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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21711
THE MARQUEE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3878295
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
888 SEVENTH AVENUE, NEW YORK, NY 10019
(Address of Principal Executive Offices) (Zip code)
212-728-2000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At August 13, 1998, there were 18,335,631 shares outstanding of the
registrant's common stock, par value $.01 per share.
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THE MARQUEE GROUP, INC.
TABLE OF CONTENTS
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PAGE NO.
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Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1998 (unaudited) and
December 31, 1997 ............................................................. 3
Condensed Consolidated Statements of Operations for the Three And Six Months
Ended June 30, 1998 and 1997 (unaudited) ....................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June
30, 1998 and 1997 (unaudited) .................................................. 5
Condensed Consolidated Statements of Stockholders' Equity for the Six Months
Ended June 30, 1998 (unaudited) ............................................... 6
Notes to Condensed Consolidated Financial Statements ........................... 7
Management's Discussion and Analysis of Financial Condition and Results of
Item 2. Operations .................................................................... 10
Part II Other Information
Item 1. Legal Proceedings .............................................................. 17
Item 2. Changes in Securities and Use of Proceeds ...................................... 17
Item 6. Exhibits and Reports on Form 8-K ............................................... 17
</TABLE>
2
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Item 1. FINANCIAL STATEMENTS
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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(UNAUDITED) (NOTE)
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ASSETS
Current assets
Cash and cash equivalents................................................ $ 3,405 $ 8,944
Cash escrow.............................................................. 2,227 704
Accounts receivable, net................................................. 13,988 6,930
Television and event costs............................................... 726 553
Prepaid expenses and other current assets................................ 611 436
----------- --------------
Total current assets.................................................... 20,957 17,567
Property and equipment, net............................................... 2,194 2,040
Receivables--non current.................................................. 2,320 668
Notes receivable.......................................................... 1,038 1,887
Deposits and other costs related to pending acquisitions.................. 1,422 677
Intangible assets--net ................................................... 22,716 23,951
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$50,647 $46,790
=========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses.................................... $ 5,459 $ 4,592
Acquisition indebtedness--current portion................................ 775 775
Escrow payable........................................................... 2,227 527
Deferred revenues........................................................ 2,793 626
----------- --------------
Total current liabilities .............................................. 11,254 6,520
Acquisition indebtedness--non-current..................................... 1,482 2,144
Deferred rent............................................................. 630 696
Deferred income taxes..................................................... 960 960
Common stock (250,000 shares) subject to put options ..................... 3,341 3,184
Stockholders' equity
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares
issued..................................................................
Common stock, $.01 par value; 25,000,000 shares authorized, 17,913,000
shares issued and outstanding........................................... 174 174
Additional paid-in-capital............................................... 37,158 36,885
Accumulated deficit ..................................................... (4,366) (3,781)
Cumulative transaction adjustment ....................................... 14 8
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32,980 33,286
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$50,647 $46,790
=========== ==============
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1997 has been
derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
3
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THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
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Revenues........................................... $ 9,804 $4,195 $21,272 $6,174
Operating expenses................................. 6,847 2,481 14,987 3,948
General and administrative expenses................ 2,779 1,775 5,374 3,040
Deferred and other non-cash expenses............... 174 29 524 53
Depreciation and amortization...................... 434 10 803 18
--------- --------- --------- ---------
Income/(loss) from operations...................... (430) (100) (416) (885)
Interest expense/(income), net..................... (37) 2 (107) (5)
--------- --------- --------- ---------
(Loss) before income taxes ........................ (393) (102) (309) (880)
Income taxes ...................................... 50 -- 118 --
--------- --------- --------- ---------
Net loss .......................................... (443) (102) (427) (880)
Accretion of obligation related to the put option
issued in connection with the ProServ acquisition 83 -- 158 --
--------- --------- --------- ---------
Net loss applicable to common stockholders ....... $ (526) $ (102) $ (585) $ (880)
========= ========= ========= =========
Net loss per share ................................ $ (0.03) $(0.01) $ (0.04) $(0.12)
========= ========= ========= =========
Weighted average common stock outstanding ......... 16,559 7,494 16,559 7,494
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
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SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
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NET CASH USED IN OPERATING ACTIVITIES ...................... $ (3,532) $(1,493)
INVESTING ACTIVITIES
Purchase of fixed assets................................... (323) (1,250)
Employee loan.............................................. (424)
Deposits and other costs related to acquisitions .......... (720) (1,550)
Increase in other assets .................................. (700)
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Net cash used in investing activities..................... (1,043) (3,924)
FINANCING ACTIVITIES
Payments of acquisition indebtedness....................... (775) (500)
Issuance of common stock, net of offering costs ........... (189) (131)
Costs related to tender offer.............................. (495)
---------- ----------
Net cash provided by financing activities ................ (964) (1,126)
(DECREASE) IN CASH ......................................... (5,539) (6,543)
CASH AT BEGINNING OF PERIOD ................................ 8,944 7,231
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CASH AT END OF PERIOD ...................................... 3,405 $ 688
========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Note received in connection with sale of associated company $ 300
==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
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ADDITIONAL CUMULATIVE TOTAL
NUMBER OF COMMON PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES STOCK CAPITAL DEFICIT ADJUSTMENT EQUITY
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Balance--December 31, 1997 .. 17,913 $174 $36,885 $(3,781) $ 8 $33,286
QBQ Escrow Shares............ 462 462
Secondary offering costs .... (189) (189)
Foreign currency translation
adjustment.................. 6 6
Net loss for period.......... (585) (585)
----------- -------- ------------ ------------- ------------- ---------------
Balance--June 30, 1998....... 17,913 $174 $37,158 $(4,366) $14 $32,980
=========== ======== ============ ============= ============= ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--MERGER WITH SFX ENTERTAINMENT
On July 23, 1998, The Marquee Group, Inc. (the "Company") entered into an
Agreement and Plan of Merger (the "Merger Agreement") with SFX Entertainment,
Inc. ("Parent") and SFX Acquisition Corp., a wholly-owned subsidiary of Parent
("Sub"), pursuant to which Sub will merge with and into the Company (the
"Merger") and the Company will become a wholly-owned subsidiary of Parent.
Pursuant to the Merger Agreement, upon the consummation of the Merger, each
outstanding share of common stock, $.01 par value, of the Company will be
converted into the right to receive from Parent a number of shares of Class A
Common Stock, $.01 par value, of Parent (the "SFX Class A Common Stock") equal
to the following exchange ratio (the "Exchange Ratio"): (i) if the SFX Class A
Common Stock Price (as defined below) is less than or equal to $57.50, then the
Exchange Ratio shall be the number of shares of SFX Class A Common Stock equal
to the quotient obtained by dividing $6.00 by the SFX Class A Common Stock
Price; (ii) if the SFX Class A Common Stock Price is greater than $57.50 and
less than or equal to $60.00, then the Exchange Ratio shall be the number of
shares of SFX Class A Common Stock equal to the difference between (A) 0.1200
and (B) the quotient obtained by dividing 0.9000 by the SFX Class A Common
Stock Price; and (iii) if the SFX Class A Common Stock Price is greater than
$60.00, then the Exchange Ratio shall be the number of shares of SFX Class A
Common Stock equal to the quotient obtained by dividing $6.30 by the SFX Class
A Common Stock Price. The term "SFX Class A Common Stock Price" means the
average of the reported price for the fifteen consecutive trading days ending
on the fifth trading day prior to the effective time of the Merger on the
primary exchange on which the SFX Class A Common Stock is traded, presently the
Nasdaq National Market.
The consummation of the Merger is subject to the satisfaction of a number of
conditions set forth in the Merger Agreement, including, but not limited to,
the approval by the stockholders of the Company of the transactions
contemplated thereby, the expiration or termination of any applicable waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the
consummation of a certain acquisition, and the receipt of all applicable
consents to the Merger from third parties and regulatory agencies. The Merger
is expected to be consummated in the fourth quarter of 1998.
NOTE 2--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Item
310(b) of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for an interim period
are not necessarily indicative of the results that may be expected for a full
year. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-KSB
for the year ended December 31, 1997.
The Company was formed in July 1995 for the purpose of providing
integrated event management, television programming and production,
marketing, talent representation and consulting services in the sports, news
and entertainment industries.
In furtherance of its business strategy, on December 12, 1996, the Company
acquired by merger, concurrently with the closing of its initial public
offering ("IPO"), Sports Marketing & Television International, Inc. ("SMTI")
which provides production and marketing services to sporting events, sports
television shows and professional and collegiate leagues and organizations,
and Athletes and Artists, Inc. ("A&A"), a sports and media representation
firm. The acquisitions of SMTI and A&A are referred to as
7
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THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
the "1996 Acquisitions". In October 1997, the Company acquired ProServ, Inc.
and ProServ Television, Inc. (collectively, "ProServ") (the "ProServ
Acquisition") and QBQ Entertainment, Inc. ("QBQ") (the "QBQ Acquisition")
(collectively, the "1997 Acquisitions"). The Company also completed the Second
Offering (as defined herein) of 8,500,000 shares of its common stock at $5.00
per share in the fourth quarter of 1997. Accordingly, the accompanying
condensed consolidated financial statements include the accounts of the
Company, and the 1997 Acquisitions from the date of acquisition on October 14,
1997. All significant intercompany transactions and accounts have been
eliminated.
NOTE 3--EARNINGS PER COMMON SHARE
Basic earnings per share applicable to common stockholders is based upon
the net loss after reduction of amounts, if any, for accretion of the
obligation related to the put option issued in connection with the ProServ
Acquisition divided by the weighted average number of shares of common stock
outstanding during the year. Shares of common stock placed in escrow upon
completion of the Company's initial public offering have been excluded from
the calculation of basic earnings per share. The Company's outstanding
options, warrants and contingently issuable shares are not included for
diluted earnings per share because the effect would be anti-dilutive.
NOTE 4--NON-CASH COMPENSATION CHARGE
In connection with the acquisition of QBQ in October 1997, the Company
placed in escrow 78,702 shares of its common stock issued to the seller as a
portion of the purchase price. As of March 31, 1998, the Company has determined
that it is probable that the financial thresholds required to be met for the
release of these escrowed share will be achieved in 1998, and, accordingly has
recorded a charge of $462,000 for the six months ended June 30, 1998 as
non-cash compensation in the accompanying condensed consolidated statements of
operations. This compensation charge will be adjusted based upon the changes in
the fair market value of the shares subject to the escrow arrangement through
the actual release date.
NOTE 5--BANK CREDIT AGREEMENT
On July 31, 1998, the Company and its subsidiaries entered into a Credit
Agreement (the "Credit Agreement") with BankBoston, N.A., which provides for
a revolving line of credit for loans and letters of credit (subject to a $2
million sublimit) of up to $35 million in the aggregate. The revolving credit
facility under the Credit Agreement may be used to finance acquisitions, and
for working capital needs. Loans under the Credit Agreement bear interest at
a floating rate equal to a base rate which approximates prime plus an
applicable margin, or an Eurocurrency rate plus an applicable margin. The
applicable margin is dependent on the Company achieving certain leverage
ratios. In August 1998, the Company borrowed a total of $10.6 million under
the revolving credit facility in connection with the Alphabet City
Acquisition, the Cambridge Acquisition and the PAL Acquisition (each as
defined below) (see Note 6), with the initial interest rate associated with
such borrowings being 8.4375% for domestic borrowings and 10.5% for British
pound loans. The obligations of the Company under the Credit Agreement are
secured by a first priority security interest in all existing and future
acquired property of the Company, including the capital stock of its
subsidiaries. The Company's obligations under the Credit Agreement are also
guaranteed by the Company's present and future subsidiaries and secured by a
first priority security interest in all existing and future property of these
subsidiaries. The Credit Agreement also contains financial leverage and
coverage ratios, which may inhibit the Company's ability to incur other
indebtedness, and restrictions on capital expenditures, distributions and
other payments. However, the Company will be permitted to incur additional
indebtedness outside of the Credit Agreement to acquire businesses secured
solely by the assets of such acquired businesses, as long as the Company is
in compliance with the financial covenants of the Credit Agreement exclusive
of such indebtedness and the
8
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THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
related borrowing base applicable to the businesses acquired. The term of the
Credit Agreement is 3 years with borrowing availability reduced periodically
commencing January 1, 2000. See "Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for additional information.
NOTE 6--RECENT ACQUISITIONS
Completed Acquisitions
On August 3, 1998, the Company consummated its acquisition of substantially
all of the assets of Alphabet City Industries, Inc. and all of the outstanding
stock of Alphabet City Sports Records, Inc., both of which are sports and music
marketing companies which develop strategic alliances among sports leagues,
music companies and corporate sponsors (collectively, the "Alphabet City
Acquisition"). The aggregate purchase price for the Alphabet City Acquisition
was approximately $3.4 million in cash (excluding assumed liabilities) and
200,000 shares of the Company's common stock. In addition, the Company may be
obligated to make additional payments of up to $9 million based upon the
financial performance of the acquired businesses.
On August 6, 1998, the Company consummated its acquisition of all of the
outstanding stock of Cambridge Sports International, Inc. ("Cambridge"), a
golf representation company, whose client roster includes a mix of
established PGA Tour winners and many prospects on the Nike Tour (the
"Cambridge Acquisition"). The aggregate purchase price for Cambridge was
approximately $3.5 million in cash and 89,536 shares of the Company's common
stock. In addition, the Company may be obligated to make additional payments
aggregating approximately $2 million based upon the financial performance of
Cambridge.
On August 13, 1998, the Company acquired Park Associates Ltd., a sports and
media talent representation firm in the United Kingdom, for an aggregate
consideration consisting of (pounds sterling) 1.6 million (approximately $2.6
million) in cash and 117,440 shares of the Company's common stock (the "PAL
Acquisition"). In addition, the Company will pay an additional (pounds
sterling) 1.0 million (approximately $1.7 million) in cash and (pounds
sterling) 200,000 (approximately $330,000) in common stock (based on the value
of the common stock during the twenty days prior to the date of each payment)
in five equal annual installments.
Pending Acquisition
On August 12, 1998, the Company entered into a letter of intent with respect
to the acquisition of Tollin/Robins Productions and Tollin/Robins Management,
LLC, both of which are independent television and film production companies
(collectively, "Tollin/Robins"), for an aggregate purchase price of $22 million
($2 million of which will be payable in five equal annual installments
beginning on September 1, 1998). The letter of intent also provides for the
payment of certain additional amounts payable in cash and the Company's common
stock based upon the financial performance of Tollin/Robins. In connection with
entering into the letter of intent, the Company paid a non-refundable deposit
of $1 million. If the acquisition of Tollin/Robins is not consummated on or
before September 15, 1998, the Company will be required to pay an additional
$1 million as liquidated damages.
9
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ITEM 2--MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the condensed
consolidated financial statements and related notes thereto. The following
discussion contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are prospective and involve risks and uncertainties; therefore, the Company's
actual results could differ materially from those discussed in such
forward-looking statements. Factors that could cause or contribute to such
differences include: the Company's limited operating history and history of
losses, the Company's ability to manage its growth and to integrate its
acquisitions, potential conflicts of interest, the Company's dependence on a
limited number of clients and events and other risks and uncertainties.
Readers are advised to review the Company's latest annual report and other
filings with the Securities and Exchange Commission in conjunction with
reviewing the following discussion of the Company's financial condition and
results of operations. The Company undertakes no obligation to publicly
release the results of any revisions to these forward looking statements that
may be made to reflect any future events or circumstances.
RECENT DEVELOPEMENTS
On July 23, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with SFX Entertainment, Inc. ("Parent") and SFX
Acquisition Corp., a wholly-owned subsidiary of Parent ("Sub"), pursuant to
which Sub will merge with and into the Company (the "Merger") and the Company
will become a wholly-owned subsidiary of Parent. Pursuant to the Merger
Agreement, upon the consummation of the Merger, each outstanding share of
common stock, $.01 par value, of the Company will be converted into the right
to receive from Parent a number of shares of Class A Common Stock, $.01 par
value, of Parent (the "SFX Class A Common Stock") equal to the following
exchange ratio (the "Exchange Ratio"): (i) if the SFX Class A Common Stock
Price (as defined below) is less than or equal to $57.50, then the Exchange
Ratio shall be the number of shares of SFX Class A Common Stock equal to the
quotient obtained by dividing $6.00 by the SFX Class A Common Stock Price; (ii)
if the SFX Class A Common Stock Price is greater than $57.50 and less than or
equal to $60.00, then the Exchange Ratio shall be the number of shares of SFX
Class A Common Stock equal to the difference between (A) 0.1200 and (B) the
quotient obtained by dividing 0.9000 by the SFX Class A Common Stock Price; and
(iii) if the SFX Class A Common Stock Price is greater than $60.00, then the
Exchange Ratio shall be the number of shares of SFX Class A Common Stock equal
to the quotient obtained by dividing $6.30 by the SFX Class A Common Stock
Price. The term "SFX Class A Common Stock Price" means the average of the
reported price for the fifteen consecutive trading days ending on the fifth
trading day prior to the effective time of the Merger on the primary exchange
on which the SFX Class A Common Stock is traded, including the Nasdaq National
Market.
Additionally, the Merger Agreement places certain restrictions on the
conduct of business by the Company, including a restriction on the incurrence
of indebtedness and the making of capital expenditures.
The consummation of the Merger is subject to the satisfaction of a number
of conditions set forth in the Merger Agreement, including, but not limited
to, the approval by the stockholders of the Company of the transactions
contemplated thereby, the expiration or termination of any applicable waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the
entry by the Company into a bank credit facility and the consummation of a
certain acquisition, and the receipt of all applicable consents to the Merger
from third parties and regulatory agencies. The Merger is expected to be
consummated in the fourth quarter of 1998.
GENERAL
The Company was formed in July 1995 for the purpose of providing integrated
event management, television programming and production, marketing, talent
representation and consulting services in the sports, news and other
entertainment industries. The Company has been engaged in developing its sports
television programming and production, marketing and consulting businesses
since the time of its formation. In December 1996, the Company acquired Sports
Marketing and Television International, Inc. ("SMTI") and Athletes and Artists,
Inc. ("A&A") (collectively, the "1996 Acquisitions"). The 1996 Acquisitions
were financed with proceeds from the Company's initial public offering in
December ("IPO"). In October 1997, the Company acquired ProServ, Inc. and
ProServ Television, Inc. (collectively, "ProServ") (the "ProServ Acquisition")
and QBQ Entertainment, Inc.
10
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("QBQ") (the "QBQ Acquisition") (collectively, the "1997 Acquisitions"). The
Company also completed its secondary public offering of 8,500,000 shares of
its common stock at $5.00 per share in October and November 1997 (the "Second
Offering").
For all periods presented, the supplemental discussion and analysis of the
results of operations on a pro forma basis include the Company, ProServ and
QBQ, as if they had always been members of the same operating group. The
following discussion also contains certain forward-looking statements that
involve risks and uncertainties. The Company's future results of operations
could differ materially from those discussed herein. Factors that could cause
or contribute to such differences include, but are not limited to,
uncertainties related to the Company's business and growth strategies,
difficulties in achieving cost savings and revenue enhancements and
difficulties in integrating the acquired companies. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
The primary sources of the Company's revenues are fees from providing
event management, television programming and production, sports marketing and
consulting services and commissions from representation of sports, news and
entertainment personalities. Revenues from event management services are
recognized when the events are held. Revenues from television programming and
production services are recognized when the programs are available for
broadcast. Marketing revenues are recognized for guaranteed amounts when
contractual obligations are met (subsequent royalties are recorded when
received). Revenues from advertising services are recognized in the month the
advertisement is broadcast or printed. Commissions based on profit or gross
receipt participations are recorded upon the determination of such amounts.
Consulting revenue is recognized as services are provided. Commissions from
the Company's talent representation services are recognized as revenue when
they become payable to the Company under the terms of the Company's
agreements with its clients. Generally, such commissions are payable by
clients upon their receipt of payments for performance of services.
The Company's revenues may vary from quarter to quarter, due to the timing
of certain significant events and the resulting recognition of revenues from
such events. Historically, the fourth quarter produced the highest percentage
of revenues for the year, principally from the Company's management and
marketing of The Breeders' Cup Championship and from representation
agreements with professional hockey players, which results in revenue to the
Company upon the commencement of the National Hockey League season. As a
result of the Company's recent entry into the business of representing
professional football players and the 1997 Acquisitions, it is anticipated
that the Company's revenues and expenses will increase, and the Company
expects that these increased revenues and expenses will be recorded
substantially in the third as well as the fourth quarter.
A significant portion of the Company's revenues to date has been derived
from a small number of events and clients. On a pro forma basis, The
Breeders' Cup Championship would have accounted for approximately 17% of the
Company's revenues for the year ended December 31, 1997. The Breeders' Cup
Agreement terminates on December 31, 2000, with an automatic renewal under
certain circumstances, unless terminated earlier in accordance with the terms
of the agreement, including the termination, for any reason, of the Company's
employment of Michael Letis or Michael Trager or the unavailability of Mr.
Letis or Mr. Trager to perform the services necessary to enable the Company
to comply with the terms of The Breeders' Cup Agreement.
The Company has recorded and will continue to record substantial
compensation charges and other non-cash charges to operations in connection
with the 1997 Acquisitions and the issuance of securities to certain officers,
directors and consultants. In connection with the 1997 Acquisitions, the
Company recorded as intangibles the excess of the purchase price over the net
tangible assets acquired of approximately $24 million which will be amortized
over twenty years. In the first six months of 1998, the Company recorded a
charge to operations of $462,000 as non-cash compensation, in recognition of
the probability of QBQ achieving certain financial thresholds which would
require the release of the shares of the Company's common stock placed in
escrow in connection with the QBQ Acquisition. This compensation charge will be
adjusted based upon the changes in the fair market value of the shares
11
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subject to the escrow arrangement through the actual release date. (See Note 3
to the Condensed Consolidated Financial Statements.) The Company may also
record additional non-cash compensation expense during the period if the shares
of the Company's common stock subject to an escrow agreement entered into in
connection with the IPO are released from escrow because certain thresholds for
the release are met. In connection with the Merger, the holders of the IPO
escrow shares executed release agreements whereby each of the holders waived
any and all rights to receive such escrow shares, effective as of the date of
the consummation of the Merger. These charges are not deductible for income tax
purposes and may have the effect of significantly increasing the Company's
losses or reducing or eliminating earnings, if any, at such time. In addition,
the Company will record charges to operations over the next two years
aggregating $.6 million related to the Company's potential obligation to
repurchase the shares of common stock issued in connection with the ProServ
Acquisition, and the Company will also record charges to operations aggregating
$.7 million over the remaining three to eight years related to imputed interest
on the indebtedness to the former stockholders of SMTI, A&A and QBQ. Further,
in connection with an officer's employment agreement, the Company will
recognize a non-cash compensation charge of $.5 million over the next four
years.
RESULTS OF OPERATIONS
The Company's consolidated financial statements are not directly
comparable from period to period because the Company consummated the 1997
Acquisitions in October 1997. As used in "Results of Operations" discussed
below, pro forma gives effect only to the 1997 Acquisitions.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
For the three months ended June 30, 1998, the Company generated revenues
of approximately $9.8 million compared to $4.2 million for the three months
ended June 30, 1997. The increase in revenues of approximately $5.6 million
is principally attributable to the inclusion of the operations of the 1997
Acquisitions ($5.1 million). The balance of the increase in revenues is
principally attributable to increases in the Company's television production
and programming activities related to the Professional Bowlers Association
("PBA") Tour broadcasts on CBS, the syndicated series More Than a Game, and
increased production of boxing broadcasts on ESPN. Revenues for the three
months ended June 30, 1998 approximated the pro forma revenues for the same
period in 1997. The Company realized increases in talent representation
revenues ($.4 million) attributable to increased talent bookings (principally
the Billy Joel tour), and increased television production and programming
revenues ($.6 million) as mentioned above. These increases were offset by
reductions in event management, which principally resulted from a decline in
ticket revenues as a result of poor weather and early round eliminations of
world class tennis players in the AT&T Challenge.
The Company's operating expenses of $6.8 million for the three months
ended June 30, 1998 increased $4.3 million from $2.5 million for the prior
year period, principally, as a result of the inclusion of the operations of
the 1997 Acquisitions ($3.3 million), increased costs associated with the
production of the PBA Tour and the syndicated series More Than a Game, and
increased staffing. The Company's operating expenses increased approximately
$.4 million for the three months ended June 30, 1998 compared to the same
period in 1997 on a pro forma basis.
General and administrative expenses were approximately $2.8 million for
the three months ended June 30, 1998 as compared to $1.8 million for the same
period in 1997. The increase was principally the result of the inclusion of
the operations of the 1997 Acquisitions. On a pro forma basis, general and
administrative expenses increased $.7 million for the three months ended June
30, 1998 from approximately $2.2 million in the prior year period after
deductions for projected cost savings that were not fully achieved by
June 30, 1998.
The Company's loss from operations was $.4 million for the three months
ended June 30, 1998 compared to an operating loss of $.1 million for the same
period in 1997. The 1998 quarter was impacted by a non-cash compensation
charge of $.1 million as a result of the determination that the financial
thresholds required to be met for the release of the QBQ escrow shares (as
discussed herein) would
12
<PAGE>
probably be achieved in 1998. This compensation charge will be adjusted based
upon changes in the fair value of the QBQ escrow shares through the actual
release date of such shares. Another factor impacting the 1998 quarter is the
charge for the amortization of goodwill for the 1997 Acquisitions of $.3
million. On a pro forma basis, the Company would have reported income from
operations of $.9 million for the 1997 Quarter.
The Company's net loss applicable to common stockholders for the three
months ended June 30, 1998 was $.5 million compared to a net loss of $.1
million for the same period in 1997. The 1998 quarter results include
non-cash charges mentioned above as well as a charge of $.1 million related
to the accretion of the Company's potential obligation in connection with the
put option on common stock issued in connection with the ProServ Acquisition.
On a pro forma basis, the net income applicable to common stockholders would
have been $.1 million.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
For the six months ended June 30, 1998, the Company generated revenues of
approximately $21.3 million compared to $6.2 million for the six months ended
June 30, 1997. The increase in revenues of approximately $15 million is
principally attributable to the inclusion of the operations of the 1997
Acquisitions ($12.7 million). The balance of the increase in revenues is
attributable to increases in the company's television production and
programming activities ($1.2 million) and talent representation ($.8
million). The increase in television revenue was principally due to the
production for broadcast of the PBA Tour on CBS and ESPN, the syndicated
series More Than a Game, and increased production of boxing broadcasts on
ESPN. The increase in talent representation fees includes revenues from the
Marquee Football division that began operations in the second quarter of
1997. The increase in revenues of $7.7 million for the six months ended June
30, 1998, as compared to the six months ended June 30, 1997, on a pro forma
basis, is attributable to the matters discussed above as well as increased
revenues for the Guardian Cup ($3.0 million), an ATP tennis tournament held
in the United Kingdom in February 1998, partially offset by reduced revenues
from the AT&T Challenge, an ATP tennis tournament in Atlanta. In addition,
the Company generated revenues for securing the naming rights of a new arena
being built in Los Angeles and the procurement of various other endorsements
($1.2 million) during the six months ended June 30, 1998. Talent
representation fees increased $1.4 million due to the Billy Joel tour,
signing bonuses for certain football players, and marketing opportunities for
represented clients.
The Company's operating expenses of $15 million for the six months ended
June 30, 1998 increased $11.1 million from $3.9 million in the same period in
1997, principally, as a result of the inclusion of the operations of the 1997
Acquisitions ($8.7 million) and increased costs associated with the
production of the PBA tour, boxing and the syndicated series More Than a Game
($2.2 million). The Company's operating expenses increased approximately $6.4
million for the six months ended June 30, 1998 compared to the same period in
1997, on a pro forma basis. The increase is principally the result of matters
previously discussed as well as costs associated with the ATP Tennis
tournament in the United Kingdom ($3.0 million), increased television
production and distribution expenses for other sporting events for which the
Company has distribution rights.
General and administrative expenses were approximately $5.4 million for
the six months ended June 30, 1998 as compared to $3.0 million for the same
period in 1997. The increase was principally the result of the inclusion of
the operations of the 1997 Acquisitions ($1.9 million) and increased staff
and occupancy costs required to support the Company's expanded business
operations. General and administrative expenses increased $.6 million for the
period ended June 30, 1998 from approximately $4.7 million in the prior year
period, on a pro forma basis. The increase is the result of higher occupancy
and staff costs required to support the Company's expanded business
operations.
The Company's loss from operations was $.4 million for the six months
ended June 30, 1998 compared to an operating loss of $.9 million for the same
period in 1997. The six month period ended June 30, 1998 was impacted by a
non-cash compensation charge of $.5 million as a result of the determination
that the financial thresholds required to be met for the release of the QBQ
escrow shares would probably be achieved in 1998. This compensation charge
will be adjusted based upon the change in the fair value of the QBQ escrow
shares through the actual release date of such shares. Another factor
13
<PAGE>
impacting six months 1998 period is the charge for the amortization of
goodwill for the 1997 Acquisitions of $.6 million. On a pro forma basis, the
Company would have reported a loss from operations of $.4 million for the six
months 1997 period.
The Company's net loss applicable to common stockholders for the six
months ended June 30, 1998 was $.6 million compared to a net loss of $.9
million for the same period in 1997. The six months 1998 results include
non-cash charges mentioned above as well as a charge of $.2 related to the
accretion of the Company's potential obligation in connection with the put
option on common stock issued in connection with the Pro Serve Acquisition.
On a pro forma basis, the net loss applicable to common stockholders would
have been $.5 million.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's principal sources of funds have been from the net proceeds
from the Company's IPO in December 1996 of approximately $15.6 million, net
proceeds of approximately $38.4 million from the Second Offering in October and
November 1997 and borrowings of $10.6 million under the Credit Facility (as
defined herein) in August 1998. The Company has paid approximately $10.6
million to finance the Company's acquisitions to date and approximately $10.5
million was used to finance the Company's 1997 tender offer for its then
outstanding warrants. Working capital as of June 30, 1998 was approximately
$9.7 million.
Completed Acquisitions
In 1997, the Company purchased ProServ for an aggregate purchase price of
$10.8 million in cash and the issuance of 250,000 shares of the Company's
common stock and repaid approximately $2.4 million of the outstanding
indebtedness of ProServ. The shares issued in connection with the purchase of
ProServ are subject to certain put and call options. The holder of the put
option, at any time within the 60 day period following the second anniversary
of the consummation of the ProServ Acquisition, may elect to transfer to the
Company up to all of the remaining common stock of the Company held by the
option holder at a price per share of $7.70 (up to approximately $1.9 million
in the aggregate). In addition, at any time between the 61st and 90th day
following the second anniversary of the consummation of the ProServ
Acquisition, the Company may purchase 50% of the common stock of the Company
held by option holder at a price per share of $7.70 (up to $962,500 in the
aggregate). The Company may also be obligated to make additional earn-out
payments of up to $2.5 million over the next 4 years based on the financial
performance of ProServ.
The Company also purchased certain assets of QBQ, in 1997, for an
aggregate purchase price of approximately $6.7 million, of which $2.0 million
was paid by the issuance of 314,812 shares of common stock of the Company,
$1.0 million will be payable in equal annual installments over eight years,
subject to acceleration in certain circumstances and $615,000 will be payable
in annual installments over five years. In addition, the Company deposited
78,702 shares of its common stock with a value of approximately $500,000 into
an escrow account. The Company has determined that it was probable that these
shares will be released from escrow and, accordingly, has recorded a charge
to operations of $462,000 as non-cash compensation (see Note 4 to the
Condensed Consolidated Financial Statements). In connection with the QBQ
Acquisition, the Company loaned $1.5 million to the sole shareholder of QBQ,
on a non-recourse basis, secured by the Company's common stock issued in the
QBQ Acquisition. The acquisition agreement also provides that, at any time
within the 30-day period following the first to occur of (i) the second
anniversary of the consummation of the QBQ Acquisition or (ii) an
Acceleration Event (as defined in the QBQ acquisition agreement), QBQ may, at
its option, elect to transfer to the Company up to 75% of the shares it
received in connection with the QBQ Acquisition for an aggregate purchase
price of up to $1.5 million. In addition, at any time within the 30-day
period following the first to occur of the second anniversary of the closing
of the QBQ Acquisition or a Pledge Event (as defined in the QBQ acquisition
agreement), the Company may, at its option, elect to purchase 50% of such
shares from QBQ for an aggregate of $1.5 million. In addition, if the QBQ
escrow shares are released from escrow at any time within the first 30 days
after the second anniversary of the consummation of the QBQ Acquisition or an
Acceleration Event, (i) QBQ may, at its option, elect to transfer up to 75%
of the QBQ escrow shares to the Company for an aggregate purchase price of up
to $375,000 and (ii) the Company may, at its option, elect to purchase up to
50% of the QBQ Escrow Shares for an aggregate purchase price of up to
$750,000.
14
<PAGE>
In connection with the 1996 Acquisitions, the Company paid $9.0 million
and agreed to pay $2.5 million to the former stockholders of SMTI and A&A in
five equal annual installments, which began on April 1, 1997. The second
installment of $500,000 was paid in April 1998.
On August 3, 1998, the Company consummated its acquisition of substantially
all of the assets of Alphabet City Industries, Inc. and all of the outstanding
stock of Alphabet City Sports Records, Inc., both of which are sports and music
marketing companies which develop strategic alliances among sports leagues,
music companies and corporate sponsors (collectively, the "Alphabet City
Acquisition"). The aggregate purchase price for the Alphabet City Acquisition
was approximately $3.4 million in cash (excluding assumed liabilities) and
200,000 shares of the Company's common stock. In addition, the Company may be
obligated to make significant additional payments (up to $9 million) based upon
the financial performance of the acquired business.
On August 6, 1998, the Company consummated its acquisition of all of the
outstanding stock of Cambridge Sports International, Inc. ("Cambridge"), a
major golf representation company, whose client roster includes a mix of
established PGA Tour winners and many prospects on the Nike Tour (the
"Cambridge Acquisition"). The aggregate purchase price for Cambridge was
approximately $3.5 million in cash and 89,536 shares of the Company's common
stock. In addition, the Company may be obligated to make additional payments
aggregating approximately $2 million based upon the financial performance of
Cambridge.
On August 13, 1998, the Company acquired Park Associates Ltd. ("Park
Associates"), a sports and media talent representation firm in the United
Kingdom, for an aggregate consideration consisting of (pounds sterling) 1.6
million (approximately $2.6 million) in cash and 117,440 shares of the
Company's common stock (the "PAL Acquisition"). In addition, the Company will
pay an additional (pounds sterling) 1.0 million (approximately $1.7 million)
in cash and (pounds sterling) 200,000 (approximately $330,000) in common
stock (based on the value of the common stock during the twenty days prior to
the date of each payment) in five equal annual installments.
15
<PAGE>
The Company financed the cash portion of the Alphabet City, Cambridge and
PAL Acquisitions with $10.6 million in borrowings under the Credit Agreement
(as defined below).
Pending Acquisition
On August 12, 1998, the Company entered into a letter of intent with respect
to the acquisition of Tollin/Robins Productions and Tollin/Robins Management,
LLC, both of which are independent television and film production companies
(collectively, "Tollin/Robins"), for an aggregate purchase price of $22 million
($2 million of which will be payable in five equal annual installments
beginning on September 1, 1998). The letter of intent also provides for the
payment of certain additional amounts payable in cash and the Company's common
stock based upon the financial performance of Tollin/Robins. In connection with
entering into the letter of intent, the Company paid a non-refundable deposit
of $1 million. If the acquisition of Tollin/Robins is not consummated on or
before September 15, 1998, the Company will be required to pay an additional
$1 million as liquidated damages. The Company financed the $1 million deposit
with its cash on hand and intends to finance the Tollin/Robins acquisition with
borrowings under the Credit Agreement.
Credit Agreement
On July 31, 1998, the Company entered into a Credit Agreement with
BankBoston, N.A. (the "Credit Agreement") which provides for a revolving line
of credit for loans and letters of credit (subject to a $2 million sublimit)
of up to $35 million in the aggregate (the "Credit Facility"). The revolving
credit facility under the Credit Agreement may be used to finance
acquisitions and for working capital needs. Loans under the Credit Agreement
bear interest at a floating rate equal to a base rate which approximates
prime plus an applicable margin, or an Eurocurrency rate plus an applicable
margin, whichever is applicable. The applicable margin is dependent on the
Company achieving certain leverage ratios. In August 1998, the Company
borrowed a total of $10.6 million under the revolving credit facility in
connection with the Alphabet City Acquisition, the Cambridge Acquisition and
the PAL Acquisition (each as defined herein), with the initial interest rate
associated with such borrowings being 8.4375% for domestic borrowings and
10.5% for British pound loans. The obligations of the Company under the
Credit Agreement are secured by a first priority security interest in all
existing and future acquired property of the Company including the capital
stock of its subsidiaries. The Company's obligations under the Credit
Agreement are also guaranteed by the Company's present and future
subsidiaries and secured by a first priority security interest in all
existing and future property of these subsidiaries. The Credit Agreement also
contains financial leverage and coverage ratios, which may inhibit the
Company's ability to incur other indebtedness, and restrictions on capital
expenditures, distributions and other payments. However, the Company will be
permitted to incur additional indebtedness outside of the Credit Agreement to
acquire businesses secured solely by the assets of the acquired businesses,
as long as the Company is in compliance with the financial covenants of the
Credit Agreement exclusive of such indebtedness and the related borrowing
base related to the businesses acquired. The term of the Credit Agreement is
3 years with borrowing availability reduced periodically commencing January
1, 2000.
Year 2000 Compliance
The Company does not expect to incur any material costs in order to become
Year 2000 compliant.
Management believes that the Company's working capital, cash flow generated
from operations, as well as the availability to make additional borrowings
under its Credit Facility are sufficient to meet the Company's working capital
requirements for the foreseeable future. However, the Company's strategy
involves continued expansion through additional acquisitions both within its
existing lines of businesses and within complementary lines of businesses.
Pursuant to such strategy, the Company is currently negotiating with respect to
certain additional acquisitions, although it has not entered into any definitive
agreements with respect to such acquisitions and there can be no assurance that
it will do so. After the utilization of the available cash on hand and
borrowings under the Credit Facility, additional acquisitions may involve
additional debt financing (which would require additional payments of principal
and interest on such indebtedness and would adversely impact the Company's cash
flows) and/or the issuance of equity securities (which may be dilutive to the
ownership interests of the Company's then existing stockholders). Any such
acquisitions may result in charges to operations relating to interest expense
or the recognition and amortization of goodwill, which would have the effect of
increasing the Company's losses or reducing or eliminating earnings, if any. In
addition, if the Company is required to repurchase its shares issued in
connection with the 1997 Acquisitions, or make any of the earn-out payments
described above, there can be no assurance that the Company will have funds
available for such repurchases or to make the additional earn-out payments.
16
<PAGE>
PART II--OTHER INFORMATION.
ITEM 1--LEGAL PROCEEDINGS.
On May 5, 1998, a class action complaint was filed in Chancery Court in the
State of Delaware, New Castle County, CA #16355NC against the Company, certain
of its directors and SFX Entertainment, Inc. ("Parent", and collectively with
the Company and its directors, the "defendants"). The complaint alleged that
Parent had proposed an acquisition of the Company and that the proposed
acquisition would be unfair to the Company's public stockholders. The complaint
sought an order enjoining the proposed transaction or in the alternative,
awarding rescissory and compensatory damages.
On July 22, 1998, the parties entered into a Memorandum of Understanding,
pursuant to which the parties have reached an agreement providing for a
settlement of the action (the "Settlement"). Pursuant to the Settlement, the
defendants acknowledged that the legal action was a significant factor in
Parent improving the terms of its offer to acquire the Company. The
Settlement also provides for the defendants to pay plaintiffs' counsel an
aggregate of $310,000, including all fees and expenses as approved by the
court. The Settlement is conditioned on the (a) consummation of the Merger,
(b) completion of confirmatory discovery and (c) approval of the court.
Pursuant to the Settlement, the defendants have denied, and continue to deny,
that they have acted improperly in any way or breached any fiduciary duty.
There can be no assurance that the court will approve the settlement on the
terms and conditions provided for therein, or at all.
ITEM 2--CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c)
In July 1998 the Company issued 15,978 shares of the Company's Common Stock
to an employee.
On August 3, 1998, the Company issued 200,000 shares of the Company's
common stock in connection with the Alphabet City Acquisition.
On August 6, 1998, the Company issued 89,536 shares of the Company's
common stock in connection with the acquisition of Cambridge.
On August 13, 1998, the Company issued 117,440 shares of the Company's
common stock in connection with the PAL Acquisition. In addition, the Company
will issue an aggregate of 200,000 shares of its common stock to the sellers
in the PAL Acquisition in five equal annual installments.
All of the above transactions were private transactions not involving a
public offering and were exempt from the registration provisions of the
Securities Act of 1933 pursuant to Section 4(2) thereof. The sale of
securities was without the use of an underwriter, and the shares bear a
restrictive legend permitting the transfer thereof only upon registration of
the shares or an exemption under the Securities Act.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Agreement and Plan of Merger, dated as of July 23, 1998, among
SFX Entertainment, Inc., SFX Acquisition Corp. and The Marquee
Group, Inc. (incorporated by reference to the Report on Form 8-K
of SFX Entertainment, Inc. (File No. 0-24017) filed with the
Commission on August 5, 1998).
10.2 Stock and Asset Purchase Agreement, dated as of August 3, 1998,
by and among Alphabet City Sports Records, Inc., Alphabet City
Industries, Inc., Kenneth Dichter, Jesse Itzler, The Marquee Group,
Inc. and Marquee Records, Inc. (incorporated by reference to the
Report on Form 8-K of the Company (File No. 0-21711) filed with the
Commission on August 13, 1998).
10.3 Credit Agreement, dated as of July 31, 1998, among The Marquee
Group, Inc., the Subsidiaries of The Marquee Group, Inc. and
BankBoston, N.A. (incorporated by reference to the Report on Form
8-K of the Company (File No. 0-21711) filed with the Commission
on August 13, 1998).
27. Financial Data Schedule.
(b) Reports on Form 8-K
None.
17
<PAGE>
SIGNATURES
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.
THE MARQUEE GROUP, INC.
/s/ Jan E. Chason
-----------------------------------
Jan E. Chason
Chief Financial Officer and
Treasurer
August 14, 1998
18
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