Clear Channel Outdoor - 10-Q quarterly report FY

 

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See Notes to Consolidated and Combined Financial Statements

See Notes to Consolidated and Combined Financial Statements

See Notes to Consolidated and Combined Financial Statements

See Notes to Consolidated and Combined Financial Statements

Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Preparation of Interim Financial Statements

The consolidated and combined financial statements were prepared by Clear Channel Outdoor Holdings, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments (consisting of normal recurring accruals and adjustments necessary for adoption of new accounting standards) necessary to present fairly the results of the interim periods shown. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. Due to seasonality and other factors, the results for the interim periods are not necessarily indicative of results for the full year. The financial statements contained herein should be read in conjunction with the consolidated and combined financial statements and notes thereto included in the Company’s 2005 Annual Report on Form 10-K.

The combined financial statements include amounts prior to the initial public offering (“IPO”) derived from Clear Channel Communications’ consolidated financial statements using the historical results of operations and bases of the assets and liabilities of Clear Channel Communications’ outdoor advertising businesses and give effect to allocations of expenses from Clear Channel Communications. These allocations were made on a specifically identifiable basis or using relative percentages of headcount or other methods management considered to be a reasonable reflection of the utilization of services provided. The Company’s historical financial data may not be indicative of its future performance nor will such data reflect what its financial position and results of operations would have been had it operated as an independent publicly traded company during the periods shown. Significant intercompany accounts among the combined businesses have been eliminated in consolidation. Investments in nonconsolidated affiliates are accounted for using the equity method of accounting.

     Certain Reclassifications

The Company has reclassified prior year operating gains and losses to be included as a component of operating income, reclassified minority interest expense below its provision for income taxes and reclassified certain other assets to current assets to conform to current year presentation.

     Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 155,Accounting for Certain Hybrid Financial Instruments (“Statement 155”). Statement 155 is an amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities(“Statement 133”) and FASB Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“Statement 140”) and allows companies to elect to measure at fair value entire financial instruments containing embedded derivatives that would otherwise have to be accounted for separately. Statement 155 also requires companies to identify interest in securitized financial assets that are freestanding derivatives or contain embedded derivatives that would have to be accounted for separately, clarifies which interest- and principal-only strips are subject to Statement 133, and amends Statement 140 to revise the conditions of a qualifying special purpose entity due to the new requirement to identify whether interests in securitized financial assets are freestanding derivatives or contain embedded derivatives. Statement 155 is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. The Company will adopt Statement 155 on January 1, 2007 and anticipates that adoption will not materially impact its financial position or results of operations.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold for tax positions taken or expected to be taken in a tax return. FIN 48 requires that entities recognize in their financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The cumulative effect of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings upon adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 on January 1, 2007 and is currently evaluating the impact FIN 48 will have on its financial position and results of operations.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“Statement 157”). Statement 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements for fair value measurements. Statement 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. Statement 157 does not expand the use of fair value in any new circumstances. Statement 157 is effective for financial statements issued for fiscal years

beginning after November 15, 2007. The Company will adopt Statement 157 on January 1, 2008 and anticipates that adoption will not materially impact its financial position or results of operations.

In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)(“Statement 158”). Statement 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The portions of Statement 158 that apply to the Company are effective as of the end of the fiscal year ending after December 15, 2006. The Company will adopt Statement 158 as of December 31, 2006 and anticipates that adoption will not materially impact its financial position or results of operations.

The Company has granted options to purchase shares of its Class A common stock to employees and directors of the Company and its affiliates under its incentive stock plan typically at no less than the fair value of the underlying stock on the date of grant. These options are granted for a term not exceeding ten years and are forfeited, except in certain circumstances, in the event the employee or director terminates his or her employment or relationship with the Company or one of its affiliates. These options generally vest over five years. The incentive stock plan contains anti-dilutive provisions that permit an adjustment of the number of shares of the Company’s common stock represented by each option for any change in capitalization.

The Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“Statement 123(R)”), on January 1, 2006, using the modified-prospective-transition method. The fair value of the options is estimated using a Black-Scholes option-pricing model and amortized straight-line to expense over five years. Prior to January 1, 2006, the Company accounted for its share-based payments under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related Interpretations, as permitted by Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation (“Statement 123”). Under that method, when options are granted with a strike price equal to or greater than the market price on the date of issuance, there is no impact on earnings either on the date of grant or thereafter, absent certain modifications to the options. The amounts recorded as share-based payments prior to adopting Statement 123(R) related to the expense associated with restricted stock awards. Under the modified-prospective-transition method, compensation cost recognized beginning in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated.

As a result of adopting Statement 123(R) on January 1, 2006, the Company’s income before income taxes and minority interest for the nine and three months ended September 30, 2006, was $3.4 million and $1.1 million lower, respectively, and net income for the nine and three months ended September 30, 2006, was $1.9 million and $0.6 million lower, respectively, than if it had continued to account for share-based compensation under APB 25. Basic and diluted earnings per share for the nine months ended September 30, 2006 were $0.01 and $0.01 lower, respectively, than if the Company had continued to account for share-based compensation under APB 25. Basic and diluted earnings per share for the three months ended September 30, 2006 remained unchanged even if the Company had continued to account for share-based compensation under APB 25.

Prior to the adoption of Statement 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the statement of cash flows. Statement 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The excess tax benefit that is required to be classified as a financing cash inflow after adoption of Statement 123(R) is not material.

Prior to the IPO, the Company did not have any compensation plans under which it granted stock awards to employees. However, Clear Channel Communications granted certain of the Company’s officers and other key employees stock options to purchase shares of Clear Channel Communications’ common stock. All outstanding options to purchase shares of Clear Channel Communications’ common stock held by the Company’s employees were converted using an intrinsic value method into options to purchase shares of the Company’s Class A common stock concurrent with the closing of the IPO. As did the Company, Clear Channel Communications accounted for its stock-based award plans in accordance with APB 25, and related interpretations. Clear Channel Communications calculated the pro forma stock compensation expense as if the stock-based awards had been accounted for using the provisions of Statement 123. The stock compensation expense was then allocated to the Company based on the percentage of options outstanding to employees of the Company.

Pro forma net income and earnings per share, assuming the Company and Clear Channel Communications accounted for all employee stock options using the fair value method and amortized such to expense over the options’ vesting period is as follows:

The fair value of each option awarded is estimated on the date of grant using a Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities from traded options on the Company’s stock, historical volatility on the Company’s stock, and other factors. The expected life is based on historical data of options granted and represents the period of time that options granted are expected to be outstanding. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. Prior to the adoption of Statement 123(R), the Company recognized forfeitures as they occurred in its Statement 123 pro forma disclosures. Beginning January 1, 2006, the Company includes estimated forfeitures in its compensation cost and updates the estimated forfeiture rate through the final vesting date of awards. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods equal to the expected life of the option.

The following assumptions were used to calculate the fair value of the Company’s options on the date of grant during the nine months ended September 30, 2006:

The following table presents a summary of the Company’s stock options outstanding at and stock option activity during the nine months ended September 30, 2006 (“Price” reflects the weighted average exercise price per share):

A summary of the Company’s nonvested options at December 31, 2005, and changes during the nine months ended September 30, 2006, is presented below:

There were 33.9 million shares available for future grants under the Company’s option plan at September 30, 2006. Vesting dates range from April 2004 to April 2011, and expiration dates range from November 2006 to April 2016 at exercise prices and average contractual lives as follows:

The Company also grants restricted stock awards to employees and directors of the Company and its affiliates. These common shares hold a legend which restricts their transferability for a term of up to five years and are forfeited, except in certain circumstances, in the event the employee terminates his or her employment or relationship with the Company prior to the lapse of the restriction. The restricted stock awards were granted out of the Company’s stock option plan.

The following table presents a summary of the Company’s restricted stock outstanding at and restricted stock activity during the nine months ended September 30, 2006 (“Price” reflects the weighted average share price at the date of grant):

The Company recorded compensation expense of $0.6 million and $0.5 million for the nine months ended September 30, 2006 and 2005, respectively, and $0.2 million and $0.3 million for the three months ended September 30, 2006 and 2005, respectively, related to shares of Clear Channel Communications’ restricted stock granted to the Company’s employees prior to the IPO.

As of September 30, 2006, there was $12.2 million of unrecognized compensation cost related to nonvested share-based compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately three years.

     Definite-lived Intangibles

The Company has definite-lived intangible assets which consist primarily of transit and street furniture contracts and other contractual rights acquired in business combinations, all of which are amortized over the shorter of either the respective lives of the agreements or over the period of time the assets are expected to contribute to the Company’s future cash flows. Other definite-lived intangible assets are amortized over the period of time the assets are expected to contribute directly or indirectly to the Company’s future cash flows. The following table presents the gross carrying amount and accumulated amortization for each major class of definite-lived intangible assets at September 30, 2006 and December 31, 2005:

The Company completed the acquisition of Interspace Airport Advertising (“Interspace”) on July 1, 2006. As a result of the acquisition, the company recorded $39.5 million in definite-lived intangible assets which consists primarily of airport contracts with a remaining weighted average life of 5 years. See further discussion of the acquisition at Note 4.

Total amortization expense from definite-lived intangible assets for the nine and three months ended September 30, 2006 and for the year ended December 31, 2005 was $61.3 million, $19.3 million and $89.3 million, respectively. The following table presents the Company’s estimate of amortization expense for each of the five succeeding fiscal years for definite-lived intangible assets:

As acquisitions and dispositions occur in the future and as purchase price allocations are finalized, amortization expense may vary.

     Indefinite-lived Intangibles

The Company’s indefinite-lived intangible assets consist of billboard permits acquired primarily in business combinations. The Company’s billboard permits are issued in perpetuity by state and local governments and are transferable or renewable at little or no cost. Permits typically include the location for which the permit allows the Company the right to operate an advertising structure. The Company’s permits are located on either owned or leased land. In cases where the Company’s permits are located on leased land, the leases are typically from 10 to 20 years and renew indefinitely, with rental payments generally escalating at an inflation based index. If the Company loses its lease, the Company will typically obtain permission to relocate the permit or bank it with the municipality for future use.

The Company does not amortize its billboard permits. The Company tests these indefinite-lived intangible assets for impairment at least annually using the direct method. Under the direct method, it is assumed that rather than acquiring indefinite-lived intangible assets as a part of a going concern business, the buyer hypothetically obtains indefinite-lived intangible assets and builds a new operation with similar attributes from scratch. Thus, the buyer incurs start-up costs during the build-up phase which are normally associated with going concern value. Initial capital costs are deducted from the discounted cash flows model which results in value that is directly attributable to the indefinite-lived intangible assets.

Under the direct method, the Company continues to aggregate its indefinite-lived intangible assets at the market level for purposes of impairment testing. The Company’s key assumptions using the direct method are market revenue growth rates, market share, profit margin, duration and profile of the build-up period, estimated start-up capital costs and losses incurred during the build-up period, the risk-adjusted discount rate and terminal values. This data is populated using industry normalized market information.

The carrying amount for billboard permits at September 30, 2006 and December 31, 2005 was $257.5 million and $207.9 million, respectively.

     Goodwill

The Company tests goodwill for impairment using a two-step process. The first step, used to screen for potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. The second step, used to measure the amount of the impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The following table presents the changes in the carrying amount of goodwill in each of the Company’s reportable segments for the nine-month period ended September 30, 2006:

Included in the Americas’ acquisitions amount above is $127.6 million related to the acquisition of Interspace, all of which is expected to be deductible for tax purposes.

     Acquisitions

The Company completed the acquisition of Interspace on July 1, 2006, by issuing 4,250,000 shares of the Company’s Class A common stock and the payment of approximately $81.3 million. The acquisition was valued at approximately $170.4 million based on the Company’s common shares issued at the closing share price on the date of acquisition of $89.1 million and the cash consideration paid. Interspace’s 2005 revenues and operating expenses (direct and SG&A expenses) were approximately $45.8 million and $32.5 million, respectively.

In addition to the Interspace acquisition, during the nine months ended September 30, 2006, the Company’s Americas segment acquired display faces for $27.9 million in cash, including assets acquired in the exchange of one of its Americas markets for assets located in a different market. In addition, the Company’s international segment paid $91.4 million, primarily related to the acquisition of an outdoor advertising business in the United Kingdom.

     Disposition of Assets

During the first quarter of 2006, the Company exchanged assets in one of its Americas markets for assets located in a different market and recognized a gain of $13.2 million in “Gain (loss) on disposition of assets – net.”

     Recent Legal Proceedings

The Company is the defendant in a lawsuit filed October 20, 1998 by Jorge Luis Cabrera, Sr., and Martha Serrano, as personal representatives of the Estate of Jorge Luis Cabrera, Jr., in the 11th Judicial Circuit in and for Miami-Dade County, Florida. The plaintiff alleged the Company negligently constructed, installed or maintained the electrical system in a bus shelter, which resulted in the death of Jorge Luis Cabrera, Jr. Martha Serrano settled her claims with the Company. On June 24, 2005, the jury rendered a verdict in favor of the plaintiff, and awarded the plaintiff $4.1 million in actual damages and $61.0 million in punitive damages. The Company filed a motion to have the punitive damages award reduced. The trial judge granted the Company’s motion. A final judgment in the amount of $4.1 million in compensatory damages and $12.3 million in punitive damages was signed on January 23, 2006. The Company has appealed the underlying judgment and the Plaintiff filed a cross-appeal. The Plaintiff seeks to reinstate the original award of punitive damages. The Company has insurance coverage for up to approximately $50.0 million in damages for this matter.

The Company is currently involved in certain other legal proceedings and, as required, has accrued an estimate of the probable costs for the resolution of these claims, inclusive of those discussed above. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is

possible, however, that future results of operations for any particular period could be materially affected by changes in the Company’s assumptions or the effectiveness of its strategies related to these proceedings.

In the third quarter of 2005, the Company restructured its operations in France. As a result, the Company recorded $26.6 million in restructuring costs as a component of selling, general and administrative expenses; $22.5 million was related to severance costs and $4.1 million was related to other costs. During the nine months ended September 30, 2006, $7.4 million was paid and charged to the restructuring reserve. As of September 30, 2006, the accrual balance was $14.7 million.

In addition to the France restructuring, the Company has a restructuring liability related to Clear Channel Communications’ merger with Ackerley in June 2002. At September 30, 2006, the accrual balance for this restructuring was $1.5 million. The remaining restructuring accrual is comprised solely of lease termination, which will be paid over the next five years.

Certain agreements relating to acquisitions provide for purchase price adjustments and other future contingent payments based on the financial performance of the acquired companies. The Company will continue to accrue additional amounts related to such contingent payments if and when it is determinable that the applicable financial performance targets will be met. The aggregate of these contingent payments, if performance targets are met, would not significantly impact the financial position or results of operations of the Company.

As discussed in Note 4, there are various lawsuits and claims pending against the Company. Based on current assumptions, the Company has accrued its estimate of the probable costs for the resolution of these claims. It is possible, however, that future results of operations for any particular period could be materially affected by changes in the Company’s assumptions or the effectiveness of its strategies related to these proceedings.

The Company records net amounts, up to a maximum of $1.0 billion, due to or from Clear Channel Communications as “Due from Clear Channel Communications” or “Due to Clear Channel Communications” on the consolidated balance sheets. The account represents the Company’s revolving promissory note with Clear Channel Communications. Subsequent to the IPO, the account accrues interest pursuant to the Master Agreement and is generally payable on demand. Included in the account is the net activity resulting from day-to-day cash management services provided by Clear Channel Communications. As a part of these services, the Company maintains collection bank accounts swept daily by Clear Channel Communications. In return, Clear Channel Communications funds the Company’s controlled disbursement accounts as checks or electronic payments are presented for payment. At September 30, 2006, the balance of $49.9 million was a liability recorded in “Due to Clear Channel Communications” on the consolidated balance sheet. At December 31, 2005, the balance of $0.1 million was an asset recorded in “Due from Clear Channel Communications” on the consolidated balance sheet. The increase in the net amount due to Clear Channel Communications during the nine months ended September 30, 2006 was a result of Clear Channel Communications funding a portion of the Company’s debt payments and certain acquisitions. The net interest income for the nine months ended September 30, 2006 was $0.8 million and the net interest expense for the three months ended September 30, 2006 was $0.4 million.

On August 2, 2005, the Company distributed a note in the original principal amount of $2.5 billion to Clear Channel Communications as a dividend. This note matures on August 2, 2010 and may be prepaid in whole at any time, or in part from time to time. This note accrues interest at a variable per annum rate equal to the weighted average cost of debt for Clear Channel Communications, calculated on a monthly basis. This note is mandatorily payable upon a change of control of us and, subject to certain exceptions, all proceeds from debt or equity raised by us must be used to prepay such note. At September 30, 2006, the interest rate on the $2.5 billion intercompany note was 6.1%.

Clear Channel Communications has a five-year, multi-currency revolving credit facility in the amount of $1.75 billion. Certain of the Company’s international subsidiaries may borrow under a $150.0 million sub-limit within this credit facility to the extent Clear Channel Communications has not already borrowed against this capacity. This sub-limit allows for borrowings in various foreign currencies, which are used to hedge net assets in those currencies and provides funds to the Company’s international operations for certain working capital needs. Certain of the Company’s international subsidiary borrowings under this sub-limit are guaranteed by Clear Channel Communications. The interest rate is based upon LIBOR or, for Euro denominated borrowings, EURIBOR, plus, in

each case, a margin. At September 30, 2006, the interest rate on borrowings under this credit facility ranged from 4.2% to 5.4%. At September 30, 2006, the outstanding balance on the sub-limit was approximately $30.7 million, and approximately $119.3 million was available for future borrowings, with the entire balance to be paid on July 12, 2009.

The Company provides advertising space on its billboards for radio stations owned by Clear Channel Communications. For the nine months ended September 30, 2006 and 2005, the Company recorded $6.9 million and $7.0 million, respectively, in revenue for these advertisements. For the three months ended September 30, 2006 and 2005, the Company recorded $1.9 million and $1.6 million, respectively, in revenue for these advertisements.

Under the corporate services agreement entered into between Clear Channel Communications and the Company at the IPO, Clear Channel Communications provides management services to the Company, which include, among other things: (i) treasury, payroll and other financial related services; (ii) executive officer services; (iii) human resources and employee benefits services; (iv) legal and related services; (v) information systems, network and related services; (vi) investment services; (vii) procurement and sourcing support services; and (viii) other general corporate services. These services are charged to the Company based on actual direct costs incurred or allocated by Clear Channel Communications based on headcount, revenue or other factors on a pro rata basis. For the nine months ended September 30, 2006 and 2005, the Company recorded $15.8 million and $11.8 million, respectively, as a component of corporate expenses for these services. For the three months ended September 30, 2006 and 2005, the Company recorded $5.2 million and $4.0 million, respectively, as a component of corporate expenses for these services.

Pursuant to the tax matters agreement entered into between Clear Channel Communications and the Company at the IPO, the operations of the Company are included in a consolidated federal income tax return filed by Clear Channel Communications. The Company’s provision for income taxes has been computed on the basis that the Company files separate consolidated income tax returns with its subsidiaries. Tax payments are made to Clear Channel Communications on the basis of the Company’s separate taxable income. Tax benefits recognized on the Company’s employee stock options exercises are retained by the Company.

The Company computes its deferred income tax provision using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, as if the Company was a separate taxpayer. Deferred tax assets and liabilities are determined based on differences between financial reporting bases and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Deferred tax assets are reduced by valuation allowances if the Company believes it is more likely than not some portion or all of the asset will not be realized.

The Company has two reportable segments – Americas and international. The Americas segment includes operations in the United States, Canada and Latin America, and the international segment includes operations in Europe, Asia, Africa and Australia.

Revenue of $59.3 million and $46.3 million derived from the Company’s operations in Latin America and Canada is included in the Americas data above for the nine months ended September 30, 2006 and 2005, respectively. Revenue of $19.5 million and $17.0 million derived from the Company’s operations in Latin America and Canada is included in the Americas data above for the three months ended September 30, 2006 and 2005, respectively. Identifiable assets of $216.1 million and $196.9 million derived from the Company’s operations in Latin America and Canada are included in the Americas data above for the nine months ended September 30, 2006 and 2005, respectively.

     Management’s discussion and analysis, or MD&A, of our financial condition and results of operations is provided as a supplement to the unaudited interim financial statements and accompanying notes thereto to help provide an understanding of our financial condition, changes in our financial condition and results of our operations. The information included in MD&A should be read in conjunction with the annual financial statements.

     Our revenues are derived from selling advertising space on displays owned or operated, consisting primarily of billboards, street furniture displays and transit displays. We own the majority of our advertising displays, which typically are located on sites that we either lease or own or for which we have acquired permanent easements. Our advertising contracts with clients typically outline the number of displays reserved, the duration of the advertising campaign and the unit price per display. The margins on our billboard contracts tend to be higher than for our other displays.

     Our advertising rates are generally based on the gross rating points, or total number of impressions delivered, expressed as a percentage of a market population, of a display or group of displays. The number of impressions delivered by a display is measured by the number of people passing the site during a defined period of time and, in some international markets, is weighted to account for such factors as illumination, proximity to other displays and the speed and viewing angle of approaching traffic. Management typically monitors our business by reviewing the average rates, average revenues per display, occupancy and inventory levels of each of our display types by market. In addition, because a significant portion of our advertising operations are conducted in foreign markets, principally France and the United Kingdom, management reviews the operating results from our foreign operations on a constant dollar basis. A constant dollar basis allows for comparison of operations independent of foreign exchange movements. Because revenue-sharing and minimum guaranteed payment arrangements are more prevalent in our international operations, the margins in our international operations are typically less than the margins in our Americas operations.

     The significant expenses associated with our operations include (i) direct production, maintenance and installation expenses, (ii) site lease expenses for land under our displays and (iii) revenue-sharing or minimum guaranteed amounts payable under our billboard, street furniture and transit display contracts. Our direct production, maintenance and installation expenses include costs for printing, transporting and changing the advertising copy on our displays, the related labor costs, the vinyl and paper costs and the costs for cleaning and maintaining our displays. Vinyl and paper costs vary according to the complexity of the advertising copy and the quantity of displays. Our site lease expenses include lease payments for use of the land under our displays, as well as any revenue-sharing arrangements we may have with the landlords. The terms of our Americas site leases generally range from 1 to 20 years. The terms of our international site leases generally range from 1 to 15 years, but vary across our networks.

     Clear Channel Communications has advised us its current intent is to continue to hold all of our Class B common stock and thereby retain its controlling interest in us. However, Clear Channel Communications is not subject to any contractual obligation that would prohibit it from selling, spinning off, splitting off or otherwise disposing of any shares of our common stock.

     Our combined financial statements for the periods prior to our IPO have been derived from the financial statements and accounting records of Clear Channel Communications, principally from the statements and records representing Clear Channel Communications’ Americas and International Outdoor segments, using the historical results of operations and historical bases of assets and liabilities of our business. The consolidated and combined statements of operations include expense allocations for certain corporate functions historically provided to us by Clear Channel Communications. These allocations were made on a specifically identifiable basis or using relative percentages of headcount as compared to Clear Channel Communications’ other businesses or other methods. We and Clear Channel Communications considered these allocations to be a reflection of the utilization of services provided.

     Under the Corporate Services Agreement, Clear Channel Communications allocates to us our share of costs for services provided on our behalf based on actual direct costs incurred by Clear Channel Communications or an estimate of Clear Channel Communications’ expenses incurred on our behalf. For the three months ended September 30, 2006 and 2005, we recorded approximately $5.2 million and $4.0 million, respectively, as a component of corporate expenses for these services. For the nine months ended September 30, 2006 and 2005, we recorded approximately $15.8 million and $11.8 million, respectively, as a component of corporate expenses for these services.

     We believe the assumptions underlying the combined financial statements prior to the IPO are reasonable. However, the combined financial statements may not necessarily reflect our results of operations, financial position and cash flows in the future or what our results of operations, financial position and cash flows would have been had we been a separate, stand-alone company during the periods presented.

     We adopted FAS 123(R), Share-Based Payment, on January 1, 2006, under the modified-prospective approach which requires us to recognize share-based payments in the same line items as cash compensation in the 2006 financial statements for all options granted after the date of adoption as well as for any options that were unvested at adoption. Under the modified-prospective approach, no stock option expense attributable to these options is reflected in the financial statements for 2005. The amounts recorded as share-based payments in the financial statements prior to adopting FAS 123(R) related to the expense associated with restricted stock awards. As a result of adoption, we recognized $3.2 million, $1.2 million and $0.07 million of share-based payments in direct operating, SG&A and corporate expenses, respectively, during the nine months ended September 30, 2006. As of September 30, 2006, there was $12.2 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of approximately three years.

     The fair value of each option awarded is estimated on the date of grant using a Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities from traded options on the Company’s stock, historical volatility on the Company’s stock, and other factors. The expected life of options granted represents the period of time that options granted are expected to be outstanding. The Company uses historical data to estimate option exercise and employees terminations within the valuation model. The risk free rate for periods equal to the life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

     The comparison of the Three and Nine Months Ended September 30, 2006 to the Three and Nine Months Ended September 30, 2005 is as follows:

     Three Months

     Consolidated revenue increased $52.3 million for the third quarter of 2006 compared to the third quarter of 2005. Our Americas segment’s revenue increased $38.7 million, primarily from increased bulletin and airport revenues, as well as the acquisition of Interspace which contributed $14.6 million. Our international segment contributed $13.6 million of the increase, primarily related to $13.1 million attributable to foreign exchange gains

     Nine Months

     Consolidated revenue increased $135.6 million for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. Our Americas segment’s revenue increased $79.1 million from an increase in bulletin and airport revenues. Our international segment contributed $56.5 million, of which approximately $44.9 million during the first six months of 2006 related to Clear Media, a Chinese outdoor advertising company, which we began consolidating in the third quarter of 2005. Increased street furniture revenues also contributed to our international revenue growth, which were partially offset by a revenue decline of $18.7 million from foreign exchange fluctuations.

     Three Months

     Direct operating expenses increased $37.9 million during the third quarter of 2006 compared to the third quarter of 2005. Our Americas segment contributed $11.4 million, principally from an increase in site-lease expenses and our acquisition of Interspace. Direct operating expenses in our international segment increased $26.5 million over the third quarter of 2005, primarily from an increase in fixed rent associated with guarantees on new contracts and $8.3 million from movements in foreign exchange. Share-based payments included in direct operating expenses associated with the adoption of FAS 123(R) were $1.1 million for the third quarter of 2006.

     Nine Months

     Direct operating expenses increased $65.4 million for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. Americas direct operating expenses increased $23.1 million, driven by increased site lease expenses associated with the increase in revenue and the acquisition of Interspace. Interspace contributed $6.2 million to direct operating expenses in the third quarter of 2006. Our international segment contributed $42.3 million, of which $18.0 million during the first six months of 2006 related to our consolidation of Clear Media and the remainder was principally due to an increase in site lease expenses. The increase in the international segment’s direct operating expense was partially offset by a decline of $11.2 million related to movements in foreign exchange. Share-based payments included in direct operating expenses associated with the adoption of FAS 123(R) were $3.2 million for the nine months ended September 30, 2006.

     Three Months

     SG&A decreased $18.5 million during the third quarter of 2006 compared to the third quarter of 2005, which included a $26.6 million charge related to restructuring our businesses in France during the third quarter of 2005, partially offset by $2.9 million related to movements in foreign exchange. SG&A increased in our Americas segment $6.3 million primarily from sales expenses associated with the increase in revenue. Share-based payments included in SG&A associated with the adoption of FAS 123(R) were $0.4 million during the third quarter of 2006.

     Nine Months

     SG&A decreased $8.5 million for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. SG&A increased $13.9 million in our Americas segment principally related to an increase in bonus and commission expenses associated with the increase in revenues. Our international SG&A expenses declined $22.4 million, primarily attributable to a decline of $4.6 million from movements in foreign exchange, as well as $26.6 million related to restructuring our businesses in France recorded in the third quarter of 2005. Share-based payments included in SG&A associated with the adoption of FAS 123(R) were $1.2 million for the nine months ended September 30, 2006.

     Depreciation and amortization increased $6.7 million and $9.0 million during the three and nine months ended September 30, 2006, respectively, as compared to the same periods of 2005. The increase was primarily due to the acquisition of Interspace during the current quarter, the acquisition of an outdoor advertising business in the United Kingdom during the second quarter of 2006 and the consolidation of Clear Media beginning in the third quarter of 2005.

     Corporate expenses increased $2.1 million and $4.4 million during the three and nine months ended September 20, 3006, respectively, as compared to the same periods of 2005. The increase was the result of additional outside professional services primarily from costs related to the first three full quarters as a public Company.

     The gain (loss) on disposition of assets – net for the nine months ended September 30, 2006 increased $18.7 million as compared to the same period of 2005. The increase was primarily related to a $13.2 million gain in our Americas segment from the exchange of assets in one of our markets for the assets of a third party located in a different market during the first quarter of 2006.

     Interest expense decreased $20.1 million and $17.6 million during the three and nine months ended September 30, 2006 as compared to the same periods of 2005, primarily as a result of a decrease in average debt outstanding. In 2005, we had in place two fixed principal and interest rate notes in the aggregate amount of $1.5 billion and a variable rate note in the amount of $2.5 billion. We used all of the net proceeds of the IPO, along with our balance in the “Due from Clear Channel Communications” account, to repay a portion of the outstanding balance of the aggregate $1.5 billion intercompany notes and the remaining balance was contributed to our capital by Clear Channel Communications.

     Other income (expense) – net was income of $0.5 million during the third quarter of 2006, an increase of $6.2 million over the expense of $5.7 million recorded during the same period of 2005. Other income (expense) – net was income of $1.7 million in the first nine months of 2006, an increase of $11.4 million compared to an expense of $9.7 million for the same period of 2005. During the three and nine months ended September 20, 2005, we recorded $4.7 million and $11.0 million in royalty fees which represent payments to Clear Channel Communications for our use of certain trademarks and licenses. The royalty fee was discontinued as of January 1, 2006.

     Our operations are included in a consolidated income tax return filed by Clear Channel Communications. However, for our financial statements, our provision for income taxes was computed on the basis that we file separate consolidated income tax returns with our subsidiaries.

     Current tax expense for the three months ended September 30, 2006 increased $23.4 million as compared to the same period of 2005. The increase is primarily due to an increase in taxable income of $46.3 million. Current tax expense for the nine months ended September 30, 2006 decreased $9.2 million as compared to the same period of 2005. The decrease was due to current tax benefits of approximately $21.3 million recorded in 2006 related to the filing of an amended tax return and the exchange of certain operating assets in the period. In addition, current tax expense decreased due to additional expense being recorded in the first nine months of 2005 for our international operations for changes in tax laws in various countries in which we operate. These amounts were offset by additional current tax expense recorded in the nine months ended September 30, 2006 due to an increase in taxable income of $108.6 million. Our effective tax rate for the nine months ended September 30, 2006 and 2005 was 44.5% and 50.0%, respectively.

     Deferred tax expense for the three months and nine months ended September 30, 2006 increased $6.4 million and $54.0 million, respectively, over the same periods of 2005. The increase was primarily due to deferred tax expense of approximately $21.3 million being recorded in the first nine months of 2006 related to the filing of an amended tax return and the exchange of certain operating assets in the period. In addition, there was an increase in deferred tax expense related to the uncertainty of our ability to utilize certain tax losses in the future for certain international operations as well as additional deferred tax benefits recorded during the first nine months of 2005 in our international operations for changes in tax laws in various countries in which we operate.

     Minority interest expense decreased $5.8 million and $3.1 million for the three and nine months ended September 30, 2006 and 2005, respectively. The decrease was mainly attributable to an overall decline in operating results in Italy and Australia as well as adjustments related to our investment in China made to be in accordance with generally accepted accounting principles in the United States.

     Our Americas revenue increased 12% during the third quarter of 2006, as compared to the third quarter of 2005, primarily attributable to bulletin and airport revenues, as well as revenues associated with the acquisition of Interspace. The increase in bulletin revenue was driven by an increase in rates. The increase in airport revenues was attributable to increased occupancy and rates as well as the acquisition of Interspace in the current quarter, which contributed $14.6 million to revenue growth over the third quarter of 2005. Strong revenue growth for the quarter was achieved across a broad spectrum of markets including Boston, Cleveland, Dallas, Minneapolis, Orlando, Sacramento, San Antonio and Tucson. Top advertising client categories during the quarter included autos, business and consumer services, entertainment, insurance and retail.

     Direct operating expenses increased $11.4 million during the third quarter of 2006 as compared to the third quarter of 2005. The increase was driven by increased site lease expenses associated with the increase in revenue. Interspace contributed $6.2 million to direct operating expenses in the third quarter of 2006. Share-based payments were $0.9 million related to the adoption of FAS 123(R). SG&A expenses increased $6.3 million primarily related to an increase in commission expenses associated with the increase in revenue. Share-based payments were $0.3 million related to the adoption of FAS 123 (R).

     Our Americas revenue increased 9% during the nine months ended September 30, 2006 as compared to the same period of 2005 primarily attributable to bulletin and airport revenues. Bulletin revenues increased primarily from an increase in average rates, while the increase in airport revenues was attributable to increased occupancy and rates. Also contributing to the increased airport revenues was $14.6 million from our acquisition of Interspace.

     Direct operating expenses increased $23.1 million for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, primarily from an increase in site lease expenses of approximately $14.9 million, as well as $2.6 million related to the adoption of FAS 123(R). Interspace contributed $6.2 million to direct operating expenses in the nine months ended September 30, 2006. Our SG&A expenses increased $13.9 million in the nine months of 2006 over the same period of 2005, primarily from an increase in bonus and commission expenses of $7.2 million related to the increase in revenue, and $0.9 million of share-based payments related to the adoption of FAS 123(R).

     Revenues from our international operations increased 4% in the third quarter of 2006 as compared to the third quarter of 2005 primarily related to $13.1 million from movements in foreign exchange. Excluding the effects of foreign exchange, our international revenue was flat over the third quarter of 2005, with growth in our street furniture revenues offset by a decline in our billboard revenues in France and the United Kingdom. Top advertising client categories during the quarter included autos, business and consumer services, entertainment, insurance and retail.

     Direct operating expenses increased $26.5 million over the third quarter of 2005, primarily from an increase in fixed rent associated with guarantees on new contracts and $8.3 million from movements in foreign exchange. Share-based payments were $0.2 million related to the adoption of FAS 123(R). SG&A expenses decreased $24.8 million primarily from a $26.6 million charge from restructuring our businesses in France recorded in the third quarter of 2005, partially offset by $2.9 million related to movements in foreign exchange. Share-based payments were $0.1 million related to the adoption of FAS 123(R).

     Revenue in our international segment increased 5% in the first nine months of 2006 compared to the same period of 2005. The increase includes approximately $44.9 million during the first six months of 2006 related to our consolidation of Clear Media, which we began consolidating in the third quarter of 2005. Also contributing to the increase was growth in street furniture revenues, partially offset by a decline in billboard revenues and approximately $18.7 million related to movements in foreign exchange for the first nine months of 2006 compared to the same period of 2005.

     Direct operating expenses increased $42.3 million for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. The increase was primarily attributable to $18.0 million during the first six months of 2006 related to our consolidation of Clear Media and an increase in site lease expenses. Also included in the increase was $0.6 million related to the adoption of FAS 123(R). SG&A expenses decreased $22.4 million for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, primarily attributable to a decline of $4.6 million from movements in foreign exchange, as well as $26.6 million related to restructuring our businesses in France recorded in the third quarter of 2005. Share-based payments were $0.3 million related to the adoption of FAS 123(R).

  Operating Activities:

     Net cash provided by operating activities of $386.4 million for the nine months ended September 30, 2006 principally reflects net income of $88.0 million, depreciation and amortization of $299.3 million, and deferred taxes of $48.0 million. Net cash flow from operating activities is partially offset by a negative change in working capital of approximately $26.9 million and gains on sales of operating and fixed assets of $21.6 million. Net cash provided by operating activities of $336.6 million for the nine months ended September 30, 2005 principally reflects net income of $21.2 million, depreciation and amortization of $290.2 million, and a positive change in working capital of approximately $35.1 million.

     Net cash used in investing activities of $382.9 million for the nine months ended September 30, 2006 principally reflects cash used for the acquisition of operating assets of $200.7 million and capital expenditures of $164.0 million related to purchases of property, plant and equipment. The cash used for the acquisition of operating assets primarily relates to the acquisition of Interspace and an outdoor advertising business in the United Kingdom. Net cash used in investing activities for the nine months ended September 30, 2005 principally reflects capital expenditures of $130.5 million related to purchases of property, plant and equipment and $43.8 million related to acquisitions of operating assets.

     Net cash used in financing activities of $5.9 million for the nine months ended September 30, 2006 principally relates to a net decrease in debt of $56.1 million, offset by a net transfer of cash from Clear Channel Communications of $50.1 million. Net cash used in financing activities of $48.2 million for the nine months ended September 30, 2005 principally reflects a net transfer of cash to Clear Channel Communications of $59.5 million, offset by a net increase in debt of $11.4 million.

As of September 30, 2006 and December 31, 2005 we had the following debt outstanding:

     In addition to cash flows from operations, another source of liquidity is through borrowings under a $150.0 million sub-limit included in Clear Channel Communications’ five-year, multicurrency $1.75 billion revolving credit facility. Certain of our international subsidiaries may borrow under the sub-limit to the extent Clear Channel Communications has not already borrowed against this capacity and is in compliance with its covenants under the credit facility. The interest rate on outstanding balances under the credit facility is based upon LIBOR or, for Euro denominated borrowings, EURIBOR, plus, in each case, a margin. At September 30, 2006, the outstanding balance on the sub-limit was approximately $30.7 million, and approximately $119.3 million was available for future borrowings, with the entire balance to be paid on July 12, 2009. At September 30, 2006, the interest rate on borrowings under this credit facility ranged from 4.2% to 5.4%. As of November 10, 2006, the outstanding balance on the sub-limit was $31.1 million and $118.9 million was available for future borrowings.

     As part of the day-to-day cash management services provided by Clear Channel Communications, we maintain an account that represents net amounts, up to a maximum of $1.0 billion, due to or from Clear Channel Communications, which is recorded as

“Due from Clear Channel Communications” or “Due to Clear Channel Communications” on the consolidated balance sheets. The account represents our revolving promissory note with Clear Channel Communications. Subsequent to the IPO, the account accrues interest pursuant to the Master Agreement and is generally payable on demand. Included in the account is the net activity resulting from day-to-day cash management services provided by Clear Channel Communications. As a part of these services, we maintain collection bank accounts swept daily by Clear Channel Communications. In return, Clear Channel Communications funds our controlled disbursement accounts as checks or electronic payments are presented for payment. At September 30, 2006, the balance of $49.9 million was a liability recorded in “Due to Clear Channel Communications” on the consolidated balance sheet. At December 31, 2005, the balance of $0.1 million was an asset recorded in “Due from Clear Channel Communications” on the consolidated balance sheet. The increase in the net amount due to Clear Channel Communications during the nine months ended September 30, 2006 was a result of Clear Channel Communications funding a portion of our debt payments and certain acquisitions. The net interest expense for the three months ended September 30, 2006 was $0.4 million and the net interest income for the nine months ended September 30, 2006 was $0.8 million.

     On August 2, 2005, we distributed a note in the original principal amount of $2.5 billion to Clear Channel Communications as a dividend. This note matures on August 2, 2010 and may be prepaid in whole at any time, or in part from time to time. The note accrues interest at a variable per annum rate equal to the weighted average cost of debt for Clear Channel Communications, calculated on a monthly basis. This note is mandatorily payable upon a change of control of us and, subject to certain exceptions, all proceeds from debt or equity raised by us must be used to prepay such note. At September 30, 2006, the interest rate on the $2.5 billion intercompany note was 6.1%.

     The $2.5 billion intercompany note requires us to comply with various negative covenants, including restrictions on the following activities: incurring consolidated funded indebtedness (as defined in the note), excluding intercompany indebtedness, in a principal amount in excess of $400.0 million at any one time outstanding; creating liens; making investments; entering into sale and leaseback transactions (as defined in the note), which when aggregated with consolidated funded indebtedness secured by liens, will not exceed an amount equal to 10% of our total consolidated shareholders’ equity (as defined in the note) as shown on our most recently reported annual audited consolidated financial statements; disposing of all or substantially all of our assets; entering into mergers and consolidations; declaring or making dividends or other distributions; repurchasing our equity; and entering into transactions with our affiliates.

     In addition, the note requires us to prepay it in full upon a change of control. The note defines a change of control to occur when Clear Channel Communications ceases to control (i) directly or indirectly, more than 50% of the aggregate voting equity interests of us, our operating subsidiary or our respective successors or assigns, or (ii) the ability to elect a majority of the Board of Directors of us, our operating subsidiary or our respective successors or assigns. Upon our issuances of equity and incurrences of debt, subject to certain exceptions, we are also required to prepay the note in the amount of the net proceeds received by us from such events.

     The significant covenants contained in the Clear Channel Communications $1.75 billion revolving credit facility relate to leverage and interest coverage (as defined in the credit facility). The leverage ratio covenant requires Clear Channel Communications to maintain a ratio of consolidated funded indebtedness to operating cash flow (as defined by the credit facility) of less than 5.25x. The interest coverage covenant requires Clear Channel Communications to maintain a minimum ratio of operating cash flow to interest expense (as defined by the credit facility) of 2.50x. At September 30, 2006, Clear Channel Communications’ leverage and interest coverage ratios were 3.7x and 4.6x, respectively.

     There are no significant covenants or events of default contained in the cash management note issued by Clear Channel Communications to us or the cash management note issued by us to Clear Channel Communications.

     At September 30, 2006, we and Clear Channel Communications were in compliance with all debt covenants. We expect to remain in compliance throughout 2006.

     We completed the acquisition of Interspace Airport Advertising on July 1, 2006, by issuing 4,250,000 shares of our Class A common stock and the payment of approximately $81.3 million, funded through our revolving promissory note with Clear Channel Communications. The acquisition is valued at approximately $170.4 million based on the Company’s common shares issued at the

closing share price on the date of acquisition of $89.1 million and the cash consideration paid. Interspace’s 2005 revenues and operating expenses (direct and SG&A expenses) were approximately $45.8 million and $32.5 million, respectively.

     In addition to the Interspace acquisition, during the nine months ended September 30, 2006, our Americas segment acquired display faces for $27.9 million in cash, including assets acquired in the exchange of one of our Americas markets for assets located in a different market. In addition, our international segment paid $91.4 million, primarily related to the acquisition of an outdoor advertising business in the United Kingdom.

     Capital expenditures were $164.0 million and $130.5 million in the nine months ended September 30, 2006 and 2005, respectively.

     From time to time, we are involved in legal proceedings arising in the ordinary course of business. Under our agreements with Clear Channel Communications, we have assumed and will indemnify Clear Channel Communications for liabilities related to our business. Other than as described in our Annual Report on Form 10-K for the year ended December 31, 2005, we do not believe there is any litigation pending that would have, individually or in the aggregate, a material adverse effect on our financial position, results of operations or cash flow.

     Certain agreements relating to acquisitions provide for purchase price adjustments and other future contingent payments based on the financial performance of the acquired companies generally over a one to five year period. We will continue to accrue additional amounts related to such contingent payments if and when it is determinable that the applicable financial performance targets will be met. The aggregate of these contingent payments, if performance targets are met, would not significantly impact our financial position or results of operations.

  Interest Rate Risk

     We had approximately $2.7 billion total debt outstanding as of September 30, 2006, substantially all of which was variable rate debt. Based on the amount of our floating-rate debt as of September 30, 2006, each 50 basis point increase or decrease in interest rates would increase or decrease our interest expense and cash outlay for the nine months ended September 30, 2006 by approximately $10.0 million. This potential increase or decrease is based on the simplified assumption that the level of floating-rate debt remains constant with an immediate across-the-board increase or decrease as of September 30, 2006 with no subsequent change in rates for the remainder of the period.

     We have operations in countries throughout the world. The financial results of our foreign operations are measured in their local currencies, except in the hyperinflationary countries in which we operate. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we operate. We believe we mitigate a small portion of our exposure to foreign currency fluctuations with a natural hedge through borrowings in currencies other than the U.S. dollar. Our foreign operations reported a net loss of approximately $29.7 million for the nine months ended September 30, 2006. We estimate a 10% change in the value of the U.S. dollar relative to foreign currencies would have changed our net income for the nine months ended September 30, 2006 by approximately $3.0 million.

     This analysis does not consider the implication such currency fluctuations could have on the overall economic activity that could exist in such an environment in the United States or the foreign countries or on the results of operations of these foreign entities.

     In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 155,Accounting for Certain Hybrid Financial Instruments (“Statement 155”). Statement 155 is an amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities(“Statement 133”) and FASB Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“Statement 140”) and allows companies to elect to measure at fair value entire financial instruments containing embedded derivatives that would otherwise have to be accounted for separately. Statement 155 also requires companies to identify interest in securitized financial assets that are freestanding derivatives or contain embedded derivatives that would have to be accounted for separately, clarifies which interest- and principal-only strips are subject to Statement 133, and amends Statement 140 to revise the conditions of a qualifying special purpose entity due to the new requirement to identify whether interests in securitized financial assets are freestanding derivatives or contain embedded derivatives. Statement 155 is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We will adopt Statement 155 on January 1, 2007 and anticipate that adoption will not materially impact our financial position or results of operations.

     In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold for tax positions taken or expected to be taken in a tax return. FIN 48 requires that entities recognize in their financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The cumulative effect of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings upon adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will adopt FIN 48 on January 1, 2007 and are currently evaluating the impact FIN 48 will have on our financial position and results of operations.

     In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“Statement 157”). Statement 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements for fair value measurements. Statement 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. Statement 157 does not expand the use of fair value in any new circumstances. Statement 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We will adopt Statement 157 on January 1, 2008 and anticipate that adoption will not materially impact our financial position or results of operations.

     In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“Statement 158”). Statement 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The portions of Statement 158 that apply to us are effective as of the end of the fiscal year ending after December 15, 2006. We will adopt Statement 158 as of December 31, 2006 and anticipate that adoption will not materially impact our financial position or results of operations.

     Management believes certain critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Due to the implementation of FAS 123(R), we identified a new critical accounting policy related to share-based compensation, which is listed below. Our other critical accounting policies and estimates are disclosed in the Note A of our Annual Report on Form 10-K for the year ended December 31, 2005.

     Prior to January 1, 2006, we accounted for our share-based payments under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations, as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (“Statement 123”). Under that method, when options were granted with a strike price equal to or greater than market price on date of issuance, there is no impact on earnings either on the date of grant or thereafter, absent certain modifications to the options. Subsequent to January 1, 2006, we account for stock based compensation in accordance with FAS 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, stock based compensation cost is measured at the grant date based on the value of the award and is recognized as expense on a straight-line basis over the vesting period. Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility and forfeiture rates, among other factors. If actual results differ significantly from these estimates, our results of operations could be materially impacted.

     The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. Except for the historical information, this report contains various forward-looking statements which represent our expectations or beliefs concerning future events, including the future levels of cash flow from operations. Management believes all statements expressing expectations and projections with respect to future matters, including our ability to negotiate contracts having more favorable terms and the availability of capital resources; are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. We caution that these forward-looking statements involve a number of risks and uncertainties and are subject to many variables which could impact our financial performance. These statements are made on the basis of management’s views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance, however, that management’s expectations will necessarily come to pass.

     A wide range of factors could materially affect future developments and performance, including:

     This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

Required information is within Item 2

     Our principal executive and financial officers have concluded, based on their evaluation as of the end of the period covered by this Form 10-Q, that our disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, are effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

     There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

     We are currently involved in certain legal proceedings and, as required, have accrued an estimate of the probable costs for the resolution of these claims. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings.

     For information regarding risk factors, please refer to Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Additional information relating to risk factors is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Risks Regarding Forward Looking Statements.”

     See Exhibit Index on Page 29

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.