seek in the future to acquire owners of content, we will be required to perform extensive due diligence in numerous domestic and foreign jurisdictions, both on the content we seek to acquire, and on the laws of the applicable jurisdiction to protect such content, which will increase the costs associated with such acquisitions.
 
Employees
 
As of December 31, 2007, the Company had a total of 410 full-time employees, 180 part-time employees and 29 seasonal employees. Management considers its relations with its employees to be good.
 
Company Organization
 
The principal executive office of the Company is located at 650 Madison Avenue, New York, New York 10022 and our telephone number is (212) 838-3100.
 
Available Information
 
The Company is subject to the informational requirements of the Securities Exchange Act and files reports and other information with the Securities and Exchange Commission. Such reports and other information filed by the Company may be inspected and copied at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, as well as in the Securities and Exchange Commission’s public reference rooms in New York, New York and Chicago, Illinois. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the Securities and Exchange Commission’s public reference rooms. The Securities and Exchange Commission also maintains an Internet site that contains reports, proxy statements and other information about issuers, like us, who file electronically with the Securities and Exchange Commission. The address of the Securities and Exchange Commission’s web site is http://www.sec.gov.
 
In addition, the Company makes available free of charge through its Web site, www.ckx.com, its Annual Reports on Form 10-KSB and Form 10-K, quarterly reports on Form 10-QSB and Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with the Securities and Exchange Commission. This reference to our Internet website does not constitute incorporation by reference in this report of the information contained on or hyperlinked from our Internet website and such information should not be considered part of this report.


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ITEM 1A.   RISK FACTORS
 
The risks and uncertainties described below are those that we currently believe are material to our stockholders.
 
Risks Related to Our Business
 
We are dependent upon a limited number of properties which may, over time, decline in popularity.
 
We rely heavily upon the continued appeal of the IDOLS brand, including the American Idol series in the United States and, to a lesser extent, its foreign adaptations. Our revenues and income derived from those television programs depend primarily upon the initial and continued acceptance of that programming by the public. Public acceptance of particular programming is dependent upon, among other things, the quality of the programming, the strength of networks on which the programming is broadcast, the promotion and scheduling of the programming and the quality and acceptance of competing television programming and other sources of entertainment and information. Popularity of programming can also be negatively impacted by excessive broadcasting or telecasting of the programming beyond viewers’ saturation thresholds. Any one or more of these factors could result in the IDOLS television series losing its popularity among viewers. Regardless of the reason, a decline in the number of television viewers who tune in to the American Idol series and its foreign adaptations could result in lower advertising revenues for the networks that broadcast television shows based on the IDOLS brand and hurt our ability to sell future IDOLS format shows. This, in turn, would have a material adverse effect on our business, operating results and financial condition.
 
We also rely upon the continued popularity of Elvis Presley and Muhammad Ali and the market for products that exploit their names, images and likenesses. Although we believe that Elvis’ fans will continue to visit Graceland and purchase Elvis-related merchandise, any tarnishing of the public image of Elvis Presley could materially negatively impact our business and results of operations. Moreover, as the life, times and artistic works of Elvis grow more distant in our past, his popularity may decline. If the public were to lose interest in Elvis or form a negative impression of him, our business, operating results and financial condition would be materially and adversely affected.
 
Our success depends, to a significant degree, on our relationships with third parties, including our co-producers, television broadcasters, and record companies.
 
Our ability to exploit new entertainment content depends on our ability to have that content produced and distributed on favorable terms. Although we have strong relationships in the entertainment industry, there can be no guarantee that these relationships will endure or that our production and distribution partners will honor their obligations to us. For example, we depend heavily on the companies that co-produce and broadcast the American Idol series in the United States, namely Fox and FremantleMedia, as well as AEG, the company that produces the American Idol tour. Similarly, we depend on affiliates of Sony BMG, to make and distribute recordings by IDOLS winners in the United States, the United Kingdom and other significant markets and to pay us royalties on record sales and advance us monies against those royalties. We advance funds to the winners, after they sign recording contracts, from the monies we receive from Sony BMG. We also rely on Sony BMG to distribute recordings featuring Elvis Presley. Any failure of FremantleMedia, Fox, Sony BMG or other third parties on whom we rely to continue to honor their obligations to us and adhere to our past course of dealing and conduct would have a material adverse effect on our ability to realize continued revenues from the IDOLS platform. Revenue from Fox, FremantleMedia, AEG and Sony BMG represent 27%, 11%, 10% and 9%, respectively, of the Company’s consolidated revenue for the year ended December 31, 2007.
 
If we are unable to complete or integrate future acquisitions, our business strategy and stock price may be negatively affected.
 
Our ability to identify and take advantage of attractive acquisition opportunities in the future is an important component in the implementation of our overall business strategy. We may be unable to identify, finance or complete acquisitions in the future. If the trading price of our common stock reflects the market’s expectation that


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we will complete acquisitions in the future, then the price of our common stock may drop if we are unable to complete such acquisitions.
 
Even if we are able to complete future acquisitions, they could result in our:
 
  •  incurrence of unanticipated liabilities or contingencies from such acquisitions;
 
  •  incurrence of potential operating losses from such acquisitions;
 
  •  engagement in competition with a larger universe of companies;
 
  •  incurrence of costs relating to possible additional regulatory requirements and compliance costs;
 
  •  issuance of more capital stock, which may dilute our stockholders’ percentage ownership in our company;
 
  •  incurrence of additional amounts of debt; and/or
 
  •  amortization of additional intangible assets.
 
The successful integration of any businesses we may acquire in the future is a key element of our business strategy. The acquisition and integration of additional businesses involve risks, including:
 
  •  the diversion of management’s time and attention away from operating our business to acquisition and integration challenges;
 
  •  our entry into markets and geographic areas where we have limited or no experience;
 
  •  the potential loss of key employees, artists or customers of the acquired businesses;
 
  •  the potential need to implement or remediate controls, procedures and policies appropriate for a public company at businesses that prior to the acquisition lacked these controls, procedures and policies;
 
  •  the integration of culturally diverse employees; and
 
  •  the need to integrate each business’ accounting, information management, human resources, contract and intellectual property management and other administrative systems to permit effective management.
 
We may be unable to effectively integrate businesses we may acquire in the future without encountering the difficulties described above. Failure to effectively integrate such businesses could have a material adverse effect on our business, prospects, results of operations or financial condition. In addition, the combined companies may not benefit as expected from the integration.
 
We may not be able to manage our expected growth, which could adversely affect our operating results.
 
We intend to continue to significantly grow our company’s business. Our anticipated growth could place a strain on our management, employees and operations. Our ability to compete and to manage our future growth effectively will depend on our ability to implement and improve financial and management information systems on a timely basis and to effect changes in our business, such as implementing internal controls to handle the increased size of our operations and hiring, training, developing and managing an increasing number of experienced management-level and other employees. Unexpected difficulties during expansion, the failure to attract and retain qualified employees or our inability to respond effectively to recent growth or plan for future expansion, could adversely affect our operating results.
 
Certain affiliates, minority interests and third parties have the right to exploit our intellectual property for commercial purposes and may exercise those rights in a manner that negatively affects our business.
 
Certain partners, co-owners and third party licensees have the right to commercially exploit certain of our intellectual property, including through shared music publishing rights and film and television production and distribution agreements. We receive a share of the resulting revenue. Our revenue share under such agreements depends on the ability of third parties to successfully market that content. If such third parties exploit our intellectual property in a manner that diminishes its value, or adversely affects the goodwill associated with such intellectual


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property, there may be a material adverse effect on our business, prospects, financial condition, results of operations or cash flow and, ultimately, the price of our common stock.
 
Our intellectual property rights may be inadequate to protect our business.
 
Our intellectual property, including the rights to the names, images and likenesses of Elvis Presley and Muhammad Ali, and the name, trademark and service mark “American Idol,” is material to our operations. If we do not or cannot protect our material intellectual property rights against infringement or misappropriation by third parties, (whether for legal reasons or for business reasons relating, for example, to the cost of litigation), our revenues may be materially adversely affected.
 
We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright, rights of publicity, and other laws, as well as licensing agreements and confidentiality and assignment agreements. Because of the differences in foreign trademark, patent, copyright and other laws concerning proprietary rights and various foreign and U.S. state laws concerning publicity rights, our intellectual property rights may not receive the same degree of protection in one jurisdiction as in another. Although we believe that our intellectual property is enforceable in most jurisdictions, we cannot guarantee such validity or enforceability. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, financial condition and results of operations.
 
We rely on trademarks, trade names, and brand names to distinguish our products, services and content from those of our competitors, and have registered or applied to register some of these trademarks in jurisdictions around the world. In addition, FremantleMedia has registered on our behalf some trademarks, which we co-own, including the trademark “American Idol” and its logo. With respect to applications to register trademarks that have not yet been accepted, we cannot assure you that such applications will be approved. Third parties may oppose the trademark applications, seek to cancel existing registrations or otherwise challenge our use of the trademarks. If they are successful, we could be forced to re-brand our products, services and content, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. We also grant third parties the right to use our trademarks. In an effort to preserve trademark rights, we enter into license agreements with these third parties which govern the use of the trademarks, and which require our licensees to abide by quality control standards with respect to the goods and services that they provide under the trademarks. Although we make efforts to police the use of the trademarks by our licensees, we cannot make assurances that these efforts will be sufficient to ensure that our licensees abide by the terms of their licenses. In the event that our licensees fail to do so, the trademark rights could be diluted, or subject to challenge or invalidation.
 
Although we rely on copyright laws to protect the works of authorship created by us or transferred to us via assignment or by operation of law as work made for hire, we do not typically register our works. Copyrights in works of U.S. origin authored after January 1, 1978 exist as soon as the works are authored and fixed in a tangible medium; however, the works must be registered before the copyright owners may bring an infringement action in the United States. Furthermore, if a copyrighted work of U.S. origin is not registered within three months of publication of the underlying work or before the act of infringement, the copyright owner cannot recover statutory damages or attorneys’ fees in any U.S. enforcement action; rather, the owner must prove he suffered actual damages or lost profits. Accordingly, if one of our unregistered works of U.S. origin is infringed by a third party, we will need to register the work before we can file an infringement suit in the United States, and our remedies in any such infringement suit could be limited. Furthermore, copyright laws vary from country to country. Although copyrights that arise under U.S. and U.K. law will be recognized in most other countries (as most countries are signatories of the Berne Convention and the Universal Copyright Convention), we cannot guarantee that courts in other jurisdictions will afford our copyrights with the same treatment as courts in the United States or the United Kingdom.
 
In addition to copyright and trademark protection, we rely on the rights of publicity to prevent others from commercially exploiting Elvis Presley’s and Muhammad Ali’s names, images and likenesses. At this time, there is no federal statute protecting our rights of publicity to Elvis Presley’s and Muhammad Ali’s names, images and likenesses. As a result, we must rely on state law to protect these rights. Although most states have recognized the rights of publicity to some extent, not all 50 states have expressly done so through their statutes or their respective


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common law and certain of those states which have recognized such rights, have imposed certain limitations on the enforcement of these rights. Consequently, there is no guarantee that the rights of publicity are enforceable in every state. Additionally, many countries outside of the United States do not recognize the rights of publicity at all or do so in a more limited manner. Consequently, there is no guarantee that we will be able to enforce our rights of publicity in these countries.
 
The departure of or failure to recruit key personnel could have a detrimental effect on us.
 
Our success will depend to a significant extent upon a limited number of members of senior management and other key employees, particularly Robert F.X. Sillerman, our Chairman and Chief Executive Officer, and Simon Fuller, the Chief Executive Officer of 19 Entertainment. The loss of the services of either of Messrs. Sillerman or Fuller, or one or more key managers or other key creative, marketing or management employees could have a material adverse effect on our business, operating results or financial condition. In addition, we believe that our future success will depend in large part upon our ability to attract and retain additional management and marketing personnel. There can be no assurance we will be successful in attracting and retaining such personnel, and the failure to do so would have a detrimental effect on our business, financial condition and results of operations.
 
We may not be able to obtain additional debt or equity financing on favorable terms, or at all.
 
We expect that we will require additional financing over time. The terms of any additional financing we may be able to procure are unknown at this time. Our access to third party sources of capital will depend, in part, on:
 
  •  general market conditions;
 
  •  the market’s perception of our then-current performance and growth potential;
 
  •  our then-current debt levels;
 
  •  our then-current and expected future earnings;
 
  •  our cash flow; and
 
  •  the market price per share of our common stock.
 
Any future debt financing or issuances of preferred stock that we may make will be senior to the rights of holders of our common stock, and any future issuances of equity securities will result in the dilution of the then-existing stockholders’ proportionate equity interest.
 
We intend to continue to expand our operations internationally, which will expose us to new risks.
 
A key element of our business strategy, which we have begun to implement through the acquisition of 19 Entertainment, is to expand our operations internationally, both through acquisitions and internal growth. Such expansion will require us to understand local customs, practices and competitive conditions as well as develop a management infrastructure to support our international operations. International operations, including operating the business of 19 Entertainment, are also subject to certain risks inherent in doing business abroad, including:
 
  •  fewer intellectual property protections and the potential difficulty in enforcing intellectual property rights in some foreign countries;
 
  •  general economic and political conditions in the countries where we operate may have an adverse effect on our operations in those countries or may not be favorable to our growth strategy;
 
  •  foreign customers may have longer payment cycles than customers in the United States;
 
  •  tax rates in some foreign countries may exceed those of the United States and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions;
 
  •  challenges caused by distance, language and cultural differences;
 
  •  unexpected changes in regulatory requirements;


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  •  the difficulties associated with managing a large organization spread throughout various countries;
 
  •  the risk that foreign governments may adopt regulations or take other actions that would have a direct or indirect adverse impact on our business and market opportunities; and
 
  •  the difficulty of enforcing agreements and collecting receivables through some foreign legal systems.
 
As we continue to expand our business internationally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations, including the operations of 19 Entertainment. Any of these risks could adversely affect the operations of 19 Entertainment and any of our other international operations and, consequently, our business, financial condition and results of operations.
 
To the extent we maintain international operations and generate revenues in foreign currencies, and currency exchange rates become unfavorable, our results of operations may be adversely affected.
 
As we expand our international operations, more of our customers may pay us in foreign currencies. Currently, we maintain significant operations in the United Kingdom and receive payments from FremantleMedia with respect to our IDOLS agreement in U.S. dollars and U.K. pounds sterling. Conducting business in currencies other than U.S. dollars subjects us to fluctuations in currency exchange rates. If the currency exchange rates were to change unfavorably, the value of revenues we generate in foreign currencies could decrease when converted to U.S. dollars and the amount of expenses we incur in foreign currencies could increase when converted to U.S. dollars. This could have a negative impact on our reported operating results. Hedging strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures, that we may implement to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations. Additionally, hedging programs expose us to risks that could adversely affect our operating results, including the following:
 
  •  Hedging programs are inherently risky and we could lose money as a result of poor trades; and
 
  •  We may be unable to hedge currency risk for some transactions because of a high level of uncertainty or the inability to reasonably estimate our foreign exchange exposures.
 
We depend upon distributions from our operating subsidiaries to fund our operations and may be subordinate to the rights of their existing and future creditors.
 
We conduct substantially all of our operations through our subsidiaries. Our subsidiaries must first satisfy their cash needs, which may include salaries of our executive officers, insurance, professional fees and service of indebtedness that may be outstanding at various times. Financial covenants under future credit agreements, or provisions of the laws of Delaware, where we are organized, or Tennessee or England and Wales, where certain of our subsidiaries are organized, may limit our subsidiaries’ ability to make sufficient dividend, distribution or other payments to us. Creditors of our subsidiaries (including trade creditors) will be entitled to payment from the assets of those subsidiaries before those assets can be distributed to us. By virtue of our holding company status, our Series B Convertible Preferred Stock, which is held by The Promenade Trust for the benefit of Lisa Marie Presley, is structurally junior in right of payment to all existing and future liabilities of our subsidiaries. The inability of our operating subsidiaries to make distributions to us could have a material adverse effect on our business, financial condition and results of operations.
 
The concentration of ownership of our capital stock with our executive officers and non-independent directors and their affiliates will limit your ability to influence corporate matters.
 
As of February 26, 2008, our executive officers and non-independent directors together beneficially own approximately 43.7% of our outstanding capital stock. In particular, Mr. Sillerman, our chief executive officer and chairman of our board of directors, beneficially owns approximately 32.8% of our outstanding capital stock. Mr. Sillerman therefore has the ability to influence our management and affairs and the outcome of matters submitted to stockholders for approval, including the election and removal of directors, amendments to our charter, approval of any equity-based employee compensation plan and any merger, consolidation or sale of all or substantially all of our assets. This concentrated control may limit your ability to influence corporate matters


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and, as a result, we may take actions that our stockholders do not view as beneficial. As a result, the market price of our common stock could be adversely affected.
 
We are subject to extensive governmental regulation, and our failure to comply with regulations could adversely affect our results of operations, financial condition and business.
 
Our businesses are regulated by governmental authorities in the jurisdictions in which we operate. Because our operations are international, we must comply with diverse and evolving regulations. These regulations relate to, among other things, management, licensing, foreign investment, use of confidential customer information and content. Our failure to comply with all applicable laws and regulations could result in, among other things, regulatory actions or legal proceedings against us, the imposition of fines, penalties or judgments against us or significant limitations on our activities. In addition, the regulatory environment in which we operate is subject to change. New or revised requirements imposed by governmental authorities could have adverse effects on us, including increased costs of compliance. Changes in the regulation of our operations or changes in interpretations of existing regulations by courts or regulators or our inability to comply with current or future regulations could adversely affect us by reducing our revenues, increasing our operating expenses and exposing us to significant liabilities.
 
Our business involves risks of liability associated with entertainment content, which could adversely affect our business, financial condition or results of operations.
 
As an owner and developer of entertainment content, we may face potential liability for any of:
 
  •  defamation;
 
  •  invasion of privacy;
 
  •  copyright infringement;
 
  •  actions for royalties and accountings;
 
  •  trademark misappropriation;
 
  •  trade secret misappropriation;
 
  •  breach of contract;
 
  •  negligence; and/or
 
  •  other claims based on the nature and content of the materials distributed.
 
These types of claims have been brought, sometimes successfully, against broadcasters, publishers, merchandisers, online services and other developers and distributors of entertainment content. We could also be exposed to liability in connection with material available through our Internet sites. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on us.
 
Risks Related to Our Common Stock
 
We do not anticipate paying cash dividends on our common stock in the foreseeable future, and the lack of cash dividends may have a negative effect on our stock price.
 
We have never declared or paid any cash dividends or cash distributions on our common stock. We currently intend to retain any future earnings to support operations and to finance expansion and therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of any future debt agreements we may enter into are likely to prohibit or restrict, the payment of cash dividends on our common stock.


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Certain provisions of Delaware law and our charter documents could discourage a takeover that stockholders may consider favorable.
 
Certain provisions of Delaware law and our certificate of incorporation and by-laws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
 
  •  Our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, subject to the right of the stockholders to elect a successor at the next annual or special meeting of stockholders, which limits the ability of stockholders to fill vacancies on our board of directors.
 
  •  Our stockholders may not call a special meeting of stockholders, which would limit their ability to call a meeting for the purpose of, among other things, voting on acquisition proposals.
 
  •  Our by-laws may be amended by our board of directors without stockholder approval, provided that stockholders may repeal or amend any such amended by-law at a special or annual meeting of stockholders.
 
  •  Our by-laws also provide that any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may not be taken by written action in lieu of a meeting.
 
  •  Our certificate of incorporation does not provide for cumulative voting in the election of directors, which could limit the ability of minority stockholders to elect director candidates.
 
  •  Stockholders must provide advance notice to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders’ meeting. These provisions may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of our company.
 
  •  Our board of directors may authorize and issue, without stockholder approval, shares of preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire our company.
 
As a Delaware corporation, by an express provision in our certificate of incorporation, we have elected to “opt out” of the restrictions under Section 203 of the Delaware General Corporation Law regulating corporate takeovers. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging, under certain circumstances, in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder, unless:
 
  •  Prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;
 
  •  Upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time such transaction commenced, excluding, for purposes of determining the number of shares outstanding, (1) shares owned by persons who are directors and also officers of the corporation and (2) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
 
  •  On or subsequent to the date of the transaction, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 662/3% of the outstanding voting stock which is not owned by the interested stockholder.
 
In this context, a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status owned, 15% or more of a corporation’s outstanding voting securities.
 
A Delaware corporation may “opt out” of Section 203 with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or by-laws resulting from amendments approved by holders of at least a majority of the corporation’s outstanding voting shares. We elected to “opt out” of Section 203 by an express provision in our original certificate of incorporation. However, subject to certain


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restrictions, we may elect by an amendment to our certificate of incorporation to be subject to Section 203. Such an amendment would not, however, restrict a business combination between us and an interested stockholder if that stockholder became an interested stockholder prior to the effective date of such amendment.
 
Our certificate of incorporation may only be amended by the affirmative vote of a majority of the outstanding shares of common stock at an annual or special meeting of stockholders and specifically provides that our board of directors is expressly authorized to adopt, amend or repeal our by-laws. The by-laws additionally provide that they may be amended by action of the stockholders at an annual or special meeting, except for certain sections relating to indemnification of directors and officers.
 
Risks Related to the Merger Transaction
 
The Failure to Complete the Merger Could Adversely Affect the Business, Prospects, Results of Operations or Stock Price of our Company
 
Since the execution of the Merger Agreement, there has been significant displacement in the equity and debt markets which have had an effect on other leveraged buy-out type transactions. While 19X has expressed confidence in its ability to consummate the transaction, there can be no assurance that the Merger will be consummated or that it will be consummated upon its existing terms. We are subject to several risks relating the transaction contemplated by the Merger Agreement, including the following:
 
  •  19X’s debt financing letters are subject to conditions, including conditions related to disruptions in the capital markets that, in the judgment of the financing sources could reasonably be expected to impair the syndication of the debt facilities;
 
  •  A substantial portion of the equity financing necessary for the proposed Merger is presently being arranged and there is no assurance that financing will be consummated on terms acceptable to 19X;
 
  •  A failed Merger may result in negative publicity and/or a negative impression of us in the investment community, which could adversely affect the price of our common stock;
 
  •  Certain costs related to the proposed merger, including the fees and/or expenses of our legal, accounting and financial advisors, must be paid even if the proposed Merger is not completed;
 
  •  The Company and certain of its affiliates are defendants in lawsuits brought by stockholders in connection with the merger agreement. Those lawsuits may continue in the event the Merger is not consummated, and we may be subject to additional lawsuits in connection with the Merger Agreement, whether the Merger is terminated or completed; and
 
Under the terms of the Merger Agreement, we will receive a termination fee of $37 million, payable at 19X’s option in cash or our common stock valued at a price of $12.00 per share in the event of the termination of the Merger by 19X for certain reasons including the failure to obtain the necessary financing, which payment has been guaranteed by Mr. Sillerman.
 
If the proposed Merger is not completed, we will remain an independent public company and our common stock will continue to be listed and traded on the NASDAQ Global Market.


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ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.   PROPERTIES
 
The following table sets forth certain information with respect to the Company’s principal locations as of December 31, 2007. These properties were leased or owned by the Company for use in its operations. We believe that our facilities are suitable for the purposes for which they are employed, are adequately maintained and will be adequate for current requirements and projected growth.
 
                         
Location
  Name of Property   Type/Use of Property   Approximate Size     Owned or Leased  
 
Memphis, TN
  Graceland   Museum/Home     13.53 acres       Lease expires in 2095  
Memphis, TN
  Presley Business   Parking Lot/     38.60 acres       Owned  
    Headquarters/Retail/   Airplane Museum/                
    Parking/Ancillary Use   Retail/EPE Corporate                
        Office/ Ancillary                
        Use                
Memphis, TN
  Heartbreak Hotel   Hotel     2.66 acres       Owned  
Memphis, TN
  Meadow Oaks Apartments   Apartment Complex     10.70 acres       Owned  
Memphis, TN
  Craft Manor   Apartment Complex     16.1 acres       Owned  
Memphis, TN
  Memphis-Graceland RV   RV Park     18.9 acres       Owned  
    Park & Campground                    
Memphis, TN
  Commercial Property   Land and Building     3.23 acres       Owned  
Memphis, TN
  Commercial Property   Land and Building     0.80 acres       Owned  
Memphis, TN
  Residential Property   Land     9.50 acres       Owned  
Memphis, TN
  Memphis Restaurant   Restaurant/ Nightclub     0.83 acres       Lease expires in 2017  
    Property (1)                    
Memphis, TN
  Presley Business Office   Office and Warehouses     75,425 square feet       Leases expire in 2009  
    and Warehouses                    
Memphis, TN
  Presley Business Offices   Offices     3,500 square feet       Lease expires in 2023  
New York, NY
  Corporate Headquarters   Offices     16,200 square feet       Lease expires in 2013  
New York, NY
  19 Entertainment   Offices     3,000 square feet       Lease expires in 2012  
    Administrative Offices                    
London, England
  19 Entertainment   Offices     22,268 square feet       Lease expires in 2010  
    Headquarters                    
Los Angeles, CA
  19 Entertainment   Offices     21,578 square feet       Lease expires in 2014  
    Administrative Offices                    
Los Angeles, CA
  MBST Executive and   Offices     11,910 square feet       Lease expires in 2010  
    Administrative Offices                    
Berrien Springs, MI
  Ali Business Executive   Offices     4,420 square feet       Lease expires in 2009  
    and Administrative                    
    Offices                    
 
 
(1) We closed the restaurant effective September 2003 and have negotiated a sublease of the entire space through 2017.
 
ITEM 3.   LEGAL PROCEEDINGS
 
We are subject to certain claims and litigation in the ordinary course of business. It is the opinion of management that the outcome of such matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.


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On June 1, 2007, the same day that CKX announced the Merger transaction, a lawsuit was filed against the Company and its directors in New York State Court, New York County. The complaint was filed by a purported stockholder of the Company and sought class action status to represent all of the Company’s public stockholders. The complaint alleged that the sale price was too low and that the Company’s directors therefore had breached their fiduciary duties by approving the transaction. The complaint sought to enjoin the transaction and compel the defendants to find alternate bidders in order to obtain the highest price for the Company. The complaint sought no money damages, but did seek attorneys’ and experts’ fees and expenses.
 
On July 12, 2007, the defendants moved to dismiss the action on the grounds that the plaintiff and its attorneys had failed to conduct any pre-filing investigation and that the relief sought by the complaint had already been addressed by the Company and was already being provided through several procedures implemented by the Company to maximize stockholder value. At a hearing on September 20, 2007, the court granted the defendants’ motion and dismissed the complaint. Plaintiff’s time to appeal has expired.
 
Another lawsuit was filed in the Delaware Chancery Court against the Company, its directors, 19X and 19X Acquisition Corp (the “Defendants”) on or about December 14, 2007. The complaint was filed by a purported stockholder of the Company and seeks class action status to represent all of the Company’s public stockholders. The complaint alleges that the sale price is too low and that the Company’s directors have therefore breached their fiduciary duties by approving the transaction.
 
The lawsuit seeks a preliminary and permanent injunction preventing the Defendants from consummating the merger. Alternatively, if the merger is consummated, the complaint seeks rescission or recessionary damages in an unspecified amount. Finally, the complaint seeks “Class compensatory damages” in an unspecified amount, as well as the costs and disbursements of the action, experts’ fees and the fees of plaintiff’s attorneys.
 
On or about February 1, 2008, another summons and complaint was filed in the Delaware Chancery Court against the Defendants, by another purported shareholder of the Company. The complaint is identical to the complaint filed on December 14, 2007. The two cases have been consolidated and plaintiffs have been given leave to file a consolidated amended complaint. The Company believes plaintiffs’ claims are without merit and intends to vigorously defend those claims.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of security holders during the three months ended December 31, 2007.


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PART II
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Since March 1, 2005, our common stock, par value $.01 per share (the “Common Stock”) has been listed on The NASDAQ Global Market ® under the ticker symbol “CKXE.” The following table sets forth the high and low closing sale prices of our Common Stock as reported on The NASDAQ Global Market® for each of the periods listed. The high and low closing sales prices for 2007 and 2006 were as follows:
 
                 
    2007  
    High     Low  
 
The NASDAQ Global Market®
               
Quarters Ended
               
December 31, 2007
  $ 12.60     $ 10.62  
September 30, 2007
  $ 14.25     $ 10.33  
June 30, 2007
  $ 14.65     $ 10.20  
March 31, 2007
  $ 14.00     $ 11.10  
 
                 
    2006  
    High     Low  
 
Quarters Ended
               
December 31, 2006
  $ 14.31     $ 11.15  
September 30, 2006
  $ 13.39     $ 8.95  
June 30, 2006
  $ 14.23     $ 12.15  
March 31, 2006
  $ 15.14     $ 11.58  
 
From January 1, 2008 through February 28, 2008, the high closing sales price for our Common Stock was $11.32, the low closing sales price was $8.50 and the last closing sales price on February 28, 2008 was $9.41. As of February 28, 2008, there were 1,055 holders of record of our Common Stock.
 
Dividend Policy
 
We have not paid and have no present intentions to pay cash dividends on our Common Stock.
 
Our Series B Convertible Preferred Stock requires payment of a cash dividend of 8% per annum in quarterly installments. On an annual basis, the total dividend payment on the Series B Convertible Preferred Stock will be $1.8 million. If we fail to make a quarterly dividend payment to the holders of the Series B Convertible Preferred Stock on a timely basis, the dividend rate increases to 12% per annum and all amounts owing must be paid within three business days in shares of common stock valued at the average closing price over the previous 30 consecutive trading days. After such payment is made, the dividend rate returns to 8% per annum. All such dividend payments were made on a timely basis.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
Information required by this item with respect to equity compensation plans of the Company will be contained in our definitive proxy statement issued in connection with the 2008 annual meeting of stockholders filed with the SEC within 120 days after December 31, 2007 and is incorporated herein by reference. If we do not file a definitive proxy statement in connection with the 2008 annual meeting of stockholders with the SEC within 120 days after December 31, 2007, we will file such information with the SEC pursuant to an amendment to this Form 10-K within 120 days after December 31, 2007
 
There were no purchases by the Company or any affiliated purchaser of the Company’s equity securities during 2007 or 2006.


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ITEM 6.   SELECTED FINANCIAL DATA
 
Prior to February 7, 2005, CKX was a publicly traded company with no operations. As a result the Presley Business is considered to be the Predecessor company (the “Predecessor”). To assist in the understanding of the results of operations and balance sheet data of the Company, we have presented the historical results of the Predecessor. The selected consolidated financial data was derived from the audited consolidated financial statements of the Company as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005. The data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto included elsewhere herein.
 
The selected historical financial data for each of the two years ended December 31, 2004 and as of December 31, 2004 and 2003 is represented by that of the Presley Business (as Predecessor) which have been derived from the Presley Business’ audited Combined Financial Statements and Notes thereto, as of December 31, 2004 and 2003, and for each of the two years ended December 31, 2004. The selected statement of operations data for the period January 1, 2005 — February 7, 2005 represents the pre-acquisition operating results of the Presley Business (as Predecessor) in 2005.
 
Our selected statement of operations data for the years ended December 31, 2007, 2006 and 2005 includes the results of the Presley Business for the period following its acquisition on February 7, 2005, the results of 19 Entertainment for the period following its acquisition on March 17, 2005, the results of MBST for the period following its acquisition on August 9, 2005 and the results of the Ali Business for the period following its acquisition on April 10, 2006. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussion of the material acquisitions that affect the comparability of the information included in the selected historical financial data.


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                        Predecessor Company  
    CKX, Inc.
      January 1-
    Year Ended
 
(Amounts in thousands,
  Year Ended December 31,       February 7,     December 31,  
except per share and share information)   2007     2006     2005       2005     2004     2003  
Statement of Operations Data:
                                                 
Net revenues
  $ 266,777     $ 210,153     $ 120,605       $ 3,442     $ 41,658     $ 44,376  
Operating expenses (excluding depreciation and amortization)
    201,468       169,717       108,547         2,854       30,558       32,268  
Depreciation and amortization
    22,551       20,541       14,910         126       1,201       1,227  
Operating income (loss)
    42,758       19,895       (2,852 )       462       9,899       10,881  
Interest income (expense), net
    (3,946 )     240       (2,820 )       (115 )     (1,327 )     (1,362 )
Write-off of unamortized deferred loan costs
                (1,894 )                    
Other income (expense)
    2,181       (3,323 )     2,970                      
Income (loss) from continuing operations before income taxes
    40,993       16,812       (4,596 )       347       8,572       9,519  
Income tax expense
    19,432       6,178       855         152       833       813  
Equity in earnings of affiliate
    1,566       686       843                      
Minority interest
    (2,553 )     (2,127 )     (1,296 )                    
Income (loss) from continuing operations
    20,574       9,193       (5,904 )       195       7,739       8,706  
Loss from discontinued operations
    (8,430 )                         (246 )     (3,378 )
Net income (loss)
    12,144       9,193       (5,904 )       195       7,493       5,328  
Dividends on preferred stock
    (1,824 )     (1,824 )     (1,632 )                    
Accretion of beneficial conversion feature
                (17,762 )                    
Net income (loss) applicable to common stockholders
  $ 10,320     $ 7,369     $ (25,298 )     $ 195     $ 7,493     $ 5,328  
Basic income (loss) per common share
  $ 0.11     $ 0.08     $ (0.35 )                          
Diluted income (loss) per common share
  $ 0.11     $ 0.08     $ (0.35 )                          
Average number of basic common shares outstanding
    96,901,172       92,529,152       71,429,858                            
Average number of diluted common shares outstanding
    96,991,441       93,555,201       71,429,858                            
 
                                           
    CKX, Inc.
      Predecessor Company  
    As of December 31,       As of December 31,  
(Amounts in thousands)   2007     2006     2005       2004     2003  
Balance Sheet Data:
                                         
Cash and cash equivalents
  $ 50,947     $ 36,610     $ 36,979       $ 201     $ 287  
Marketable securities
                42,625                
Other current assets
    58,127       36,088       26,495         6,912       8,188  
Total assets(1)
    525,455       489,117       444,600         36,032       37,304  
Current liabilities (excluding current portion of debt)
    59,845       39,432       33,937         8,978       6,949  
Debt
    103,070       3,701       3,500         23,582       26,431  
Total liabilities(1)
    207,992       91,153       94,365         34,615       35,645  
Redeemable restricted common stock
    23,002       23,002       23,002                
Stockholders’ equity/net assets
    289,704       371,009       323,432         1,417       1,659  
 
 
(1) Goodwill and deferred tax liabilities for 2006 and 2005 have been corrected. See note 13 to the consolidated financial statements.


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FORWARD LOOKING STATEMENTS
 
In addition to historical information, this Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward-looking statements contain these identifying words. All statements in this Annual Report regarding our future strategy, future operations, projected financial position, estimated future revenue, projected costs, future prospects, and results that might be obtained by pursuing management’s current plans and objectives are forward-looking statements. You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this Annual Report was filed with the Securities and Exchange Commission (“SEC”). We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our stockholders.


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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following management’s discussion and analysis of financial condition and results of operations of the Company (and its predecessor) should be read in conjunction with the historical financial statements and footnotes of the Presley Business, and the Company’s historical consolidated financial statements and notes thereto included elsewhere in this Annual Report. Our future results of operations may change materially from the historical results of operations reflected in our historical financial statements.
 
Overview
 
We are engaged in the ownership, development and commercial utilization of entertainment content, including the rights to the name, image and likeness of Elvis Presley and the operations of Graceland, the rights to the name, image and likeness of Muhammad Ali and proprietary rights to the IDOLS television brand, including the American Idol series in the United States and local adaptations of the IDOLS television show format which, collectively, air in over 100 countries around the world. Our existing properties generate recurring revenues across multiple entertainment platforms, including music and television; sponsorship; licensing and merchandising; artist management; themed attractions and touring/live events. On June 1, 2007, CKX, through two of its subsidiaries, granted exclusive licenses to FX Luxury Realty, LLC, a subsidiary of FX Real Estate and Entertainment Inc., to utilize Elvis Presley-related intellectual property and Muhammad Ali-related intellectual property in connection with the development, ownership and operation of Elvis Presley-themed and Muhammad Ali-themed real estate and attraction based properties around the world.
 
The Company owns an 85% interest in the Presley Business. The former owner of the Presley Business maintains a 15% interest in the business, is entitled to certain future distributions and has other contractual rights. The Company owns an 80% interest in the Ali Business. The former owner of the Ali Business maintains a 20% interest in the business and is entitled to certain future distributions and has other contractual rights.
 
Management’s discussion and analysis of financial condition and results of operations is based on the historical financial condition and results of operations of the Presley Business, as predecessor, rather than those of CKX, prior to February 7, 2005. Since the results of our acquired businesses are only included in our operating results from the dates of acquisition, the timing of those acquisitions significantly impacts the comparability of our results on a year over year basis.
 
Merger Agreement
 
On June 1, 2007, we entered into an Agreement and Plan of Merger (as amended on August 1, 2007, September 27, 2007 and January 23, 2008, the “Merger Agreement”) with 19X, Inc., a Delaware corporation (“19X” or “Parent”), and 19X Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”). 19X was initially formed for an unrelated purpose and has had no operations or business other than as contemplated by the Merger Agreement, including the related financings. Robert F.X. Sillerman, Chairman and Chief Executive Officer of CKX, and Simon R. Fuller, a director of CKX and the Chief Executive Officer of 19 Entertainment Limited, a wholly owned subsidiary of CKX, are the sole current stockholders of 19X.
 
Description of Merger Offer
 
Pursuant to the terms of the Merger Agreement, Merger Sub will be merged with and into CKX, and as a result, CKX will continue as the surviving corporation and as a wholly owned subsidiary of Parent (the “Merger”).
 
If the Merger is completed, each share of CKX common stock will be converted into the right to receive a maximum of $13.75 in cash, without interest, subject to adjustment based on the average trading price of shares of common stock of FX Real Estate and Entertainment Inc. (“FXRE”) as described below (the “Merger Consideration”).
 
Prior to and as a condition to the Merger, we distributed to our stockholders two shares of common stock of FXRE for every 10 shares of CKX common stock or preferred stock owned on the record date for the distribution. The distribution of these shares of common stock of FXRE took place on January 10, 2008. The $13.75 per share


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cash purchase price to be paid by 19X to CKX stockholders at the closing of the Merger will be reduced by an amount equal to 7.5% of the average of the last reported sales price of FXRE’s common stock on 20-trading days (which need not be consecutive) between February 8, 2008 and April 1, 2008, which have been selected blindly and at random by the Special Committee. The 20-trading days selected as described above will be held in escrow by an independent third party and not disclosed to any party until the close of trading on The NASDAQ Global Market on April 1, 2008, at which time the final adjustment to the cash purchase price for the merger will be calculated and disclosed publicly.
 
In no event will the per share purchase price for the Merger be reduced by an amount greater than $2.00 so that the minimum per share cash purchase price for each share of CKX common stock will be $11.75. The adjustment to the per share cash purchase price will only take place if FXRE’s common stock is listed and trading during the entire period from February 8, 2008 through April 1, 2008 on a national securities exchange. Shares of FXRE are listed on The NASDAQ Global Market under the symbol “FXRE.”
 
On February 4, 2008, FXRE filed a registration statement with the Securities and Exchange Commission with respect to an offer to its stockholders of the right to purchase one share of FXRE common stock at a price of $10 per share for every two shares of FXRE common stock held on a to-be-determined record date. FXRE’s stockholders who received their shares from Flag Luxury Properties, LLC have waived their right to participate in this rights offering. In the event that FXRE completes the rights offering at the $10 per share price and for total proceeds of not less than $90.0 million, under the terms of the Merger agreement the minimum reduction to the $13.75 per share cash purchase price for the merger will be $0.75 per share regardless of the average trading price of the FXRE common stock over the 20 randomly selected trading days described above. FXRE has entered into agreements with Mr. Sillerman and The Huff Alternative Fund, L.P. and The Huff Alternative Parallel Fund, L.P., principal stockholders of FXRE, for them to purchase shares in the rights offering that are not otherwise subscribed for by FXRE other stockholders at the same $10 per share price offered to other stockholders, which, in conjunction with their exercise of their own rights, would result in gross proceeds to FXRE in excess of the $90 million threshold described above.
 
Consummation of the Merger is subject to various customary closing conditions, including approval of the transaction by the Company’s stockholders, absence of a “material adverse effect” on the Company, receipt of regulatory approvals, the distribution of the shares of common stock of FXRE (as described below) to CKX’s stockholders and stockholders of the Company holding no more than 7.5% of the outstanding Common Stock exercising appraisal rights under Delaware law. Completion of the Merger is not conditioned upon 19X receiving financing, however, upon termination due to a failure of 19X to obtain necessary financing 19X must pay CKX a termination fee of $37 million, payable at the option of 19X in cash or shares of CKX common stock valued at a price of $12.00 per share. Additional detailed information about the Merger can be found in the Company’s Current Reports on Form 8-K, filed with the Securities and Exchange Commission (the “SEC”) on June 1, 2007, August 1, 2007, September 28, 2007 and January 24, 2008.
 
On November 8, 2007, 19X, Inc. delivered fully executed financing letters which provide for capital sufficient to complete the merger on the previously disclosed terms. The financing letters delivered by 19X include firm commitments from, as well as other detailed arrangements and engagements with, three prominent Wall Street firms and expressions of intentions from management and other significant investors in CKX. On October 30, 2007, 19X had delivered unsigned copies of the letters to allow the CKX Board of Directors to complete a review of the financing package. Upon completion of the Board’s review, 19X delivered the fully signed financing letters.
 
For risks related to the merger transaction, please see Item 1A. Risk Factors — Risks Related to the Merger Transaction — The Failure to Complete the Merger Could Adversely Affect the Business, Prospects, Results of Operations or Stock Price of the Company.
 
Affiliated Elements of Transaction
 
As described above, 19X is owned and controlled by Robert F.X. Sillerman, our Chairman and Chief Executive Officer, and Simon R. Fuller, a director of CKX and the Chief Executive Officer of 19 Entertainment Limited, a wholly owned subsidiary of CKX. Mr. Sillerman is also the Chairman and Chief Executive Officer of FXRE.


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Approval Process
 
Our Board of Directors, acting upon the unanimous recommendation of a special committee comprised entirely of independent directors (the “Special Committee”), has (except for directors affiliated with 19X, who abstained) unanimously approved the Merger Agreement and recommended that our stockholders adopt the Merger Agreement and approve the Merger. The Special Committee engaged Houlihan, Lokey, Howard & Zukin, Inc. (“Houlihan Lokey”) to serve as independent financial advisor to the Special Committee. On June 1, 2007, Houlihan Lokey delivered an opinion to the Special Committee and the Board of Directors that as of the date of the opinion, the Merger Consideration to be received by holders of the Company’s Common Stock is fair from a financial point of view to such holders (other than holders of Common Stock that are affiliated with Parent). On September 27, 2007, Houlihan Lokey delivered another opinion to the Special Committee and the Board of Directors that as of the date of the opinion, the revised Merger Consideration to be received by holders of CKX’s common stock is fair from a financial point of view to such holders (other than holders of common stock that are affiliated with 19X).
 
Transactions Involving FX Real Estate and Entertainment Inc. and FX Luxury Realty, LLC
 
Investment in FX Luxury Realty
 
On June 1, 2007, the Company acquired 50% of the newly issued common membership interests in FX Luxury Realty, LLC (“FXLR”). The consideration for the acquired interests was $100 million, paid in cash at closing. Transaction costs totaled $2.1 million. The Company funded the $100 million purchase price with proceeds from a drawdown under the Credit Facility (as defined). At the time of CKX’s investment in FXLR, FXLR owned a 50% interest in entities (the “Metroflag Entities”) that collectively own and control the Park Central Property and had entered into a binding agreement to acquire the other 50% of such entities. The acquisition of the remaining 50% of the Metroflag Entities, which gave FXLR 100% ownership and control of the Park Central Property, closed on July 6, 2007.
 
License Agreements
 
Simultaneous with the CKX investment in FXLR, FXLR entered into a worldwide license agreement with Elvis Presley Enterprises, Inc. (“EPE”), a 85% owned subsidiary of CKX, granting FXLR the exclusive right to utilize Elvis Presley-related intellectual property in connection with the development, ownership and operation of Elvis Presley-themed hotels, casinos and certain other real estate-based projects and attractions around the world. FXLR also entered into a worldwide license agreement with Muhammad Ali Enterprises LLC, a 80% owned subsidiary of CKX (the “Ali Business”), granting FXLR the right to utilize Muhammad Ali-related intellectual property in connection with Muhammad Ali-themed hotels and certain other real estate-based projects and attractions.
 
Under the terms of the license agreements, FXLR is required to pay to EPE and the Ali Business an amount equal to 3% of the gross revenue generated at the properties that incorporate the Elvis Presley and Muhammad Ali intellectual property, as applicable, and 10% of gross revenues generated from the sale of related merchandise. FXLR is required to pay a guaranteed annual minimum royalty during each year of the agreement, which amount is recoupable against royalties paid during such year as described above. The aggregate guaranteed minimum royalty due for 2007 was $10.0 million. The initial payment (for 2007) under the license agreement, as amended, will be due on the earlier of the completion of FXRE’s previously announced rights offering described elsewhere herein or April 1, 2008, provided that if the initial payment is made after December 1, 2007, it shall bear interest at the then current prime rate as quoted in The Wall Street Journal plus 3% per annum between December 1, 2007 and December 31, 2007, plus 3.5% per annum from January 1, 2008 through January 31, 2008, plus 4.0% from February 1, 2008 through February 29, 2008, and plus 4.5% from and after March 1, 2008. The 2007 royalty amount of $10.0 million has not yet been paid to the Company and the revenue was not recognized in 2007 because under the Company’s revenue recognition policy, revenue from licensing activities is recognized only when all of the conditions of a multiple-element arrangement are met.


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Dividend of FXRE shares to CKX Stockholders
 
June Dividend into Trusts
 
As a condition to the Merger Agreement as executed on June 1, 2007, CKX agreed to distribute to its stockholders one-half of the equity it purchased in FXLR through a distribution of shares of FXRE common stock (which shares would be received prior to the distribution through an exchange of FXLR interests for FXRE shares) to allow current CKX stockholders to share directly in the continued growth and exploitation of the existing Elvis Presley and Muhammad Ali intellectual property rights and assets in the capital intensive development opportunities to be pursued by us in accordance with the terms of the license agreements described above.
 
On June 18, 2007, the Company declared and transferred into two trusts, for the benefit of its stockholders, a dividend consisting of 25% of the outstanding shares of common stock of FXRE (the “June Dividend Shares”) payable to CKX stockholders as of the Record Date (as defined below). The dividend was valued at approximately $50.3 million, or 50% of the then value of CKX’s investment in FXLR (taking into account transaction costs).
 
Following these transfers, CKX continued to own 25% of the outstanding common equity interests of FXLR but retained no interest in or control over the June Dividend Shares.
 
Reorganization of FX Luxury Realty into FX Luxury Real Estate and Entertainment
 
On September 26, 2007, CKX and other members of FXLR entered into a Contribution and Exchange Agreement pursuant to which each member of FXLR contributed its common membership interests in FXLR to FXRE in exchange for shares of common stock of FXRE. As a result of the reorganization, FXRE owns 100% of the outstanding common membership interests of FXLR. Immediately after the reorganization, FXRE was owned 25% by CKX, 25% by the CKX distribution trusts and 50% by Flag Luxury Properties, LLC (“Flag”).
 
Where appropriate, certain references to FXRE set forth in this Form 10-K for the period prior to the reorganization described above refer to FXLR, its subsidiary and the company through which CKX held its direct interest at such time.
 
CKX Loan to FXRE
 
On September 26, 2007, CKX entered into a Line of Credit Agreement with FXRE pursuant to which CKX agreed to loan up to $7.0 million to FXRE, $6.0 million of which was drawn down on September 26, 2007 and is evidenced by a promissory note dated September 26, 2007. The majority of the proceeds of the loan were used by FXRE, together with proceeds from additional borrowings, to exercise an option held by FXRE to acquire an additional 573,775 shares of Riviera Holdings Corporation’s common stock [AMEX: RIV] at a price of $23 per share. The loan bears interest at LIBOR plus 600 basis points and is payable upon the earlier of (i) two years and (ii) the consummation by FXRE of an equity raise at or above $90.0 million. The loan is secured by a pledge of $5.0 million of FXRE common stock held by Mr. Sillerman and certain other members of Flag.
 
Additional FXRE Equity Investment
 
Also on September 26, 2007, CKX acquired an additional 0.742% of the outstanding capital stock of FXRE for a price of $1.5 million. The proceeds of this investment, together with an additional $0.5 million that was invested by Flag, will be used by FXRE for working capital and general corporate purposes.
 
Second FXRE Dividend into Trust
 
As a result of the reorganization and purchase of additional FXRE stock by CKX and Flag, CKX owned directly 25.5% of the outstanding common stock of FXRE on September 26, 2007. On September 27, 2007, pursuant to and in accordance with the amendment to the merger agreement dated September 27, CKX declared and transferred into trust for the benefit of its stockholders a dividend consisting of 23.5% of the shares of common stock of FXRE (the “Second Dividend Shares”). Upon declaration of the dividend, CKX irrevocably transferred and assigned the Second Dividend Shares to the new trust and thereafter retained no interest in or control over such shares. At such time, CKX did not declare a dividend or transfer into trust shares representing 2% of the outstanding


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shares of FXRE. The Second Dividend Shares were valued at approximately $40.9 million. As of December 31, 2007, CKX had an investment of $6.2 million representing its then remaining 2% ownership interest in FXRE.
 
January 2008 CKX Distribution of FXRE Stock
 
On December 21, 2007, the Company declared a dividend with respect to its remaining 2% ownership interest in FXRE and set the record date of December 31, 2007 for the distribution of all of the shares of FX Real Estate and Entertainment Inc. stock held by CKX and the three Distribution Trusts to CKX stockholders. The Company reflected a pre-tax gain of $2.2 million in 2007 on the distribution. The gain represents the difference between the Company’s cost basis in the shares and the trading price of FXRE on January 10, 2008, the first day of trading in FXRE stock.
 
On January 10, 2008, CKX and the Distribution Trusts delivered to each stockholder of CKX two shares of FXRE common stock for every ten shares of CKX common or preferred stock held by such stockholder pursuant to the CKX Distribution. The total number of shares of FXRE common stock distributed to CKX stockholders was 19,743,349.
 
Accounting for the Investment and Distributions
 
The Company consolidated FXRE from the date of the Company’s investment (June 1, 2007) through September 26, 2007 (date of the second distribution to trust, as noted above) as it controlled FXRE though its direct 25% ownership interest and the separate indirect ownership of affiliates, primarily the Company’s Chairman, Robert F.X. Sillerman, in the Distribution Trusts and in Flag, which each own direct interests in FXRE. Subsequent to September 26, 2007, the Company accounted for it’s 2% investment in FXRE under the cost method. Upon the January 10, 2008 distribution described above, CKX’s ownership interest in FXRE was fully divested. The operating results of FXRE are reflected as discontinued operations in the accompanying consolidated financial statements because the distribution of the FXRE shares to the CKX shareholders qualifies as a spin-off under Accounting Principles Board Opinion 29, Accounting for Non-monetary Transactions, and Financial Accounting Standards Board Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
 
FXRE accounted for its ownership interest in the Metroflag Entities under the equity method of accounting through July 6, 2007 because it did not have control with its then 50% ownership interest. Effective July 7, 2007, with its purchase of the 50% of the Metroflag Entities that it did not already own, FXRE began consolidating the results of the Metroflag Entities.
 
FXRE was audited for the period from inception (May 11, 2007) to December 31, 2007. The independent registered public accounting firm’s opinion includes an explanatory paragraph about FXRE’s ability to continue as a going concern. FXRE’s ability to pay royalties to CKX under the EPE and Ali Business license agreements and other obligations is dependent on FXRE successfully completing its rights offering or other capital event.
 
Affiliated Elements of Transactions
 
Mr. Sillerman, our Chairman and Chief Executive Officer, also serves as Chairman and Chief Executive Officer of FXRE. Mr. Sillerman owns approximately 29% of the outstanding equity of Flag Luxury Properties, which, prior to the investment in FXLR described above, owned 100% of FXLR and a 50% interest in the Metroflag Entities. Following the January 2008 Distribution, Mr. Sillerman owns approximately 30% of the outstanding common stock of FXRE. Mr. Sillerman has pledged 324,254 shares of his FXRE common stock as security for the $7 million CKX loan described above.
 
Thomas P. Benson, our Chief Financial Officer, also serves as Chief Financial Officer of FXRE.
 
Approval Process
 
The Company’s Board of Directors, acting upon the unanimous recommendation of a special committee comprised entirely of independent directors (the “Special Committee”), (except for directors affiliated with FXLR, FXRE and Flag, who abstained) unanimously approved the license agreements and the FXLR Investment. In addition, the Special Committee, acting on authority granted to it by the Board of Directors, unanimously approved


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the Additional FXRE Equity Investment and the FXRE Loan. The Special Committee engaged Houlihan, Lokey, Howard & Zukin, Inc. (“Houlihan Lokey”) to serve as independent financial advisor to the Special Committee. On June 1, 2007, Houlihan Lokey delivered opinions to the Special Committee and the board of directors that as of the date of the opinion, the terms of the FXLR Investment and the licenses were fair to the holders of the Company’s common stock (other than holders of Common Stock that are affiliated with Parent) from a financial point of view. In addition, the terms of the license agreements were approved by the minority equity owners of EPE and the Ali Business.
 
Shared Services Agreement
 
We are party to a shared services agreement with FXRE, pursuant to which certain of our employees, including members of senior management, provide services for FXRE, and certain of FXRE’s employees, including members of senior management, may provide services for CKX. The services to be provided pursuant to the shared services agreement are expected to include management, legal, accounting and administrative. The agreement expires on December 31, 2010 and can be extended or terminated with ninety days notice by both parties.
 
Charges under the shared services agreement are made on a quarterly basis and are determined taking into account a number of factors, including but not limited to, the overall type and volume of services provided, the individuals involved, the amount of time spent by such individuals and their current compensation rate with the company with which they are employed. Each quarter, representatives of the parties will meet to (i) determine the net payment due from one party to the other for provided services performed by the parties during the prior calendar quarter, and (ii) prepare a report in reasonable detail with respect to the provided services so performed, including the value of such services and the net payment due. The parties shall use their reasonable, good-faith efforts to determine the net payments due in accordance with the factors described in above.
 
Because the shared services agreement with FXRE constitutes an agreement with a related party, the agreement was reviewed and approved by the independent members of our board of directors. In addition, the agreement was reviewed and approved by a special committee of independent members of the board of directors of FXRE formed to evaluate and approve certain related party transactions.
 
For the year ended December 31, 2007, CKX has billed FXRE $1.0 million for services, primarily accounting and legal support, performed under the shared services agreement. These amounts have not yet been paid to the Company.
 
Presley Business
 
The Presley Business consists of entities which own and/or control the commercial utilization of the name, image and likeness of Elvis Presley, the operation of the Graceland museum and related attractions, as well as revenue derived from Elvis Presley’s television specials, films and certain of his recorded musical works. The Presley Business consists of two reportable segments: Royalties and Licensing — intellectual property, including the licensing of the name, image, likeness and trademarks associated with Elvis Presley, as well as other owned and/or controlled intellectual property and the collection of royalties from certain motion pictures, television specials and recorded musical works and music compositions; and Graceland Operations — the operation of the Graceland museum and related attractions and retail establishments, including Elvis Presley’s Heartbreak Hotel and other ancillary real estate assets.
 
The Royalties and Licensing segment generates revenue from the exploitation of the name, image and likeness of Elvis Presley, including physical and intellectual property owned or created by Elvis Presley during his life. The primary revenue source of this segment comes from licensing Elvis’ name and likeness for consumer products, commercials and other uses and royalties and other income derived from intellectual property created by Elvis including records, movies, videos and music publishing. Licensing revenue is primarily derived from long-term contracts with terms of one to five years. Although we seek to obtain significant minimum guarantees, our licensing revenue varies based on the actual product sales generated by licensees. The intellectual property created by Elvis during his lifetime which we own has generally been assigned to third parties for commercial exploitation under long-term agreements.


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Although we maintain certain controls over the use of this content and, in certain cases, have rights to terminate these agreements if the third party fails to perform, our revenue from this intellectual property is highly dependant upon the ability of third parties to successfully market the content.
 
The Graceland Operations segment generates its primary revenue from ticket and merchandise sales and related income from public tours of Graceland as well as from the operation of Elvis Presley’s Heartbreak Hotel and the other ancillary real estate assets. Revenue from Graceland has historically been seasonal with sharply higher numbers of visitors during the late spring and summer seasons as compared to the fall and winter seasons.
 
Most of the Presley Business’ revenue sources are dependant upon the public’s continued interest in Elvis Presley and the intellectual property he created.
 
Our significant costs to operate the Presley Business include salaries, rent and other general overhead costs. Most of our costs do not vary significantly with our revenue. Our discretionary costs are generally in our marketing and promotions department which we primarily incur to maintain and/or increase the number of visitors to Graceland. We also incur expenses in exploring opportunities to bring Elvis-related attractions to Las Vegas and other strategic locations throughout the world.
 
19 Entertainment
 
19 Entertainment generates revenue from the creation and production of entertainment properties. Our primary revenue sources include production and license fees and related ratings and rankings bonuses from television programs, and royalties from the sale of recorded music by artists signed to our record labels. We also derive revenue from the sale of merchandise, sponsorships and tours based on our television programs and recorded music artists, and fee income from management clients.
 
The majority of our revenue is derived from production and license fees and related performance bonuses from producing and licensing the IDOLS television show format in various countries and ancillary revenue streams from the IDOLS brand. Ancillary revenue from the IDOLS brand is generated through agreements which provide us with the option to sign finalists on the IDOLS television shows to long-term recording contracts, concert tours we produce featuring IDOLS finalists and the sale of sponsorships and merchandise involving the IDOLS brand.
 
The majority of our IDOLS related revenue is generated through agreements with our global television production and distribution partner, FremantleMedia, and our principal global record label partners Ronagold for seasons American Idol 1 through American Idol 4 and Simco for all seasons subsequent to American Idol 4. Therefore, we are highly dependent upon the continued ability of these entities to successfully maintain the IDOLS brand and promote our recording artists.
 
Other than American Idol, which is discussed below, the IDOLS television shows are generally produced or licensed under one year contracts under which each local television network has the right, but not the obligation, to renew the agreement for additional years. Our recording artists are generally signed to long-term recording contracts under which we and Sony BMG have the right, but not the obligation, to require the artist to release a specified number of albums.
 
Our revenue from the IDOLS brand is also highly dependent upon the continued success of the American Idol series which currently airs on the Fox television network in the United States, and local adaptations of the IDOLS television show which air around the world. Our revenue is also dependent upon the continued success and productivity of our recording artists and management clients. A portion of our revenue from the American Idol series is dependent upon the number of hours of programming we deliver. In the sixth broadcast season, which aired during our first and second fiscal quarters of 2007, we delivered 49 hours of programming compared to 45 hours of programming during the same period of 2006. On November 28, 2005, 19 Entertainment entered into a series of agreements with Fox, FremantleMedia and Sony BMG/Simco, related to the American Idol television program. Under the terms of the agreements, Fox has guaranteed at least two more seasons of American Idol (2008-2009), with an automatic renewal for up to two additional seasons upon the show achieving certain minimum ratings in 2009 and potentially 2010. Additional terms of the agreements call for Fox to order a minimum of 37 hours and a maximum of 45 hours of American Idol programming each season (though 19 Entertainment and FremantleMedia can agree to produce additional hours) and to pay 19 Entertainment and FremantleMedia an increased license fee


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per season. Fox also agreed to make an annual payment to 19 Entertainment tied to the most recent recording agreement with Sony BMG.
 
19 Entertainment’s revenue is seasonal in nature, reflecting the timing of our television shows and tours in various markets. Historically, 19 Entertainment generated higher revenue during the first three quarters of the calendar year, which corresponds to the dates our American Idol and So You Think You Can Dance series air on Fox in the United States. 19 Entertainment’s revenues reflect its contractual share of the IDOLS television revenue representing producer, format and licensing fees as well as ratings and ratings bonuses and do not include the revenues earned or the production costs incurred directly by our production and distribution partner, FremantleMedia. 19 Entertainment records all of the television and sponsorship revenue for So You Think You Can Dance and our operating expenses include the contractual share that we distribute to our production partners.
 
Our significant costs to operate 19 Entertainment include salaries and other compensation, royalties, tour expenses, rents and general overhead costs. Our discretionary costs include salary and overhead costs incurred in the development of new entertainment content.
 
Ali Business
 
The Ali Business consists of the commercial exploitation of the name, image, likeness and intellectual property of Muhammad Ali, primarily through endorsement and licensing arrangements.
 
The primary revenue source comes from licensing Muhammad Ali’s name and likeness for consumer products, commercials and other uses. Licensing revenue is primarily derived from long-term contracts with terms of one to five years. Although we seek to obtain significant minimum guarantees, our licensing revenue varies based on the actual product sales generated by licensees. The intellectual property that is owned by the Company is licensed to third parties for commercial exploitation under long-term agreements. Although we maintain certain controls over the use of this content and, in certain cases, have rights to terminate these agreements if the third party fails to perform, our revenue from this intellectual property is highly dependant upon the ability of third parties to successfully market the content. Most of our revenue sources are dependant upon the public’s continued interest in Muhammad Ali and associated intellectual property. The Ali Business also generates revenue from sports memorabilia signings performed by Mr. Ali.
 
Our significant costs to operate the Ali Business include commissions, salaries and other general overhead costs. With the exception of commissions, most of our costs do not vary significantly with our revenue.
 
Other
 
MBST is a full service management company representing an array of leading entertainers including Robin Williams, Billy Crystal and Woody Allen. In addition to its management activities, MBST produces motion pictures.
 
MBST earns revenue through arrangements with artists that result in MBST receiving a percentage of the artists’ performance revenue, from consulting fees paid by advisory clients and from participations in films it has produced. Executives and other employees of MBST are also actively involved in developing and implementing revenue enhancement opportunities for the Company’s other entertainment content and assets.
 
Our significant costs to operate MBST include salaries, rent and general overhead costs. Most of these costs do not vary significantly with our revenue.
 
Use of OIBDAN
 
We evaluate our operating performance based on several factors, including a financial measure of operating income (loss) before non-cash depreciation of tangible assets and non-cash amortization of intangible assets and non-cash compensation (which we refer to as “OIBDAN”). The Company considers OIBDAN to be an important indicator of the operational strengths and performance of our businesses and the critical measure the chief operating decision maker (CEO) uses to manage and evaluate our businesses, including the ability to provide cash flows to service debt. However, a limitation of the use of OIBDAN as a performance measure is that it does not reflect the


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periodic costs of certain capitalized tangible and intangible assets used in generating revenue in our businesses or stock-based compensation expense. Accordingly, OIBDAN should be considered in addition to, not as a substitute for, operating income (loss), net income (loss) and other measures of financial performance reported in accordance with US GAAP as OIBDAN is not a GAAP equivalent measurement.
 
We have reconciled OIBDAN to operating income in the following consolidated operating results table for the Company for the years ended December 31, 2007 and 2006.
 
Consolidated Operating Results Year Ended December 31, 2007
Compared to Year Ended December 31, 2006
 
                         
    Year Ended
    Year Ended
       
    December 31,
    December 31,
       
    2007     2006     Variance  
    (Amounts in thousands)  
 
Revenue
  $ 266,777     $ 210,153     $ 56,624  
Operating expenses
    224,019       190,258       33,761  
Operating income
    42,758       19,895       22,863  
Income tax expense
    19,432       6,178       13,254  
Net income
    12,144       9,193       2,951  
                         
Operating income
  $ 42,758     $ 19,895     $ 22,863  
Depreciation and amortization
    22,551       20,541       2,010  
Non-cash compensation
    1,325       1,052       273  
                         
OIBDAN
  $ 66,634     $ 41,488     $ 25,146  
                         
 
Revenue growth in 2007 was driven by 19 Entertainment, which benefited from the continued success and growth of its television programming, primarily American Idol and So You Think You Can Dance, both of which saw an increase in the number of broadcast hours. Also contributing to the growth in revenue was increased licensing revenues at the Presley Business and higher attendance and spending at Graceland due in part to the commemoration of the 30th anniversary of Elvis Presley’s death. Higher operating expenses for the year ended December 31, 2007 resulted from higher overall costs at 19 Entertainment and the Presley Business to support revenue growth, higher corporate expenses and merger and distribution-related expenses.
 
Presley Business — Royalties and Licensing
 
The following table provides a breakdown of Presley Business — Royalties and Licensing revenue, cost of sales, selling, general and administrative expenses and OIBDAN for the years ended December 31, 2007 and 2006:
 
                         
    Year Ended
    Year Ended
       
    December 31,
    December 31,
       
    2007     2006     Variance  
    (Amounts in thousands)  
 
Revenue
  $ 21,883     $ 13,699     $ 8,184  
Cost of sales
    (2,211 )     (476 )     (1,735 )
Selling, general and administrative expense, excluding non-cash compensation
    (7,691 )     (4,326 )     (3,365 )
                         
OIBDAN
  $ 11,981     $ 8,897     $ 3,084  
                         
OIBDAN
  $ 11,981     $ 8,897     $ 3,084  
Depreciation and amortization
    (2,582 )     (2,582 )      
Non-cash compensation
    (35 )     (15 )     (20 )
                         
Operating income
  $ 9,364     $ 6,300     $ 3,064  
                         


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The increase in royalties and licensing revenue was due to sales of a limited edition collectible DVD box set of Elvis movies of $4.2 million, increased royalties of $1.7 million from the release of single versions of digitally enhanced videos and DVDs of “’68 Special” and “Aloha from Hawaii” and increased merchandise licensing royalties of $1.8 million. Other television and video projects offset lower publishing, record and film royalties in 2007. Royalties and licensing cost of sales increased $1.7 million due to the cost of sales of the DVD box set and cost of production for other TV and Video projects. Royalties and licensing selling, general and administrative expenses increased by $3.4 million primarily due to $2.7 million for advertising and marketing of the DVD box set, including upfront costs to produce an infomercial, and higher legal costs for trademark work.
 
Presley Business — Graceland Operations
 
The following table provides a breakdown of the Presley Business — Graceland Operations revenue, cost of sales, selling, general and administrative expenses and OIBDAN for the years ended December 31, 2007 and 2006:
 
                         
    Year Ended
    Year Ended
       
    December 31,
    December 31,
       
    2007     2006     Variance  
    (Amounts in thousands)  
 
Revenue
  $ 40,879     $ 35,081     $ 5,798  
Cost of sales
    (7,487 )     (7,258 )     (229 )
Selling, general and administrative expense, excluding non-cash compensation
    (26,220 )     (23,569 )     (2,651 )
                         
OIBDAN
  $ 7,172     $ 4,254     $ 2,918  
                         
OIBDAN
  $ 7,172     $ 4,254     $ 2,918  
Depreciation and amortization
    (2,089 )     (1,823 )     (266 )
Non-cash compensation
    (64 )     (40 )     (24 )
                         
Operating income
  $ 5,019     $ 2,391     $ 2,628  
                         
 
Tour and exhibit revenue of $14.8 million in 2007 accounted for $1.8 million of the increase in Graceland Operations revenue. This increase resulted from a 10.5% increase in attendance to 612,541 in 2007 from 554,193 in 2006. 2007 attendance was higher due in part to an increase in visitors in August for the commemoration of the 30th anniversary of Elvis Presley’s death. In addition, attendance in the first half of 2006 was depressed by the lingering affects on tourism in the region of Hurricane Katrina. Retail operations revenue of $15.5 million in 2007 accounted for $1.6 million of the overall increase in revenue. The increase was the result of the increase in attendance and an increase in total per visitor spending of 9.5% in part due to the 30th anniversary events, partially offset by a decline of $0.6 million in revenue due to a change in 2007 in mail order retail sales to a commission-based operation.
 
Other revenue of $10.6 million increased by $2.4 million in 2007 over 2006 due primarily to $2.0 million of revenue related to 30th anniversary commemoration events, including the Elvis 30th anniversary concert, higher hotel revenue ($0.6 million) and higher rental revenue ($0.8 million) partially due to the operations of newly purchased ancillary real estate assets adjoining Graceland, offset by $1.2 million of revenue in 2006 from ticket sales from the non-recurring Elvis the Concert performed in Australia, New Zealand and Thailand in October 2006.
 
Graceland Operations cost of sales increased $0.2 million in 2007 compared to 2006 due to the production of the 30th anniversary concert of $0.8 million and increased retail operations revenue and higher costs based on exhibit attendance of $0.3 million offset by $0.9 million of costs associated with Elvis the Concert in 2006. Graceland Operations selling, general and administrative expenses increased $2.7 million primarily due to $0.6 million of increased advertising, $0.4 million of costs related to 30th anniversary commemoration events, $0.9 million due to the impact of additional headcount added in 2007 and late 2006, and $0.8 million in costs to operate the newly acquired ancillary real estate assets.


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19 Entertainment
 
Revenue for 19 Entertainment was $193.0 million for the year ended December 31, 2007, an increase of $41.7 million, or 28%, over the prior period. Operating expenses for 19 Entertainment, including amortization expense of intangible assets of $15.9 million, were $142.7 million, an increase of $19.6 million, or 16%, over the prior period.
 
The following tables provide a breakdown of 19 Entertainment’s revenue, cost of sales, selling, general and administrative expenses and other costs, OIBDAN and operating income for the year ended December 31, 2007 and 2006:
 
                         
Year Ended December 31, 2007
  Revenue     Cost of Sales        
    (Amounts in thousands)        
 
American Idol (including television production, foreign syndication, sponsorship, merchandise and touring)
  $ 83,859     $ (20,647 )   $ 63,212  
Other IDOLS television programs (including license fees and sponsorship)
    15,837       (385 )     15,452  
So You Think You Can Dance and other television productions
    54,154       (45,352 )     8,802  
Recorded music, management clients and other
    39,112       (12,056 )     27,056  
                         
    $ 192,962     $ (78,440 )   $ 114,522  
Selling, general and administrative expenses, excluding non-cash compensation
                    (46,797 )
Other costs
                    (308 )
                         
OIBDAN
                  $ 67,417  
                         
OIBDAN
                  $ 67,417  
Depreciation and amortization
                    (16,916 )
Non-cash compensation
                    (247 )
                         
Operating income
                  $ 50,254  
                         
 
                         
Year Ended December 31, 2006
  Revenue     Cost of Sales        
    (Amounts in thousands)        
 
American Idol (including television production, foreign syndication, sponsorship, merchandise and touring)
  $ 67,710     $ (20,499 )   $ 47,211  
Other IDOLS television programs (including license fees and sponsorship)
    8,605       (77 )     8,528  
So You Think You Can Dance and other television productions
    38,240       (31,335 )     6,905  
Recorded music, management clients and other
    36,663       (18,432 )     18,231  
                         
    $ 151,218     $ (70,343 )   $ 80,875  
Selling, general and administrative expenses, excluding non-cash compensation
                    (34,730 )
Other costs
                    (2,669 )
                         
OIBDAN
                  $ 43,476  
                         
OIBDAN
                  $ 43,476  
Depreciation and amortization
                    (15,195 )
Non-cash compensation
                    (220 )
                         
Operating income
                  $ 28,061  
                         


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The revenue increase of $41.7 million in the year ended December 31, 2007 over 2006 is primarily due to an increase in revenue from American Idol, other Idols programming and So You Think You Can Dance. American Idol 6 aired 49 series hours in the U.S. in 2007 while American Idol 5 aired 45 series hours in the U.S. in the comparable 2006 period. The additional hours of programming along with an increase in guaranteed license fees accounted for approximately $5.0 million of higher revenue. Additionally, 19 Entertainment recognized higher foreign syndication and format sales revenue in 2007 reflecting higher syndication and sponsorship revenue in certain foreign markets and changes in the timing of sales. The year over year performance of American Idol was slightly offset by a less successful tour in 2007. Revenue for So You Think You Can Dance increased due to the timing of and increase in foreign syndication sales and format fees and the broadcast of an additional 1.5 hours in 2007 as compared to 2006. Management revenue increased due to several new projects including promotions with the Spice Girls reunion tour, which more than offset a decline in music revenues.
 
Operating expenses, including cost of sales, selling, general and administrative expenses, depreciation and amortization and non-cash compensation, increased by $19.6 million in 2007 over the prior period primarily due to higher costs associated with So You Think You Can Dance, increased foreign syndication sales, costs for several television pilots and higher selling, general and administrative expenses, including travel expenses, partially offset by decreased music royalty expenses. Other costs of $0.3 million and $2.7 million for 2007 and 2006, respectively, represent foreign exchange losses generated at 19 Entertainment from transactions denominated in non-UK pound sterling currencies, primarily the U.S. dollar. The $1.7 million increase in depreciation and amortization expense in 2007 is primarily due to foreign exchange movements as the 19 Entertainment intangible assets that are denominated in U.K. pound sterling.
 
Ali Business
 
The Ali Business contributed $6.2 million and $4.1 million in revenue in 2007 and 2006, respectively. The revenue increase is primarily due to the inclusion of the full year in 2007 due to the acquisition of the Ali Business in April 2006 and more frequent memorabilia signings by Mr. Ali. Operating expenses for the period were $3.4 million and $2.7 million, respectively. OIBDAN was $2.8 million and $1.5 million, respectively, for the year ended December 31, 2007 and 2006.
 
Corporate and Other
 
MBST
 
MBST contributed $4.9 million and $6.1 million in revenue for the year ended December 31, 2007 and 2006, respectively. The revenue decrease of $1.2 million is primarily due to fewer significant client projects compared to the prior year and the impact of the writers’ strike in the latter part of the year. Operating expenses for the same periods, including acquisition-related amortization expenses of $0.8 million and $0.7 million, respectively, were $6.0 million and $5.9 million, respectively. OIBDAN was $(0.2) million and $1.0 million for the years ended December 31, 2007 and 2006, respectively.
 
Corporate Expenses and Other Costs
 
The Company incurred corporate overhead expenses of $18.2 million and $15.2 million in the years ended December 31, 2007 and 2006, respectively. The increase of $3.0 million reflects increased employee and legal costs.
 
Merger and distribution-related costs incurred in 2007 of $5.3 million primarily include the costs of the Special Committee of the Board of Directors formed to review the Merger, the cost of the fairness opinions and related legal and accounting costs.
 
During the year ended December 31, 2006, the Company incurred $3.2 million of acquisition-related costs, consisting of third party due diligence costs for potential acquisitions that were not consummated.


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Interest Income/Expense, net
 
The Company had interest expense of $5.6 million and $1.2 million in 2007 and 2006, respectively. The increase in interest expense in 2007 reflects the drawdown from the revolving credit facility of $100 million to fund the investment in FXLR on June 1, 2007. The Company had interest income of $1.6 million and $1.4 million for the years ended December 31, 2007 and 2006, respectively.
 
Other Income (Expense)
 
Other income of $2.2 million in 2007 is primarily a gain recorded on the distribution of the final 2% ownership interest in FXRE to the Company’s shareholders. The gain represents the difference between the Company’s cost basis in the shares and the trading price of FXRE on January 10, 2008, the first day of trading in FXRE stock.
 
Other expense of $3.3 million for the year ended December 31, 2006 relates to foreign exchange losses generated as a result of short-term intercompany loans between 19 Entertainment and the parent company that were denominated in U.S. dollars. The 2006 loans were settled through the declaration of an intercompany dividend before the end of the year.
 
Income Taxes
 
For the year ended December 31, 2007, the Company recorded a provision for income taxes of $19.4 million. The provision reflects an effective tax rate of 47.4%. The tax provision is comprised of $5.9 million federal income tax, $2.6 million state & local income tax, and $10.9 million of foreign income tax (predominantly relating to the United Kingdom). The effective tax rate differs from the federal statutory rate of 35% primarily due to state and local taxes, the capitalizing of certain deal costs, and recognition of income on the repatriation of cash from our UK subsidiary and other permanent items.
 
For the year ended December 31, 2006, the Company’s effective tax rate was 36.7%. The Company recorded a provision for income taxes of $6.2 million comprised of federal, state and local and foreign taxes.
 
The increase in the 2007 effective tax rate as compared with the 2006 effective tax rate of the same period relates primarily to: 1) no reduction to the valuation allowance and 2) non-deductible privatization transaction costs, offset by 1) lower state, local and foreign taxes and 2) a smaller gain recognition on the income on the repatriation of cash from our UK subsidiary.
 
The Company, based on advice of tax counsel, structured the distribution of its interest in FXRE in a manner which it believes will result in the distribution creating minimal additional taxable income to the Company. However, if the IRS disagrees with the Company’s position with respect to when and how the value of the distribution is determined, the Company could be required to recognize taxable income related to the distribution.
 
A portion of the Company’s long-term deferred tax asset reversed during 2007. As this was related to the purchase of 19 Entertainment Group, there was a decrease in the valuation allowance, offset by a decrease in goodwill of $5.0 million. In addition, the change in the New York, Michigan and United Kingdom tax laws resulted in a reduction to the effective tax rate applied to the deferred tax items. This resulted in a decrease to the net deferred amount.
 
The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of FASB Statement No. 109 (“SFAS 109”) on January 1, 2007. As a result of the implementation of FIN 48, the Company reviewed its uncertain tax positions in accordance with the recognition standards established by FIN 48. The liability is recorded in income taxes payable. The Company does not expect any reasonably possible material changes to the estimated amount of liability associated with its uncertain tax positions through December 31, 2008. If all the uncertain tax positions were settled with the taxing authorities there would be no material effect on the effective tax rate. See the Tax Footnote within the consolidated financial statement for greater detail on FIN 48.
 
The Company recognizes accrued interest and penalties related to uncertain tax positions through income tax expense.


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New York State has commenced an audit of 19 Entertainment, Inc. for the period July 1, 2003 through March 17, 2005. Aside from New York State, there are no other federal, state or city audits in process as of December 31, 2007. Open tax years related to federal filings are for the years ended December 31, 2004, 2005 and 2006. Open tax years for state and local jurisdictions are not expected to have a material impact on the financial statements in the event of an examination.
 
The United Kingdom’s Revenue & Customs (“HMRC”) has reviewed the historical 19 Entertainment Ltd. UK group through December 2005. HMRC usually has 24 months from the end of the accounting period to review and query each return.
 
Equity in Earnings of Affiliates
 
The Company recorded $1.6 million and $0.7 million of earnings in unconsolidated affiliates for the years ended December 31, 2007 and 2006, respectively, reflecting primarily the Company’s investment in Beckham Brands Limited. The increase is a result of higher Beckham Brands Limited income, principally related to David Beckham’s marketing contract with the Los Angeles Galaxy and an increase in licensing activity.
 
Minority Interest
 
Minority interest expense of $2.6 million and $2.1 million for the years ended December 31, 2007 and 2006, respectively, reflect shares in the net income of the Presley Business and the Ali Business related to the equity interests retained by the former owners.
 
Discontinued Operations
 
The Company has consolidated FXRE from the date of the Company’s investment (June 1, 2007) through September 26, 2007 (date of the second distribution to trust, as noted above). Subsequent to September 26, 2007, the Company accounted for it’s 2% investment in FXRE under the cost method because the Company had no significant continuing involvement. The operating results of FXRE are reflected as discontinued operations in the accompanying consolidated financial statements because the distribution of the FXRE shares to the CKX shareholders qualifies as a spin-off under Accounting Principles Board Opinion 29, Accounting for Non-monetary Transactions, and Financial of Accounting Standards Board Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
 
Consolidated Operating Results Year Ended December 31, 2006
Compared to Combined Year Ended December 31, 2005
 
Prior to the acquisition of the Presley Business on February 7, 2005, the Company had no operations. As a result the Presley Business is considered to be the predecessor company (the “Predecessor”). To assist in the understanding of the results of operations of the Company, we have presented supplemental historical results of the Predecessor. For the purpose of management’s discussion and analysis of financial condition and results of operations, we have compared the results of the Company for the year ended December 31, 2006 with the Company’s results for the year ended December 31, 2005 combined with that of the Predecessor for the period January 1, 2005 to February 7, 2005. Although the combined 2005 financial information does not comply with US GAAP, management is providing this information solely to explain changes in results of operations for the periods presented in the financial statements. The combined total column has been prepared on a different accounting basis than the Company for the period ended December 31, 2006. The combined total excludes the impact of additional depreciation and amortization expense resulting from the application of fair value accounting for acquired assets of the Presley Business for the predecessor period January 1, 2005 to February 7, 2005.
 


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                  Predecessor
             
    CKX
      CKX
    Presley
             
    Year
      Year
    January 1,
             
    Ended
      Ended
    2005 to
             
    December 31,
      December 31,
    February 7,
    Combined
       
    2006       2005     2005     Total     Variance  
    (Amounts in thousands)  
Revenue
  $ 210,153       $ 120,605     $ 3,442     $ 124,047     $ 86,106  
Operating expenses
    190,258         123,457       2,980       126,437       63,821  
Operating income (loss)
    19,895         (2,852 )     462       (2,390 )     22,285  
Income tax expense
    6,178         855       152       1,007       5,171  
Net income (loss)
    9,193         (5,904 )     195       (5,709 )     14,902  
                                           
Operating income (loss)
  $ 19,895       $ (2,852 )   $ 462     $ (2,390 )   $ 22,285  
Depreciation and amortization
    20,541         14,910       126       15,036       5,505  
Non-cash compensation
    1,052         731             731       321  
                                           
OIBDAN
  $ 41,488       $ 12,789     $ 588     $ 13,377     $ 28,111  
 
The 2006 results reflect a full year of results for 19 Entertainment and MBST as well as the results for the Ali Business from the date of its acquisition on April 10, 2006. In addition, revenue growth in 2006 was driven by 19 Entertainment, which benefited from the continued success and growth of its television programming, primarily American Idol, which reflects the new Fox agreement entered into in 2005, and So You Think You Can Dance, which reflects an increase in the number of broadcast hours. Higher operating expenses for the year ended December 31, 2006 resulted from higher overall costs at 19 Entertainment to support the revenue growth and a full year of amortization expense related to acquired intangible assets, offset by a decrease in overall costs at the Presley Business.
 
Presley Business — Royalties and Licensing
 
The following table provides a breakdown of Presley Business — Royalties and Licensing revenue, cost of sales, selling, general and administrative expenses and OIBDAN for the years ended December 31, 2006 and 2005 (combined, as previously described):
 
                         
          2005
       
    2006     combined     Variance  
    (Amounts in thousands)  
 
Revenue
  $ 13,699     $ 21,172     $ (7,473 )
Cost of sales
    (476 )     (5,503 )     (5,027 )
Selling, general and administrative expense, excluding non-cash compensation
    (4,326 )     (5,419 )     (1,093 )
                         
OIBDAN
  $ 8,897     $ 10,250     $ (1,353 )
                         
OIBDAN
  $ 8,897     $ 10,250     $ (1,353 )
Depreciation and amortization
    (2,582 )     (3,040 )     458  
Non-cash compensation
    (15 )     (6 )     (9 )
                         
Operating income
  $ 6,300     $ 7,204     $ (904 )
                         
 
The decrease in royalties and licensing revenue was largely due to $5.7 million of revenue generated in 2005 from the television broadcast of “Elvis by the Presleys,” and the release of a related DVD and book. The remaining decrease reflects $2.4 million in lower royalties in 2006 compared to 2005 from the sales of DVDs of the “Aloha from Hawaii” and “’68 Special” concerts which were re-released in 2004, license fees of $0.7 million in 2005 for a separate television miniseries and a decline in revenue from commercials and other projects of $0.4 million. Partially offsetting these revenue declines was the receipt of $0.6 million from a royalty audit settlement with Sony BMG in 2006, increased merchandise licensing royalties of $0.7 million and $0.4 million in revenue from other new DVD releases.

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Cost of sales decreased $5.0 primarily due to production costs of $5.4 million related to “Elvis by the Presleys” in 2005. The decrease in selling, general and administrative expenses was primarily attributable to $0.5 million of legal and professional fees specifically for “Elvis by the Presleys” in 2005 and a $0.6 million decrease in other legal and professional fees.
 
Presley Business — Graceland Operations
 
The following table provides a breakdown of the Presley Business — Graceland Operations revenue, cost of sales, selling, general and administrative expenses and OIBDAN for the years ended December 31, 2006 and 2005 (combined, as previously described):
 
                         
          2005
       
    2006     combined     Variance  
    (Amounts in thousands)  
 
Revenue
  $ 35,081     $ 30,358     $ 4,723  
Cost of sales
    (7,258 )     (6,426 )     832  
Selling, general and administrative expense, excluding non-cash compensation
    (23,569 )     (19,094 )     4,475  
                         
OIBDAN
  $ 4,254     $ 4,838     $ (584 )
                         
OIBDAN
  $ 4,254     $ 4,838     $ (584 )
Depreciation and amortization
    (1,823 )     (1,473 )     (350 )
Non-cash compensation
    (40 )     (5 )     (35 )
                         
Operating income
  $ 2,391     $ 3,360     $ (969 )
                         
 
Graceland Operations tour and exhibit revenue of $13.0 million in 2006 accounted for $1.4 million of the increase in Graceland Operations revenue. The increase resulted from an 11% increase in per visitor spending and a 0.5% increase in attendance from 551,292 in 2005 to 554,193 in 2006. After an 8.2% decrease in visitors in the first half of 2006, which we believe was due to the continued impact of Hurricane Katrina and higher gasoline prices, attendance increased by 8.7% in the second half of the year compared to the prior year period. Per visitor spending improvement is partially due to an increase in the number of visitors choosing the VIP premium tour option.
 
Retail operations revenue of $13.9 million in 2006 accounted for $1.5 million of the overall increase in revenue. The increase of $1.5 million in retail operations resulted in part from a change in July 2005 to the mail order retail business where the Company now bears the business risk for revenue and related expenses and therefore records revenue and cost of sales. This change contributed $0.7 million of additional revenue in 2006. During the first seven months of 2005, mail order retail sales were outsourced and the Company received a commission based on net sales. Other Graceland retail sales increased by $0.8 million, or 9.5%, in 2006, which is primarily attributable to an increase in per visitor spending of 4.4% and the increase in attendance.
 
$1.2 million of the revenue increase was due to ticket sales from the non-recurring Elvis the Concert performed in Australia, New Zealand and Thailand in October 2006. Other revenue, primarily hotel room revenue and other property operations, also increased in 2006 over the prior year.
 
Graceland operations cost of sales increased $0.8 million, or 13%, due primarily to $0.9 million of costs associated with Elvis the Concert. Graceland operations selling, general and administrative expenses increased $4.5 million, or 23%, due to $1.2 million of professional services and related costs associated with the potential redevelopment of the Graceland attraction and our new initiatives with Cirque du Soleil for the creation, development, production and promotion of touring and permanent shows, including a permanent Elvis Presley show at the CityCenter hotel/casino in Las Vegas, higher fulfillment and distribution costs for the mail order retail sales business and a general increase in operating costs.


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19 Entertainment
 
Revenue for 19 Entertainment was $151.2 million for the year ended December 31, 2006, an increase of $80.6 million, or 114%, over the prior period from the date of acquisition, March 17, 2005, through December 31, 2005. Operating expenses for 19 Entertainment, including amortization expense of intangible assets of $14.5 million, were $123.2 million, an increase of $53.4 million, or 76%, over the prior period. The following tables provide a breakdown of 19 Entertainment’s revenue, cost of sales, selling, general and administrative expenses, other costs and OIBDAN for the year ended December 31, 2006 and for the period from the date of acquisition (March 17, 2005) through December 31, 2005:
 
                         
Year Ended December 31, 2006
  Revenue     Cost of Sales        
    (Amounts in thousands)        
 
American Idol (including television production, foreign syndication, sponsorship, merchandise and touring)
  $ 67,710     $ (20,499 )   $ 47,211  
Other IDOLS television programs (including license fees and sponsorship)
    8,605       (77 )     8,528  
So You Think You Can Dance and other television productions
    38,240       (31,335 )     6,905  
Recorded music, management clients and other
    36,663       (18,432 )     18,231  
                         
    $ 151,218     $ (70,343 )   $ 80,875  
Selling, general and administrative expenses, excluding non-cash compensation
                    (34,730 )
Other costs
                    (2,669 )
                         
OIBDAN
                  $ 43,476  
                         
OIBDAN
                  $ 43,476  
Depreciation and amortization
                    (15,195 )
Non-cash compensation
                    (220 )
                         
Operating income
                  $ 28,061  
                         
 
                         
Period from date of acquisition (March 17,
                 
2005) through December 31, 2005
  Revenue     Cost of Sales        
    (Amounts in thousands)        
 
American Idol (including television production, foreign syndication, sponsorship, merchandise and touring)
  $ 25,280     $ (9,857 )   $ 15,423  
Other IDOLS television programs (including license fees and sponsorship)
    8,563       (917 )     7,646  
So You Think You Can Dance and other television productions
    20,234       (18,558 )     1,676  
Recorded music and management clients
    16,490       (9,489 )     7,001  
                         
    $ 70,567     $ (38,821 )   $ 31,746  
Selling, general and administrative expenses, excluding non-cash compensation
                    (20,637 )
                         
OIBDAN
                  $ 11,109  
                         
OIBDAN
                  $ 11,109  
Depreciation and amortization
                    (10,219 )
Non-cash compensation
                    (75 )
                         
Operating income
                  $ 815  
                         
 
The revenue increase of $80.6 million in the year ended December 31, 2006 over the prior period is primarily due to the full year of CKX ownership in 2006, an increase in revenue for American Idol 5 due to the November 2005 amended Fox agreement and improved touring results, increased broadcast hours of So You Think You Can Dance and higher revenue from recording artists. 19 Entertainment’s revenue is seasonal in nature, reflecting the timing of our television shows and tours in various markets. Historically, 19 Entertainment has generated higher


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revenue during the first three quarters of the calendar year, which corresponds to the dates our American Idol and So You Think You Can Dance series air on Fox in the United States and the timing of the related live tours.
 
American Idol 5 aired 45 series hours in the U.S. between January and May 2006. 19 Entertainment recognized $9.0 million in incremental guaranteed license fees in 2006 from the amended Fox agreement. In addition to the license fees, Fox also paid higher bonus fees in 2006 reflecting the higher ratings for American Idol 5 in its targeted demographics. The American Idol 5 tour played 60 dates as compared to 40 dates for the American Idol 4 tour in the prior period. The American Idol 5 tour benefited from strong ticket sales, better terms with the tour promoter and higher sponsorship revenues. Revenues for So You Think You Can Dance increased to $38.1 million from $18.4 million in the prior year reflecting an increase in broadcast hours to 30 hours as compared to 17.5 hours in the prior year and the launch of a tour in 2006. Music revenues increased over the prior year period reflecting the continuing success of prior American Idol artists and due to an annual fee of $5.0 million paid by Fox to 19 Entertainment beginning with American Idol 5 for designating Sony BMG as the continuing record label for American Idol artists and for featuring certain Sony BMG controlled talent on the show.
 
American Idol 4 aired 38.5 hours in the U.S. in 2005. Our results of operations for the period from the date of acquisition, March 17, 2005, through December 31, 2005 included the broadcast of 18.0 hours of American Idol 4 and excluded 20.5 hours which aired prior to the acquisition date.
 
Operating expenses increased by $53.4 million in the year ended December 31, 2006 over the prior period due to the full year of CKX ownership in 2006, the cost of producing additional hours of the So You Think You Can Dance television program, higher tour costs, increased music royalties and higher selling, general and administrative expenses. Other costs of $2.7 million representing foreign exchange losses generated at 19 Entertainment from transactions denominated in non-UK pound sterling currencies, primarily the U.S. dollar, reflect the significant weakening of the U.S. dollar in 2006.
 
Ali Business
 
The Ali Business contributed $4.1 million in revenue for the period from the date of acquisition (April 10, 2006) to December 31, 2006, $1.3 million of which was related to sports memorabilia signings by Mr. Ali. Operating expenses for the period were $2.7 million. OIBDAN was $1.5 million for the period from the date of acquisition to December 31, 2006.
 
Corporate and Other
 
MBST
 
MBST contributed $6.1 million and $1.9 million in revenue for the year ended December 31, 2006 and for the period from the date of acquisition (August 9, 2005) through December 31, 2005, respectively. Operating expenses for the same periods, including acquisition-related amortization expenses of $0.7 million and $0.3 million, respectively, were $5.9 million and $2.1 million, respectively. OIBDAN was $1.0 million and break-even for the year ended December 31, 2006 and for the period from the date of acquisition through December 31, 2005, respectively.
 
Corporate Expenses and Other Costs
 
The Company incurred corporate overhead expenses of $15.2 million and $11.4 million in the years ended December 31, 2006 and 2005, respectively. The increase of $3.8 million reflects a full year of corporate operations in 2006, increased headcount and increased accounting and audit-related expenses arising from the initial year of compliance with the requirements of the Sarbanes-Oxley Act of 2002.
 
During the year ended December 31, 2006, the Company incurred $3.2 million of acquisition-related costs, consisting of third party due diligence costs for potential acquisitions that are not likely to be consummated. For the year ended December 31, 2005, the Company incurred $2.2 million of other costs related to the transition of the Company from an entity with no operations.


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Interest Income/Expense, net
 
The Company had net interest income of $0.2 million for the year ended December 31, 2006, attributable to $1.4 million in interest income generated from cash and marketable securities, offset in part by $1.2 million of interest expense on the Company’s debt and costs associated with maintaining the Company’s revolving credit facilities. The Company had net interest expense of $2.8 million for the combined 2005 period attributable to interest costs associated with borrowings incurred to finance the acquisitions of the Presley Business and 19 Entertainment. These borrowings were repaid in June 2005 with the proceeds from the Company’s public offering of common stock.
 
Deferred Loan Cost Write-Off
 
In the prior year, unamortized deferred loan costs of $1.9 million were expensed when the short-term senior loans used to finance the Presley Business and 19 Entertainment acquisitions were re-paid in June 2005 from the proceeds of the Company’s public offering of common stock.
 
Other Income (Expense)
 
Other expense of $3.3 million for the year ended December 31, 2006 relates to foreign exchange losses generated as a result of short-term intercompany loans between 19 Entertainment and the parent company that were denominated in U.S. dollars. These loans were settled through the declaration of an intercompany dividend before the end of the year.
 
Other income of $3.0 million for the year ended December 31, 2005 was primarily a result of a foreign exchange gain on the Company’s deferred purchase consideration payable for 19 Entertainment, which was recorded on the date of acquisition (March 17, 2005) and paid in December 2005.
 
Income Taxes
 
For the year ended December 31, 2006, the Company recorded income tax expense of $6.2 million, reflecting federal income taxes of $1.7 million, state income taxes of $0.9 million and foreign income taxes of $3.6 million. The federal expense is net of a tax benefit of $2.9 million due to the reversal of a valuation allowance recorded in the prior year which relates to the utilization of net operating loss carryforwards. Applying the 35% U.S. Federal statutory rate to the Company’s pre-tax income would result in income tax expense of $5.9 million in 2006. The Company’s actual income tax expense differs from this amount as a result of several factors, including permanent differences (i.e., certain financial statement items that are not includable in income for income tax purposes), foreign income taxed at different rates, state and local income taxes and the reversal of the valuation allowance.
 
The deferred tax assets at December 31, 2006 were reduced by a valuation allowance of $28.6 million, principally relating to uncertainty regarding the future realizability of tax benefits related to foreign tax credits. When $27.2 million of these valuation allowances are reversed in future years, the reversals will be credited to goodwill in accordance with FAS 109.
 
At December 31, 2006, the Company has approximately $1.9 million in foreign net operating loss carryforwards that may also have limits on utilization.
 
For the year ended December 31, 2005, the Company recorded income tax expense of $0.9 million, reflecting state income taxes of $0.8 million and foreign income taxes of $0.1 million. A federal income tax benefit of $2.7 million was offset by a valuation allowance due to uncertainty of the realization of these tax benefits. Applying the 35% U.S. Federal statutory rate to the pre-tax loss would result in income tax benefit of $1.6 million in 2005. The Company’s actual income tax expense differs from this amount as a result of several factors, including permanent differences, foreign income taxed at different rates, state and local income taxes and the valuation allowance.


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Equity in Earnings of Affiliates
 
The Company recorded $0.7 and $0.8 million of earnings in unconsolidated affiliates for the years ended December 31, 2006 and 2005, respectively, reflecting primarily the Company’s investment in Beckham Brands Limited.
 
Minority Interest
 
Minority interest expense of $2.1 million and $1.3 million for the years ended December 31, 2006 and 2005, respectively, reflect shares in the net income of the Presley Business and the Ali Business related to the equity interests retained by the former owners.
 
Liquidity and Capital Resources
 
Revolving Credit Facility — On May 24, 2006, the Company entered into a $125.0 million revolving credit agreement (the “Credit Facility”) with various lenders, including Bear, Stearns & Co. Inc. Loans under the Credit Facility are guaranteed by all of the Company’s wholly-owned domestic subsidiaries and certain of its wholly-owned foreign subsidiaries. The loans are secured by a pledge of certain assets of the Company and its subsidiary guarantors, including ownership interests in all wholly-owned domestic subsidiaries, substantially all wholly- owned foreign subsidiaries and certain subsidiaries that are not wholly-owned. On June 1, 2007 the Company amended the agreement to increase the amount of the Credit Facility by $25.0 million to a total of $150.0 million and to permit the investment by the Company in FXLR and the subsequent distribution to the Company’s stockholders of the Company’s equity interest in FXRE. As of December 31, 2007, the Company had drawn down $100 million on the Credit Facility, with the proceeds used for the investment in FXLR. Additional borrowings under the Credit Facility are available to the Company for general corporate purposes and to finance future acquisitions and joint ventures. Base rate loans under the Credit Facility bears interest at a rate equal to the greater of (i) the prime rate or (ii) the federal funds rate, plus 50 basis points. Eurodollar loans under the Credit Facility bears interest at a rate determined by a formula based on a published Telerate rate, adjusted for the reserve requirements prescribed for eurocurrency funding by a member bank of the Federal Reserve, plus 150 basis points. Any loans under the Credit Facility must be repaid by May 24, 2011. A commitment fee of 0.50% on the daily unused portion of the Credit Facility is payable monthly in arrears. The effective interest rate on these borrowings under the revolving credit agreement was 6.76% as of December 31, 2007. The Credit Facility requires the Company and its subsidiaries to maintain certain financial covenants, including (a) a maximum debt to EBITDA ratio of 4.5 to 1.0 and (b) a minimum EBITDA to interest expense ratio. Under the terms of the Credit Facility, EBITDA is defined as consolidated net income plus income tax expense, interest expense, depreciation and amortization expense, extraordinary charges and non-cash charges and minus interest income, extraordinary gains and any other non-cash income. The Credit Facility also contains covenants that regulate the Company’s and its subsidiaries’ incurrence of debt, disposition of property and capital expenditures.
 
The Company was in compliance with all loan covenants as of December 31, 2007.
 
Cash Flow for the Years Ended December 31, 2007, 2006 and 2005
 
Operating Activities
 
Net cash provided by operating activities was $40.7 million for the year ended December 31, 2007, reflecting net income of $12.1 million, which includes depreciation and amortization expenses of $22.6 million, discontinued operations of $8.4 million and the impact of seasonal changes in working capital levels.
 
Net cash provided by operating activities was $29.9 million for the year ended December 31, 2006, reflecting the net income of $9.2 million, which includes depreciation and amortization expenses of $20.5 million. Operating cash flow was unfavorably impacted compared to the prior year due to income tax payments made in 2006.
 
Net cash provided by operating activities was $22.1 million for the year ended December 31, 2005, reflecting the net loss of $5.9 million, which includes depreciation and amortization expenses of $14.9 million, and a decline in net working capital levels in the business related primarily to the mid season timing of our acquisition of 19 Entertainment with regards to American Idol 4. Additionally, in 2005 the Company received a payment of


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$5.0 million in advance of American Idol 5, which had not yet been recognized as revenue since the company had not yet fulfilled its obligations under its agreement with Fox.
 
Investing Activities
 
Net cash used in investing activities was $122.8 million for the year ended December 31, 2007 primarily reflecting the amount, including transaction costs, paid for the investment in FXRE of $103.7 million, the loan to FXRE of $6.0 million and capital expenditures of $11.4 million related primarily to the purchase of additional land adjacent to Graceland.
 
In 2007, the Company entered into a $1.8 million loan agreement with a vendor that provides marketing and branding services to the Company. This vendor is owned by several individuals who collectively own less than one percent of our outstanding common stock. The loan bears interest, payable monthly, at 10% per annum, which has been paid currently through December 31, 2007. The borrowers are required to make principal payments, beginning in February 2009 in an amount equal to 50% of the vendor’s cash flow, as defined; the maturity date of the loan is August 2012. The loan is personally guaranteed by the four principals of the vendor. $1.8 million was outstanding under the loan agreement in 2007. The Company also entered into a consulting agreement with the vendor in 2007 that terminates in December 2010 and provides for the Company to pay monthly consulting fees that would total $1.8 million over the term of the agreement; $0.2 million was expensed under the agreement in 2007. The consulting agreement may be terminated by either party upon sixty days notice.
 
Net cash used in investing activities was $33.0 million for the period ended December 31, 2006. Cash paid for the Ali Business, certain assets of a Las Vegas-based Elvis-themed museum, a company that provides marketing services to advertisers to build relationships between consumers and their brands and 50% of a previously 50%-owned affiliate by 19 Entertainment totaled $64.9 million. The Company sold $42.6 million of marketable securities during the period ended December 31, 2006. Capital expenditures of $10.7 million included the purchase of additional land adjacent to Graceland and improvements to the Heartbreak Hotel.
 
Net cash used in investing activities was $288.9 million for the year ended December 31, 2005. Cash paid for acquisitions and related costs were $245.3 million. $80.0 million of proceeds from the June 2005 public offering of common stock were invested in marketable securities with $37.4 million subsequently redeemed principally to pay the deferred purchase consideration for 19 Entertainment. Capital expenditures were $1.0 million.
 
Financing Activities
 
Cash provided by financing activities was $95.9 million for the year ended December 31, 2007. The Company borrowed $100.0 million under its revolving credit facility to fund the FXLR acquisition and received $0.2 million of net proceeds from warrant exercises. The Company made distributions to minority interest shareholders of $1.8 million, principal payments on notes payable of $0.6 million and dividend payments of $1.8 million to the holder of the Series B Convertible Preferred Stock. During the year ended December 31, 2007, the Company made payments of $0.1 million for costs associated with amending the revolving credit facility.
 
Cash used in financing activities was $0.8 million for the year ended December 31, 2006. During the period ended December 31, 2006, the Company made payments totaling $3.1 million for costs associated with the new revolving credit facility, distributions to minority interest shareholders of $2.0 million, principal payments on notes payable of $0.8 million and dividend payments of $1.8 million to the holder of the Series B Convertible Preferred Stock, offset by proceeds from warrant exercises of $6.9 million.
 
Net cash provided by financing activities was $304.1 million for the year ended December 31, 2005. The net proceeds from the public offering of common stock after underwriting discounts and commissions and other offering costs were $233.0 million. The Company received $43.8 million of net proceeds from the Huff investment and $30.0 million of net proceeds from warrant exercises. Acquisition-related borrowings of $148.0 million under the short-term credit facilities in 2005 were repaid on June 27, 2005.
 
Uses of Capital
 
At December 31, 2007, the Company had $103.1 million of debt outstanding and $50.9 million in cash and cash equivalents.


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We believe that our current cash on hand together with the $50 million available under the Company’s revolving credit facility and cash flow from operations will be sufficient to fund our current operations, including payments of interest and principal due on the Company’s debt, dividends on our Series B Convertible Preferred Stock, mandatory minimum distributions to the minority shareholder in the each of the Presley Business and Ali Business and capital expenditures.
 
Capital Expenditures
 
We presently anticipate that our total capital expenditures for 2008, including land purchases in the vicinity around Graceland, will total approximately $3.5 million. We estimate that we will incur expenditures for the development of the Elvis Cirque du Soleil Las Vegas show of approximately $5.0 million in 2008. These estimates exclude expenditures for the Company’s Graceland re-development projects, the timing and extent of which is not determinable at this time.
 
We announced preliminary plans to re-develop our Graceland attraction including an expanded visitors center, developing new attractions and merchandising shops and building a new boutique convention hotel. This project is conditioned on a number of factors, including obtaining necessary approvals and concessions from local and state authorities. Although we have not yet determined the exact scope, cost, financing plan and timing of this project, we expect that the re-development of Graceland will take several years and could require a substantial financial investment by the Company. FXRE is expected to fund the cost of any new hotels and related meeting facilities built at Graceland pursuant to the terms of the license agreement it has entered into with EPE.
 
Dividends
 
Our Series B Convertible Preferred Stock requires payment of a cash dividend of 8% per annum in quarterly installments. On an annual basis, our total dividend payment on the Series B Convertible Preferred Stock is $1.8 million. If we fail to make our quarterly dividend payments to the holders of the Series B Convertible Preferred Stock on a timely basis, the dividend rate increases to 12% and all amounts owing must be paid within three business days in shares of Common Stock valued at the average closing price over the previous 30 consecutive trading days. After such payment is made, the dividend rate returns to 8%. All such dividend payments were made on a timely basis.
 
We have no intention of paying any cash dividends on our Common Stock for the foreseeable future.
 
Commitments and Contingencies
 
There are various lawsuits and claims pending against us and which we have initiated against others. We believe that any ultimate liability resulting from these actions or claims will not have a material adverse effect on our results of operations, financial condition or liquidity.
 
In addition to our scheduled maturities of debt, obligations to redeem preferred stock and obligations to the seller of the Presley Business, to certain sellers of 19 Entertainment and to the sellers of MBST and the Ali Business, we have future cash obligations under various types of contracts. We lease office space and equipment under long-term operating leases. We have also entered into long-term employment agreements with certain of our executives and other key employees. These employment agreements typically contain provisions that allow us to terminate the contract with good cause
 
On August 17, 2007, the Company announced that, together with its subsidiaries, Elvis Presley Enterprises, Inc. and Elvis Presley Enterprises LLC, it has reached an agreement with Cirque du Soleil and MGM MIRAGE (“MGM”) to create a permanent Elvis Presley show at MGM’s CityCenter hotel/casino, which is currently under construction in Las Vegas. The new Elvis Presley show is expected to open with the CityCenter hotel/casino in November 2009. CKX and Cirque du Soleil have each agreed to pay one-half of the creative development and production costs of the new Elvis Presley show. CKX expects its portion of the investment to be approximately $24 million, with the largest amount expected to be funded in the later stages of development. The Company expects to incur expenses of approximately $5.0 million in connection with the show in 2008.
 
We expect to incur substantial additional legal and other costs related to the Merger.


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The scheduled maturities as of December 31, 2007 for our credit facilities, future minimum rental commitments under non-cancelable operating leases, minimum payments under employment agreements, guaranteed minimum distributions to The Promenade Trust and The Muhammad Ali Family Trust and future obligations to the former owners of 19 Entertainment are as follows (in thousands):
 
                                                         
    2008     2009     2010     2011     2012     Thereafter     Total  
                      (In thousands)              
 
Debt (including interest at current rates)
  $ 7,569     $ 7,373     $ 7,310     $ 103,217     $ 550     $ 550     $ 126,569  
Non-cancelable operating leases
    4,427       4,414       3,627       2,875       2,938       3,987       22,268  
Employment contracts
    16,071       15,658       4,178       1,427       560       1,167       39,061  
Guaranteed minimum distributions
    1,700       1,700       1,700       1,700       1,700       (a)     8,500  
19 Entertainment put right
                                  22,039 (b)     22,039  
Series B convertible preferred stock dividend
    1,826       1,826       1,826       1,826       1,826       (c)     9,130  
MBST contingent consideration
                                  (d)      
MAE contingent consideration
                                  (e)      
Tax reserve (Fin 48)
    193                                     193  
                                                         
Total
  $ 31,786     $ 30,971     $ 18,641     $ 111,045     $ 7,574     $ 27,743     $ 227,760  
                                                         
 
 
(a) We are required to make guaranteed minimum distributions to the minority interest shareholder of at least $1.2 million annually for as long as the minority interest shareholder continues to own 15% of the Presley Business. We are also required to make guaranteed minimum distributions to the minority interest shareholder of at least $0.5 million annually for as long as the minority interest shareholder continues to own 20% of the Ali Business.
 
(b) We have granted to the former holders of capital stock of 19 Entertainment the right, during a short period beginning March 17, 2011, to cause us to purchase up to 1.7 million shares of common stock from them at a price of $13.18 per share, which is reflected in the table above.
 
(c) We are required to pay an annual dividend of $1.8 million per year in quarterly installments on our outstanding Series B Convertible Preferred Stock issued in the acquisition of the Presley Business.
 
(d) The sellers of MBST may receive up to 150,000 additional restricted shares of common stock upon satisfaction of certain performance thresholds during the period ending August 9, 2010.
 
(e) The Ali Trust has the right to receive an additional 5% membership interest in the Ali Business effective as of the end of the calendar year in which the total compound internal rate of return to the Company on its initial $50 million investment equals or exceeds (i) 30% on a cumulative basis during the period ending April 10, 2011 or (ii) 25% on a cumulative basis for any period commencing on the acquisition date and ending at any time after April 10, 2011. The Ali Trust also has the right to require the Company to purchase all of its remaining ownership interest in the Ali Business beginning on the fifth anniversary of the acquisition at a price based on the then current fair market value.
 
Future Acquisitions
 
We intend to acquire additional businesses that fit our strategic goals. We expect to finance our future acquisitions of entertainment related businesses from cash on hand, our revolving credit facility, new credit facilities, additional debt and equity offerings, issuance of our equity directly to sellers of businesses and cash flow from operations. However, no assurance can be given that we will be able to obtain adequate financing to complete any potential future acquisitions we might identify.


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As we acquire additional businesses, we expect to incur incremental corporate support costs to manage and operate our business. These costs could include, but may not be limited to, the hiring of additional employees and related operating expenses for legal, finance, audit, human resources and systems functions.
 
Inflation
 
Inflation has affected the historical performances of the businesses primarily in terms of higher operating costs for salaries and other administrative expenses. Although the exact impact of inflation is indeterminable, we believe that the Presley Business has offset these higher costs by increasing prices at Graceland and for intellectual property licenses and that 19 Entertainment has offset these higher costs by increasing fees charged for its production services and higher royalty and sponsorship rates.
 
Application of Critical Accounting Policies
 
The preparation of our financial statements in accordance with US GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Management considers an accounting estimate to be critical if it requires assumptions to be made about matters that were highly uncertain at the time the estimate was made and changes in the estimate or different estimates could have a material effect on the Company’s results of operations. On an ongoing basis, we evaluate our estimates and assumptions, including those related to television production costs, artist advances and recoupable recording costs, goodwill and other intangible assets, income taxes and share based payments. The Company bases its estimates on historical experience and on various other assumptions that are 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 revenues and expenses that are not readily available from other sources. Actual results may differ from these estimates under different assumptions. We have discussed the development, selection, and disclosure of our critical accounting policies with the Audit Committee of the Company’s Board of Directors.
 
The Company continuously monitors its estimates and assumptions to ensure any business or economic changes impacting these estimates and assumptions are reflected in the Company’s financial statements on a timely basis, including the sensitivity to change the Company’s critical accounting policies.
 
The following accounting policies require significant management judgments and estimates.
 
Investment in FXRE
 
The Company evaluated its investment to acquire a 50% interest in FXRE in accordance with the guidance in FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”). The Company completed the analysis required by FIN 46R and determined that FXLR did not meet the criteria to be a variable interest entity because FXRE shareholders absorb FXRE’s risks and returns in proportion to their ownership interests. Therefore, FIN 46R does not apply. The Company consolidated FXRE from the date of the Company’s investment (June 1, 2007) through the date of the September dividend (September 27, 2007) as it controlled FXRE though its direct 25% ownership interest and the separate indirect ownership of affiliates, primarily the Company’s Chairman, Robert F.X. Sillerman, in the Distribution Trusts and in Flag, which each own direct interests in FXRE. Therefore, under the requirements of Accounting Research Bulletin No. 51, Consolidated Financial Statements, the Company consolidated FXRE based on its control through voting interests. The Company recorded minority interest for the 75% of the shares that it did not own through the date of the September dividend. Through July 6, 2007, FXRE accounted for its interest in the Metroflag Entities under the equity method of accounting because it did not have control with its then 50% ownership interest. Subsequent to July 6, 2007 (the date of the purchase of the 50% of the entities that collectively own the Park Central Property that it did not already own) through the date of the September dividend, FXRE consolidated the Metroflag Entities. As a result of the distribution of the Second Dividend Shares into trust on September 27, 2007, CKX ownership interest was reduced to 2% of the outstanding equity of FXRE. Subsequent to September 26, 2007, the Company accounted for it’s 2% investment in FXRE under the cost method because the Company had no significant continuing involvement.


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The operating results of FXRE are reflected as discontinued operations in the accompanying consolidated financial statements because the distribution of the FXRE shares to the CKX shareholders qualifies as a spin-off under Accounting Principles Board Opinion 29, Accounting for Non-monetary Transactions, and Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
 
Television Production Costs
 
The Company accounts for television projects in development pursuant to American Institute of Certified Public Accountants Statement of Position (“SOP”) No. 00-2, Accounting by Producers or Distributors of Films (“SOP 00-2”). Third party costs incurred in producing television programs for which we have secured distribution agreements are capitalized and remain unamortized until the project is distributed or are written off at the time they are determined not to be recoverable. Third party costs incurred in developing concepts for new television programs are expensed as incurred until such time as we have secured distribution agreements.
 
The capitalized cost of producing television programs are recognized as expense in accordance with the individual film forecast method specified in SOP 00-2, pursuant to which we estimate the ratio that revenue which is earned for such programming in the current period bears to its estimate at the beginning of the current year of total revenue to be realized from all media and markets for such programming. The estimate of revenue is based upon the Company’s contractual rights with respect to certain television projects and are calculated on an individual production basis for these programs. Amortization commences in the period in which revenue recognition commences. Our management regularly reviews and revises our total revenue estimates for each project, which may result in modifications to the rate of amortization as estimates of total revenue can change due to a variety of factors, including a change in the number of hours of programming and foreign distribution opportunities for its programs. If a net loss is projected for a particular project, the related capitalized costs are written down to estimated realizable value.
 
Artist Advances and Recoupable Recording Costs
 
Recoupable recording costs and artist advances, as adjusted for anticipated returns, are recognized in accordance with Statement of Financial Accounting Standards Statement (“SFAS”) No. 50, Financial Reporting in the Record and Music Industry (“SFAS 50”) and thus, are charged to expense in the period in which the sale of the record takes place. Recoupable recording costs and artist advances are only capitalized based on management’s judgment that past performance and current popularity of the artist for whom the recording costs are incurred or to whom the advance is made provide a sound basis for estimating that the amount capitalized will be recoverable from future royalties to be earned by the artist. Our management determines the recoverability of artist advances and recoupable recording costs on an artist-by-artist basis based on the success of prior records and projects and costs are only capitalized if the artist has developed a track record of success. Any portion of recoupable recording costs or artists advances that subsequently appear not to be fully recoverable from future royalties to be earned by the artist are charged to expense during the period in which the loss becomes evident.
 
Goodwill and Other Intangible Assets
 
Significant estimates and assumptions are made by management in the allocation of fair values to assets acquired and liabilities assumed in business combinations. The excess of the purchase price over the fair values of assets acquired and liabilities assumed are allocated to goodwill. Elements of the purchase price that meet the requirements in SFAS No. 141, Business Combinations, are valued as intangible assets upon acquisition. The significant assumptions used in these valuations include the duration or useful life of the assets, growth rates and amounts of future cash flows for each income stream. To determine these factors, management specifically makes assumptions regarding the future economic outlook for the industry, risks involved in the business and the impact of competition and technological changes.
 
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. The Company follows SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). In accordance with the provisions of SFAS 142, goodwill and other intangible


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assets with indefinite lives are not amortized, but instead are tested for impairment annually or if certain circumstances indicate a possible impairment may exist.
 
The Company performs its annual impairment assessment on goodwill and indefinite lived intangible assets in accordance with the methods prescribed below on the first day of its fiscal fourth quarter.
 
The Company has evaluated the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step the fair value for the reporting unit is compared to its book value including goodwill. The estimates of fair value of a reporting unit are determined primarily using a discounted cash flow analysis. A discounted cash flow analysis requires the Company to make various judgmental assumptions including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the Company’s internal budget and business plans. Discount rate assumptions are based on an assessment of the risk inherent in the respective reporting units. In the case that the fair value of the reporting unit is less than the book value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the book value of the goodwill. The fair value for the goodwill is determined based on the difference between the fair values of the reporting units and the net fair values of the identifiable assets and liabilities of such reporting units. If the fair value of the goodwill is less than the book value, the difference is recognized as an impairment.
 
The Company has also performed the impairment test for its intangible assets with indefinite lives, which consists of a comparison of the fair value of the intangible asset with its carrying value. Significant assumptions inherent in this test include estimates of royalty rates and discount rates. Discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets. Assumptions about royalty rates are based on the rates at which similar brands and trademarks are being licensed in the marketplace.
 
The Company performed its impairment assessment on long-lived assets, including intangible assets and goodwill, in accordance with the methods prescribed above. The Company concluded that no impairment existed as of October 1, 2007, the date of its assessment.
 
Income Taxes
 
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of SFAS No. 109, Accounting for Income Taxes (“SFAS 109”) on January 1, 2007. See note 13 within the consolidated financial statements.
 
The Company accounts for income taxes in accordance with SFAS 109, which requires that deferred tax assets and liabilities be recognized, using enacted tax rates, for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the future tax consequences of events that have been recognized in our financial statements or tax returns, judgment is required. In determining the need for a valuation allowance, the historical and projected financial performance of the operation that is recording a net deferred tax asset is considered along with any other pertinent information.
 
At year end, the actual effective tax rate is calculated based upon the actual results for the full fiscal year, taking into consideration facts and circumstances known at year end.
 
In the future, certain events could occur that would materially affect the Company’s estimates and assumptions regarding deferred taxes. Changes in current tax laws and applicable enacted tax rates could affect the valuation of deferred tax assets and liabilities, thereby impacting the Company’s income tax provision.
 
Share-Based Payments
 
In accordance with SFAS 123R, Share-Based Payment, the fair value of stock options is estimated as of the grant date based on a Black-Scholes option pricing model. Judgment is required in determining certain of the inputs to the model, specifically the expected life of options and volatility. As a result of the Company’s short operating history, no reliable historical data is available for expected lives and forfeitures. We estimated the expected lives of


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the options granted using an estimate of anticipated future employee exercise behavior, which is partly based on the vesting schedule. We estimated forfeitures based on management’s experience. The expected volatility is based on the Company’s historical share price volatility, and an analysis of comparable public companies operating in our industry.
 
Impact of Recently Issued Accounting Standards
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for the Company beginning after January 1, 2008. The Company has not completed its assessment of the impact of adopting SFAS 157 on its financial statements.
 
In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities, providing companies with an option to report selected financial assets and liabilities. SFAS 159’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. US GAAP requires different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. SFAS 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of asset and liabilities. SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements more easily understand the effect of the Company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the Company has chosen to use fair value on the face of the balance sheet. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has not completed its assessment of the impact of adopting SFAS 159 on its financial statements.
 
On December 4, 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”) and Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). These new standards will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS 141(R) and SFAS 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company has not completed its assessment of the impact of adopting SFAS 160 on its financial statements. The adoption of SFAS 141R will change the Company’s accounting treatment for business combinations on a prospective basis beginning January 1, 2009.
 
Off Balance Sheet Arrangements
 
As of December 31, 2007, we did not have any off balance sheet arrangements as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to market risk arising from changes in market rates and prices, including movements in foreign currency exchange rates, interest rates and the market price of our common stock. To mitigate these risks, we may utilize derivative financial instruments, among other strategies. We do not use derivative financial instruments for speculative purposes.
 
Interest Rate Risk
 
We had $103.1 million of total debt outstanding at December 31, 2007, of which $100.0 million was variable rate debt.
 
Any additional borrowings under the Company’s revolving credit facility commitment would also be variable rate debt and the Company would therefore have exposure to interest rate risk. Assuming a hypothetical increase in


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the Company’s variable interest rate of 100 basis points, our net income for the year ended December 31, 2007 would have decreased by approximately $1.0 million.
 
Foreign Exchange Risk
 
We have significant operations outside the United States, principally in the United Kingdom. Some of our foreign operations are measured in local currencies. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which we operate.
 
Assuming a hypothetical weakening of the U.S. dollar exchange rate with the U.K. pound sterling of 10%, our net income for the year ended December 31, 2007 would have decreased by approximately $3.2 million, reflecting an excess of U.K. pound sterling denominated operating expenses over U.K. pound sterling denominated revenue.
 
As of December 31, 2007, we have not entered into any foreign currency option contracts on other financial instruments intended to hedge our exposure to changes in foreign exchange rates. We intend to continue to monitor our operations outside the United States and in the future may seek to reduce our exposure to such fluctuations by entering into foreign currency option contracts or other hedging arrangements.
 
19 Entertainment Put Option
 
In connection with the acquisition of 19 Entertainment, certain sellers of 19 Entertainment entered into a Put and Call Option Agreement that provided them with certain rights whereby, during a short period following the six year anniversary of the acquisition, these sellers can exercise a put right to sell 1,672,170 shares of common stock to the Company at a price equal to $13.18 per share. If the Company’s stock price is below $13.18 per share during the period that the put is exercisable and the sellers exercise this put right, the Company will have exposure to market risk for the amount that $13.18 per share exceeds the then market price of the stock for the number of shares put back to the Company.


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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Table of Contents to Financial Statements
 
         
    Page
 
CKX, Inc.
       
    60  
    63  
Consolidated Statements of Operations for the years ended December 31, 2007, 2006, and 2005, and Combined Statements of Operations for the period January 1, 2005 to February 7, 2005 (Predecessor)
    64  
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005, and Combined Statements of Cash Flows for the period January 1, 2005 to February 7, 2005 (Predecessor)
    65  
Consolidated Statement of Stockholders’ Equity for the years ended December 31, 2007, 2006 and 2005
    67  
    68  


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
CKX, Inc.
New York, New York
 
We have audited the accompanying consolidated balance sheets of CKX, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ 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 at Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and the financial statement 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CKX, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2008, expressed an unqualified opinion on the Company’s internal control over financial reporting.
 
/s/  Deloitte & Touche LLP
 
New York, New York
March 3, 2008


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
CKX, Inc.
New York, New York
 
We have audited the internal control over financial reporting of CKX, Inc. and subsidiaries (the “Company”) 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. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and the financial statement schedule as of and for the year ended December 31, 2007, of the Company and our report dated March 3, 2008 expressed an unqualified opinion on those financial statements and the financial statement schedule.
 
/s/  Deloitte & Touche LLP
 
New York, New York
March 3, 2008


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
CKX, Inc.
New York, New York
 
We have audited the accompanying combined statements of operations and cash flows related to the net assets acquired from Promenade Trust (the Presley Business) for the period January 1, 2005 to February 7, 2005. These financial statements are the responsibility of the Presley Business management. Our responsibility is to express an opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with the auditing 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. The Presley Business is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Presley Business’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, such combined financial statements present fairly, in all material respects, the combined results of operations and cash flows of the Presley Business for the period January 1, 2005 to February 7, 2005, in conformity with accounting principles generally accepted in the United States of America.
 
/s/  Deloitte & Touche LLP
 
Memphis, Tennessee
March 13, 2006


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    December 31,
    December 31,
 
    2007     2006  
    In thousands, except per share and share information  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 50,947     $ 36,610  
Receivables, net of allowance for doubtful accounts of $832 at December 31, 2007 and $457 at December 31, 2006
    42,231       23,364  
Due from related party
    999        
Inventories, net of allowance for obsolescence of $627 at December 31, 2007 and $636 at December 31, 2006
    2,092       2,192  
Prepaid expenses and other current assets
    5,337       2,758  
Prepaid income taxes
          7,014  
Investment in FXRE
    6,175        
Deferred tax assets
    1,293       760  
                 
Total current assets
    109,074       72,698  
Property and equipment — net
    43,989       35,329  
Receivables
    1,607       1,274  
Loans to related parties
    7,931        
Deferred production costs
    635        
Other assets
    19,223       20,394  
Goodwill
    160,454       158,418  
Other intangible assets — net
    181,872       199,805  
Deferred tax assets
    670       1,199  
                 
TOTAL ASSETS
  $ 525,455     $ 489,117  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 14,987     $ 8,121  
Accrued expenses
    20,448       16,831  
Accrued dividend
    6,175        
Current portion of long-term debt
    652       631  
Income taxes payable
    6,226        
Other current liabilities
          1,988  
Deferred revenue
    12,009       12,492  
                 
Total current liabilities
    60,497       40,063  
Long-term liabilities:
               
Long-term debt
    102,418       3,070  
Deferred revenue
    2,778       2,566  
Other long-term liabilities
    4,216       4,359  
Deferred tax liabilities
    38,083       41,095  
                 
Total liabilities
    207,992       91,153  
                 
Minority interest
    4,757       3,953  
Redeemable restricted common stock — 1,672,170 shares outstanding at December 31, 2007 and 2006
    23,002       23,002  
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock, $.01 par value, authorized 75,000,000 shares:
               
Series B-1,491,817 shares outstanding
    22,825       22,825  
Series C-1 share outstanding
           
Common stock, $0.01 par value: authorized 200,000,000 shares, 95,402,757 shares issued and outstanding at December 31, 2007 and 94,237,075 issued and outstanding at December 31, 2006
    954       942  
Additional paid-in-capital
    374,665       373,115  
Accumulated deficit
    (123,746 )     (36,562 )
Accumulated other comprehensive income
    15,006       10,689  
                 
Total stockholders’ equity
    289,704       371,009  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 525,455     $ 489,117  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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                        Combined  
            Predecessor
 
    Consolidated       Company (1)  
    Year Ended
    Year Ended
    Year Ended
      January 1 to
 
    December 31,
    December 31,
    December 31,
      February 7,
 
    2007     2006     2005       2005  
    (In thousands, except per share and share information)  
Revenue
  $ 266,777     $ 210,153     $ 120,605       $ 3,442  
Operating expenses:
                                 
Cost of sales
    90,073       79,893       50,533         423  
Selling, general and administrative expenses
    87,672       68,760       44,477         2,431  
Corporate expenses
    18,156       15,236       11,362          
Depreciation and amortization
    22,551       20,541       14,910         126  
Merger and distribution-related costs
    5,259                      
Acquisition-related costs
          3,159                
Other costs
    308       2,669       2,175          
                                   
Total operating expenses
    224,019       190,258       123,457         2,980  
                                   
Operating income (loss)
    42,758       19,895       (2,852 )       462  
Interest income
    1,644       1,406       1,797          
Interest expense
    (5,590 )     (1,166 )     (4,617 )       (115 )
Write-off of unamortized deferred loan costs
                (1,894 )        
Other income (expense)
    2,181       (3,323 )     2,970          
                                   
Income (loss) before income taxes, equity in earnings of affiliates and minority interest
    40,993       16,812       (4,596 )       347  
Income tax expense
    19,432       6,178       855         152  
                                   
Income (loss) before equity in earnings of affiliates and minority interest
    21,561       10,634       (5,451 )       195  
Equity in earnings of affiliates
    1,566       686       843          
Minority interest
    (2,553 )     (2,127 )     (1,296 )        
                                   
Income (loss) from continuing operations
    20,574       9,193       (5,904 )       195  
Loss from discontinued operations
    (8,430 )                    
                                   
Net income (loss)
    12,144       9,193       (5,904 )       195  
Dividends on preferred stock
    (1,824 )     (1,824 )     (1,632 )        
Accretion of beneficial conversion feature
                (17,762 )        
                                   
Net income (loss) available to common shareholders
  $ 10,320     $ 7,369     $ (25,298 )     $ 195  
                                   
Basic income (loss) per share:
                                 
Income (loss) from continuing operations
  $ 0.21     $ 0.10     $ (0.08 )          
Discontinued operations
    (0.08 )                      
Dividends on preferred stock
    (0.02 )     (0.02 )     (0.02 )          
Accretion of beneficial conversion feature
                (0.25 )          
                                   
Basic income (loss) per share
  $ 0.11     $ 0.08     $ (0.35 )          
                                   
Diluted income (loss) per share:
                                 
Income (loss) from continuing operations
  $ 0.21     $ 0.10     $ (0.08 )          
Discontinued operations
    (0.08 )                      
Dividends on preferred stock
    (0.02 )     (0.02 )     (0.02 )          
Accretion of beneficial conversion feature
                (0.25 )          
                                   
Diluted income (loss) per share
  $ 0.11     $ 0.08     $ (0.35 )          
                                   
Average number of common shares outstanding:
                                 
Basic
    96,901,172       92,529,152       71,429,858            
Diluted
    96,991,441       93,555,201       71,429,858            
 
 
(1) Prior to the acquisition of the Presley Business, the Company did not have any operations. As a result, the Presley Business is considered to be a predecessor company (“Predecessor”). Accordingly, relevant prior year financial information regarding the Predecessor has been presented herein.
 
The accompanying notes are an integral part of these consolidated financial statements.


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                        Combined  
            Predecessor
 
    Consolidated       Company(1)  
    Year Ended
    Year Ended
    Year Ended
      January 1 to
 
    December 31,
    December 31,
    December 31,
      February 7,
 
    2007     2006     2005       2005  
    (In thousands)  
Cash flows from operating activities:
                                 
Net income (loss)
  $ 12,144     $ 9,193     $ (5,904 )     $ 195  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                                 
Depreciation and amortization
    22,551       20,541       14,910         126  
Impact on cash of discontinued operations
    8,430                      
Unrealized foreign currency gains and losses
    308       3,996                
Share-based payments
    1,325       1,052       731          
Minority interest
    2,553       2,127       1,296          
Equity in earnings of affiliates, net of cash received
    482       (988 )     (805 )        
Gain on distribution
    (2,225 )                    
Deferred income taxes
    (1,802 )     (2,009 )     123          
Non-cash interest expense
    654       390                
Provision for accounts receivable allowance
    588       450       7          
Provision for inventory allowance
    32       242       394          
Foreign exchange gain on deferred purchase consideration
                (2,800 )        
Changes in operating assets and liabilities:
                                 
Receivables
    (21,005 )     (1,677 )     2,536         (566 )
Inventory
    68       662       (1,191 )       124  
Prepaid expenses
    (2,579 )     1,210       (1,212 )       (576 )
Prepaid income taxes
    7,014       (5,512 )     (1,477 )        
Other assets
    364       (1,416 )     2,815          
Accounts payable and accrued expenses
    7,456       4,376       6,436         1,048  
Deferred revenue
    (271 )     (3,388 )     4,772         1,410  
Income taxes payable
    4,736       (768 )     240         152  
Other
    (143 )     1,447       1,199          
                                   
Net cash provided by operating activities
    40,680       29,928       22,070         1,913  
Cash flows from investing activities:
                                 
Investment in and loan to FXRE
    (109,691 )                    
Purchases of businesses, net of cash acquired of $1,787 and $3,501 in the years ended December 31, 2006 and 2005, respectively
          (60,993 )     (245,283 )        
Acquisition of certain assets of Elvis-themed museum
          (3,928 )              
Investment in marketable securities
                (80,000 )        
Proceeds from sale of marketable securities
          42,625       37,375          
Additions to property and equipment
    (11,354 )     (10,684 )     (1,023 )       (2 )
Loan to related party
    (1,750 )                    
                                   
Net cash used in investing activities
    (122,795 )     (32,980 )     (288,931 )       (2 )
                                   
Cash flows from financing activities:
                                 
Borrowing under revolving credit facility
    100,000                      
Proceeds from exercise of warrants
    244                      
Issuance of common stock
          6,911       33,056          
Public offering of common stock
                253,000          
Underwriting discount and other offering costs
                (20,017 )        
Proceeds from Huff investment
                43,819          
Proceeds from credit facilities
                148,000          
Costs associated with Huff investment and credit facility
                (3,207 )        
Debt issuance costs
    (94 )     (3,158 )              
Distributions to minority interest shareholders
    (1,750 )     (1,967 )     (1,365 )        
Principal payments on debt
    (631 )     (759 )     (148,000 )       (185 )
Dividends paid on preferred stock
    (1,824 )     (1,824 )     (1,177 )        
Distributions to trust beneficiaries
                        (23 )
                                   
Net cash provided by (used in) financing activities
    95,945       (797 )     304,109         (208 )
                                   
Effect of exchange rate changes on cash
    507       3,480       (269 )        
                                   
Net increase (decrease) in cash and equivalents
    14,337       (369 )     36,979         1,703  
                                   
Cash and cash equivalents, beginning of period
    36,610       36,979               201  
                                   
Cash and cash equivalents, end of period
  $ 50,947     $ 36,610     $ 36,979       $ 1,904  
                                   
Supplemental cash flow data (in thousands):
                                 
Cash paid during the period for:
                                 
Interest
  $ 4,535     $ 514     $ 3,254       $ 172  
Income taxes
    11,033       15,118       1,668         125  


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(1) Prior to the acquisition of the Presley Business, the Company did not have any operations. As a result, the Presley Business is considered to be a predecessor company (“Predecessor”). Accordingly, relevant prior year financial information regarding the Predecessor has been presented herein.
 
Supplemental Cash Flow Information:
 
The Company had the following non-cash investing and financing activities in the year ended December 31, 2007 (in thousands):
 
         
Dividend of CKX’s interests in FXRE to the Distribution Trusts (as defined)
  $ 91,259  
Accrued dividend of CKX’s interests in FXRE to the Distribution Trusts (as defined)
    6,175  
Accrued but unpaid Series B Convertible Preferred Stock Dividends
    456  
 
The Company had the following non-cash investing and financing activities in the year ended December 31, 2006 (in thousands):
 
         
Issuance of note in connection with the acquisition of certain assets of Elvis-themed museum
  $ 750  
Common stock issued in connection with acquisitions
    2,387  
Accrued but unpaid Series B Convertible Preferred Stock Dividends
    456  
 
The Company had the following non-cash investing and financing activities in the year ended December 31, 2005 (in thousands):
 
         
Common stock issued for the acquisition of the Presley Business
  $ 3,835  
Series B Convertible Preferred stock issued for acquisition of the Presley Business
    22,825  
Issuance of Priscilla Presley Note for the acquisition of the Presley Business
    3,500  
Common stock and redeemable restricted common stock issued for the acquisition of 19 Entertainment
    26,341  
Conversion of Series A Convertible Redeemable Preferred Stock to common stock
    17,762  
Issuance of common shares in satisfaction of obligation to former affiliate
    270  
Common stock issued for the acquisition of MBST
    10,123  
Accrued but unpaid Series B Convertible Preferred Stock Dividends
    456  
 
The accompanying notes are an integral part of these consolidated financial statements.


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CKX, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
 
                                                                                                 
                                                                Accumulated
       
    Preferred Stock                 Additional
          Other
       
    Series A     Series B     Series C     Common Stock     Paid-In
    Accumulated
    Comprehensive
       
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Capital     Deficit     Income (Loss)     Total  
 
Balance at January 1, 2005
        $           $           $       4,283,061     $ 6,115     $ 12,249     $ (18,633 )   $     $ (269 )
Stock issued in settlement of affiliate liability
                                        10,000             270                   270  
Change of par value to $0.01 per share
                                              (6,072 )     6,072                    
Issuance of common stock
                                        30,389,072       304       2,752                   3,056  
Huff investment
    2,172,400       17,762                               3,706,052       37       25,520                   43,319  
Recognition of beneficial conversion feature
          (17,762 )                                         17,762                    
Warrant exercises
                                        21,517,199       215       29,785                   30,000  
Shares issued for acquisitions
                1,491,817       22,825       1             1,438,868       15       17,282                   40,122  
Restricted shares issued to independent directors and employees
                                        124,500       1       475                   476  
Shares issued to independent directors
                                        8,813             117                   117  
Stock option expense
                                                    94                   94  
Conversion of Series A Preferred and accretion of beneficial conversion feature
    (2,172,400 )                                   6,051,253       60       17,702       (17,762 )            
Series B preferred dividends
                                                          (1,632 )           (1,632 )
Public offering of common stock
                                        23,000,000       230       232,753                   232,983  
Net loss
                                                          (5,904 )           (5,904 )
Other comprehensive income (loss)
                                                                (19,200 )     (19,200 )
                                                                                                 
Balance at December 31, 2005
        $       1,491,817     $ 22,825       1     $       90,528,818     $ 905     $ 362,833     $ (43,931 )   $ (19,200 )   $ 323,432  
Warrant exercises
                                        3,455,219       35       6,876                   6,911  
Shares issued for acquisitions
                                        221,683       2       2,385                   2,387  
Shares issued to independent directors
                                        16,355             576                   576  
Restricted shares issued to employees
                                        15,000             70                   70  
Stock option expense
                                                    375                   375  
Series B preferred dividends
                                                          (1,824 )           (1,824 )
Net income
                                                          9,193             9,193  
Other comprehensive income
                                                                29,889       29,889  
                                                                                                 
Balance at December 31, 2006
        $       1,491,817     $ 22,825       1     $       94,237,075     $ 942     $ 373,115     $ (36,562 )   $ 10,689     $ 371,009  
Fin 48 adjustment
                                                          (70 )           (70 )
Warrant exercises
                                        1,081,889       11       233                   244  
Shares issued to independent directors
                                        28,293             656                   656  
Restricted shares issued to employees
                                        55,500       1       189                   190  
Stock option expense
                                                    472                   472  
Series B preferred dividends
                                                          (1,824 )           (1,824 )
Distribution of FXRE
                                                          (97,434 )           (97,434 )
Net income
                                                          12,144             12,144  
Other comprehensive income
                                                                4,317       4,317  
                                                                                                 
Balance at December 31, 2007
        $       1,491,817     $ 22,825       1     $       95,402,757     $ 954     $ 374,665     $ (123,746 )   $ 15,006     $ 289,704  
                                                                                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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CKX, INC.
 
 
1.   Overview
 
CKX, Inc. (the “Company” or “CKX”) is engaged in the ownership, development and commercial utilization of entertainment content. Our primary assets and operations include the rights to the name, image and likeness of Elvis Presley and the operation of Graceland, the rights to the name, image and likeness of Muhammad Ali and proprietary rights to the IDOLS television brand, including the American Idol series in the United States and local adaptations of the IDOLS television show format which, collectively with American Idol, air in over 100 countries around the world.
 
On February 7, 2005, RFX Acquisition LLC, an entity formed and controlled by Robert F.X. Sillerman, acquired a controlling interest in the Company (formerly known as Sports Entertainment Enterprises, Inc.), which had been inactive since it sold all of its assets in August 2002. Simultaneous with that transaction, the Company acquired an 85% interest in the entities which own and/or control certain content relating to Elvis Presley (the “Presley Business”). Prior to the acquisition of the Presley Business, the Company did not have any operations. As a result, the Presley Business is considered to be a predecessor company (“Predecessor”). Accordingly, relevant financial information regarding the Predecessor, including financial statements for the period from January 1 — February 7, 2005 has been presented.
 
On March 17, 2005 the Company acquired 100% of 19 Entertainment Limited (“19 Entertainment”), a private limited company incorporated under the laws of England and Wales, that is a creator, producer, and promoter of entertainment properties, including the IDOLS television show format.
 
On March 25, 2005, we merged into our wholly-owned subsidiary, changing, among other things, (i) the name of our company from Sports Entertainment Enterprises, Inc. to CKX, Inc., (ii) our state of incorporation from Colorado to Delaware, and (iii) our capital stock from no par value to $0.01 par value per share.
 
On August 9, 2005, the Company acquired 100% of Morra, Brezner, Steinberg & Tenenbaum Entertainment, Inc. (“MBST”), a manager of comedic talent and producer of motion pictures and television programming.
 
On April 10, 2006, the Company acquired an 80% interest in the name, image and likeness and all other rights of publicity of Muhammad Ali, certain trademarks and copyrights owned by Mr. Ali and his affiliates and the rights to all existing Muhammad Ali license agreements (the “Ali Business”).
 
On June 1, 2007, and as amended on August 1, 2007, September 27, 2007 and January 23, 2008, CKX entered into an agreement to be acquired by 19X, Inc., a company controlled by Robert F.X. Sillerman, the Company’s Chairman and Chief Executive Officer, and Simon R. Fuller, a director of the Company and the Chief Executive Officer of the Company’s subsidiary, 19 Entertainment Limited. This transaction is described below in more detail under Note 2, titled “Merger Agreement.”
 
On June 1, 2007, CKX, through two of its subsidiaries, granted exclusive licenses to FX Luxury Realty, LLC, a subsidiary of FX Real Estate and Entertainment Inc., to utilize Elvis Presley-related intellectual property and Muhammad Ali-related intellectual property in connection with the development, ownership and operation of Elvis Presley-themed and Muhammad Ali-themed real estate and attraction based properties around the world.
 
2.   Merger Agreement
 
On June 1, 2007, the Company entered into an Agreement and Plan of Merger (as amended on August 1, 2007, September 27, 2007 and January 23, 2008, the “Merger Agreement”) with 19X, Inc., a Delaware corporation (“19X” or “Parent”), and 19X Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”). 19X was initially formed for an unrelated purpose and has had no operations or business other than as contemplated by the Merger Agreement, including the related financings. Robert F.X. Sillerman, Chairman and Chief Executive Officer of CKX, and Simon R. Fuller, a director of CKX and the Chief Executive Officer of 19 Entertainment Limited, a wholly owned subsidiary of CKX, are the sole current stockholders of 19X.


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CKX, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
Description of Merger Offer
 
Pursuant to the terms of the Merger Agreement, Merger Sub will be merged with and into the Company, and as a result, the Company will continue as the surviving corporation and as a wholly owned subsidiary of Parent (the “Merger”).
 
If the Merger is completed, each share of CKX common stock will be converted into the right to receive a maximum of $13.75 in cash, without interest, subject to adjustment based on the average trading price of shares of common stock of FX Real Estate and Entertainment Inc. (“FXRE”) as described below (the “Merger Consideration”).
 
Prior to and as a condition to the merger, CKX distributed to its stockholders two shares of common stock of FXRE for every 10 shares of CKX common stock or preferred stock owned on the record date for the distribution. The distribution of these shares of common stock of FXRE took place on January 10, 2008. The $13.75 per share cash purchase price to be paid by 19X to CKX stockholders at the closing of the merger will be reduced by an amount equal to 7.5% of the average of the last reported sales price of FXRE’s common stock on 20-trading days (which need not be consecutive) between February 8, 2008 and April 1, 2008, which have been selected blindly and at random by the Special Committee. The 20-trading days selected as described above will be held in escrow by an independent third party and not disclosed to any party until the close of trading on The NASDAQ Global Market on April 1, 2008, at which time the final adjustment to the cash purchase price for the merger will be calculated and disclosed publicly.
 
In no event will the per share purchase price for the merger be reduced by an amount greater than $2.00 so that the minimum per share cash purchase price for each share of CKX common stock will be $11.75. The adjustment to the per share cash purchase price will only take place if FXRE’s common stock is listed and trading during the entire period from February 8, 2008 through April 1, 2008 on a national securities exchange. Shares of FXRE are listed on The NASDAQ Global Market under the symbol “FXRE.”
 
On February 4, 2008, FXRE filed a registration statement with the Securities and Exchange Commission with respect to an offer to its stockholders of the right to purchase one share of FXRE common stock at a price of $10 per share for every two shares of FXRE common stock held on a to-be-determined record date. FXRE’s stockholders who received their shares from Flag Luxury Properties, LLC have waived their right to participate in this rights offering. In the event that FXRE completes the rights offering at the $10 per share price and for total proceeds of not less than $90.0 million, under the terms of the merger agreement the minimum reduction to the $13.75 per share cash purchase price for the merger will be $0.75 per share regardless of the average trading price of the FXRE common stock over the 20 randomly selected trading days described above. FXRE has entered into agreements with Mr. Sillerman and The Huff Alternative Fund, L.P. and The Huff Alternative Parallel Fund, L.P., principal stockholders of FXRE, for them to purchase shares in the rights offering that are not otherwise subscribed for by FXRE other stockholders at the same $10 per share price offered to other stockholders, which, in conjunction with their exercise of their own rights, would result in gross proceeds to FXRE in excess of the $90 million threshold described above.
 
Consummation of the Merger is subject to various customary closing conditions, including approval of the transaction by the Company’s stockholders, absence of a “material adverse effect” on the Company, receipt of regulatory approvals, the distribution of the shares of common stock of FXRE (as described below) to CKX’s stockholders and stockholders of the Company holding no more than 7.5% of the outstanding Common Stock exercising appraisal rights under Delaware law. Completion of the Merger is not conditioned upon 19X receiving financing, however, upon termination due to a failure of 19X to obtain necessary financing 19X must pay CKX a termination fee of $37 million, payable at the option of 19X in cash or shares of CKX common stock valued at a price of $12.00 per share.
 
On November 8, 2007, 19X, Inc. delivered fully executed financing letters which provide for capital sufficient to complete the merger on the previously disclosed terms. The financing letters delivered by 19X include firm


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CKX, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
commitments from, as well as other detailed arrangements and engagements with, three prominent Wall Street firms and expressions of intentions from management and other significant investors in CKX. On October 30, 2007, 19X had delivered unsigned copies of the letters to allow the CKX Board of Directors to complete a review of the financing package. Upon completion of the Board’s review, 19X delivered the fully signed financing letters.
 
Affiliated Elements of Transaction
 
As described above, 19X is owned and controlled by Robert F.X. Sillerman, our Chairman and Chief Executive Officer, and Simon R. Fuller, a director of CKX and the Chief Executive Officer of 19 Entertainment Limited, a wholly owned subisidiary of CKX. Mr. Sillerman is also the Chairman and Chief Executive Officer of FXRE.
 
3.   Transactions Involving FX Real Estate and Entertainment Inc. and FX Luxury Realty, LLC
 
During 2007, the Company engaged in a series of transactions with FXRE and FX Luxury Realty, LLC (“FXLR”), each of which is described below.
 
FXRE holds its assets and conducts its limited operations through its subsidiary, FXLR and its subsidiaries. FXRE owns 17.72 contiguous acres of land located on the southeast corner of Las Vegas Boulevard and Harmon Avenue in Las Vegas, Nevada, referred to herein as the Park Central Property. The Park Central Property is currently occupied by a motel and several commercial and retail tenants. FXRE intends to redevelop the Park Central Property into a hotel, casino, entertainment, retail, commercial and residential project, as contemplated by the license agreement described below. As described elsewhere herein, FXLR, recently entered into license agreements with Elvis Presley Enterprises, Inc., an 85%-owned subsidiary of CKX, Inc., and Muhammad Ali Enterprises LLC, an 80%- owned subsidiary of CKX, which allow FXLR to use the intellectual property and certain other assets associated with Elvis Presley and Muhammad Ali in the development of real estate and other entertainment attraction based projects. FXRE currently anticipates that the development of the Park Central Property will involve multiple elements that incorporate the Elvis Presley assets and theming. In addition, the license agreement with Elvis Presley Enterprises grants FXLR the right to develop one or more hotels as part of the master plan of Elvis Presley Enterprises, Inc. to redevelop the Graceland property and surrounding areas in Memphis, Tennessee. In addition to the Park Central Property and the development of one or more Elvis Presley-themed hotels at or near Graceland in Memphis, Tennessee, FXRE intends to develop hotels and attractions worldwide, including Elvis Presley and Muhammad Ali themed projects pursuant to the aforementioned license agreements.
 
FXRE, through direct and indirect wholly owned subsidiaries, also owns 1,410,363 shares of common stock of Riviera Holdings Corporation [AMEX:RIV], a company that owns and operates the Riviera Hotel & Casino in Las Vegas, Nevada and the Blackhawk Casino in Blackhawk, Colorado.
 
Investment in FX Luxury Realty
 
On June 1, 2007, the Company acquired 50% of the newly issued common membership interests in FXLR. The consideration for the acquired interests was $100 million, paid in cash at closing. Transaction costs totaled $2.1 million. The Company funded the $100 million purchase price with proceeds from a drawdown under the Credit Facility (as defined). At the time of CKX’s investment in FXLR, FXLR owned a 50% interest in entities (the “Metroflag Entities”) that collectively own and control the Park Central Property and had entered into a binding agreement to acquire the other 50% of such entities. The acquisition of the remaining 50% of the Metroflag Entities, which gave FXLR 100% ownership and control of the Park Central Property, closed on July 6, 2007.
 
License Agreements
 
Simultaneous with the CKX investment in FXLR, FXLR entered into a worldwide license agreement with Elvis Presley Enterprises, Inc., an 85% owned subsidiary of CKX (“EPE”), granting FXLR the exclusive right to utilize Elvis Presley-related intellectual property in connection with the development, ownership and operation of


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CKX, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
Elvis Presley-themed hotels, casinos and certain other real estate-based projects and attractions around the world. FXLR also entered into a worldwide license agreement with Muhammad Ali Enterprises LLC, an 80% owned subsidiary of CKX (the “Ali Business”), granting FXLR the right to utilize Muhammad Ali-related intellectual property in connection with Muhammad Ali-themed hotels and certain other real estate-based projects and attractions.
 
Under the terms of the license agreements, FXLR is required to pay to EPE and the Ali Business an amount equal to 3% of the gross revenue generated at the properties that incorporate the Elvis Presley and Muhammad Ali intellectual property, as applicable, and 10% of gross revenues generated from the sale of related merchandise. FXLR is required to pay a guaranteed annual minimum royalty during each year of the agreement, which amount is recoupable against royalties paid during such year as described above. The aggregate guaranteed minimum royalty due for 2007 is $10.0 million. The initial payments under the license agreements were due on December 1, 2007. As the initial payments will be made after December 1, 2007, however, FXRE will be required to pay us interest at the then current prime rate as quoted in the Wall Street Journal plus 3% if the payment is made from December 1, 2007 through December 31, 2007, plus 3.5% if paid from January 1, 2008 through January 31, 2008, plus 4.0% if paid from February 1, 2008 through February 29, 2008 or plus 4.5% if paid from and after March 1, 2008. The 2007 royalty amount of $10.0 million has not yet been paid to the Company.
 
In 2007, FXRE recorded royalty expense of $10 million, representing the guaranteed annual minimum royalty payments under the license agreements with EPE and the Ali Business. CKX did not record any related royalty revenue as, per the Company’s revenue recognition policy, revenue from licensing activities is recognized only when all the conditions of a multiple-element arrangement are met. The FXRE royalty expense was not recorded.
 
June Dividend into Trusts
 
As a condition to the Merger Agreement as executed on June 1, 2007, CKX agreed to distribute to its stockholders one-half of the equity it purchased in FXLR through a distribution of shares of FXRE common stock (which shares would be received prior to the distribution through an exchange of FXLR interests for FXRE shares) to allow current CKX stockholders to share directly in the continued growth and exploitation of the existing Elvis Presley and Muhammad Ali intellectual property rights and assets in the capital intensive development opportunities to be pursued by us in accordance with the terms of the license agreements described above.
 
On June 18, 2007, the Company declared and transferred into two trusts, for the benefit of its stockholders, a dividend consisting of 25% of the outstanding shares of common stock of FXRE (the “June Dividend Shares”) payable to CKX stockholders as of the Record Date (as defined below). The dividend was valued at approximately $50.3 million, or 50% of the then value of CKX’s investment in FXLR (taking into account transaction costs).
 
Following these transfers, CKX continued to own 25% of the outstanding common equity interests of FXLR but retained no interest in or control over the June Dividend Shares.
 
Reorganization of FX Luxury Realty into FX Real Estate and Entertainment
 
On September 26, 2007, CKX and other members of FXLR entered into a Contribution and Exchange Agreement pursuant to which each member of FXLR contributed its common membership interests in FXLR to FXRE in exchange for shares of common stock of FXRE. As a result of the reorganization, FXRE owns 100% of the outstanding common membership interests of FXLR. Immediately after the reorganization, FXRE was owned 25% by CKX, 25% by the CKX distribution trusts referenced above and 50% by Flag Luxury Properties, LLC (“Flag”).
 
Where appropriate, certain references to FXRE set forth in this Form 10-K for the period prior to the reorganization described above refer to FXLR, its subsidiary and the company through which CKX held its direct interest at such time.


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CKX, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
CKX Loan to FXRE
 
On September 26, 2007, CKX entered into a Line of Credit Agreement with FXRE pursuant to which CKX agreed to loan up to $7.0 million to FXRE, $6.0 million of which was drawn down on September 26, 2007 and is evidenced by a promissory note dated September 26, 2007. The proceeds of the loan were used by FXRE, together with proceeds from additional borrowings, to exercise an option held by FXRE to acquire an additional 573,775 shares of Riviera Holdings Corporation’s common stock [AMEX: RIV] at a price of $23 per share. The loan bears interest at LIBOR plus 600 basis points and is payable upon the earlier of (i) two years and (ii) the consummation by FXRE of an equity raise at or above $90.0 million. The loan is secured by a pledge of $5.0 million of FXRE common stock held by Mr. Sillerman and certain other members of Flag, whom hold ownership interests in FXRE. As of December 31, 2007, $6.0 million of principal plus $0.2 million of interest is outstanding.
 
Additional FXRE Equity Investment
 
Also on September 26, 2007, CKX acquired an additional 0.742% of the outstanding capital stock of FXRE for a price of $1.5 million.
 
Second FXRE Dividend into Trust
 
As a result of the reorganization and purchase of additional FXRE stock by CKX and Flag, CKX owned directly 25.5% of the outstanding common stock of FXRE on September 26, 2007. On September 27, 2007, pursuant to and in accordance with the amendment to the merger agreement dated September 27, 2007, CKX declared and transferred into trust for the benefit of its stockholders a dividend consisting of 23.5% of the shares of common stock of FXRE (the “Second Dividend Shares”). Upon declaration of the dividend, CKX irrevocably transferred and assigned the Second Dividend Shares to the new trust and thereafter retained no interest in or control over such shares. At that time, CKX did not declare a dividend or transfer into trust shares representing 2% of the outstanding shares of FXRE but has subsequently distributed such shares to its stockholders together with the distribution of the Second Dividend Shares and the June Dividend Shares. The Second Dividend Shares were valued at approximately $40.9 million leaving CKX with an investment of $6.2 million at December 31, 2007 representing its remaining 2% ownership interest in FXRE.
 
January 2008 CKX Distribution of FXRE Stock
 
On December 21, 2007, the Company declared a dividend with respect to its remaining 2% ownership interest in FXRE and set the record date of December 31, 2007 for the distribution of all of the shares of FXRE stock held by CKX and the three Distribution Trusts to the CKX stockholders. In 2007, the Company recorded a $2.2 million gain on the distribution of the final 2% interest in FXRE to the Company’s shareholders. The gain represents the difference between the Company’s cost basis in the shares and the trading price of FXRE on January 10, 2008, the first day of trading in FXRE stock.
 
On January 10, 2008, CKX and the Distribution Trusts delivered to each stockholder of CKX two shares of FXRE common stock for every ten shares of CKX common or preferred stock held by such stockholder on the record date. The total number of shares of FXRE common stock distributed to CKX stockholders was 19,743,349.
 
Accounting for the Investment and Distributions
 
The Company consolidated FXRE from the date of the Company’s investment (June 1, 2007) through September 26, 2007 (date of the second distribution to trust, as noted above). Subsequent to September 26, 2007, the Company accounted for it’s 2% investment in FXRE under the cost method because the Company had no significant continuing involvement. Upon the January 10, 2008 distribution and the third dividend described above, CKX’s ownership interest in FXRE was fully divested and no investment will be recorded by CKX subsequent to such date. The operating results from June 1, 2007 to September 26, 2007 of FXRE are reflected as discontinued operations in


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CKX, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
the accompanying consolidated financial statements because the distribution of the FXRE shares to the CKX shareholders qualifies as a spin-off under Accounting Principles Board Opinion 29, Accounting for Non-monetary Transactions, and Financial Accounting Standards Board Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
 
FXRE was audited for the period from inception (May 11, 2007) to December 31, 2007 and the independent registered public accounting firm’s opinion includes an explanatory paragraph about FXRE’s ability to continue as a going concern. FXRE’s ability to pay royalties to CKX under the EPE and Ali Business license agreements and other obligations is dependent on FXRE successfully completing its planned rights offering or other capital event.
 
Shared Services Agreement
 
We are party to a shared services agreement with FXRE, pursuant to which certain of our employees, including members of senior management, provide services for FXRE, and certain of FXRE’s employees, including members of senior management, may provide services for CKX. The services to be provided pursuant to the shared services agreement are expected to include management, legal, accounting and administrative.
 
Charges under the shared services agreement are made on a quarterly basis and are determined by taking into account a number of factors, including but not limited to, the overall type and volume of services provided, the individuals involved, the amount of time spent by such individuals and their current compensation rate with the company with which they are employed. Each quarter, representatives of the parties will meet to (i) determine the net payment due from one party to the other for provided services performed by the parties during the prior calendar quarter, and (ii) prepare a report in reasonable detail with respect to the provided services so performed, including the value of such services and the net payment due. The parties shall use their reasonable, good-faith efforts to determine the net payments due in accordance with the factors described in above.
 
Because the shared services agreement with CKX constitutes an agreement with a related party, the agreement was reviewed and approved by the independent members of our board of directors. In addition, the agreement was reviewed and approved by a special committee of independent members of the board of directors of CKX formed to evaluate and approve certain related party transactions.
 
For the year ended December 31, 2007, CKX has billed FXRE $1.0 million for professional services, primarily accounting and legal services, performed under the shared services agreement. These amounts have not yet been paid to the Company.
 
4.   Summary of Significant Accounting Policies and Basis of Presentation
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of all subsidiaries and the Company’s share of earnings or losses of joint ventures and affiliated companies under the equity method of accounting. The interests held by our minority shareholders in the Presley Business and the Ali Business are reported as minority interest in the consolidated financial statements. All intercompany accounts and transactions have been eliminated.
 
Any variable interest entities for which the Company is the primary beneficiary, as defined in Financial Accounting Standards Board Interpretation 46(R), Consolidation of Variable Interest Entities, are consolidated.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted within the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.


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CKX, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
Investment in FXRE
 
The Company evaluated its investment to acquire a 50% interest in FXRE in accordance with the guidance in FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”). The Company completed the analysis required by FIN 46R and determined that FXRE does not meet the criteria to be a variable interest entity because FXRE shareholders absorb FXRE’s risks and returns in proportion to their ownership interests. Therefore, FIN 46R does not apply. The Company consolidated FXRE from the date of the Company’s investment (June 1, 2007) through the date of the September dividend (September 27, 2007) as it controlled FXRE though its direct 25% ownership interest and the separate indirect ownership of affiliates, primarily the Company’s Chairman, Robert F.X. Sillerman, in the Distribution Trusts and in Flag, which each own direct interests in FXRE. Therefore, under the requirements of Accounting Research Bulletin No. 51, Consolidated Financial Statements, the Company consolidated FXRE based on its control through voting interests. The Company recorded minority interest for the 75% of the shares that it does not own through the date of the September dividend. As a result of the distribution of the Second Dividend Shares into trust on September 27, 2007, CKX ownership interest was reduced to 2% of the outstanding equity of FXRE. Subsequent to September 26, 2007, the Company accounted for it’s 2% investment in FXRE under the cost method because the Company had no significant continuing involvement.
 
Discontinued Operations
 
The operating results of FXRE are reflected as discontinued operations in the accompanying financial statements because the distribution of the FXRE shares to the CKX shareholders qualifies as a spin-off under Accounting Principles Board Opinion 29, Accounting for Non-monetary Transactions, and Financial Accounting Standards Board Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. The results of operations presented as discontinued operations for the period from June 1, 2007 to September 26, 2007 are summarized below (dollar amounts in thousands):
 
         
    Period from
 
    June 1, 2007 to
 
    September 26, 2007  
 
Revenue
  $ 1,346  
Total costs and expenses, net of minority interest share
    (6,802 )
Equity in losses of unconsolidated subsidiaries
    (2,974 )
Income taxes
     
         
Loss from discontinued operations, net of income taxes
  $ (8,430 )
         
 
Cash and Cash Equivalents
 
All highly liquid investments with original maturities of three months or less are classified as cash and cash equivalents. The fair value of cash and cash equivalents approximates the amounts shown on the financial statements. Cash and cash equivalents consist of unrestricted cash in accounts maintained with major financial institutions.
 
Inventory
 
Inventory, all of which is finished goods, is valued at the lower of cost or market. Cost is determined using the first-in, first out method. Allowances are provided for slow-moving or obsolete inventory items based on management’s review of inventory data.
 
Property and Equipment, net
 
Property and equipment, net are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Expenditures for additions, major renewals, and betterments are capitalized.


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CKX, INC.
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
Maintenance and repairs not representing betterments are expensed as incurred. Depreciation and amortization expenses were $2.7 million, $2.2 million and $1.9 million for the years ended December 31, 2007, 2006 and 2005, respectively, and $0.1 million for the period January 1-February 7, 2005 (Predecessor).
 
Property and equipment, net consisted of the following as of December 31, 2007 and 2006 :