| CLEAR CHANNEL COMMUNICATIONS INC Item 1A Risk Factors We Have a Large Amount of Indebtedness We currently use a portion of our operating income for debt service |
| Our leverage could make us vulnerable to an increase in interest rates or a downturn in the operating performance of our businesses due to various factors including a decline in general economic conditions |
| At December 31, 2005, we had debt outstanding of dlra7dtta0 billion and shareholders’ equity of dlra8dtta8 billion |
| We may continue to borrow funds to finance capital expenditures, share repurchases, acquisitions or to refinance debt, as well as for other purposes |
| Our debt obligations could increase substantially because of additional share repurchase programs, special dividends, or acquisitions that may be approved by our Board as well as the debt levels of companies that we may acquire in the future |
| Such a large amount of indebtedness could have negative consequences for us, including without limitation: • limitations on our ability to obtain financing in the future; • much of our cash flow will be dedicated to interest obligations and unavailable for other purposes; • limiting our liquidity and operational flexibility in changing economic, business and competitive conditions which could require us to consider deferring planned capital expenditures, reducing discretionary spending, selling assets, restructuring existing debt or deferring acquisitions or other strategic opportunities; • making us more vulnerable to an increase in interest rates, a downturn in our operating performance or a decline in general economic conditions; and • making us more susceptible to changes in credit ratings which could, particularly in the case of a downgrade below investment grade, impact our ability to obtain financing in the future and increase the cost of such financing |
| The failure to comply with the covenants in the agreements governing the terms of our or our subsidiaries’ indebtedness could be an event of default and could accelerate the payment obligations and, in some cases, could affect other obligations with cross-default and cross-acceleration provisions |
| Our Business is Dependent Upon the Performance of Key Employees, On-Air Talent and Program Hosts Our business is dependent upon the performance of certain key employees |
| We employ or independently contract with several on-air personalities and hosts of syndicated radio programs with significant loyal audiences in their respective markets |
| Although we have entered into long-term agreements with some of our executive officers, key on-air talent and program hosts to protect our interests in those relationships, we can give no assurance that all or any of these key employees will remain with us or will retain their audiences |
| Competition for these individuals is intense and many of our key employees are at-will employees who are under no legal obligation to remain with us |
| Our competitors may choose to extend offers to any of these individuals on terms which we may be unwilling to meet |
| In addition, any or all of our key employees may decide to leave for a variety of personal or other reasons beyond our control |
| Furthermore, the popularity and audience loyalty of our key on-air talent and program hosts is highly sensitive to rapidly changing public tastes |
| A loss of such popularity or audience loyalty is beyond our control and could limit our ability to generate revenues |
| Doing Business in Foreign Countries Creates Certain Risks Not Found in Doing Business in the United States Doing business in foreign countries carries with it certain risks that are not found in doing business in the United States |
| The risks of doing business in foreign countries that could result in losses against which we are not insured include: • exposure to local economic conditions; • potential adverse changes in the diplomatic relations of foreign countries with the United States; • hostility from local populations; • the adverse effect of currency exchange controls; • restrictions on the withdrawal of foreign investment and earnings; 20 _________________________________________________________________ [52]Table of Contents • government policies against businesses owned by foreigners; • investment restrictions or requirements; • expropriations of property; • the potential instability of foreign governments; • the risk of insurrections; • risks of renegotiation or modification of existing agreements with governmental authorities; • foreign exchange restrictions; • withholding and other taxes on remittances and other payments by subsidiaries; and • changes in taxation structure |
| Exchange Rates May Cause Future Losses in Our International Operations Because we own assets overseas and derive revenues from our international operations, we may incur currency translation losses due to changes in the values of foreign currencies and in the value of the US dollar |
| We cannot predict the effect of exchange rate fluctuations upon future operating results |
| Extensive Government Regulation May Limit Our Broadcasting Operations The federal government extensively regulates the domestic broadcasting industry, and any changes in the current regulatory scheme could significantly affect us |
| Our broadcasting businesses depend upon maintaining broadcasting licenses issued by the FCC for maximum terms of eight years |
| Renewals of broadcasting licenses can be attained only through the FCC’s grant of appropriate applications |
| Although the FCC rarely denies a renewal application, the FCC could deny future renewal applications resulting in the loss of one or more of our broadcasting licenses |
| The federal communications laws limit the number of broadcasting properties we may own in a particular area |
| While the Telecommunications Act of 1996 relaxed the FCC’s multiple ownership limits, any subsequent modifications that tighten those limits could make it impossible for us to complete potential acquisitions or require us to divest stations we have already acquired |
| Most significantly, in June 2003 the FCC adopted a decision comprehensively modifying its media ownership rules |
| The modified rules significantly changed the FCC’s regulations governing radio ownership, allowed increased ownership of TV stations at the local and national level, and permitted additional cross-ownership of daily newspapers, television stations and radio stations |
| Soon after their adoption, however, a federal court issued a stay preventing the implementation of the modified media ownership rules while it considered appeals of the rules by numerous parties (including us) |
| In a June 2004 decision, the court upheld the modified rules in certain respects, remanded them to the FCC for further justification in other respects, and left in place the stay on their implementation |
| In September 2004, the court partially lifted its stay on the modified radio ownership rules, putting into effect aspects of those rules that established a new methodology for defining local radio markets and counting stations within those markets, limit our ability to transfer intact combinations of stations that do not comply with the new rules, and require us to terminate within two years (ie, by September 2006) certain of our agreements whereby we provide programming to or sell advertising on radio stations we do not own |
| The modified media ownership rules are subject to various further FCC and court proceedings and recent and possible future actions by Congress |
| We cannot predict the ultimate outcome of the media ownership proceeding or its effect on our ability to acquire broadcast stations in the future, to complete acquisitions that we have agreed to make, to continue to own and freely transfer groups of stations that we have already acquired, or to continue our existing agreements to provide programming to or sell advertising on stations we do not own |
| Moreover, the FCC’s existing rules in some cases permit a company to own fewer radio stations than allowed by the Telecommunications Act of 1996 in markets or geographical areas where the company also owns television stations |
| These rules could require us to divest radio stations we currently own in markets or areas where we also own television stations |
| Our acquisition of television stations in five local markets or areas in our merger with The Ackerley Group resulted in our owning more radio stations in these markets or areas than is permitted by these rules |
| The FCC has given us a temporary period of time to divest the necessary radio and/or television stations to come into compliance with the rules |
| We have completed such divestiture with respect to one such market and have requested an extension of time to complete such divestiture with respect to the other four markets |
| Other changes in governmental regulations and policies may have a material impact on us |
| For example, we currently provide programming to several television stations we do not own |
| These programming arrangements are made through contracts known as local marketing agreements |
| The FCC’s rules and policies regarding television local marketing agreements will restrict our ability to enter into television local marketing agreements in the future, and may eventually require us to terminate our programming arrangements under existing local marketing agreements |
| Moreover, the FCC has begun a proceeding to adopt rules that will restrict our ability to enter into television joint sales agreements, by which we sell advertising on television stations we do not own, and may eventually require us to terminate our existing agreements of this nature |
| Additionally, the FCC has adopted rules which under certain circumstances subject 21 _________________________________________________________________ [53]Table of Contents previously nonattributable debt and equity interests in communications media to the FCC’s multiple ownership restrictions |
| These rules may limit our ability to expand our media holdings |
| We May Be Adversely Affected By New Statutes Dealing With Indecency Congress currently has under consideration legislation that addresses the FCC’s enforcement of its rules concerning the broadcast of obscene, indecent, or profane material |
| Potential changes to enhance the FCC’s authority in this area include the ability to impose substantially higher monetary penalties, consider violations to be “serious” offenses in the context of license renewal applications, and, under certain circumstances, designate a license for hearing to determine whether such license should be revoked |
| In the event that this or similar legislation is ultimately enacted into law, we could face increased costs in the form of fines and a greater risk that we could lose one or more of our broadcasting licenses |
| Antitrust Regulations May Limit Future Acquisitions Additional acquisitions by us of radio and television stations and outdoor advertising properties may require antitrust review by federal antitrust agencies and may require review by foreign antitrust agencies under the antitrust laws of foreign jurisdictions |
| We can give no assurances that the Department of Justice (“DOJ”) or the Federal Trade Commission or foreign antitrust agencies will not seek to bar us from acquiring additional radio or television stations or outdoor advertising properties in any market where we already have a significant position |
| Following passage of the Telecommunications Act of 1996, the DOJ has become more aggressive in reviewing proposed acquisitions of radio stations, particularly in instances where the proposed acquiror already owns one or more radio station properties in a particular market and seeks to acquire another radio station in the same market |
| The DOJ has, in some cases, obtained consent decrees requiring radio station divestitures in a particular market based on allegations that acquisitions would lead to unacceptable concentration levels |
| The DOJ also actively reviews proposed acquisitions of outdoor advertising properties |
| In addition, the antitrust laws of foreign jurisdictions will apply if we acquire international broadcasting properties |
| Environmental, Health, Safety and Land Use Laws and Regulations May Limit or Restrict Some of Our Operations As the owner or operator of various real properties and facilities, especially in our outdoor advertising operations, we must comply with various foreign, federal, state and local environmental, health, safety and land use laws and regulations |
| We and our properties are subject to such laws and regulations relating to the use, storage, disposal, emission and release of hazardous and non-hazardous substances and employee health and safety as well as zoning restrictions |
| Historically, we have not incurred significant expenditures to comply with these laws |
| However, additional laws, which may be passed in the future, or a finding of a violation of or liability under existing laws, could require us to make significant expenditures and otherwise limit or restrict some of our operations |
| Government regulation of outdoor advertising may restrict our outdoor advertising operations Changes in laws and regulations affecting outdoor advertising at any level of government, including laws of the foreign jurisdictions in which we operate, could have a significant financial impact on us by requiring us to make significant expenditures or otherwise limiting or restricting some of our operations |
| US federal, state and local regulations have had an impact on the outdoor advertising industry |
| One of the seminal laws was The Highway Beautification Act of 1965 (HBA), which regulates outdoor advertising on the 306cmam000 miles of Federal-Aid Primary, Interstate and National Highway Systems roads |
| HBA regulates the locations of billboards, mandates a state compliance program, requires the development of state standards, promotes the expeditious removal of illegal signs, and requires just compensation for takings |
| Size, spacing and lighting are regulated by state and local municipalities |
| From time to time, certain state and local governments and third parties have attempted to force the removal of displays not governed by the HBA under various state and local laws, including amortization |
| Amortization permits the display owner to operate its display which does not meet current code requirements for a specified period of time, after which it must remove or otherwise conform its display to the applicable regulations at its own cost without any compensation |
| Several municipalities within our existing markets have adopted amortization ordinances |
| Other regulations limit our ability to rebuild or replace nonconforming displays and require us to remove or modify displays that are not in strict compliance with applicable laws |
| In addition, from time to time third parties or local governments assert that we own or operate displays that either are not properly permitted or otherwise are not in strict compliance with applicable law |
| Such regulations and allegations have not had a material impact on our results of operations to date, but if we are increasingly unable to resolve such allegations or obtain acceptable arrangements in circumstances in which our displays are subject to removal, modification or amortization, or if there occurs an increase in such regulations or their enforcement, our results could suffer |
| 22 _________________________________________________________________ [54]Table of Contents Legislation has from time to time been introduced in state and local jurisdictions attempting to impose taxes on revenues of outdoor advertising companies |
| Several jurisdictions have already imposed such taxes as a percentage of our gross receipts of outdoor advertising revenues in that jurisdiction |
| While these taxes have not had a material impact on our business and financial results to date, we expect states to continue to try to impose such taxes as a way of increasing revenues |
| The increased imposition of these taxes and our inability to pass on the cost of these taxes to our clients could negatively affect our operating income |
| In addition, we are unable to predict what additional regulations may be imposed on outdoor advertising in the future |
| Legislation that would regulate the content of billboard advertisements and implement additional billboard restrictions has been introduced in Congress from time to time in the past |
| International regulation of the outdoor advertising industry varies by region and country, but generally limits the size, placement, nature and density of out-of-home displays |
| Significant international regulations include the Law of December 29, 1979 in France, the Town and Country Planning (Control of Advertisements) Regulations 1992 in the United Kingdom, and Règlement Regional Urbain de l’agglomeration bruxelloise in Belgium |
| These laws define issues such as the extent to which advertisements can be erected in rural areas, the hours during which illuminated signs may be lit and whether the consent of local authorities is required to place a sign in certain communities |
| Other regulations limit the subject matter and language of out-of-home displays |
| For instance, the United States and most European Union countries, among other nations, have banned outdoor advertisements for tobacco products |
| Our failure to comply with these or any future international regulations could have an adverse impact on the effectiveness of our displays or their attractiveness to clients as an advertising medium and may require us to make significant expenditures to ensure compliance |
| As a result, we may experience a significant impact on our operations, revenues, international client base and overall financial condition |
| Additional restrictions on outdoor advertising of tobacco, alcohol and other products may further restrict the categories of clients that can advertise using our products Out-of-court settlements between the major US tobacco companies and all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and four other US territories include a ban on the outdoor advertising of tobacco products |
| Other products and services may be targeted in the future, including alcohol products |
| Legislation regulating tobacco and alcohol advertising has also been introduced in a number of European countries in which we conduct business and could have a similar impact |
| Any significant reduction in alcohol-related advertising due to content-related restrictions could cause a reduction in our direct revenues from such advertisements and an increase in the available space on the existing inventory of billboards in the outdoor advertising industry |
| Future Acquisitions Could Pose Risks We may acquire media-related assets and other assets or businesses that we believe will assist our customers in marketing their products and services |
| Our acquisition strategy involves numerous risks, including: • certain of our acquisitions may prove unprofitable and fail to generate anticipated cash flows; • to successfully manage our large portfolio of broadcasting, outdoor advertising and other properties, we may need to: Ø recruit additional senior management as we cannot be assured that senior management of acquired companies will continue to work for us and, in this highly competitive labor market, we cannot be certain that any of our recruiting efforts will succeed, and Ø expand corporate infrastructure to facilitate the integration of our operations with those of acquired properties, because failure to do so may cause us to lose the benefits of any expansion that we decide to undertake by leading to disruptions in our ongoing businesses or by distracting our management; • entry into markets and geographic areas where we have limited or no experience; • we may encounter difficulties in the integration of operations and systems; • our management’s attention may be diverted from other business concerns; and • we may lose key employees of acquired companies or stations |
| We frequently evaluate strategic opportunities both within and outside our existing lines of business |
| We expect from time to time to pursue additional acquisitions and may decide to dispose of certain businesses |
| These acquisitions or dispositions could be material |
| 23 _________________________________________________________________ [55]Table of Contents Capital Requirements Necessary to Implement Strategic Initiatives Could Pose Risks The purchase price of possible acquisitions, share repurchases, special dividends and/or other strategic initiatives could require additional debt or equity financing on our part |
| Since the terms and availability of this financing depend to a large degree upon general economic conditions and third parties over which we have no control, we can give no assurance that we will obtain the needed financing or that we will obtain such financing on attractive terms |
| In addition, our ability to obtain financing depends on a number of other factors, many of which are also beyond our control, such as interest rates and national and local business conditions |
| If the cost of obtaining needed financing is too high or the terms of such financing are otherwise unacceptable in relation to the strategic opportunity we are presented with, we may decide to forego that opportunity |
| Additional indebtedness could increase our leverage and make us more vulnerable to economic downturns and may limit our ability to withstand competitive pressures |
| Additional equity financing could result in dilution to our shareholders |
| We Face Intense Competition in the Broadcasting and Outdoor Advertising Industries Our business segments are in highly competitive industries, and we may not be able to maintain or increase our current audience ratings and advertising and sales revenues |
| Our radio stations and outdoor advertising properties compete for audiences and advertising revenues with other radio stations and outdoor advertising companies, as well as with other media, such as newspapers, magazines, television, direct mail, satellite radio and Internet based media, within their respective markets |
| Audience ratings and market shares are subject to change, which could have the effect of reducing our revenues in that market |
| Our competitors may develop services or advertising media that are equal or superior to those we provide or that achieve greater market acceptance and brand recognition than we achieve |
| It is possible that new competitors may emerge and rapidly acquire significant market share in any of our business segments |
| Other variables that could adversely affect our financial performance by, among other things, leading to decreases in overall revenues, the numbers of advertising customers, advertising fees, or profit margins include: • unfavorable economic conditions, both general and relative to the radio broadcasting, outdoor advertising and all related media industries, which may cause companies to reduce their expenditures on advertising; • unfavorable shifts in population and other demographics which may cause us to lose advertising customers as people migrate to markets where we have a smaller presence, or which may cause advertisers to be willing to pay less in advertising fees if the general population shifts into a less desirable age or geographical demographic from an advertising perspective; • an increased level of competition for advertising dollars, which may lead to lower advertising rates as we attempt to retain customers or which may cause us to lose customers to our competitors who offer lower rates that we are unable or unwilling to match; • unfavorable fluctuations in operating costs which we may be unwilling or unable to pass through to our customers; • technological changes and innovations that we are unable to adopt or are late in adopting that offer more attractive advertising, listening or viewing alternatives than what we currently offer, which may lead to a loss of advertising customers or to lower advertising rates; • unfavorable changes in labor conditions which may require us to spend more to retain and attract key employees; and • changes in governmental regulations and policies and actions of federal regulatory bodies which could restrict the advertising media which we employ or restrict some or all of our customers that operate in regulated areas from using certain advertising media, or from advertising at all |
| New Technologies May Affect Our Broadcasting Operations Our broadcasting businesses face increasing competition from new broadcast technologies, such as broadband wireless and satellite television and radio, and new consumer products, such as portable digital audio players and personal digital video recorders |
| These new technologies and alternative media platforms compete with our radio and television stations for audience share and advertising revenue, and in the case of some products, allow listeners and viewers to avoid traditional commercial advertisements |
| The FCC has also approved new technologies for use in the radio broadcasting industry, including the terrestrial delivery of digital audio broadcasting, which significantly enhances the sound quality of radio broadcasts |
| In the television broadcasting industry, the FCC has established standards and a timetable for the implementation of digital television broadcasting in the US We are unable to predict the effect such technologies and related services and products will have on our broadcasting operations, but the capital expenditures necessary to implement such technologies could be substantial and other companies employing such technologies could compete with our businesses |
| 24 _________________________________________________________________ [56]Table of Contents We May be Adversely Affected by a General Deterioration in Economic Conditions The risks associated with our businesses become more acute in periods of a slowing economy or recession, which may be accompanied by a decrease in advertising |
| A decline in the level of business activity of our advertisers could have an adverse effect on our revenues and profit margins |
| During the most recent economic slowdown in the United States, many advertisers reduced their advertising expenditures |
| The impact of slowdowns on our business is difficult to predict, but they may result in reductions in purchases of advertising |
| We May Be Adversely Affected by the Occurrence of Extraordinary Events, Such as Terrorist Attacks The occurrence of extraordinary events, such as terrorist attacks, intentional or unintentional mass casualty incidents or similar events may substantially decrease the use of and demand for advertising, which may decrease our revenues or expose us to substantial liability |
| The September 11, 2001 terrorist attacks, for example, caused a nationwide disruption of commercial activities |
| As a result of the expanded news coverage following the attacks and subsequent military actions, we experienced a loss in advertising revenues and increased incremental operating expenses |
| The occurrence of future terrorist attacks, military actions by the United States, contagious disease outbreaks or similar events cannot be predicted, and their occurrence can be expected to further negatively affect the economies of the United States and other foreign countries where we do business generally, specifically the market for advertising |
| Caution Concerning Forward Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf |
| Except for the historical information, this report contains various forward-looking statements which represent our expectations or beliefs concerning future events, including the future levels of cash flow from operations |
| Management believes that all statements that express expectations and projections with respect to future matters, including the success of our strategic realignment of our businesses and our Less is More initiative; our ability to negotiate contracts having more favorable terms; and the availability of capital resources; are forward-looking statements within the meaning of the Private Securities Litigation Reform Act |
| We caution that these forward-looking statements involve a number of risks and uncertainties and are subject to many variables which could impact our financial performance |
| These statements are made on the basis of management’s views and assumptions, as of the time the statements are made, regarding future events and business performance |
| There can be no assurance, however, that management’s expectations will necessarily come to pass |
| A wide range of factors could materially affect future developments and performance, including: • the impact of general economic and political conditions in the US and in other countries in which we currently do business, including those resulting from recessions, political events and acts or threats of terrorism or military conflicts; • the impact of the geopolitical environment; • our ability to integrate the operations of recently acquired companies; • shifts in population and other demographics; • industry conditions, including competition; • fluctuations in operating costs; • technological changes and innovations; • changes in labor conditions; • fluctuations in exchange rates and currency values; • capital expenditure requirements; • the outcome of pending and future litigation settlements; • legislative or regulatory requirements; • interest rates; • the effect of leverage on our financial position and earnings; • taxes; • access to capital markets; and • certain other factors set forth in our filings with the Securities and Exchange Commission |
| This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative, but by no means exhaustive |
| Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty |