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The following is an excerpt from a S-1 SEC Filing, filed by CKX, INC. on 4/11/2005.
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CKX, INC. - S-1 - 20050411 - MANAGEMENTS_DISCUSSION


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis of the financial condition and results of operations should be read in conjunction with "Selected Historical Financial Data" and our company's financial statements and related notes thereto appearing elsewhere in this prospectus. The following discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from management's expectations. Factors that could cause such differences include those set forth under "Risk Factors," "Special Note Regarding Forward-Looking Statements," "Business" and elsewhere in this prospectus.

        On February 7, 2005, a management group led by Robert F.X. Sillerman acquired control of our company, which had been inactive since it sold all of its assets in August 2002. Simultaneous with that transaction, the company acquired a controlling interest in the entities which own and/or control certain content relating to Elvis Presley. Subsequently, we acquired 19 Entertainment Limited.

        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, which are included in "Certain Information Relating to Our Company Prior To Recent Transactions" elsewhere in this prospectus.

        We acquired our 85% interest in the Presley business on February 7, 2005. The historical financial statements of the Presley business and related management's discussion and analysis of financial condition and results of operations reflects 100% of the Presley business. The former owner of this business maintains a 15% ownership interest in the business, is entitled to certain future distributions and has other contractual rights which are described further below and elsewhere in this prospectus. The Presley business discussion is based on the results of operations for the years ended December 31, 2002, 2003 and 2004.

        On March 17, 2005, we acquired 100% of the outstanding capital stock of 19 Entertainment. Given the significance of 19 Entertainment's operations on a stand alone basis, as well as when compared to the Presley business, we believe it is useful to provide certain information regarding its results of operations for its fiscal years ended June 30, 2003 and 2004.

        As a result of these acquisitions, we have made changes to the historical capital and financial structure of our company, which is noted below under "Pro Forma Liquidity and Capital Resources." We are required to apply purchase accounting rules to the acquisitions of the Presley business and 19 Entertainment. Therefore, management's discussion and analysis of historical financial condition and results of operations may not be indicative of future operating results.

        Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the historical financial statements and footnotes thereto for the Presley business and 19 Entertainment, included in this prospectus.

        Our future financial condition and results of operations may change materially from the historical financial condition and results of operations reflected in the historical financial statements of the Presley business, 19 Entertainment and our company. Accordingly, management's discussion and analysis of financial condition and results of operations should also be read in conjunction with our unaudited pro forma condensed combined financial statements included elsewhere in this prospectus.

    Critical Accounting Policies

        The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America (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 expenses during the reporting period. On an ongoing basis, we evaluate our estimates based on

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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 expenses that are not readily available from other sources. Actual results may differ from these estimates under different assumptions. The following accounting policies require significant management judgments and estimates.

    Revenue Recognition

        Merchandising/Name and Likeness Licensing Revenues:

        A portion of our revenue is derived from licensing rights to third parties to sell merchandise based on our intellectual property, including the name, image and likeness of Elvis Presley and related marks. Revenue from these activities is recognized when all of the following conditions are met: (i) pervasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the price to the licensee or buyer is fixed or determinable; and (iv) collectibility is reasonably assured. Licensing advances are deferred until earned under the licensing agreement. Licensing contracts normally provide for quarterly reporting from the licensee of sales made and royalties due. Guaranteed minimum royalties are recognized ratably over the term of the license or are based on sales of the related products, if greater.

        Royalty Income:

        Income from music and film contracts are derived from the sale of records and DVDs or from the licensing of film/music rights to third parties. Revenue from recordings are recognized in accordance with Statement of Financial Accounting Standards ("SFAS") 50, Financial Reporting in the Record and Music Industry ("SFAS 50"). Under SFAS 50, revenue is recognized when we: (i) have signed a non-cancelable contract; (ii) have delivered the rights to the licensee who is free to exercise them; (iii) have no remaining significant obligations to furnish music or records; and (iv) when collectibility of the full fee is reasonably assured. A significant portion of our royalty income is paid to us based on the timetable associated with royalty statements generated by third party processors, and is not typically known by us on a timely basis. This revenue is consequently recognized on a cash basis if the amount of accrual is not known or reasonably estimable until receipt of the statements from the third parties. We contract with various agencies to facilitate collection of royalty income. When the company is entitled to royalties based on gross receipts, revenue is recognized before deduction of agency fees, which are included in our financial statements as a component of cost of sales.

        Television and Film Revenue:

        We recognize revenues for television and film productions pursuant to American Institute of Certified Public Accountants Statement of Position 00-2, Accounting by Producers or Distributors of Films ("SOP 00-2"). The following conditions must be met in order to recognize revenue under SOP 00-2: (i) persuasive evidence of a sale or licensing arrangement exists; (ii) the program is complete and has been delivered or is available for immediate and unconditional delivery; (iii) the license period of the arrangement has begun and the customer can begin its exploitation, exhibition or sale; (iv) the arrangement fee is fixed or determinable; and (v) collection of the arrangement fee is reasonably assured. Advance payments received from buyers or licensees are included in our financial statements as a component of deferred revenue.

        Sponsorship Revenue:

        We derive revenue from sponsorships associated with certain of our television productions and tours. Sponsorship fees relate to either (i) a one time event, or (ii) a period of time. Revenues from a one time event are recognized once: (i) pervasive evidence of an arrangement exists; (ii) the event has occurred; (iii) the price is fixed or determinable; and (iv) collectibility is reasonably assured. Non-refundable advance payments associated with sponsorships over a period of time are recognized on a straight line basis over the term of the contract from the later of the point at which: (i) pervasive

48



evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the price is fixed or determinable; and (iv) collectibility is reasonably assured, or, the beginning of the license period. Sponsorship advances are deferred until earned pursuant to the sponsorship agreement.

        Graceland Retail Operations:

        Ticket sales for tours and exhibits, as well as merchandise sales and food and beverage sales are recognized at point of sale. Advance ticket sales are recorded as deferred revenue pending the "event date" on the ticket.

    Television and Film Production Costs

        The cost of producing television and film programs is capitalized and 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 our estimate at the beginning of the current year of total revenues to be realized from all media and markets for such programming. Amortization commences in the period in which revenue recognition commences. Management regularly reviews and revises its total revenue estimates for each project, which may result in modifications to the rate of amortization. If a net loss is projected for a particular project, the related capitalized costs are written down to estimated realizable value.

        We also account for our film and television projects in development pursuant to SOP 00-2. Third party costs incurred in producing television programs and films are capitalized and remain unamortized until the project is developed or are written off at the earlier of the date they are determined not to be recoverable, when abandoned, or, three years from the date of the initial investment.

    Artist Advances and Recoupable Recording Costs

        Recoupable recording costs and artist advances, as adjusted for anticipated returns, are recognized in accordance with SFAS No. 50, "Financial Reporting in the Record and Music Industry" 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 if the 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. 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.

    Uses of Estimates

        The preparation of financial statements in conformity with US GAAP 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 revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

PRESLEY BUSINESS

        Our Presley business consists of generating revenue from the name, image and likeness of Elvis Presley and certain personal property items owned and intellectual property created or acquired by Elvis during his life. Our primary revenue sources include income from licensing Elvis' name and likeness for consumer products, commercials and other uses, royalties and other income derived from intellectual property created or otherwise owned by Elvis including records, movies, videos and music publishing, and ticket sales and related income from public tours of Graceland. We also derive revenue from the operation of Elvis Presley's Heartbreak Hotel and the Meadow Oaks apartment complex.

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Most of our revenue sources are dependent upon the public's continued interest in Elvis and all related intellectual property.

        Licensing revenue is primarily derived from long-term contracts with terms ranging from two to ten years. Although we seek minimum guaranteed royalties, our licensing revenue varies based on the actual product sales generated by licensees.

        Certain intellectual property created by Elvis Presley during his lifetime, which we own, has generally been assigned to third parties for commercial exploitation under long-term agreements. Although we maintain certain controls over the use of this content and, in certain cases, have rights to terminate these agreements if the third party fails to perform, our revenue from this intellectual property is highly dependent upon these third parties' ability to successfully market the content.

        Revenue from tours of Graceland has historically been seasonal, with sharply higher numbers of visitors during the late spring and summer months as compared to the fall and winter seasons.

        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 attendance and revenue. Our discretionary costs are generally incurred by our marketing and promotions department in seeking to maintain and/or increase the number of visitors to Graceland.

        Operating results for the Presley business for each of the three years ended December 31, 2004 are as follows:

(dollars in thousands)

  2002
  % of
Revenue

  2003
  % of
Revenue

  2004
  % of
Revenue

Revenues   $ 43,644       $ 44,376       $ 41,658    
Operating expenses     30,896   71%     32,359   73%     30,566   73%
Depreciation expense     1,123   3%     1,227   3%     1,201   3%
Operating income     11,625   26%     10,790   24%     9,891   24%
Interest expense     1,623   4%     1,362   3%     1,327   3%
Loss from discontinued operations     720   2%     3,378   8%     247   1%
Income tax expense     1,863   4%     813   2%     833   2%
Net income     7,475   17%     5,328   12%     7,493   18%

        Revenues for the Presley business for each of the three years ended December 31, 2004 by category are as follows:

(dollars in thousands)

  2002
  % of
Total
Revenue

  2003
  % of
Total
Revenue

  2004
  % of
Total
Revenue

 
Licensing Fees and Royalties   $ 12,575   29 % $ 12,862   29 % $ 13,506   32 %
Tour and Exhibit     10,297   24 %   10,699   24 %   11,129   27 %
Graceland Retail     15,188   35 %   15,088   34 %   11,133   27 %
Hotel Room Revenues     3,169   7 %   3,318   8 %   3,294   8 %
Apartment Rent and Other     2,415   5 %   2,409   5 %   2,596   6 %
   
 
 
 
 
 
 
Total Revenue   $ 43,644   100 % $ 44,376   100 % $ 41,658   100 %
   
 
 
 
 
 
 

        Licensing fees and royalties revenue comprises income from licensing Elvis Presley's name, image and likeness and royalties and other income derived from certain intellectual property created or otherwise owned by Elvis Presley. Tour and exhibit revenue comprises ticket sales from public tours of Graceland. Graceland retail represents revenues derived from the Graceland and Heartbreak Hotel gift shops and food concessions; mail order merchandise income and income generated from the sale of merchandise from certain Elvis related touring shows. Hotel room revenues relate to room rental income at the Heartbreak Hotel, while apartment rent and other revenue includes rental and miscellaneous income from the Meadow Oaks Apartments (located adjacent to Graceland) and

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Graceland parking fees. Cost of sales represents the cost of merchandise and other products sold within the Graceland Retail businesses. Operating expenses are all other costs of the Presley business, including salaries and benefits, rents, professional fees and general overhead costs.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Revenues

        Licensing fees and royalties increased $0.6 million, or 5.0%, from $12.9 million in 2003 to $13.5 million in 2004, largely due to new licensing activities, including a new license agreement with Sirius Satellite Radio for an exclusively Elvis radio channel and additional licensing agreements in the electronics and collectibles categories.

        Tour and exhibit revenues increased by $0.4 million, or 4.0%, from $10.7 million in 2003 to $11.1 million in 2004. This increase resulted primarily from a 6.5% increase in average ticket prices which was partially offset by a 2.5% decline in mansion attendance. Attendance was approximately 567,000 in 2004 compared to approximately 582,000 in 2003.

        Revenue from Graceland's retail operations decreased by $4.0 million, or 26.2%, from $15.1 million in 2003 to $11.1 million in 2004. $2.4 million of this variance reflects a change in the operation of the mail order retail business. On April 1, 2004 we outsourced the operation of that segment of the business and now receive commissions based on net sales, and do not bear any business risk for sales and related expenses. Graceland gift shop revenue declined approximately $0.7 million, reflecting the 2.5% decline in attendance and a 7% decline in per capita spending due, in part, to stronger sales in 2003 from the carryover benefit of the 25 th Commemoration of the death of Elvis Presley. Also, there were no touring shows in 2004, whereas sales of merchandise at touring shows contributed $0.6 million to merchandise revenues in 2003.

        Hotel room revenues were flat in 2004 at $3.3 million as the average annual occupancy rate remained at approximately 80% and there was no material change in the average room rate.

        Apartment rent and other revenues increased by $0.2 million, or 7.8%, from $2.4 million in 2003 to $2.6 million in 2004. Apartment rent increased $0.1 million due to higher rental rates as occupancy remained flat compared to 2003.

Operating Expenses

        Cost of sales declined by $0.8 million or 11.0%, from $7.4 million in 2003 to $6.6 million in 2004, due to the outsourcing of the mail order business described above. Cost of sales as a percentage of Graceland retail revenue was 59.5% in 2004 compared to 49.3% in 2003, due to reduced margins on the sale of some merchandise close-outs and the absence of touring shows in 2004.

        Other operating expenses decreased by $1.0 million, or 3.9%, from $24.9 million in 2003 to $23.9 million in 2004, due to reduced fulfillment and distribution expenses resulting from the outsourcing of the retail mail order business, partially offset by higher salaries and benefit costs due to annual salary increases and additional staff.

Depreciation Expense

        Depreciation expense remained constant at $1.2 million with 2003 as there were no significant capital expenditure projects in 2004.

Interest Expense

        Interest expense was flat in 2004 due to reduced average borrowings under a line of credit and notes payable, which was partially offset by higher variable rates. All debt outstanding at December 31, 2004 was subsequently repaid in connection with the acquisition of the Presley business.

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Income Tax Expense

        Income tax expense increased slightly despite the reduction in pre-tax earnings, reflecting a higher effective tax rate due to a decrease in the amount of non-taxable trust income. Certain intellectual property was previously held and related royalty income was received by The Promenade Trust, a grantor trust for the benefit of Lisa Marie Presley. Trust income was directly taxable to the beneficiary upon distribution and, therefore, the Presley business did not pay taxes on this income.

Loss From Discontinued Operations

        An additional after-tax provision of $0.2 million was recorded in 2004 related to the prior year shutdown of an Elvis-themed restaurant in downtown Memphis. This provision covers an expected additional twelve months of rent and related expenses as we continue to actively seek to sublease the property.

Net income

        Net income increased from $5.3 million in 2003 to $7.5 million in 2004 due to the decreased loss from discontinued operations, partially offset by reduced operating income.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenues

        Licensing fees and royalties increased by $0.3 million, or 2.2%, from $12.6 million in 2002 to $12.9 million in 2003 as a result of revenue earned in connection with the 25 th Commemoration of Elvis' death in August 2002. Such revenues were largely earned in 2003, including from the release of a highly successful new album containing the thirty number one singles Elvis achieved on U.S. and U.K. charts during his career.

        Tour and exhibit revenues increased $0.4 million, or 3.9%, from $10.3 million in 2002 to $10.7 million in 2003, reflecting a 1% increase in attendance and a modest increase in average ticket prices. Attendance was approximately 582,000 in 2003 compared to approximately 575,000 in 2002.

        Revenues from the Graceland retail operations declined by $0.1 million, or 0.7%, from $15.2 million in 2002 to $15.1 million in 2003, as average per patron spending dropped modestly from 2002 which had benefited from activities and promotions in connection with the 25 th Commemoration of the death of Elvis Presley.

        Hotel room revenues increased by $0.1 million, or 4.7%, reflecting higher occupancy rates of approximately 80% in 2003 compared to 74% in 2002 which was partially offset by lower average daily room rates.

Operating Expenses

        Cost of sales increased by $0.3 million, or 4.5%, reflecting programs designed to aggressively sell remaining 25 th Commemoration merchandise. Cost of sales as a percentage of Graceland retail revenue was 49.3% in 2003 compared to 46.9% in 2002.

        Other operating expenses increased by $1.1 million, or 4.8%, in 2003 compared to 2002 due, in part, to increased salary and benefits of $0.4 million. Professional fees increased $0.3 million in 2003 reflecting increased legal fees associated with new licensing projects. Other expenses increased by $0.7 million due primarily to increased costs associated with maintaining the Elvis.com website and additional costs associated with attending licensing conventions. These increases were partially offset by a decline in insurance expense in 2003, largely due to a reduction in higher 2002 insurance premiums following the September 11 th terrorist attacks.

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Depreciation Expense

        Depreciation expense increased by $0.1 million, or 9.3%, in 2003 compared to 2002 primarily as a result of renovations completed at the Heartbreak Hotel in early 2003.

Interest Expense

        Interest expense decreased by $0.3 million in 2003 compared to 2002 principally due to a refinancing of fixed rate debt to a floating rate loan, which carried a lower interest rate.

Income Tax Expense

        Income tax expense decreased by $1.0 million due to a lower effective tax rate principally reflecting an increase in the amount of non-taxable trust income.

Loss from Discontinued Operations

        Loss from discontinued operations was $0.7 million in both 2003 and 2002 due to losses from an Elvis-themed restaurant owned by our company in downtown Memphis. A decision was made to cease operating the restaurant in September of 2003 due to ongoing operating losses in that business, and the restaurant's loss in 2002 was re-classed as discontinued operations to be consistent with the 2003 presentation. We also recorded an impairment loss of $2.7 million after tax in 2003, which included the write-down of furniture and fixtures and an accrual for the estimated future rent, real estate taxes and insurance costs our company expected to incur on the property.

Net Income

        Net income declined to $5.3 million in 2003 from $7.5 million in 2002, reflecting the decline in operating income and the increased loss from discontinued operations.

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 artist 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.

        Most of our IDOLS related revenue is generated through agreements with our global television production and distribution partner, FremantleMedia Limited, and our global record label partner, Ronagold Limited, a subsidiary of Sony BMG Music Entertainment. Therefore, we are highly dependent upon the continued ability of these entities to successfully maintain the IDOLS brand and promote our recording artists.

        The IDOLS television shows, which have aired in over 30 countries, 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 Music Entertainment have the right, but not the obligation, to require the artist to release a specified number of albums.

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        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. For the year ended June 30, 2004, 52% of 19 Entertainment's total revenue was derived from television, sponsorship, merchandise sales and tours relating to the American Idol series and an additional 12% of 19 Entertainment's total revenue was derived from recording artists whose relationship with our company is a result of their appearing as a finalist on American Idol. Our revenue is also dependent upon the continued success and productivity of our other recording artists and management clients.

        19 Entertainment's revenue is seasonal in nature, reflecting the timing of our IDOLS television shows in various markets. Historically, we have generated higher revenue during the first half of the calendar year, which corresponds to the dates our American Idol series airs on the Fox television network in the United States. A significant portion of our revenue from American Idol is paid to us in the second half of the calendar year.

        Our significant costs to operate 19 Entertainment include salaries and other compensation, rents and general overhead costs. Our discretionary costs include salary and overhead costs incurred in the development of new television projects and investments made in trying to establish successful recording careers for artists who have appeared as finalists on the IDOLS television series.

        19 Entertainment's historical audited and unaudited financial statements included elsewhere in this prospectus have been prepared in accordance with UK GAAP. Significant differences exist between UK GAAP and US GAAP, as described within the notes to these consolidated financial statements of 19 Entertainment. As well, certain assumptions and estimates have been made by management to convert 19 Entertainment financial statements from U.K. pounds sterling, its historical reporting currency, to the U.S. dollar. Prior to the acquisition of 19 Entertainment, its historical fiscal year end was June 30. The following discussion is based on 19 Entertainment's historical results for its years ended June 30, 2004 and 2003. All amounts discussed below have been converted to US GAAP and are reflected in U.S. dollars.

        Operating results for the fiscal years ended June 30, 2003 and 2004 are as follows:

(dollars in thousands)

  2003
  % of
Revenue

  2004
  % of
Revenue

 
Revenues   $ 84,816       $ 77,272      
Operating expenses     71,712   85 %   65,334   85 %
Depreciation and amortization     395   0 %   461   1 %
Operating income     12,709   15 %   11,477   15 %
Interest expense (income)     6   0 %   (64 ) 0 %
Income tax expense     4,051   5 %   3,989   5 %
Net income     8,652   10 %   7,552   10 %

        Revenues for 19 Entertainment for the fiscal year ended June 30, 2004 compared to the fiscal year ended June 30, 2003 by category are as follows:

(dollars in thousands)

  2003
  % of
Total
Revenue

  2004
  % of
Total
Revenue

 
Film and Television   $ 48,479   57 % $ 23,547   30 %
Music     14,571   17 %   20,916   27 %
Touring     10,436   12 %   15,514   20 %
Sponsorship and Merchandising     9,019   11 %   13,496   18 %
Management     2,311   3 %   3,799   5 %
   
 
 
 
 
Total   $ 84,816   100 % $ 77,272   100 %
   
 
 
 
 

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Fiscal Year Ended June 30, 2004 Compared to Fiscal Year Ended June 30, 2003

Revenues

        Film and television revenues are largely derived from the IDOLS franchise and represent contractual payments for each broadcast, ratings-based bonuses and a share of American Idol program sponsorship fees. Film and television revenues also includes revenue from feature films produced by 19 Entertainment featuring certain of our artists. Music revenues are earned primarily from royalties on music sales as well as music publishing royalties on copyrights to music compositions. Touring revenues primarily result from the production of tours featuring IDOLS finalists. Sponsorship and merchandising revenues are fees earned from crafting relationships with leading brands and 19 Entertainment properties and the optioning of merchandising rights for the top contestants on IDOLS television shows. Management revenues represent fees earned for artist management, which are typically a percentage of the artists' earnings.

        Revenues declined $7.5 million, or 9.8%, from $84.8 million in fiscal 2003 to $77.3 million in fiscal 2004.

        The decline in Film and television revenues of $24.9 million, or 51.4%, resulted largely from the production in fiscal 2003 of the movie From Justin to Kelly featuring Kelly Clarkson and Justin Guarini (from the first series of American Idol), the distribution of the All American Girl television series in the U.S. and the U.K. and the release of the feature film Double Vision , which featured S Club 7. These projects generated $32 million of revenues in fiscal 2003. Revenues from television shows based on the IDOLS format increased by $5 million in fiscal 2004, primarily due to the incremental contribution from the third series of American Idol compared to the second series due to an increase in broadcast hours and higher ratings. Revenues in fiscal 2004 also benefited from new television productions such as I Dream and an On the Road documentary filmed during the American Idol tour.

        Music revenues increased $6.3 million, or 43.5%, primarily due to the success of several artists, including Kelly Clarkson and Clay Aiken, who each sold in excess of two million albums and Will Young, who sold 1.5 million albums. Also contributing to the revenue increase was the release of IDOLS compilation albums, particularly in the United States and Germany.

        Touring revenues increased by $5.1 million, or 48.7%, due to a successful American Idol tour in fiscal 2004 which generated approximately $10.0 million of revenue compared to an S Club 7 tour in fiscal 2003 which generated revenue of $4.0 million.

        Sponsorship and merchandising revenues increased by $4.5 million, or 49.6%, as additional revenues were generated primarily from the third series of American Idol and the second Pop Idol series in the United Kingdom. The success of earlier series attracted additional sponsors to the format and favorably impacted sponsorship rates in fiscal 2004. The success of touring noted above also resulted in increased sponsorship revenues and merchandising revenues generated on the tours in fiscal 2004.

        Management revenues increased $1.5 million, or 64.4%, due to revenues of $0.8 million from the highly successful Kelly Clarkson and Clay Aiken joint tour and increased commissions of $0.6 million on other artists.

Operating Expenses

        Operating expenses, which include cost of sales and selling, general and administrative expenses, declined $6.4 million, or 8.9%, from $71.7 million in fiscal 2003 to $65.3 million in fiscal 2004. Excluding the costs of the film From Justin to Kelly of approximately $18.0 million in fiscal 2003, operating expenses increased $11.6 million. $9.6 million of this increase represents costs associated with American Idol, investments in additional headcount, and the opening of offices in Los Angeles, Paris and Hamburg and related operating costs. The remaining increase is largely attributable to artist advances.

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Depreciation and Amortization Expenses

        Depreciation and amortization expense increased $0.1 million, in fiscal 2004 due to leasehold improvements and equipment purchases.

Interest Expense

        Interest expense was flat with the prior year.

Income Tax Expense

        Income tax expense declined $0.1 million compared to the prior fiscal year, reflecting a higher effective tax rate in fiscal 2004 due to income generated in higher tax jurisdictions, primarily in the United States.

CKX, INC.

        The historical Management's Discussion and Analysis of Financial Condition and Results of Operations for CKX, Inc. is located elsewhere in this prospectus.

Liquidity and Capital Resources

Presley Business–Cash Flow

    Operating Activities

        Net cash flow provided from operating activities was $10.8 million in 2004, $9.1 million in 2003, and $9.5 million in 2002. The increase of $1.7 million in 2004 compared to 2003 is due primarily to a reduction in inventory levels of $1.6 million resulting from the outsourcing of the mail order merchandising operation, and higher deferred revenues of $1.2 million associated with advances on Elvis by the Presleys , a television special expected to be broadcast in May 2005, offset by an increase in television production costs of $1.2 million related to that production.

        The reduction in cash flow provided by operating activities of $0.4 million in 2003 compared to 2002 is due to an increase in television production costs of $1.0 million for the Elvis by the Presleys production noted above, a decline in deferred revenue from licensing fees of $1.2 million offset by a decline in accounts receivable of $2.4 million resulting from collections in connection with licensing activities, including activities related to the 25th Commemoration events.

    Investing Activities

        Capital expenditures totaled $0.3 million in 2004, $0.8 million in 2003, and $0.3 million in 2002. These capital expenditures consisted principally of costs incurred to fund improvements to various buildings at our Graceland complex, including the Heartbreak Hotel, and spending on information technology equipment and systems. Renovations to guest rooms at the Heartbreak Hotel accounted for the increased capital expenditures in 2003.

    Financing Activities

        Net cash used in financing activities was $10.6 million in 2004 compared to $8.3 million in 2003 due to an increase in debt principal payments of $1.8 million and reduced line of credit borrowings of $1.2 million, partially offset by a decline in distributions to the trust beneficiary of $0.7 million. In 2003 cash used in financing activities decreased $0.4 million from 2002 due to increased line of credit borrowings of $1.6 million, lower debt principal payments of $2.3 million, offset by an increase in distributions to the trust beneficiary of $3.5 million.

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19 Entertainment–Cash Flow

    Operating Activities

        Net cash used in operating activities in fiscal 2004 was $2.5 million compared to operating income of $11.5 million, a difference of $14.0 million. Excluding the impact of income tax payments of $5.3 million, the major cause of the variance was investment in work in process of approximately $6.0 million due to investments in projects, particularly the I Dream television series which accounted for $4.3 million of the spending. Also contributing to the variance was a decrease in accounts payable from the prior fiscal year of $3.3 million, reflecting payments to vendors and employees from collections early in the fiscal year associated with the second series of American Idol, which aired in fiscal 2003. Partially offsetting these amounts were depreciation and amortization expense of $0.5 million.

        Net cash provided by operating activities in fiscal 2003 was $2.2 million compared to operating income of $12.7 million, a variance of $10.5 million. Reflected in this variance are the gross cash proceeds of $4.9 million related to a sale leaseback transaction to finance the film Double Vision . Approximately $7.0 million of the variance reflects the success of the second series of American Idol, which improved the profitability of the company in fiscal 2003, while some of the collections were received in fiscal 2004. Related to the American Idol series, accounts receivable increased $15.0 million over the prior fiscal year end, largely due to the American Idol series but also from music and touring operations, while accounts payable increased $8.0 million over the prior fiscal year end. There was also a reduction in work in process (included in stocks on the consolidated balance sheet) of $2.0 million. Depreciation and amortization expenses were $0.4 million. The net cash flow was further reduced by tax payments of $1.9 million.

    Investing Activities

        Capital expenditures were $0.6 million in fiscal 2004 compared to $1.2 million in fiscal 2003 primarily due to leasehold improvements on additional office space.

    Financing Activities

        Net cash used in financing activities reflects dividends paid of $5.5 million and $2.1 million in fiscal 2004 and 2003, respectively. A sale leaseback transaction related to the film Double Vision yielded cash of approximately $4.9 million, $4.0 million of which is restricted to payments on the sale leaseback liability.

Pro Forma Consolidated Liquidity and Capital Resources

    Sources of Liquidity

        As a result of our acquisition of an 85% interest in the Presley business and 19 Entertainment, we have made changes to our historical capital and financial structure. The following highlights the most significant changes:

    Acquisition by RFX Acquisition LLC

        RFX Acquisition LLC invested in our company on February 7, 2005, pursuant to a Stock Purchase Agreement dated as of December 15, 2004 and amended as of February 7, 2005. In accordance with the terms of that agreement, RFX Acquisition LLC contributed $3,046,407 in cash to our company in exchange for 30,464,072 newly issued shares of common stock and warrants to purchase (i) 6,828,938 shares of common stock at $1.00 per share, (ii) 6,828,938 shares of common stock at $1.50 per share, and (iii) 6,828,939 shares of common stock at $2.00 per share. Simultaneous with this exchange, RFX Acquisition LLC also acquired an aggregate of 2,240,397 shares of common stock directly from certain former principal stockholders at a price of $0.10 per share. The amendment to the original purchase

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agreement provided for a reduction in the number of shares of common stock and warrants RFX Acquisition LLC had originally agreed to acquire in order to allow for the investment in our company by The Huff Alternative Fund, L.P. and its affiliate and the issuance of shares of our common stock to certain of our directors, without further dilution to our public stockholders. Immediately following the consummation of its investment in our company, RFX Acquisition LLC distributed all of its shares of common stock and its warrants to its members, including our Chief Executive Officer, Mr. Sillerman, and certain members of our company's senior management. In order to provide additional capital to our company, certain recipients of the warrants, including Mr. Sillerman, and other members of our company's senior management, immediately exercised an aggregate of five million of the $1.00 warrants for aggregate consideration to our company of $5,000,000. Upon consummation of the RFX Acquisition investment, the four former directors of our company resigned, and new directors designated by RFX Acquisition were appointed to the board.

    The Presley Contribution and Exchange Agreement

        We acquired our 85% interest in the Presley business on February 7, 2005, pursuant to a Contribution and Exchange Agreement dated December 15, 2004 and amended on February 7, 2005 by and among our company, The Promenade Trust and RFX Acquisition LLC. At the closing of acquisition of the Presley business, The Promenade Trust contributed to our company 85% of the outstanding equity interests of Elvis Presley Enterprises, Inc. and 85% of the outstanding membership interests of Elvis Presley Enterprises, LLC. In exchange, The Promenade Trust received from us, $50,125,000 in cash, 1,491,817 shares of Series B Convertible Preferred Stock and one share of Series C Convertible Preferred Stock valued at $22,825,000, and 500,000 shares of common stock valued at $7.67 per share (which represents the three day average of the closing sales price of our common stock following the public announcement of the acquisition of the Presley business). In addition, at closing, we repaid $25,125,000 of outstanding indebtedness of the Presley business. The Promenade Trust currently owns 15% of the outstanding equity interests of Elvis Presley Enterprises, Inc. and 15% of the outstanding membership interests of Elvis Presley Enterprises, LLC.

    Distributions to Minority Stockholders of Subsidiaries

        Under the terms of our agreement to acquire an 85% interest in the Presley business, we are required to make future minimum annual distributions, in monthly installments, to The Promenade Trust which are intended to represent its 15% share of the operating income of the Presley business before depreciation and amortization and after income taxes and capital expenditures. We have agreed that during the first year we operate the Presley business we will make a monthly distribution of $125,000 to The Promenade Trust. At the end of each calendar year, we will make a calculation of the actual amount due to The Promenade Trust based on its 15% ownership interest and make an additional distribution to The Promenade Trust if its actual 15% share is higher than the total distributions paid to The Promenade Trust over the prior twelve months. If the calculation indicates that we have paid more than The Promenade Trust was entitled to, we will reduce future monthly distributions to The Promenade Trust by such amount. However, we will always be required to pay The Promenade Trust a minimum annual distribution of $1.2 million for each full calendar year irrespective of the actual operating results for the business in such year.

    Series B Convertible Preferred Stock

        Each share of Series B Convertible Preferred Stock has a stated value of $15.30 and entitles the holder to receive an annual dividend calculated at a rate of 8% of the stated value. The shares of Series B Convertible Preferred Stock are convertible by the holder into common stock at any time at a conversion price equal to the stated value, subject to adjustments in connection with standard anti-dilution protections for stock splits, stock dividends and reorganizations. The shares of Series B Convertible Preferred Stock become convertible at our option from and after the third anniversary of

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the date of issuance, if, at any time, the average closing price of the common stock over a thirty day trading period equals or exceeds 150% of the conversion price.

        During the period beginning August 7, 2012 and ending August 7, 2013, we can redeem the outstanding shares of Series B Convertible Preferred Stock, in whole or in part, for an aggregate price equal to the stated value plus accrued but unpaid dividends through the date of redemption. If we do not exercise this redemption right, the conversion price for all remaining shares of Series B Convertible Preferred Stock is thereafter reduced to the lower of (i) the conversion price then in effect and (ii) the average closing price of our common stock over a thirty day trading period measured as of the last day of the redemption period.

        The Promenade Trust has the right to require us to purchase for cash all or a portion of its 15% ownership interest in the Presley business from time to time beginning on January 1, 2008. The price we will be required to pay to The Promenade Trust will be based on the then current fair market value of the Presley business as determined through an appraisal process.

    Priscilla Presley Transaction

        In connection with the acquisition of our 85% interest in the Presley business, we acquired from Priscilla Presley all commercial rights held by Ms. Presley to use the name "Presley" in connection with our use and exploitation of the assets acquired from The Promenade Trust as well as all of Ms. Presley's rights, if any, to the name Graceland. The purchase price for the rights acquired from Priscilla Presley was $6.5 million, with $3.0 million paid in cash at the closing and $3.5 million paid in the form of an eight year subordinated promissory note. The promissory note bears interest at a rate of 5.385% per year and requires annual payments of $550,000.

    The Huff Alternative Fund, L.P. Investment

        Simultaneous with the acquisition of control of our company by a management group led by Robert F.X. Sillerman, and our acquisition of the Presley business, The Huff Alternative Fund, L.P. and its affiliate contributed an aggregate of $43,818,605 in cash in exchange for: (i) 2,172,400 shares of Series A Preferred Stock, (ii) 3,706,052 newly issued shares of common stock, (iii) warrants to purchase 1,860,660 shares of common stock at $1.00 per share, (iv) warrants to purchase 1,860,660 shares of common stock at $1.50 per share, and (v) warrants to purchase 1,860,661 shares of common stock at $2.00 per share. The transaction was consummated in accordance with a Stock Purchase Agreement dated February 7, 2005.

        The allocation of the proceeds from the investment by The Huff Alternative Fund, L.P. and its affiliate between the fair value of the Series A Preferred Stock and the fair value of the detachable warrants resulted in a beneficial conversion feature in the amount of $17,762,000.

        On March 21, 2005, The Huff Alternative Fund, L.P. and its affiliate exercised their rights to convert all of their 2,172,400 shares of Series A Preferred Stock into 6,051,253 shares of common stock. Accordingly, there are currently no shares of Series A Preferred Stock outstanding. As a result of the early conversion, we will record a dividend of $17.8 million in our financial statements for the quarter ended March 31, 2005.

    The Presley Short Term Senior Loan

        A portion of the cash consideration we paid for the acquisition of our 85% interest in the Presley business was obtained through a $39.0 million short term senior loan from an affiliate of Bear, Stearns & Co. Inc., one of the underwriters of this offering. The borrower under the Presley short term senior loan was EPE Holding Corporation, our wholly owned subsidiary, which directly owns 100% of our company's interests in the Presley business. The principal amount of the loan is guaranteed by us and secured by the borrower's ownership interest in the Presley business. Full payment on the principal amount is due on February 6, 2006, although we are required to repay the loan with the proceeds from

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a public offering or private placement of any debt or equity securities, any future bank loan or comparable borrowings, and any future assets sales. At maturity, the borrower must repay the loan at 101% of the principal amount thereof plus accrued and unpaid interest to the date of maturity. The loan bears interest at a rate per annum equal to LIBOR plus (a) 400 basis points through August 6, 2005, (b) 500 basis points from August 7, 2005 through November 6, 2005, and (c) 600 basis points at all times thereafter through maturity. The loan places restrictions on EPE Holding Corporation's ability, as the borrower, to pay dividends to us, as its parent company, to fund corporate expenses. The loan also requires us to maintain certain financial covenants including (i) a maximum debt to EBITDA ratio, (ii) minimum EBITDA, (iii) minimum tangible net worth and (iv) minimum cash on hand. If we are unable to meet these requirements or satisfy these covenants, EPE Holding Corporation may not be able to pay dividends to us and we therefore may not be able to fund all of our obligations. We anticipate repaying the entire balance of the Presley short term senior loan with the proceeds of this offering.

    19 Entertainment Share Purchase Agreement

        We acquired 19 Entertainment pursuant to a Share Purchase Agreement dated March 17, 2005, by and among our company, CKX UK Holdings Limited, our wholly owned subsidiary, 19 Entertainment, Mr. Fuller and the other shareholders of 19 Entertainment for total consideration consisting of £64.5 million (U.S. $124.4 million) in cash and 1,870,558 unregistered shares of our common stock valued at $16.83 per share (which represents the average of our company's closing stock prices for the two days prior to and the day of the acquisition), each paid at closing and an additional £19.2 million (U.S. $36.9 million, based on the exchange rate at closing of the acquisition) in either cash or additional shares of common stock to be paid on the earlier of (i) thirty days following delivery of the audited financial statements of 19 Entertainment for its fiscal year ending June 30, 2005 and (ii) December 30, 2005. Under different circumstances, the additional consideration is payable in cash or shares of common stock (valued as of the date of issuance). The additional consideration can be requested in common stock by Mr. Fuller and his nominee company. If Mr. Fuller does not request this payment in common stock, and we have not completed any public sale or offering of equity securities in excess of $40.0 million on or before June 30, 2005, the full amount of such additional consideration is payable in registered common stock at our option. The Share Purchase Agreement provides Mr. Fuller and his nominee company with the right, during a short period following the six-year anniversary of our acquisition of 19 Entertainment, to cause us to purchase all shares issued to them at a price of $13.18 per share.

        Pursuant to Mr. Fuller's new employment agreement, he will continue to serve as Chief Executive Officer of 19 Entertainment. The employment agreement is for a term of six years, and provides for the base salary, bonus, incentive compensation, and other benefits for Mr. Fuller. Mr. Fuller is expected to play a key role in planning and implementing our overall creative direction. We financed the 19 Entertainment acquisition by borrowing $109.0 million through a short term senior loan from an affiliate of Bear, Stearns & Co. Inc., one of the underwriters of this offering, and through the receipt of cash from the exercise of $25.0 million of outstanding warrants to purchase common stock held by Robert F. X. Sillerman and other members of our management, The Huff Alternative Fund, L.P., our largest institutional equity investor, and an affiliate of The Huff Alternative Fund, L.P.

    The 19 Entertainment Short Term Senior Loan

        A portion of the cash consideration we paid for the acquisition of 19 Entertainment was obtained through a $109.0 million short term senior loan by CKX UK Holdings Limited, our wholly owned subsidiary which directly owns 100% of 19 Entertainment, from an affiliate of Bear, Stearns & Co. Inc., one of the underwriters of this offering. We were required to pay a 1% commitment fee upon the funding of the loan. This additional $1,090,000 of principal will be recorded as interest expense over the life of the loan. The loan is guaranteed by us, 19 Entertainment and each of the material

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subsidiaries of 19 Entertainment and is secured by 100% of our beneficial ownership interest in CKX UK Holdings Limited, 19 Entertainment and its subsidiaries. The loan is also secured by a second lien on our ownership interests in EPE Holding Corporation and its subsidiaries. Full payment on the principal amount is due on February 6, 2006, although we are required to repay the loan with the proceeds from a public offering or private placement of any debt or equity securities, any future bank loan or comparable borrowings, and any future asset sales. The loan bears interest at a rate per annum equal to LIBOR plus (a) 400 basis points through September 16, 2005, (b) 500 basis points from September 17, 2005 through December 16, 2005, and (c) 600 basis points at all times thereafter through maturity, and may be increased under certain circumstances. The loan places restrictions on CKX UK Holdings Limited's ability, as the borrower, to pay dividends to us, as its parent company, to fund corporate expenses. The loan also requires us to maintain certain financial covenants including (i) a maximum debt to EBITDA ratio, (ii) minimum EBITDA, (iii) minimum tangible net worth and (iv) minimum cash on hand. If we are unable to meet these requirements or satisfy these covenants, CKX UK Holdings Limited may not be able to pay dividends to us and we therefore may not be able to fund all of our obligations. We anticipate repaying the entire balance of the 19 Entertainment short term senior loan with the proceeds of this offering.

    Reincorporation

        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.

    Uses of Capital

        At December 31, 2004, on a pro forma basis, before giving effect to this offering, we had $148.4 million of debt outstanding under two loan agreements, the Presley short term senior loan and the 19 Entertainment short term senior loan. We also had $3.5 million of debt outstanding under the Priscilla Presley note and $8.7 million in cash and cash equivalents. If we successfully complete this offering, we intend to use a portion of the net proceeds to repay all amounts outstanding under the short term senior loans. However, if we do not consummate this offering, we will be unable to repay the Presley and 19 Entertainment short term senior loans at maturity in February 2006 unless we can successfully arrange a longer-term senior credit facility or sell additional equity or debt securities in a public or private offering. Our ability to successfully arrange new debt or equity financing to repay the Presley and 19 Entertainment short term senior loans will be dependent upon a number of factors including the future financial performance of our business and general conditions in the capital markets. In the future, we may seek to obtain a new credit facility or seek to issue debt securities.

        We believe that our current cash on hand together with cash flow from operations will be sufficient to fund our current operations, including payments of interest due under the Presley and 19 Entertainment short term senior loans, dividends on our Series B Convertible Preferred Stock, mandatory minimum distributions to the minority shareholder in the Presley business and capital expenditures, for the remainder of 2005.

    Capital Expenditures

        We have not completed our 2005 capital expenditures budget. We presently anticipate that our capital expenditures in 2005 will include ongoing improvements at the Presley business and 19 Entertainment with total costs reasonably similar to those incurred by the businesses in recent years. We also expect to incur additional capital expenditures at the corporate level to implement new information technology and financial systems.

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    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 new credit facilities, additional debt and equity offerings, issuance of our equity directly to sellers of businesses and cash flow from operations.

        We are highly leveraged and have not previously issued significant amounts of equity or debt to the public markets. Therefore, no assurance can be given that we will be able to obtain adequate financing to complete any potential future acquisitions we might identify.

    Dividends

        Our Series B Convertible Preferred Stock requires payment of a cash dividend of 8% per annum in quarterly installments. On an annual basis, our total dividend payment on the Series B Convertible Preferred Stock will be $1,826,000. 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%.

        We are restricted under the terms of certain of our financing arrangements and have no intention of paying any 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, 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 contracts typically contain provisions that allow us to terminate the contract with good cause.

        The scheduled maturities of our credit facilities, future minimum rental commitments under non-cancelable operating leases and minimum payments under employment agreements as of December 31, 2004 on a pro forma basis are as follows (in thousands):

 
  2005
  2006
  2007
  2008
  2009
  Thereafter(a)
  Total
Debt facilities   $ 719   $ 709   $ 679   $ 650   $ 620   $ 801   $ 4,178
Non cancelable operating leases     2,349     2,256     2,136     2,127     2,154     6,336     17,358
Employment contracts     4,700     4,585     4,318     3,390     3,529     2,847     23,369
Guaranteed minimum distributions     1,200     1,200     1,200     1,200     1,200         6,000
19 Entertainment put right(b)                         22,079     22,079
   
 
 
 
 
 
 
Total   $ 8,968     8,750     8,333     7,367     7,503     32,063   $ 72,984
   
 
 
 
 
 
 
(a)
In addition to the amounts listed above, we are required to make guaranteed minimum distributions to The Promenade Trust of at least $1.2 million annually for as long as The Promenade Trust continues to own a 15% interest in the Presley business.

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(b)
We have granted to the former holders of capital stock of 19 Entertainment the right, during a short period following the six-year anniversary of our acquisition of 19 Entertainment, to cause us to purchase up to 1.7 million shares of their common stock at a price of $13.18 per share, which is reflected in the table above. We have also granted them the same right with respect to additional shares, if any, issued to Mr. Fuller and his nominee company as additional consideration, as described under "–19 Entertainment Share Purchase Agreement."

        The table above excludes our repayment obligations under the Presley short term senior loan and the 19 Entertainment short term senior loan, totaling $148.4 million plus amounts necessary to pay any accrued interest, as set forth in the Unaudited Pro Forma Condensed Combined Balance Sheet, which are expected to be repaid with proceeds of this offering.

Inflation

        Inflation has affected the historical performance of the Presley business and 19 Entertainment primarily in terms of higher operating costs for salaries and other administrative expenses. Although the exact impact of inflation in 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.

Impact of Recently Issued Accounting Standards

        In December 2004, the FASB issued a revision to SFAS No. 123, "Accounting for Stock-Based Compensation." This revision will require us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. This revised Statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. This revised Statement will apply to all awards granted after the required effective date and to awards modified, repurchased or canceled after that date. As of the required effective date, we will apply this revised Statement using a modified version of prospective application. Under that transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures. For periods before the required effective date, we intend to comply with SFAS No. 123.

Off Balance Sheet Arrangements

        We do not have any off balance sheet arrangements.

Quantitative And Qualitative Disclosure About Market Risk

    Interest Rate Risk

        Our short term senior loans require payments of interest at variable rates based on LIBOR. Accordingly, our earnings will be affected by changes in interest rates. Assuming our current level of variable rate debt outstanding, each 1% change in interest rates will result in a $1,480,000 change in our annual interest expense.

    Foreign Exchange Risk

        As a result of our acquisition of 19 Entertainment, we have significant operations outside the United States, principally in the United Kingdom. Our foreign operations are measured in local currencies. In addition, certain of our entertainment properties, including the IDOLS brand and our rights to the name, image and likeness of Elvis Presley, generate revenue in various countries throughout the world. 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.

        Historically, 19 Entertainment, as a U.K. based enterprise, entered into foreign currency option contracts to hedge it exposure to certain U.S. dollar denominated revenue. Due to the recent timing of our acquisitions, we are currently evaluating what strategies, if any, we should adopt to minimize our exposure to foreign currencies.

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BUSINESS

Our Business

        We are engaged in the ownership, development and commercial utilization of entertainment content. To date, we have focused on acquiring globally recognized entertainment content and related assets, including the rights to the name, image and likeness of Elvis Presley, the operations of Graceland and proprietary rights to the IDOLS television brand, including the American Idol series in the United States, the Pop Idol series in the United Kingdom and local adaptations of the IDOLS television show format which, collectively, air in over 30 countries around the world. We plan to continue to make strategic acquisitions of, or partner or align with, companies or individuals that control various forms of established entertainment content, which may include intellectual property rights in music, film, television programming, written works and characters, rights to names, images and likenesses, video games, corporate brands and other related assets. We believe our corporate management team and our existing infrastructure will enhance and expand commercial opportunities for existing content and enable the companies we acquire or individuals with whom we partner or align to more effectively develop, acquire, license, market and promote content.

        As new technologies emerge and are adopted by consumers, we believe that new modes of distribution of entertainment content will enable consumers to more easily and readily consume content when, where and how they choose. We believe that the ability of consumers to exert greater control over the timing and method of content consumption will increase demand for entertainment content generally and, correspondingly, will increase the value of our globally recognized entertainment properties. We plan to strategically deploy capital in ways which we believe will allow us and our partners to gain or retain greater control over the assets which we and they create and to challenge the existing economic relationship between owners and distributors of content. We do not intend to make significant investments in new technologies, as we believe our ownership, development and control of entertainment content will become more valuable, regardless of which distribution technologies are adopted by consumers.

        Our existing properties have a proven track record of generating recurring revenues across multiple entertainment platforms, including music, film and television; sponsorship, licensing and merchandising; artist management; themed attractions and touring/live events. We are in active discussions with companies and individuals that control other popular entertainment content. We believe our recent acquisitions, together with the infrastructure our senior management has built and continues to develop, will support the anticipated growth of our business and enable us to effectively manage the content we already own and additional content we develop or acquire in the future.

Our Strengths

        We believe the following are our key competitive and business strengths.

        Strong Management Team with Successful Track Record.     The members of our senior corporate management group, including Robert F.X. Sillerman, Mitchell J. Slater, Howard J. Tytel and Thomas P. Benson, have worked in the media and entertainment business for an average of 25 years, including almost ten years together as a management team. They previously built, managed, and sold five public companies, the most recent of which was SFX Entertainment, Inc. These companies, in the aggregate, raised over $4.7 billion of capital through external financings and consummated and integrated over 50 acquisitions. Our senior corporate management team has a successful track record of identifying and realizing synergies among unique and diverse businesses and has proven its ability to acquire and integrate these businesses to capitalize on and enhance their combined value.

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        Creative and Experienced Managers of Content.     Simon Fuller, the Chief Executive Officer of our recently acquired 19 Entertainment subsidiary and a key member of our management team, has been the driving force behind the creation, development and marketing of multiple globally successful entertainment properties, including the Spice Girls, S Club 7 and, most recently, the IDOLS television show format. Since founding 19 Entertainment in 1985, Mr. Fuller's accomplishments include launching and managing artists, songwriters and producers who have had more than 100 number one albums and 80 number one singles in the United States and United Kingdom. Mr. Fuller also helped launch the television show format behind, and co-executive produces, American Idol, which has consistently occupied two of the top three weekly ratings positions this season for regularly scheduled prime time television shows in the United States, according to Nielsen Media Research. In addition to continuing to oversee the operations of 19 Entertainment and its subsidiaries, Mr. Fuller will play a key role in planning and implementing our company's overall creative direction.

        Jack Soden and Gary Hovey, the Chief Executive Officer and Executive Vice President, respectively, of our Elvis Presley Enterprises, Inc. subsidiary, has each built a strong reputation in his field and contributed to the preservation and enhancement of the popular public image of Elvis Presley. Mr. Soden has managed the operations of Graceland and its related properties, as well as licensing and marketing activities, since Elvis Presley Enterprises was formed in 1981. Mr. Hovey has managed the administration of Elvis' recorded music, music publishing, film and television interests since 1990. Messrs. Soden and Hovey will continue to oversee the operations of the Presley business.

        Each of Messrs. Fuller, Soden and Hovey has entered into a long-term employment agreement with our company. See "Management–Executive Officer Employment Agreements."

        Globally Recognized Content.     The entertainment content we have acquired to date, including, most notably, the rights to the name, image and likeness of Elvis Presley and the IDOLS television show format, has a proven history of generating recurring revenues across multiple platforms. Elvis is the world's most iconic and 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 RIAA. In each of the past four years, Forbes Magazine has listed Elvis as the top earning deceased celebrity. During that time, more than eleven million Elvis albums have been sold worldwide and an average of approximately 571,000 people have visited Graceland annually. Adaptations of the IDOLS television show format have been broadcast in over 30 countries around the world, and have set notable viewership records in the United States, the United Kingdom, Finland, Germany, the Netherlands, Australia and New Zealand, among other markets. Every American Idol winner to date has produced a number one album or single (as measured by Nielsen SoundScan) and winners and finalists on IDOLS brand shows, collectively, have had five Platinum® or equivalent and two multi-Platinum® albums and have collectively sold over eleven million albums and singles.

        Access to New Content and Acquisition Opportunities.     We believe that the combination of our management's broad network of relationships in the entertainment industry and the array of globally recognized entertainment content we already own, provides us with a competitive advantage in accessing potential strategic acquisitions and partnerships. In addition, we believe our management's reputation and successful track record have encouraged and will continue to encourage potential partners and sellers of content, including those who might not have previously been willing to consider transaction opportunities, to initiate contact with us regarding partnerships and other transactions.

        Established and Extensive Infrastructure.     We believe our recent acquisitions, together with the infrastructure our senior management has built and continues to develop, will allow us to manage and enhance the value of additional companies and content we may acquire. We currently possess in-house capabilities to provide multiple and comprehensive services designed to maximize the brand

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sustainability and profitability of our talent and content worldwide, including creative development, television production, music recording and publishing, royalty accounting, artist and brand management, touring and live events promotion, licensing and merchandising, and sponsorship sales. With offices in New York, Los Angeles, Memphis, London, Paris and Hamburg, our geographic breadth will help us manage our anticipated growth as we acquire additional assets in the future.

Our Business Strategy

        We intend to leverage our strengths to pursue the growth of our business by utilizing the following strategies.

        Acquire/Partner with Valuable Content.     We plan to make strategic acquisitions of, or partner or align with, individuals or companies that control various forms of entertainment content which could offer multiple revenue opportunities across various entertainment platforms and distribution channels. In some instances, we will seek to acquire control of, or work with partners to enhance, existing content. In other cases, we will seek transaction opportunities with entities or individuals that we believe will allow us and them to create and develop new content.

        Capitalize on Recognition of Existing Properties.     We believe the global recognition of our existing content, including the name, image and likeness of Elvis Presley, the IDOLS television show format and our partnership with David Beckham, a globally recognized celebrity athlete, and Victoria Beckham, a fashion and lifestyle personality whose career Mr. Fuller managed as a member of the Spice Girls and now manages, will provide us with numerous opportunities for substantial growth through new and diverse projects. For example, we intend to license the "Presley" and "Graceland" names for use at Elvis-related attractions or venues in Las Vegas and other strategic locations throughout the world, including in Asia, the Middle East and Europe.

        Diversify and Broaden Revenue Opportunities.     We intend to capitalize on our existing infrastructure and experience across various entertainment platforms and distribution channels to develop additional revenue opportunities for content we currently control or may develop or acquire in the future. We currently have important strategic relationships with sponsors, licensees, merchandisers, promotional and other partners who enhance the consumer awareness and revenue producing potential of our content. We plan to utilize our global capabilities for television production, music publishing, merchandising, live touring, licensing, creative development, royalty accounting, music recording and sponsorship sales to develop revenue opportunities across various entertainment platforms and distribution channels for each of our company's artists under management and our content.

        Capitalize on Technological Advancements.     Distribution models based upon actively marketing and advertising pre-packaged content to consumers are being displaced by consumers' desire and ability to actively seek out and access content and to determine the timing and method of its consumption. As personalized channels of distribution become more prevalent, we believe the demand for and value of popular, high-quality content will increase. While we do not intend to make significant investments in content distribution technologies, we are positioning our company and our content to capitalize on whichever new distribution technologies prevail in the marketplace and are broadly adopted by consumers, including broadband Internet access, satellite/digital cable television, digital video recorders, satellite radio, cellular telephones/personal digital assistants and other devices that support digitally distributed content.

Description of Presley Business

        On February 7, 2005, we acquired 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

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museum and related attractions, as well as revenue derived from Elvis Presley's television specials, films and certain of his recorded musical works. We decided to launch our content-focused strategy with the acquisition of the Presley business primarily because Elvis Presley is a global icon, the Presley business has proven itself both successful and profitable and because we believe there is potential to significantly enhance and expand the "Elvis" presence both in the United States and throughout the world.

        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.

    Licensing and Intellectual Property

    Music Rights

        We own co-publishing rights to approximately 650 music compositions, most of which were recorded by Elvis Presley. Chrysalis Music Publishing administers our company's share of these compositions, along with that of one of two other co-publishers under an administration agreement. Approximately 40% of our publishing income from these compositions originates outside the United States. The public performance rights for these compositions are administered by The American Society of Composers, Authors and Publishers and Broadcast Music, Inc., 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 right for a lump sum payment from RCA on everything he had recorded up to that time. 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 newly released compilation records that include recordings Elvis recorded before March 1973.

        Sony BMG Music Entertainment (as RCA's successor) 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.

    Name, Image & 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.

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    Television/Video

        We own the rights to two of Elvis' television specials: "68 Special" (1968); and "Aloha From Hawaii" (1973). We also own the rights to "Elvis by the Presleys," a two-hour documentary and four-hour DVD being produced for television, 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. "Elvis by the Presleys" is expected to air on the CBS television network in the United States and on various foreign television networks in 2005.

    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 right 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.

    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 571,000 visitors per year.

        We operate Graceland under the terms of a 90-year lease with The Promenade Trust. 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 have also acquired 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 the mansion tour, which includes a guided walk through the living room, music room, Elvis' parents' bedroom, the dining room, kitchen, TV room, pool room, and "jungle" den in the main house, and, behind the house, Elvis' racquetball building and his original business office. The tour includes 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" museum, which features changing exhibits of Elvis memorabilia, a movie theater showing movies starring Elvis, an aviation exhibition featuring the airplanes on which Elvis traveled while on tour, retail stores offering Elvis themed

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merchandise, restaurants, a wedding chapel, ticketing and parking. We also own and operate retail stores at Graceland 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.

    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. In addition to the regular guest rooms, the Heartbreak Hotel has four themed suites which provide guests with an opportunity to experience an Elvis themed lodging experience. The hotel had an average occupancy rate of approximately 80% during the year ended December 31, 2004.

Description of the Business of 19 Entertainment

    Overview

        On March 17, 2005, we acquired 19 Entertainment Limited and entered into a long-term employment agreement with Simon Fuller, its founder and the creative force behind its most successful projects. In addition to continuing to oversee the operations of 19 Entertainment and its subsidiaries, Mr. Fuller will play a key role in planning and implementing our overall creative direction.

    History

        19 Entertainment was founded in 1985 as an artist management company by Simon Fuller, who, after four years working in the record and music publishing industries, left to independently manage the career of Paul Hardcastle, whom Mr. Fuller had originally signed to a recording contract with his then employer, Chrysalis Records. 19 Entertainment went on to represent a number of successful singers and songwriters, including Annie Lennox and Cathy Dennis.

        Mr. Fuller was the principal architect behind the "Spice Girls" global phenomenon, including naming the group, commissioning certain writers and musicians represented by 19 Entertainment to write music for the group, and developing sponsorship and marketing opportunities around the world. Following the release of their first single in 1996, the Spice Girls went on to sell more than 40 million albums, generate significant corporate sponsorship deals, including a global deal with Pepsi, sell out multiple concert tours worldwide, and star in a movie produced and developed by 19 Entertainment that generated $77.5 million in global box office sales.

        Upon recognizing the growing opportunities available to those who create and control entertainment content, Mr. Fuller changed 19 Entertainment's strategy to capture further value and control of its entertainment properties, by strategically developing and retaining ownership in content specifically tailored for distribution across multiple entertainment platforms and to capitalize on multiple revenue opportunities. The first property created under 19 Entertainment's new model was the television show S Club 7, a scripted drama program that followed the exploits of the seven members of a musical group by the same name, which was originally broadcast in the United Kingdom. As the first property entirely conceived by Mr. Fuller and owned by 19 Entertainment, the S Club 7 television show, the band and its music provided 19 Entertainment with multiple revenue streams. 19 Entertainment ultimately produced four television series based on S Club 7 which were broadcast in more than 100 countries, sold over 10 million albums and singles worldwide and had several sold out live concert tours.

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    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, Mr. Fuller 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 the Pop Idol show, first broadcast in the United Kingdom in 2001 and in the United States, under the name "American Idol" in 2002. The popularity of the IDOLS brand around the world, most notably the American Idol series in the United States, has resulted in substantial revenue growth across multiple media platforms, in all of which 19 Entertainment retains a substantial ownership interest. For 19 Entertainment's fiscal year ended June 30, 2004, $49.5 million of revenue, representing 64% of its total revenue for that fiscal year, was generated by American Idol-related activities, including television, sponsorship, merchandise sales, tours and recorded music.

        Since the success of the Pop Idol series in the United Kingdom, television shows based on the IDOLS brand have been broadcast in over 30 countries, with second runs being broadcast in Germany, France, Australia, Canada, Lebanon, Holland, Norway and South Africa, and a third series being broadcast in Poland. The global popularity of television shows based on the IDOLS brand is evidenced by the following:

    To date, IDOLS programming has been viewed by over 100 million people and over 500 million votes have been cast worldwide.

    Adaptations of the IDOLS television show format have been broadcast in over 30 countries around the world, and have set notable viewership records in the United States, the United Kingdom, Finland, Germany, the Netherlands, Australia and New Zealand, among other markets.

    In its first season in the United Kingdom, the Pop Idol series was the highest rated live entertainment show with a peak audience of 13.3 million viewers.

    Over 28 million viewers tuned in and over 65 million votes were cast via telephone and text-messaging for the season finale of the third American Idol series in the United States.

    In Germany, the locally titled Deutschland sucht den Superstar is broadcaster RTL's highest rated entertainment show since 1992.

    In the Netherlands, over a third of the entire viewing population watched the March 2003 season finale, making it the then highest rated show ever on Dutch commercial television (excluding sporting and royal events).

        Having conceived and developed the IDOLS brand, Mr. Fuller recognized the need for a global record label partner and/or a global television production and distribution partner. Mr. Fuller chose FremantleMedia Limited, the content business production arm of the RTL Group, Europe's largest television and radio broadcast company, as 19 Entertainment's global television production and distribution partner and BMG Music Publishing Limited (now part of Sony BMG Music Entertainment), as 19 Entertainment's global record label partner. The respective rights and obligations of FremantleMedia and 19 Entertainment are described below under "Film and Television" and the relationship with BMG is described in detail under "Division Music/Division" below.

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        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 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 shows in the United States and United Kingdom with its partner, FremantleMedia, which owns the other one-third of the IDOLS brand.

    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 and the Pop Idol series in the United Kingdom.

    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 right to licensing and merchandising of the IDOLS tours and in the United States and United Kingdom is jointly responsible for off-air sponsorship of the televised programs.

    Business Activities

        The following chart lists the percentage of overall revenue generated by 19 Entertainment and its subsidiaries, by principal business activity, for the fiscal year ended June 30, 2004. These percentages are based on generally accepted accounting practices in the United Kingdom, reconciled to US GAAP.

Business Activity

  Percent of Total Revenue
 
Film and Television   30 %
Music   27 %
Sponsorship and Merchandising   18 %
Touring   20 %
Management   5 %
   
 
Total   100 %
   
 

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    Film and Television

        19 Entertainment's film and television division is an integral part of our company's strategy to capture the full multi-media potential of the entertainment properties we create and/or control. The typical model for a 19 Entertainment television project thus far, as demonstrated by the roll out of the IDOLS brand and before that, S Club 7, 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. In addition to television shows based on the IDOLS format, 19 Entertainment is continually developing new concepts for television projects and currently has several new television projects in various stages of production and development, in both the United States and the United Kingdom.

        Though 19 Entertainment does not actively seek to invest in, create or develop films, it has been involved in and will continue to consider the development of movies based on or otherwise involving existing and future 19 Entertainment properties. For instance, in 1997, 19 Entertainment developed and produced the movie Spice World , starring the Spice Girls, which grossed more than $77.5 million worldwide. In 2003, 19 Entertainment produced the film, S Club Seeing Double , based on the popular S Club 7 television show and was the executive producer of From Justin to Kelly , starring Kelly Clarkson and Justin Guarini, the winner and runner-up of the first American Idol series.

        For 19 Entertainment's fiscal year ended June 30, 2004, film and television activities generated revenue of $23.5 million, the majority of which was driven by the American Idol series. Television revenue related to the American Idol series is largely dictated by the terms of the agreements with FremantleMedia and the Fox Broadcasting Company, each as more fully described below.

         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 the United States, where 19 TV Limited co-produces the American Idol series. In the United Kingdom, the Pop Idol series airs on ITV, a popular U.K. based commercial television channel. In the United States, the American Idol series airs on Fox Broadcasting Network, 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 a "Producer Margin," which is a percentage of FremantleMedia's profits on the production of the Pop Idol series in the United Kingdom;

    a percentage of revenues derived from distribution of IDOLS series and programs after a deduction of a percentage of gross revenues and other deductions;

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    a percentage of FremantleMedia's net revenue derived from program sponsorship and program merchandising; and

    a percentage of FremantleMedia's net revenue derived from local merchandising and management deals (outside the United States and the United Kingdom). 19 TV retains 100% of artist management and artist merchandising income from the United States and United Kingdom.

    Fox Agreement

        Under the terms of the agreement among 19 TV Limited, FremantleMedia and Fox, Fox is given 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.

        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.

        In addition to license fees, Fox also pays a significant ratings/rankings bonus depending on where the American Idol series is ranked in the Nielsen 18-49 age demographic. 19 TV Limited and FremantleMedia share the ratings/rankings bonus 50/50, with 19 TV Limited receiving its share directly from Fox. Fox also pays an executive producer fee per episodic hour, and a format fee of a percentage of the approved production budget, of which 19 TV Limited receives 50% and 40%, respectively.

    Music Division

        19 Entertainment's music division primarily consists of its recorded music activities and its music publishing rights, each as more fully described below. As with most areas of 19 Entertainment's business, the music division is largely driven by the success of the IDOLS brand franchise. In its fiscal year ended June 30, 2004, 19 Entertainment's music division generated revenue of approximately $20.9 million.

    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 United Kingdom, 19 Entertainment typically options the recording rights to the top ten or twelve 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. In its fiscal year ended June 30, 2004, approximately 12% of the total revenue for 19 Entertainment was generated by American Idol finalists, including Ruben Studdard, Clay Aiken and Fantasia Barrino.

        19 Entertainment has a worldwide agreement with Ronagold Limited, a subsidiary of Sony BMG Music Entertainment, through which Ronagold is entitled to select the record company (which must be a BMG group record company) in territories outside the United States and the United Kingdom which will sign the contestant-artists. With respect to contestants on the American Idol series in the United States and the Pop Idol series in the United Kingdom, 19 Entertainment itself enters into recording agreements with the finalists and then grants an optional exclusive license to Ronagold to select a BMG record company to handle the marketing, manufacturing and distribution of the records

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throughout the world. 19 Entertainment's agreement with Ronagold runs through the first four American Idol/Pop Idol series.

        In the United States, the BMG record company that licenses the winning artist and/or any of the finalists pays to the 19 record label a recoupable advance, a percentage of which is passed along to the finalist/artist.

        Outside the United States and the United Kingdom, the designated BMG 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 BMG's usual exclusive recording agreements for artists with one Platinum selling album prior to signature in the relevant country.

    Music Publishing

        The music publishing division of 19 Entertainment is driven directly and indirectly by the IDOLS brand franchise. 19 Entertainment owns 50% of music publishing company 19 Songs Limited, with the remaining 50% owned by BMG. 19 Songs Limited owns the copyrights to an increasing number of songs developed by artists, writers and producers managed by Native Management, which is 50% owned by one of our subsidiaries. Many of the songs are written and developed exclusively for 19 Entertainment's current entertainment properties and projects.

        Pursuant to a publishing agreement between 19 Songs Limited and BMG Music Publishing, 19 Songs Limited assigns to BMG, for a specified period of time, all of its rights and interest in (including all copyrights to) its current and future compositions throughout the world in exchange for a royalty equal to all fees and royalties received by BMG in the United Kingdom from use and exploitation of the compositions (less any taxes, commissions retained by performing rights societies and mechanical rights collection agencies and certain forms of remuneration) and a percentage of the publisher's share of public performance fees.

        BMG has the right to purchase 19 Entertainment's interest in 19 Songs Limited beginning at the end of 2005, when the publishing agreement is scheduled to expire.

    Sponsorship/Merchandising

        19 Entertainment's sponsorship and merchandising revenues are driven primarily by the IDOLS brand franchise. 19 Entertainment generated approximately $13.5 million in sponsorship and merchandising revenue for its fiscal year ended June 30, 2004. 19 Entertainment's sponsorship division works to craft relationships between leading brands and 19 Entertainment properties. The sale of sponsorships in connection with the IDOLS brand is handled by a combination of 19 Entertainment/FremantleMedia/ITV in the United Kingdom, 19 Entertainment/FremantleMedia/Fox in the United States and 19 Entertainment/FremantleMedia/local broadcaster in the rest of the world. 19 Entertainment's staff solicits sponsors for IDOLS tours directly and exclusively.

        Fox and ITV have exclusive responsibility for selling on-air media on behalf of the American Idol and Pop Idol series, respectively. 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. Major media buyers in the United States such as Ford, Coca-Cola and AT&T Wireless/Cingular have in-program identification and off-air promotional tie-ins. For example, Coca-Cola is consumed by the judges during the program and the "green room" is actually Coca-Cola red and stocked with Coca-Cola products; AT&T Wireless/Cingular is the telephonic voting partner; and Ford received on-screen identification and segments featuring Ford trucks.

        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

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Idol series is handled by FremantleMedia on a world-wide basis, though 19 Entertainment is entitled to 50% of net merchandising revenue.

BROKERAGE PARTNERS