<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration File No.: 333-57511
PROSPECTUS SUPPLEMENT NO. 2
TO
PROSPECTUS DATED JUNE 30, 1998
3,740,034 SHARES
[SFX ENTERTAINMENT, INC. LOGO]
CLASS A COMMON STOCK
(PAR VALUE $.01 PER SHARE)
----------------
The following information (including the annexes hereto, "Supplement No.
2") supplements the Prospectus dated June 30, 1998 (the "Prospectus") of SFX
Entertainment, Inc., a Delaware corporation (the "Company" or "SFX"), related
to the offering of up to 3,740,034 shares of Class A Common Stock, par value
$.01 per share (the "Class A Common Stock"), of the Company from time to time
by certain Selling Stockholders. Capitalized terms used but not defined herein
have the meaning ascribed to them in the Prospectus.
This Supplement No. 2 should be read in conjunction with the Prospectus
and the Prospectus Supplement No.1, dated July 7, 1998 ("Supplement No. 1"). To
the extent information contained in this document (including the annexes
hereto) differs from the Prospectus or Supplement No. 1, please rely on the
information in this Supplement No. 2.
The date of this Supplement No. 2 is September 18, 1998.
COMPLETED ACQUISITIONS
On July 2, 1998, the Company acquired certain assets of Don Law. The Don
Law Acquisition is described in Supplement No. 1 and in the Prospectus.
In July and August 1998, the Company completed the acquisition of five
additional companies (including EMI) in the theatrical and music segments,
principally in the areas of programming, touring and merchandising. The
aggregate purchase price was $101.6 million in cash and 300,000 shares of Class
A Common Stock (which are subject to piggyback and demand registration rights).
The purchase prices were financed with available cash and a portion of the
proceeds of the Equity Offering. The Company may also be required to make
additional payments to the sellers of one of the acquired companies based on
that company's EBITDA for the years 1998 through 2000.
On September 11, 1998, the Company purchased Magicworks Entertainment
Incorporated ("Magicworks"), a publicly-traded company, for a total
consideration of approximately $120.0 million in cash. The acquisition was
consummated by means of a tender offer (in which the Company purchased
approximately 98.7% of the Magicworks common stock) followed by a merger (in
which the remaining shares of common stock were converted into the cash
consideration). The acquisition was financed with available cash and borrowings
under the Credit Facility. Magicworks specializes in the production and
promotion of live entertainment events such as theatrical shows, musical
concerts, ice skating shows, and other forms of live entertainment.
The above acquisitions will be accounted for using the purchase method of
accounting, and intangible assets created in the purchase transaction will
generally be amortized against future earnings over a fifteen-year period. The
amount of such amortization will be substantial and will continue to affect the
Company's operating results in the future. These expenses, however, do not
result in an outflow of cash by the Company and do not impact EBITDA.
PENDING ACQUISITIONS AND REGULATORY MATTERS
The Company has entered into an Agreement and Plan of Merger, dated as of
July 23, 1998, with The Marquee Group, Inc. ("Marquee"). The agreement
contemplates that Marquee will become a wholly-owned subsidiary of the Company,
in a merger transaction. The agreement provides that, when the merger is
consummated, each outstanding share of common stock of Marquee will convert
into the right to receive shares of Class A Common Stock having a value equal
to $6.00 (subject to upward adjustment to $6.30 under certain circumstances).
The Class A Common Stock value will equal the average of the last reported sale
price of Class A Common Stock for the fifteen consecutive trading days ending
on the fifth trading day before the merger is consummated. The closing will be
subject to various conditions, including approval by Marquee's stockholders,
Marquee's consummation of certain transactions and the receipt of governmental
clearance under the HSR Act. Marquee is a publicly traded company that provides
integrated event management, television production, marketing and consulting
services in the sports, news and entertainment industries.
<PAGE>
On August 13, 1998, the Company and the owner of the Cellar Door group of
companies (collectively, "Cellar Door") entered into a letter of intent with
respect to the Company's acquisition of all of the outstanding capital stock of
Cellar Door. Pursuant to the letter of intent, the aggregate purchase price for
Cellar Door will be $70.0 million in cash payable at closing, shares of Class A
Common Stock with a value of $20.0 million (based upon the stock's average
closing price for the twenty business days before closing) and $8.5 million
payable in five equal annual installments beginning on the first anniversary of
the closing date. In addition, the Company will issue to the seller options to
purchase 100,000 shares of Class A Common Stock. The closing will be subject to
customary closing conditions, including the entry into a definitive acquisition
agreement and the receipt of governmental clearance under the HSR Act. Cellar
Door is a leading promoter and producer of live entertainment events in the
Southeast and Midwest.
In connection with the HSR Act filings for the Marquee acquisition, the
Company has received notice of a preliminary inquiry from the Antitrust
Division of the U.S. Department of Justice relating to the Marquee and Cellar
Door acquisitions. In order to allow the Department of Justice to evaluate the
information provided by the Company, the Company has agreed to re-submit its
HSR Act filing for the Marquee acquisition. The Company intends to cooperate
fully with the Department of Justice inquiry. The Company believes that the
Marquee and Cellar Door acquisitions, along with the Company's overall business
and plan of acquisitions, are in compliance with applicable antitrust laws.
The Company expects to complete the Marquee and Cellar Door acquisitions
during the fourth quarter of 1998. However, the timing and completion of these
acquisitions are subject to a number of conditions, certain of which are beyond
the Company's control (including, in particular, clearance under the HSR Act).
These acquisitions might not be consummated during the anticipated time period,
on the terms described herein, or at all.
CREDIT FACILITY
On September 10, 1998, the Company entered into an agreement with The Bank
of New York to increase available borrowings under the Revolver portion of the
Credit Facility to up to $200.0 million, and thereby increased the aggregate
amount that may be borrowed under the Credit Facility to $350.0 million. As of
the date hereof, the Company has outstanding borrowings under the Credit
Facility of $332.0 million (consisting of $150.0 million under the Term Loan
and $182.0 million under the Revolver) and outstanding letters of credit
thereunder aggregating $3.4 million.
In addition, the Company has received a commitment letter from its lenders
to replace its existing Credit Facility with a new $600.0 million credit
facility. The new facility would consist of a $450.0 million Term Loan and a
$150.0 million Revolver. The new facility is subject to the execution of a
definitive agreement, and will differ from the current Credit Facility in
several respects, including applicable financial ratios, interest rate margins
and term of repayment.
QUARTERLY REPORT
On August 14, 1998, the Company filed with the Commission a Form 10-Q
Quarterly Report for the quarter ended June 30, 1998. This report contains
updated financial data and a discussion of the Company's financial conditions
and results of operations. A copy of this report, without exhibits, is attached
to this Supplement No. 2 as Annex A.
PRO FORMA FINANCIAL INFORMATION
Annex B to this Supplement No. 2 contains pro forma financial information
regarding the Company, which supersedes the pro forma financial information set
forth in the Prospectus.
<PAGE>
ANNEX A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter 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: 000-24017
SFX ENTERTAINMENT, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3977880
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 MADISON AVENUE, 16TH FLOOR
NEW YORK, NEW YORK 10155
(Address of Principal Executive Offices)
(212)-838-3100
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of August 7, 1998, the
number of shares outstanding of the Registrant's Class A Common Stock, $.01 par
value, and Class B Common Stock, $.01 par value, was 28,753,194 and 1,697,037,
respectively.
S-A-1
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
PAGE
-------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1998 (Unaudited) and
December 31, 1997 ............................................... S-A-3
Consolidated Statements of Operations for the Three Months
Ended June 30, 1998 and 1997 (Unaudited) ........................ S-A-4
Consolidated Statements of Operations for the Six Months
Ended June 30, 1998 and 1997 (Unaudited) ........................ S-A-5
Consolidated Statements of Shareholders' Equity for the Six Months
Ended June 30, 1998 and 1997 (Unaudited) ........................ S-A-6
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997 (Unaudited) .............................. S-A-7
Notes to Consolidated Financial Statements (Unaudited) ........... S-A-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... S-A-16
PART II Other Information
Item 1. Legal proceedings ................................................ S-A-30
Item 6. Exhibits and Reports on Form 8-K ................................. S-A-30
</TABLE>
S-A-2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<S> <C> <C>
June 30, December 31,
1998 1997
---------- --------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 244,438 $ 5,979
Accounts receivable 58,350 3,831
Prepaid expenses 36,282 --
Receivables from equity investees 974 --
Other current assets 10,352 1,410
---------- --------
Total current assets 350,396 11,220
Property and equipment, net 235,664 59,685
Deferred acquisition costs 1,173 6,213
Goodwill and other intangible assets, net 625,125 60,306
Investment in and receivables from, less current portfolio equity investees 19,262 937
Other assets 11,541 8,581
---------- --------
TOTAL ASSETS $1,243,161 $146,942
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable and accrued expenses $ 56,792 $ 2,715
Deferred revenue 136,202 3,603
Income taxes payable 16,553 1,707
Due to SFX Broadcasting 52,349 11,539
Current portion of long-term debt 13,602 755
Current portion of capital lease obligations 144 168
Current portion of deferred purchase consideration 296 1,950
---------- --------
Total current liabilities 275,938 22,437
Long-term debt, less current portion 523,743 14,929
Capital lease obligations, less current portion 6,042 326
Deferred purchase consideration, less current portion 2,835 4,289
Deferred income taxes 47,358 2,817
---------- --------
TOTAL LIABILITIES 855,916 44,798
Minority interest 3,023 --
Temporary equity -- stock subject to redemption 16,500 --
Shareholders' equity:
Preferred Stock, $.01 par value, 25,000,000 shares authorized, none issued
and outstanding June 30, 1998 and December 31, 1997 -- --
Class A common stock, $.01 par value, 100,000,000 shares authorized,
28,392,662 and 13,579,024 shares issued and outstanding as of June 30,
1998 and December 31, 1997, respectively 284 136
Class B common stock, $.01 par value, 10,000,000 shares authorized,
1,697,037 and 1,047,037 shares issued and outstanding as of June 30,
1998 and December 31, 1997, respectively 17 10
Additional paid in capital 421,673 98,184
Deferred compensation (8,427) --
Accumulated (deficit) earnings (45,825) 3,814
---------- --------
Total shareholders' equity 367,722 102,144
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,243,161 $146,942
========== ========
</TABLE>
See accompanying notes.
S-A-3
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Revenue $ 231,348 $ 23,182
Operating expenses:
Cost of revenue 212,506 19,738
Depreciation and amortization 14,746 1,036
Corporate expenses, net of Triathlon fees 2,015 190
Non-cash charges 32,052 --
------------ -----------
261,319 20,964
------------ -----------
Income (loss) from operations (29,971) 2,218
Income from equity investments (1,380) --
Interest expense 11,473 475
Investment income (1,602) (92)
Minority interest 316 --
============ ===========
Income (loss) before provision for income taxes (38,778) 1,835
Provision for income taxes 850 --
------------ -----------
Net income (loss) (39,628) 1,835
Accretion on stock subject to redemption (825) --
------------ -----------
Net income (loss) applicable to common shares $ (40,453) $ 1,835
============ ===========
Basic and diluted net income (loss) per share $ (1.68) $ 0.13
============ ===========
Weighted average common shares outstanding 24,084,374 14,519,080
</TABLE>
See accompanying notes.
S-A-4
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Revenue $ 292,342 $ 30,971
Operating expenses:
Cost of revenue 270,681 27,476
Depreciation and amortization 19,174 1,696
Corporate expenses, net of Triathlon fees 3,329 1,048
Non-cash charges 32,052 --
------------ -----------
325,236 30,220
------------ -----------
Income (loss) from operations (32,894) 751
Income from equity investments (1,825) --
Interest expense 18,221 578
Investment income (2,499) (118)
Minority interest 398 --
============ ===========
Income (loss) before provision for income taxes (47,189) 291
Provision for income taxes 1,350 --
------------ -----------
Net income (loss) (48,539) 291
Accretion on stock subject to redemption (1,100) --
------------ -----------
Net income (loss) applicable to common shares $ (49,639) $ 291
============ ===========
Basic and diluted net income (loss) per share $ (2.56) $ 0.02
============ ===========
Weighted average common shares outstanding 19,381,345 14,260,465
</TABLE>
See accompanying notes.
S-A-5
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1998 1997
----------- --------
<S> <C> <C>
Balances at January 1, $ 102,144 $ --
Liabilities in excess of assets of SFX Broadcasting, Inc. assumed in
the Spin-Off, principally taxes of $105.0 million (128,545) 97,726
Sale of Class A Common Stock 329,004 --
Issuance of Class A Common Stock for acquisitions 87,464 --
Issuance of Class A Common Stock pursuant to employment
agreements 7,668 --
Issuance of Class B Common Stock pursuant to employment
agreements 18,526 --
Net (loss) income (48,539) 291
----------- --------
Balances at June 30 $ 367,722 $98,017
=========== ========
</TABLE>
See accompanying notes.
S-A-6
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1998 1997
----------- ---------
<S> <C> <C>
Operating activities:
Net (loss) income $ (48,539) $ 291
Adjustment to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization 19,174 1,696
Pretax income of equity investees, net of distributions received 1,219 (220)
Non-cash charges 32,052 --
Minority interest 398 --
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable (2,546) (1,789)
Prepaid expenses (17,467) (2,051)
Other current assets (9,224) --
Other assets 1,867 --
Accounts payable and accrued expenses 2,001 487
Accrued interest and dividends 13,271 (405)
Deferred revenue 79,062 9,626
----------- ---------
Net cash provided by operating activities 71,268 7,635
Investing activities:
Purchases of entertainment businesses, net of cash acquired (514,753) (70,033)
Deposits and other payments for pending acquisitions (1,140)
Purchases of property and equipment (35,956) (672)
----------- ---------
Net cash used in investing activities (551,849) (70,705)
----------- ---------
Financing activities:
Capital contributed by SFX Broadcasting -- 79,541
Proceeds from issuance of senior subordinated debt and borrowings
under the credit agreement 527,500 --
Proceeds from sale of common stock 330,683 --
Repayment of debt (32,428) (247)
Payments made to SFX Broadcasting pursuant to the Spin-Off (89,230) --
Other, principally debt issuance costs (17,485) --
----------- ---------
Net cash provided by financing activities 719,040 79,294
Net increase in cash and cash equivalents 238,459 16,224
Cash and cash equivalents at beginning of period 5,979 --
----------- ---------
Cash and cash equivalents at end of period $ 244,438 $ 16,224
Supplemental disclosure of cash flow information:
Cash paid for interest $ 4,052 $ --
=========== =========
Cash paid for income taxes $ 284 $ --
=========== =========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
o Issuance of equity securities, including deferred equity security issuance
and assumption of debt in connection with certain acquisitions (see Note 1).
o Agreements to pay future cash consideration in connection with certain
acquisitions (see Note 1).
o The balance sheet includes certain assets and liabilities that have been
contributed to the Company by SFX Broadcasting.
See accompanying notes.
S-A-7
<PAGE>
SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
SFX Entertainment, Inc. ("SFX" or the "Company") is a leading promoter,
producer and venue operator for live entertainment events. In addition, the
Company is a leading full-service marketing and management company specializing
in the representation of team sports athletes, primarily in professional
basketball.
The Company owns and/or operates the largest network of venues in the country
used principally for music concerts and other live entertainment events. Upon
completion of all pending acquisions, it will have 73 venues either directly
owned or operated under lease or exclusive arrangements, including 13
amphitheatres in 9 of the top 10 markets. The Company also develops and manages
touring Broadway shows, selling subscriptions series in 39 of the estimated 60
markets that maintain active touring schedules with approximately 240,000
subscribers last year. Through its large number of venues and the long
operating histories of the business it has acquired, SFX operates an integrated
franchise that promotes and produces a broad variety of live entertainment
events locally, regionally and nationally. Pro forma for all completed and
pending acquisitions, during 1997, approximately 30 million people attended
11,300 events promoted and/or produced by SFX, including approximately 5,400
music concerts, 5,600 theatrical shows and over 200 specialized motor sports
events.
SFX was formed as a wholly-owned subsidiary of SFX Broadcasting, Inc. in
December 1997 and as the parent company of SFX Concerts, Inc ("Concerts").
Concerts was formed in January of 1997 to acquire and hold SFX Broadcasting's
live entertainment operations. The Company had no substantive operations until
its acquisition of Delsener/Slater Enterprises, Ltd. and affiliated companies
("Delsener/Slater") in January 1997.
In August 1997, SFX Broadcasting agreed to the merger (the "Broadcasting Merger
Agreement") among SBI Holdings, Inc. (the "Buyer"), SBI Radio Acquisition
Corporation, a wholly-owned subsidiary of the Buyer, and SFX Broadcasting (the
"Broadcasting Merger") and to the spin-off of the Company to the shareholders
of SFX Broadcasting (the "Spin-Off"). The Spin-Off was completed on April 27,
1998 and the Broadcasting Merger was completed on May 29, 1998.
Information with respect to the three and six months ended June 30, 1998 and
1997 is unaudited. The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, the unaudited interim financial statements contain
all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the financial position, results of operations and cash flows of
the Company, for the periods presented.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131
("SFAS 131"), "Disclosure About Segments of an Enterprise and Related
Information," which establishes new standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that these enterprises report selected information
about operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. SFAS 131 is effective for financial statements for fiscal
years beginning after December 31, 1997, and therefore the Company will adopt
the new requirements in 1998. Management has not yet completed its review of
SFAS 131 and as such has not determined what reportable segments will be
presented.
The Company's operations and revenues are largely seasonal in nature, with
generally higher revenue generated in the second and third quarters of the
year. The Company's outdoor venues are primarily utilized in the summer months
and do not generate substantial revenue in the late fall, winter and early
spring. Similarly, the musical concerts that the Company promotes largely occur
in the second and third quarters. To the extent that the Company's
entertainment marketing and consulting relate to musical concerts, they also
predominantly generate revenues in the second and third quarters. However, this
seasonality is somewhat offset by typically non-summer seasonal businesses such
as motor sports (which is winter-seasonal) and touring Broadway shows (which
typically tour between September and May).
S-A-8
<PAGE>
2. ACQUISITIONS
1997 Acquisitions
In January 1997, SFX Broadcasting acquired Delsener/Slater, a concert promotion
company which has long-term leases or is the exclusive promoter for seven of
the major concert venues in the New York City metropolitan area. In March 1997,
the Company acquired the stock of certain companies which own and operate the
Meadows Music Theater (the "Meadows"), an indoor/outdoor complex located in
Hartford, Connecticut. In June 1997, the Company acquired the stock of Sunshine
Promotions, Inc. and certain other related Companies ("Sunshine Promotions"),
an owner-operator of venues and a concert promoter in the Midwest.
The Delsener/Slater, Meadows, and Sunshine Promotions acquisitions are
collectively referred to herein as the "1997 Acquisitions." The 1997
Acquisitions were financed through capital contributions from SFX Broadcasting
and were accounted for under the purchase method of accounting.
1998 Acquisitions
Westbury
On January 8, 1998, the Company acquired a long-term lease for Westbury Music
Fair, located in Westbury, New York, (the "Westbury Acquisition") for an
aggregate consideration of approximately $3.0 million in cash and 75,019 shares
of Class A Common Stock. During the period between the closing and January 8,
2000, the Company has the right to repurchase all of such shares for an
aggregate consideration of $2.0 million and the seller has the right to require
the Company to purchase all of such shares for an aggregate consideration of
$750,000.
BGP
On February 24, 1998, the Company acquired all of the outstanding capital stock
of BG Presents ("BGP"), an owner-operator of venues for live entertainment and
a promoter in the San Francisco Bay area (the "BGP Acquisition"), for total
consideration of approximately $80.3 million (including the repayment of $12.0
million in BGP debt and the issuance upon the Spin-Off of 562,640 shares of
Class A Common Stock of the Company valued by the parties at $7.5 million). The
sellers of BGP provided net working capital (as defined in the acquisition
agreement) at the closing in an amount equal to or greater than long-term debt.
PACE
On February 25, 1998, the Company acquired all of the outstanding capital stock
of PACE Entertainment Corporation ("PACE"), a diversified producer and promoter
of live entertainment in the United States (the "PACE Acquisition"), for total
consideration of approximately $150.1 (including issuance upon the Spin-Off of
1,500,000 shares of the Company's Class A Common Stock valued by the parties at
$20.0 million and assumption of approximately $20.6 million of debt). In
related transactions, the Company acquired, for total consideration of $90.6
million comprised of $41.4 million in cash, the repayment of approximately
$43.1 million of debt and the assumption of approximately $6.1 million of debt
related to a capital lease, the 66 2/3% ownership interests of Blockbuster
Entertainment Corporation and Sony Music Entertainment, Inc. in Amphitheater
Entertainment Partnership, a partner of PACE in the Pavilion Partners venue
partnership. As a result, the Company owns 100% of Pavilion Partners.
The PACE acquisition agreement further provides that each seller of PACE shall
have an option, exercisable during a period beginning on the fifth anniversary
of the closing of the PACE Acquisition and ending 90 days thereafter, to
require the Company to purchase up to one-third of the PACE consideration stock
received by such PACE seller for a cash purchase price of $33.00 per share.
With certain limited exceptions, these option rights are not assignable by the
PACE sellers.
Under the terms of an employment agreement entered into by the Company with an
officer of PACE, the officer will have the right, two years from the date of
the acquisition, to purchase PACE's motor sports division at fair value. If the
motor sports division has been sold by the Company, the officer would be
entitled to purchase PACE's theatrical division for the fair value.
In addition, on March 25, 1998 PACE paid $4.0 million to acquire a 67% interest
in certain assets and liabilities of USA Motor Sports, a producer and promoter
of motor sports events. The remaining 33% interest is owned by the Contemporary
Group.
S-A-9
<PAGE>
Contemporary
On February 27, 1998, the Company acquired the Contemporary Group
("Contemporary"), a fully-integrated live entertainment and special event
promoter and producer, venue owner and operator and consumer marketer, for
total consideration of approximately $101.4 million comprised of $72.8 million
in cash, a payment for working capital of approximately $9.9 million and the
issuance of preferred stock of the Company valued by the parties at $18.7
million which, upon the Spin-Off, was converted into 1,402,850 shares of Class
A Common Stock of the Company (the "Contemporary Acquisition"). The
Contemporary Acquisition involved the merger of Contemporary International
Productions Corporation with and into the Company, the acquisition by a wholly
owned subsidiary of the Company of substantially all of the assets, excluding
certain cash and receivables, of the remaining members of Contemporary and the
acquisition by Contemporary of the 50% interest in the Riverport Amphitheater
Joint Venture not owned by Contemporary. If any of the Contemporary sellers
owns any shares of the Company's Class A Common Stock received in the
Contemporary Acquisition on the second anniversary of the closing date and the
average trading price of such stock over the 20-day period ending on such
anniversary date is less than $13.33 per share, then the Company will make a
one-time cash payment to each individual holding any such shares that is equal
to the product of (i) the quotient of the difference between (A) the actual
average trading price per share over such 20-day period and (B) $13.33 divided
by two, multiplied by (ii) the number of shares of Class A Common Stock of the
Company received by such individual in the Contemporary Acquisition and owned
as of such anniversary date. In May 1998 the Company placed 140,000 of the
shares issued in connection with the Contemporary Acquisition into an escrow
account. The Company may, at its sole discretion, cancel such shares at any
time.
Network
On February 27, 1998, the Company acquired the Network Magazine Group ("Network
Magazine"), a publisher of trade magazines for the radio broadcasting industry,
and SJS Entertainment Corporation ("SJS"), an independent creator, producer and
distributor of music-related radio programming, services and research which it
exchanges with radio broadcasters for commercial air-time sold, in turn, to
national network advertisers (the "Network Acquisition"), for total
consideration of approximately $66.8 million comprised of $52.0 million in
cash, a payment for working capital of approximately $1.8 million, reimbursed
sellers costs of $500,000, the purchase of an office building and property for
$2.5 million and the issuance upon the Spin-Off of approximately 750,000 shares
of Class A Common Stock of the Company valued by the parties at $10.0 million.
The $2.5 million purchase of the office building and property is comprised of
cash of approximately $700,000 and the assumption of debt of approximately $1.8
million. The Company is also obligated to pay the sellers an additional payment
in Class A Common Stock or, at the Company's option, cash based on future
operating results, as defined, generated on a combined basis by Network
Magazine and SJS in 1998, up to a maximum of $14.0 million. In the Network
Acquisition, the Company, through a wholly owned subsidiary, acquired all of
the outstanding capital stock of each of The Album Network, Inc. and SJS
Entertainment Corporation and purchased substantially all of the assets and
properties and assumed substantially all of the liabilities and obligations of
The Network 40, Inc.
Concert/Southern
On March 4, 1998, the Company acquired Concert/Southern Promotions
("Concert/Southern"), a promoter of live music events in the Atlanta, Georgia
metropolitan area (the "Concert/Southern Acquisition"), for total cash
consideration of approximately $16.9 million, which includes a $300,000 payment
for working capital.
Avalon
On May 14, 1998, the Company acquired all of the outstanding equity interests
of Irvine Meadows Amphitheater, New Avalon, Inc., TBA Media, Inc. and West
Coast Amphitheater (collectively, "Avalon") for a cash purchase price of $26.8
million (subject to upward adjustment), including approximately $300,000 that
the Company paid to reimburse the Avalon sellers for certain third party out of
pocket expenses incurred in the development of the Camarillo Creek Amphitheatre
(the "Avalon Acquisition"). Avalon is a concert promoter and producer that
operates predominantly in the Los Angeles area.
Oakdale
On June 3, 1998, the Company acquired certain assets of Oakdale Concerts, LLC
and Oakdale Development Limited Partnership (collectively, "Oakdale"), a
promoter and producer of concerts in Connecticut and the owner of the 4,800
seat
S-A-10
<PAGE>
Oakdale Music Theater, for a purchase price of $9.4 million in cash and the
assumption of $2.5 million in liabilities (the "Oakdale Acquisition"). The
Company also made a non-recourse loan to the Oakdale sellers in the amount of
$11.4 million. In addition, pursuant the Oakdale Agreement, if the Combined
EBITDA (as defined in the Oakdale Agreement) of the Oakdale Theater and Meadows
exceeds $5.5 million in 1999, the Company will be obligated to pay between 5.0
to 5.8 times the amount of such excess to the Oakdale sellers.
FAME
On June 4, 1998, the Company acquired Falk Associates Management Enterprises,
Inc. and Financial Advisory Management Enterprises, Inc. (collectively,
"FAME"), a full-service marketing and management company which specializes in
the representation of team sports athletes, primarily in professional
basketball. The aggregate purchase price for FAME was approximately $82.2
million in cash (including approximately $7.9 million which the Company paid in
connection with certain taxes incurred by FAME and the FAME sellers and
excluding $4.7 million of taxes paid on behalf of the sellers which will be
refunded to the Company in 1999) and 1.0 million shares of Class A Common Stock
(the "FAME Acquisition"). The agreement also provides for payments by the
Company to the FAME sellers of additional amounts up to an aggregate of $15.0
million in equal annual installments over 5 years contingent on the achievement
of certain operating performance targets. The agreement also provides for
additional payments by the Company if FAME's operating performance exceed the
targets by certain amounts.
The Westbury Acquisition, the PACE Acquisition, the Contemporary Acquisition,
the Network Acquisition, the BGP Acquisition, the Concert/Southern Acquisition,
the Avalon Acquisition, the Oakdale Acquisition, and the FAME Acquisition are
collectively referred to herein as the "1998 Acquisitions." The 1998
Acquisitions were accounted for under the purchase method of accounting and
funded with the proceeds of the Note and Equity Offerings. The purchase prices
of the 1998 Acquisitions have been preliminarily allocated to the assets
acquired and liabilities assumed and are subject to change.
Operating results for the 1997 Acquisitions and the 1998 Acquisitions are
included herein from their respective acquisition dates. Operating results
associated with the assets and liabilities contributed by SFX Broadcasting are
included herein. Prior to the Spin-Off, SFX Broadcasting provided various
administrative services to the Company. SFX Broadcasting allocated these
expenses on the basis of direct usage. In the opinion of management, this
method of allocation was reasonable and allocated expenses approximated what
the Company would have incurred on a stand-alone basis. Intercompany
transactions and balances have been eliminated in consolidation.
The following pro forma summary represents the consolidated results for the six
months ended June 30, 1998 and the year ended December 31, 1997 as if the 1997
Acquisitions and the 1998 Acquisitions had occurred at January 1, 1997 after
giving effect to certain adjustments, including amortization of intangible
assets and interest expense on the acquisition debt. These pro forma results
have been included for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisitions been made as of
that date or of results which may occur in the future (in thousands).
<TABLE>
<CAPTION>
PRO FORMA
Six Months Ended Year Months Ended
June 30, 1998 December 31, 1997
------------------ ------------------
<S> <C> <C>
Revenues $ 419,464 $ 701,301
Net loss $ (30,921) $ (19,016)
Loss applicable to common shares $ (1.68) $ (1.15)
</TABLE>
3. FINANCING
Note Offering and Guarantees by Subsidiaries
On February 11, 1998, the Company completed an offering of $350.0 million 9
1/8% Senior Subordinated Notes (the "Notes" and "Note Offering") due 2008.
Interest is payable on the Notes on February 1 and August 1 of each year. On
July 15, 1998, the Company consummated the exchange of substantially identical
notes (the "Exchange Notes") for all outstanding Notes. All Notes were tendered
for exchange and were cancelled upon the issuance of the same principal amount
of Exchange Notes.
The Company is a holding company that has no operating assets or operations of
its own. Substantially, all the Company's subsidiaries are wholly owned and
have jointly and severally guaranteed the Company's indebtedness represented by
the Exchange Notes (the "Guarantors"). Certain subsidiaries (the "Non-Guarantor
Subsidiaries") do not guarantee such indebtedness.
S-A-11
<PAGE>
Full financial statements of the Guarantors and Non-Guarantor Subsidiaries have
not been included because, pursuant to their respective guarantees, the
Guarantors are jointly and severally liable with respect to the Exchange Notes
and management believes that the Non-Guarantor Subsidiaries are not material to
the Company on a consolidated basis. Accordingly, the Company does not believe
that the information contained in separate full financial statements of the
Guarantors or Non-Guarantor Subsidiaries would be material to investors.
The following are summarized unaudited statements setting forth certain
financial information concerning the Guarantors and Non-Guarantor Subsidiaries
as of and for the six months ended June 30, 1998 (in thousands).
<TABLE>
<CAPTION>
SFX
Entertainment, Guarantor Non-Guarantor SFX Entertainment
Inc. Subsidiaries Subsidiaries Eliminations consolidated
---------------- -------------- --------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
Current assets 158,377 182,523 9,703 (207) 350,396
Property and equipment, net 8,412 217,306 9,946 - 235,664
Goodwill, net 77,548 525,788 21,789 - 625,125
Investment in subsidiaries 778,301 - - (778,301) -
Other assets 7,356 34,220 3,147 (12,747) 31,976
------- ------- ------ -------- -------
Total assets 1,029,994 959,837 44,585 (791,255) 1,243,161
========= ======= ====== ======== =========
Current liabilities 84,287 183,177 8,681 (207) 275,938
Long-term debt, less current portion 512,118 17,962 12,452 (12,747) 529,785
Other liabilities 49,367 355 471 - 50,193
Minority interest - 2,657 366 - 3,023
Temporary equity 16,500 - - - 16,500
Shareholders' equity 367,722 755,686 22,615 (778,301) 367,722
--------- ------- ------ -------- ---------
Total liabilities and shareholders'
equity 1,029,994 959,837 44,585 (791,255) 1,243,161
========= ======= ====== ======== =========
Revenue - 289,380 2,962 - 292,342
Operating expenses 40,302 281,874 3,060 - 325,236
Interest expense, net 15,308 387 299 (272) 15,722
Minority interest - 399 (1) - 398
Income from equity investments - (1,825) - - (1,825)
Provision for income taxes 1,350 - - - 1,350
--------- ------- ------- -------- ---------
Net (loss) income (56,960) 8,545 (396) 272 (48,539)
========= ======= ======= ======== =========
Cash flow from operations (74,347) 141,056 4,559 - 71,268
Cash flow from investing activities (515,893) (35,671) (285) - (551,849)
Cash flow from financing activities 732,968 (4,834) (94) - 719,040
Cash at the beginning of the period - 2,915 3,064 - 5,979
Cash at the end of the period 133,728 103,466 7,244 - 244,438
</TABLE>
The following are summarized unaudited statements setting forth certain
financial information concerning the Guarantors and Non-Guarantor Subsidiaries
as of and for the three months ended June 30, 1998 (in thousands).
<TABLE>
<CAPTION>
SFX SFX
Entertainment Guarantor Non-Guarantor Entertainment
Inc. Subsidiaries Subsidiaries Elimination Consolidated
--------------- -------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue - 228,386 2,962 231,348
Operating expenses 37,761 220,856 2,702 261,319
Interest expense, net 9,922 (74) 227 (204) 9,871
Minority interest - 218 98 316
Income from equity investments - (1,380) (1,380)
Provision for income taxes 850 - 850
------ ------- ------
Net (loss) income (48,533) 8,766 (65) 204 (39,628)
======= ======= ===== ======= =======
</TABLE>
S-A-12
<PAGE>
Credit Agreement
On February 26, 1998 the Company executed a Credit and Guarantee Agreement (the
"Credit Agreement" or "Credit Facility") which established a $300.0 million
senior secured credit facility comprised of (i) a $150.0 million eight-year
term loan (the "Term Loan") and (ii) a $150.0 million seven-year reducing
revolving credit facility (the "Revolver"). In addition, in August 1998, the
Company received a commitment from its lenders to increase its borrowing
availability under the Revolver by $50.0, which increases the Company's
remaining borrowing availability under the Credit Agreement to approximately
$135.0. Loans outstanding under the Credit Facility bear interest, at the
Company's option, at 1.875 to 2.375 percentage points over LIBOR or the greater
of the Federal Funds rate plus 0.50% or The Bank of New York's prime rate. The
interest rate spreads on the Term Loan and the Revolver will be adjusted based
on the Company's Total Leverage Ratio (as defined in the Credit Agreement). The
Company will pay a per annum commitment fee on unused availability under the
Revolver of 0.50% to the extent that the Company's Leverage Ratio is greater
than or equal to 4.0 to 1.0, and 0.375% if such ratio is less than 4.0 to 1.0
and a per annum letter of credit fee equal to the Applicable LIBOR Margin (as
defined in the Credit Agreement) for the Revolver then in effect. Borrowings
under the Credit Agreement are secured by substantially all of the assets of
the Company, including a pledge of the outstanding stock of substantially all
of its subsidiaries and guaranteed by all of the Company's subsidiaries. On
February 27, 1998, the Company borrowed $150.0 million under the Term Loan. As
of June 30, 1998 there were no borrowings under the Revolver. As of August 14,
1998, the Company had borrowed $65.0 million of the Revolver to fund a portion
of the purchase prices of the Subsequent Acquisitions (as defined, see Note 8).
Equity Offering
On May 27, 1998, the Company consummated an offering of 8,050,000 shares of
Class A Common Stock at an offering price of $43.25 per share (the "Equity
Offering"). The proceeds received by the Company, after deducting the
underwriting discount and offering expenses, were approximately $329.0 million.
The proceeds (i) were used to repay certain indebtedness and consummate the
FAME Acquisition and Oakdale Acquisition and a portion of the Subsequent
Acquisitions (as defined, see Note 8) and (ii) were used to pay $67.5 million
of the tax indemnification obligation due to SFX Broadcasting on June 30, 1998
pursuant to the tax sharing agreement, as amended (see Note 1).
4. CAPITAL STOCK
In order to facilitate the Spin-Off, the Company revised its capital structure
to increase its authorized capital stock and to effect a stock split. The
authorized capital stock of the Company consists of 110,000,000 shares of
Common Stock (comprised of 100,000,000 shares of Class A Common Stock and
10,000,000 shares of Class B Common Stock), and 25,000,000 shares of preferred
stock, par value $.01 per share.
In the Spin-Off, (a) 13,579,024 shares of Class A Common Stock were distributed
to holders on the Spin-Off record date of SFX Broadcasting's Class A Common
Stock, Series D preferred stock and interests in SFX Broadcasting's director
deferred stock ownership plan, (b) 1,047,037 shares of Class B Common Stock
were distributed to holders on the Spin-Off record date of SFX Broadcasting
Class B Common Stock and (c) 609,856 shares of Class A Common Stock were issued
upon the exercise of certain warrants of SFX Broadcasting. The financial
statements have been retroactively adjusted to reflect this transaction.
Holders of Class A Common Stock and Class B Common Stock vote as a single class
on all matters submitted to a vote of the stockholders, with each share of
Class A Common Stock entitled to one vote and each share of Class B Common
Stock entitled to ten votes, except (a) for the election of directors, (b) with
respect to any "going private" transaction between the Company and Mr.
Sillerman or any of his affiliates and (c) as otherwise provided by law.
The Board of Directors has the authority to issue preferred stock and will
assign the designations and rights at the time of issuance.
During January 1998, the Board of Directors and SFX Broadcasting, as sole
stockholder, approved and adopted a stock option and restricted stock plan
providing for the issuance of restricted shares of the Company's Class A Common
Stock and options to purchase shares of the Company's Class A Common Stock
totaling up to 2,000,000 shares. In January 1998, the Company granted options
exercisable for an aggregate of 360,000 shares of the Company's Class A Common
Stock at an exercise price of $5.50 which will vest over three years. The
Company will record non-cash compensation charges over the three-year vesting
period of approximately $3.3 million annually. Between April and June the
Company granted options exercisable for an aggregate of 1,629,666 shares of
Class A Common Stock at exercise prices ranging from $29.125 to $45.875.
S-A-13
<PAGE>
During January 1998, in connection with the expectation of certain executive
officers entering into employment agreements with the Company, the Board of
Directors, upon recommendation of the Compensation Committee, approved the sale
of an aggregate of 650,000 shares of the Company's Class B Common Stock and
190,000 shares of the Company's Class A Common Stock to certain officers for a
purchase price of $2.00 per share. Such shares were issued in April 1998. A
non-cash charge to earnings was recorded by the Company in the second quarter
of approximately $23.9 million associated with the sale.
The Board of Directors also approved the issuance of shares of the Company's
Class A Common Stock to holders of stock options or stock appreciation rights
("SARs") of SFX Broadcasting as of the Spin-Off record date, whether or not
vested. The issuance was approved to allow such holders of these options or
SARs to participate in the Spin-Off in a similar manner to holders of SFX
Broadcasting's Class A Common Stock. Additionally, many of the option holders
will become officers, directors and employees of the Company.
5. NON-CASH CHARGES
Non-cash charges recorded in the second quarter of 1998 of $32.1 million
consisted of (a) $23.9 million of compensation related to sale of 650,000
shares of Class B Common Stock and 190,000 shares of Class A Common Stock at a
purchase price of $2.00 per share to certain executive officers pursuant to
employment agreements (b) $7.5 million associated with the issuance of 247,177
shares of Class A Common Stock to Mr. Sillerman in connection with the
repurchase (the "Meadows Repurchase") of shares of SFX Broadcasting, Inc.
issued to the Sellers of Meadows and (c) $573,000 related to the issuance of
stock options to certain executive officers pursuant to employment agreements
exercisable for an aggregate of 252,500 shares of Class A Common Stock. These
options vest over three years and have an exercise price of $5.50 per share.
The Company is recording non-cash compensation charges of approximately $3.3
million annually over the three-year exercise period.
In addition, a $2.7 million write down of the remaining balance of the deferred
expense relating to the Triathlon Broadcasting Company ("Triathlon") agreement
was recorded in the second quarter of 1998 as a result of Triathlon's recent
agreement to be acquired by a third party. If Triathlon is acquired by a third
party, it is unlikely that the consulting fees would continue for the remainder
of the agreement's term. The write down was recorded as a charge to
amortization expense.
6. SPIN-OFF
Pursuant to the terms of the Spin-Off, SFX Broadcasting contributed to the
Company all of the assets relating to its live entertainment businesses and the
Company assumed all of SFX Broadcasting's liabilities pertaining to the live
entertainment businesses, as well as certain other liabilities including the
obligation to make change of control payments to certain employees of SFX
Broadcasting of approximately $5,000,000 as well as the obligation to indemnify
one-half of certain of these employees' excise tax. At the time of the
Broadcasting Merger, the Company preliminarily paid $8.3 million of negative
Working Capital (as defined in the Broadcasting Merger Agreement) to SFX
Broadcasting. Any additional payments which may be payable upon the final
determination of the Working Capital will be reflected as an increase or
decrease, as the case may be, to equity. In a related transaction, the Company
received $10.3 million of these costs by a third party.
In connection, with the Spin-Off, the Company entered into a tax sharing
agreement with SFX Broadcasting, pursuant to the tax sharing agreement, as
amended, the Company is responsible for certain taxes incurred by SFX
Broadcasting, including income taxes imposed with respect to income generated
by the Company for periods prior to the Spin-Off and taxes resulting from gain
recognized by SFX Broadcasting in the Spin-Off. The Company believes that the
amount of taxes it will be required to pay in connection with the Spin-Off will
be approximately $120.0 million, of which $67.5 million was paid on June 30,
1998. The remaining portion of the tax indemnity payment will be paid as
follows: $26.3 million on September 30, 1998 and $26.3 million on December 31,
1998. Management's estimates of the amount of the indemnity payment are based
on assumptions which management believes are reasonable. However, upon the
completion of all final tax returns, including any potential tax audits, such
assumptions could be modified in a manner that would result in a significant
variance in the actual amount of the tax indemnity.
7. COMMITMENTS AND CONTINGENCIES
While the Company is involved in several law suits and claims arising in the
ordinary course of business, the Company is not now a party to any legal
proceeding that the Company believes would have a material adverse effect on
its business, financial position or results of operations.
S-A-14
<PAGE>
8. SUBSEQUENT EVENTS
Subsequent Acquisitions
Since June 30, 1998, the Company has completed the acquisitions of Don Law and
five other entertainment related companies (collectively, the "Subsequent
Acquisitions").
Don Law
On July 2, 1998, the Company acquired certain assets of Blackstone
Entertainment, LLC ("Don Law"), a concert and theater promoter in New England,
for an aggregate consideration of approximately $92.2 million, including the
repayment of approximately $7.0 million in debt. Don Law currently owns and/or
operates three venues in New England with an aggregate seating capacity of
27,400. Don Law also acts as the sole ticket operator for all of its own venues
as well as several third party venues.
Other Acquisitions
In July and August of 1998, the Company completed the acquisition of five
companies in the theatrical and music segments, principally in the areas of
programming, touring and merchandising. The aggregate purchase price was $101.6
million in cash and 300,000 shares of Class A Common Stock. In addition, the
Company is required to make a loan to certain sellers in an amount equal to
taxes incurred by the sellers in connection with one of the transactions. The
Company expects that the amount of the loan will be approximately $750,000.
The Company used a portion of the proceeds from the Equity Offering and
additional borrowings under the Credit Agreement to consummate the Subsequent
Acquisitions.
Pending Acquisitions
Marquee
The Company has entered into an agreement and plan of merger (the "Marquee
Merger Agreement"), dated as of July 28, 1998, with The Marquee Group, Inc.
("Marquee"), pursuant to which Marquee will become a wholly-owned subsidiary of
the Company. Pursuant to the Marquee Merger Agreement, at the effective time of
the merger, each outstanding share of common stock of Marquee will be converted
into the right to receive the number of shares of the Company's Class A Common
Stock having a value equal to $6.00 (subject to upward adjustment to $6.30
under certain circumstances). The value of the Company's Class A Common Stock
will be based upon the average of the reported price of the Company's Class A
Common Stock for the fifteen consecutive trading days ending on the fifth
trading day prior to the effective time of the merger. Marquee is a publicly
traded company that provides integrated event management, television
production, marketing and consulting services in the sports, news and
entertainment industries. The merger is expected to be consummated in the
fourth quarter of 1998.
Magicworks
On August 6, 1998, the Company and MWE Acquisition Corp. ("MWE"), a wholly
owned subsidiary of the Company, entered into an Agreement and Plan of Merger
pursuant to which, among other things, (i) MWE agreed to make a cash tender
offer (the "Offer") for all outstanding shares of common stock, par value $.001
per share (the "Shares"), of Magicworks Entertainment Incorporated
("Magicworks"), for $4.00 per Share, net to the seller in cash, and (ii) MWE
will subsequently merge with and into Magicworks (the "Merger", and together
with the Offer, the "Magicworks Acquisition"). The Offer was commenced on
August 13, 1998. Magicworks specializes in the production and promotion of live
entertainment events such as theatrical shows, musical concerts, ice skating
shows, and other forms of live entertainment. The total consideration payable
in the Magicworks Acquisition is estimated to be approximately $120.7 million
in cash, and is expected to be financed with available cash and borrowings
under the Credit Facility.
Cellar Door
On August 13, 1998, the Company and the beneficial owner of all of the
outstanding equity interest of the entities comprising the Cellar Door
Companies (collectively, "Cellar Door") entered into a letter of intent with
respect to the Company's acquisition of all of the outstanding capital stock of
Cellar Door (the "Cellar Door Acquisition"). Pursuant to the letter of intent,
the aggregate purchase price for Cellar Door will be $70.0 million in cash
payable at closing, Class A Common Stock with a value of $20.0 million (based
upon the average closing price of the Class A Common Stock for the twenty
business day period ending on the business day prior to the closing) and $8.5
million payable in five equal annual
S-A-15
<PAGE>
installments beginning on the first anniversary of the closing date. In
addition, the Company will issue to the seller options to purchase 100,000
shares of the Company's Class A Common Stock. The closing will be subject to
customary closing conditions, including the entry into a definitive acquisition
agreement. Cellar Door is a leading promoter and producer of live entertainment
events.
The Marquee Merger, the Magicworks Acquisition, and the Cellar Door Acquisition
are collectively referred to herein as the "Pending Acquisitions." The Company
expects to complete each of the Pending Acquisitions during the third and
fourth quarters of 1998. However, the timing and completion of the Pending
Acquisitions are subject to a number of conditions, including the approval of
the stockholders of Marquee and Magicworks, the expiration or termination of
any applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, and the receipt of all applicable consents from third
parties and regulatory agencies. Certain of these conditions are beyond the
Company's control and there can be no assurance that each of the Pending
Acquisitions will be consummated during the third and fourth quarter 1998, on
the terms described herein, or at all. The Company is also currently pursuing
certain additional acquisitions; however, it has not entered into any
definitive agreements with respect to such acquisitions and there can be no
assurance that it will do so.
Incentive Stock Grant Program
The Company's compensation committee has recommended that the Company adopt an
incentive stock grant program. The Company has engaged an outside compensation
consultant to assist in finalizing the details of the plan. It is presently
anticipated that the plan will involve approximately 1.3 million shares of the
Company's Common Stock which will be issuable to members of the Company's
senior management based upon the achievement of significant increases in the
trading price of the Company's Class A Common Stock. Adoption of the plan may
be subject to stockholder approval depending upon its final terms. The Company
expects that the plan will be finalized prior to the end of the third quarter.
Credit Agreement
In August 1998, the Company received a commitment to increase the availability
under the revolving Credit Facility from $150.0 to $200.0 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
SFX Entertainment, Inc. ("SFX" or the "Company") is a leading promoter,
producer and venue operator for live entertainment events. In addition, the
Company is a leading full-service marketing and management company specializing
in the representation of team sports athletes, primarily in professional
basketball.
The Company owns and/or operates the largest network of venues in the country
used principally for music concerts and other live entertainment events. Upon
completion of all pending acquisions, it will have 73 venues either directly
owned or operated under lease or exclusive arrangements, including 13
amphitheatres in 9 of the top 10 markets. The Company also develops and manages
touring Broadway shows, selling subscriptions series in 39 of the estimated 60
markets that maintain active touring schedules with approximately 240,000
subscribers last year. Through its large number of venues and the long
operating histories of the business it has acquired, SFX operates an integrated
franchise that promotes and produces a broad variety of live entertainment
events locally, regionally and nationally. Pro forma for all completed and
pending acquisitions, during 1997, approximately 30 million people attended
11,300 events promoted and/or produced by SFX, including approximately 5,400
music concerts, 5,600 theatrical shows and over 200 specialized motor sports
events.
The following discussion of the financial condition and results of operations
of the Company should be read in conjunction with the consolidated financial
statements and related notes thereto. The following discussion contains certain
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to the differences include, but are not limited
to, risks and uncertainties relating to the Company's absence of a combined
operating history, its potential inability to integrate its acquisitions and
other risks related to the recent acquisitions, the Company's substantial
leverage, control of the motor sports and theatrical businesses, future
acquisitions, inability to obtain future financing, inability to successfully
implement operating strategies (including the achievement of cost savings), the
Company's expansion strategy, its need for additional funds, its control of
venues, control by management, dependence on key personnel, potential conflicts
of interest,
S-A-16
<PAGE>
indemnification agreements, seasonality, competition, regulatory matters,
environmental matters, economic conditions and consumer tastes and availability
of artists and events. For a more detailed discussion of these and other risk
and uncertainties, readers should see the Company's latest annual report and
other filings with the Securities and Exchange Commission. 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.
The performance of entertainment companies, such as the Company, is measured,
in part, by their ability to generate EBITDA. "EBITDA" is defined as earnings
before interest, taxes, other income, net equity income (loss) from investments
and depreciation and amortization. Although EBITDA is not a measure of
performance calculated in accordance with generally accepted accounting
principles ("GAAP"), the Company believes that EBITDA is accepted by the
industry as a generally recognized measure of performance and is used by
analysts who report publicly on the performance of entertainment companies.
Nevertheless, this measure should not be considered in isolation or as a
substitute for operating income, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity that is calculated in accordance with GAAP.
The Company's core business is the promotion and production of live
entertainment events, most significantly for concert and other music
performances in venues owned and/or operated by the Company and in third-party
venues. In connection with all of its live entertainment events, the Company
seeks to maximize related revenue streams, including the sale of corporate
sponsorships, the sale of concessions and the merchandising of a broad range of
products. On a pro forma basis for the 1998 Acquisitions, the Company's music
businesses, including venue operations, comprised approximately 65% of net
revenues, theater comprised approximately 18% of net revenues, sports,
including representation of professional athletes and specialized motor sports,
comprised approximately 7% of net revenues and other operations comprised
approximately 14% of net revenues for the twelve months ended June 30, 1998.
Promotion of events involves booking talent, renting or providing the event
venue, marketing the event to attract ticket buyers and providing for local
services required in the production of the event, such as security and stage
hands. Promoters generally receive revenues from the sale of tickets and
sponsorships. When an event is promoted at a venue owned or managed by the
promoter, the promoter also generally receives a percentage of revenues from
concessions, merchandising, parking, premium box seats and ticket rebates. The
Company earns promotion revenues principally by promoting (a) music concerts,
(b) Touring Broadway Shows and (c) specialized motor sports events.
Production of events involves developing the event content, hiring artistic
talent and managing the actual production of the event (with the assistance of
the local promoter). Producers generally receive revenues from guarantees and
from profit sharing agreements with promoters, a percentage of the promoters'
ticket sales, merchandising, sponsorships, licensing and the exploitation of
other rights (including intellectual property rights) related to the
production. The Company earns revenues by producing (a) Touring Broadway Shows,
(b) specialized motor events and (c) other proprietary and non-proprietary
entertainment events.
THE SPIN-OFF
On April 27, 1998, the Company was spun-off (the "Spin-Off") from its former
parent, SFX Broadcasting, Inc., a company primarily engaged in the radio
broadcasting business ("Broadcasting"). In connection with the Spin-Off, the
Company and Broadcasting entered into a distribution agreement (the
"Distribution Agreement"), a tax sharing agreement (the "Tax Sharing
Agreement") and an Employee Benefits Agreement (the "Employee Benefits
Agreement"), each of which provides for certain indemnification obligations by
the Company.
FINANCINGS
Note Offering
On February 11, 1998, the Company completed an offering of $350.0 million 9
1/8% Senior Subordinated Notes (the "Notes" and "Note Offering") due 2008.
Interest is payable on the Notes on February 1 and August 1 of each year. On
July 15, 1998, the Company consummated the exchange of substantially identical
notes (the "Exchange Notes") for all outstanding Notes. All Notes were tendered
for exchange and were cancelled upon the issuance of the same principal amount
of Exchange Notes.
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Credit Agreement
On February 26, 1998 the Company executed a Credit and Guarantee Agreement (the
"Credit Agreement") which established a $300.0 million senior secured credit
facility comprised of (i) a $150.0 million eight-year term loan (the "Term
Loan") and (ii) a $150.0 million seven-year reducing revolving credit facility.
In addition, in August 1998, the Company received a commitment from its lenders
to increase its borrowing availability under the Revolver by $50.0, which
increases the Company's remaining borrowing availability under the Credit
Agreement to approximately $135.0.
Equity Offering
On May 27, 1998, the Company consummated an offering of 8,050,000 shares of
Class A Common Stock at an offering price of $43.25 per share (the "Equity
Offering"). The proceeds received by the Company, after deducting the
underwriting discount and offering expenses, were approximately $329.0 million.
1997 ACQUISITIONS
The Company entered the live entertainment business with SFX Broadcasting's
acquisition of Delsener/Slater, a New York-based concert promotion company, in
January 1997. Delsener/Slater has long-term leases or is the exclusive promoter
for many of the major concert venues in the New York City metropolitan area,
including the Jones Beach Amphitheater, a 14,000-seat complex located in
Wantagh, New York, and the PNC Bank Arts Center (formerly known as the Garden
State Arts Center), a 17,500-seat complex located in Holmdel, New Jersey. In
March 1997, Delsener/Slater acquired companies which hold a 37-year lease to
operate the Meadows Music Theater ("Meadows"), a 25,000-seat indoor/outdoor
complex located in Hartford, Connecticut. In June 1997, SFX Broadcasting
acquired Sunshine Promotions, a concert promoter in the Midwest, and certain
other related companies. As a result of the acquisition of Sunshine Promotions,
the Company owns the Deer Creek Music Theater, a 21,000-seat complex located in
Indianapolis, Indiana, the Polaris Amphitheater, a 20,000-seat complex located
in Columbus, Ohio, and has a long-term lease to operate the Murat Centre, a
2,700-seat theater and 2,200-seat ballroom located in Indianapolis, Indiana.
The acquisitions of Delsener/Slater, Sunshine and Meadows are collectively
referred to herein as the "1997 Acquisitions." The cash portion of the 1997
Acquisitions was financed through capital contributions from SFX Broadcasting.
1998 ACQUISITIONS
In January 1998, the Company acquired Westbury Music Fair. In February 1998,
the Company acquired PACE, Pavilion Partners, Contemporary, BGP and Network and
in March 1998, the Company acquired Concert/Southern and USA Motorsports. In
May 1998, the Company acquired Avalon and in June 1998 the Company acquired
Oakdale and FAME. The acquisitions of Westbury Music Fair, PACE, Pavilion
Partners, Contemporary, BGP, Network, Concert/Southern, USA Motorsports,
Avalon, Oakdale and FAME are collectively referred to herein as the "1998
Acquisitions."
Westbury
On January 8, 1998, the Company acquired a long-term lease for Westbury Music
Fair, located in Westbury, New York, for an aggregate consideration of
approximately $3.0 million in cash and 75,019 shares of Class A Common Stock
(the "Westbury Acquisition"). During the period between the closing and January
8, 2000, the Company has the right to repurchase all of such shares for an
aggregate consideration of $2.0 million and the seller has the right to require
the Company to purchase all of such shares for an aggregate consideration of
$750,000. The purchase price was financed from the Company's cash on hand.
PACE
On February 25, 1998, the Company acquired all of the outstanding capital stock
of PACE (the "PACE Acquisition"). In connection with the PACE Acquisition, the
Company acquired 100% of Pavilion Partners, a partnership that owns interests
in 10 venues, one-third through the acquisition of PACE and two-thirds through
separate agreements between PACE and Blockbuster and between PACE and Sony (the
acquisition of such two-thirds interest, the "Pavilion Acquisition"). The total
consideration for the PACE Acquisition was approximately $109.5 million in
cash, the repayment of approximately $20.6 million of debt and the issuance of
1.5 million shares of Class A Common Stock. The total consideration for the
Pavilion Acquisition was approximately $90.6 million, comprised of $41.4
million in cash and the repayment of $43.1 million of debt and the assumption
of approximately $6.1 million of debt related to a capital lease. The purchase
price was financed from the proceeds of the Note Offering.
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The PACE acquisition agreement further provides that each seller of PACE shall
have an option, exercisable during a period beginning on the fifth anniversary
of the closing of the PACE acquisition and ending 90 days thereafter, to
require the Company to purchase up to one-third of the PACE consideration stock
received by such PACE seller for a cash purchase price of $33.00 per share.
With certain limited exceptions, these option rights are not assignable by the
PACE sellers.
Under the terms of an employment agreement entered into by the Company with an
officer of PACE, the officer will have the right, two years from the date of
the acquisition, to purchase PACE's motor sports division at fair value. If the
motor sports division has been sold by the Company, the officer would be
entitled to purchase PACE's theatrical division for the fair value.
In addition, on March 25, 1998, PACE acquired a 67% interest in certain assets
and liabilities of USA Motorsports for an aggregate cash consideration of
approximately $4.0 million. The remaining 33% interest is held by Contemporary.
In connection with its acquisition of partnership interests in Lakewood
Amphitheater in Atlanta, Georgia and Starplex Amphitheater in Dallas, Texas,
PACE entered into a co-promotion agreement with its partner that contains a
provision that purports, under certain circumstances, to require PACE to
co-promote (and share one-half of the profits and losses) with such partnership
certain concerts which are presented by PACE or any of its affiliates in
another venue located in either Atlanta, Georgia or Dallas, Texas. However, the
Company acquired an interest in Chastain Park Amphitheater, also in Atlanta, in
the Concert Southern acquisition described below. The Company is currently
negotiating with the third party to waive this restrictive provision; however,
it is possible that the Company will be unable to obtain the waiver. In
management's view, this provision will not materially affect the business or
prospects of the Company.
Contemporary
On February 27, 1998, the Company acquired Contemporary (the "Contemporary
Acquisition"). The Contemporary Acquisition involved the merger of Contemporary
International Productions Corporation with and into the Company, the
acquisition by a wholly-owned subsidiary of the Company of substantially all of
the assets, excluding certain cash and receivables, of the remaining members of
Contemporary and the acquisition of the 50% interest in the Riverport
Amphitheatre Joint Venture not owned by Contemporary. The total consideration
of the Contemporary Acquisition was approximately $72.8 million in cash, a
payment for working capital of $9.9 million, and the issuance of 1,402,850
shares of Class A Common Stock. If any of the Contemporary sellers owns any
shares of the Company's Class A Common Stock received in the Contemporary
Acquisition on the second anniversary of the closing date and the average
trading price of such stock over the 20-day period ending on such anniversary
date is less than $13.33 per share, then the Company will make a one-time cash
payment to each individual holding any such shares that is equal to the product
of (i) the quotient of the difference between (A) the actual average trading
price per share over such 20-day period and (B) $13.33 divided by two,
multiplied by (ii) the number of shares of Class A Common Stock of the Company
received by such individual in the Contemporary Acquisition and owned as of
such anniversary date. In May 1998 the Company placed 140,000 of the shares
issued in connection with the Contemporary Acquisition into an escrow account.
The Company may, at its sole discretion, cancel such shares at any time. The
purchase price was financed with borrowings under the Credit Facility and with
the proceeds of the Note Offering.
BGP
On February 24, 1998, the Company, through the Company's wholly-owned
subsidiary, BGP Acquisition, LLC acquired all of the outstanding capital stock
of BGP, for a total consideration of $60.8 million in cash, $12.0 million in
repayment of debt, which amount was at least equal to BGP's working capital (as
defined in the acquisition agreement), and 562,640 shares of Class A Common
Stock (the "BGP Acquisition"). The purchase price was financed from borrowings
under the Credit Facility and with the proceeds of the Note Offering.
Network
On February 27, 1998, the Company acquired Network (the "Network Acquisition").
In the Network Acquisition, the Company acquired all of the outstanding capital
stock of each of The Album Network, Inc. and SJS and purchased substantially
all of the assets and properties and assumed substantially all of the
liabilities and obligations of The Network 40, Inc. The total purchase price
was approximately $52.0 million cash, a payment for working capital of $1.8
million, reimbursed seller's costs of $500,000, the purchase of an office
building and related property for approximately $2.5 million and the issuance
of approximately 750,000 shares of Class A Common Stock. The purchase price is
subject to increase
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based on Network's actual 1998 EBITDA (as defined in the acquisition agreement)
by $4.0 million if such EBITDA equals or exceeds $9.0 million to $14 million if
EBITDA is greater than $11 million, and is payable in stock, or in certain
circumstances in cash, by no later than March 20, 1999. The $2.5 million
purchase of the office building and related property used in connection with
Network's business was comprised of cash of $700,000 and the assumption of debt
of $1.8 million. The purchase price was financed by the borrowings under the
Credit Facility and with the proceeds of the Note Offering. In connection with
the Network Acquisition, the selling stockholders were reimbursed working
capital (as defined in the acquisition agreement) in excess of $500,000.
Concert/Southern
On March 4, 1998, the Company acquired Concert/Southern Promotions, a promoter
of live music entertainment in the Atlanta metropolitan area, for a total
consideration of $16.9 million (the "Concert/Southern Acquisition"). The
purchase price was financed by the borrowings under the Credit Facility and
with the proceeds of the Note Offering.
Avalon
On May 14, 1998, the Company acquired all the outstanding equity interests in
Avalon for a total cash purchase price of $26.8 million, including
approximately $300,000 that the Company paid to reimburse the Avalon sellers'
third party out of pocket costs and expenses incurred with the development of
the Camarillo Creek Amphitheater (the "Avalon Acquisition"). The purchase price
was financed from borrowings under the Credit Agreement, which were
subsequently repaid with the proceeds of the Company's offering of 8,050,000
shares of Class A Common Stock at a price of $43.25 per share (the "Equity
Offering").
Oakdale
On June 3, 1998, the Company acquired certain assets of Oakdale for a purchase
price of $9.4 million in cash and the assumption of $2.5 million in liabilities
(the "Oakdale Acquisition"). At the closing, the Company also made a
non-recourse loan to the Oakdale sellers in the amount of $11.4 million, a
portion of which was used to repay outstanding indebtedness. In addition, if
the combined EBITDA (as defined in the acquisition agreement) for the Oakdale
Music Theater and Meadows exceeds $5.5 million in 1999, the Company will be
obligated to pay the amount of such excess multiplied by a factor of between
5.0 and 5.8 to the Oakdale sellers. The purchase price was financed from the
proceeds of the Equity Offering.
FAME
On June 4, 1998 the Company acquired all of the outstanding capital stock of
FAME (the "FAME Acquisition"). The aggregate purchase price for FAME was
approximately $82.2 million in cash (including approximately $7.9 million which
the Company paid in connection with certain taxes incurred by FAME and the FAME
sellers and excluding $4,676,000 million of taxes paid on behalf of the seller
which will be refunded to the Company in 1999) and 1.0 million shares of Class
A Common Stock. The agreement also provides for payments by the Company to the
FAME sellers of additional amounts up to an aggregate of $15.0 million in equal
annual installments over 5 years contingent on the achievement of certain
EBITDA targets. The agreement also provides for additional payments by the
Company if FAME's EBITDA performance exceeds the targets by certain amounts.
The additional payments are to be within 120 days after the end of the year to
which they relate. The purchase price was financed from the proceeds of the
Equity Offering.
The 1998 Acquisitions were accounted for using the purchase method of
accounting, and the intangible assets created in the purchase transactions will
generally be amortized against future earnings over a 15-year period. The
amount of amortization will be substantial and will continue to affect the
Company's operating results in the future. These expenses, however, do not
result in an outflow of cash by the Company and do not impact EBITDA.
SUBSEQUENT ACQUISITIONS
Since June 30, 1998, the Company has completed the acquisitions of Don Law and
five other entertainment related companies (collectively, the "Subsequent
Acquisitions").
Don Law
On July 2, 1998, the Company acquired certain assets of Blackstone
Entertainment, LLC ("Don Law"), a concert and theater promoter in New England,
for an aggregate consideration of approximately $92.2 million, including the
repayment of approximately $7.0 million in debt. Don Law currently owns and/or
operates three venues in New England with an
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aggregate seating capacity of 27,400. Don Law also acts as the sole ticket
operator for all of its own venues as well as several third party venues. The
purchase price was financed from the proceeds of the Equity Offering.
Other Acquisitions
In July and August of 1998, the Company completed the acquisition of five
companies in the theatrical and music segments, principally in the areas of
programming, the acquisition of tours and merchandising. The aggregate purchase
price was $101.6 million in cash and 300,000 shares of Class A Common Stock. In
addition, the Company is required to make a loan to certain sellers in an
amount equal to taxes incurred by the sellers in connection with one of the
transactions. The Company expects that the amount of the loan will be
approximately $750,000. The purchase prices were financed from the proceeds of
the Equity Offering and cash on hand.
The Subsequent Acquisitions will be accounted for using the purchase method of
accounting and intangible assets created in the purchase transaction will
generally be amortized against future earnings over a fifteen-year period. The
amount of such amortization may be substantial and will continue to affect the
Company's operating results in the future. These expenses, however, will not
result in an outflow of cash by the Company and do not impact EBITDA.
The consummation of the acquisitions by the Company and other future
acquisitions will result in substantial charges to earnings relating to
interest expense and the recognition and amortization of goodwill and other
intangible assets. As of June 30, 1998, the Company's goodwill was
approximately $622.9 million. This balance will substantially increase due to
the Subsequent and Pending Acquisitions. Goodwill and other intangible assets
are being amortized using the straight-line method over 15 years.
PENDING ACQUISITIONS
Marquee
The Company has entered into an agreement and plan of merger (the "Marquee
Merger Agreement"), dated as of July 23, 1998, with The Marquee Group, Inc.
("Marquee"), pursuant to which Marquee will become a wholly-owned subsidiary of
the Company (the "Marquee Merger"). Pursuant to the Marquee Merger Agreement,
at the effective time of the merger, each outstanding share of common stock of
Marquee will be converted into the right to receive the number of shares of the
Company's Class A Common Stock having a value equal to $6.00 (subject to upward
adjustment to $6.30 under certain circumstances). For purposes of the Marquee
Merger, the value of the Company's Class A Common Stock will be based upon the
average of the reported price of the Company's Class A Common Stock for the
fifteen consecutive trading days ending on the fifth trading day prior to the
effective time of the Merger. Marquee is a publicly traded company that
provides integrated event management, television production, marketing and
consulting services in the sports, news and entertainment industries.
The consummation of the Marquee Merger is subject to the satisfaction of a
number of conditions set forth in the Marquee Merger Agreement, including, but
not limited to, the approval of the stock holders 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 an acquisition, and the receipt of all applicable consents to
the Marquee Merger from third parties and regulatory agencies. The Marquee
Merger is expected to be consummated in the fourth quarter of 1998.
Magicworks
On August 6, 1998, the Company and MWE Acquisition Corp. ("MWE"), a wholly
owned subsidiary of the Company, entered into an Agreement and Plan of Merger
pursuant to which, among other things, (i) MWE agreed to make a cash tender
offer (the "Offer") for all outstanding shares of common stock, par value $.001
per share (the "Shares"), of Magicworks Entertainment Incorporated
("Magicworks"), for $4.00 per Share, net to the seller in cash, and (ii) MWE
will subsequently merge with and into Magicworks (the "Merger", and together
with the Offer, the "Magicworks Acquisition"). The Offer was commenced on
August 13, 1998. Magicworks specializes in the production and promotion of live
entertainment events such as theatrical shows, musical concerts, ice skating
shows, and other forms of live entertainment. The total consideration payable
in the Magicworks Acquisition is estimated to be approximately $100 million in
cash, and is expected to be financed with available cash and borrowings under
the Credit Facility.
Cellar Door
On August 13, 1998, the Company and the beneficial owner of all of the
outstanding equity interest of the entities comprising the Cellar Door
Companies (collectively, "Cellar Door") entered into a letter of intent with
respect to the
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Company's acquisition of all of the outstanding capital stock of Cellar Door
(the "Cellar Door Acquisition"). Pursuant to the letter of intent, the
aggregate purchase price for Cellar Door will be $70.0 million in cash payable
at closing, Class A Common Stock with a value of $20.0 million (based upon the
average closing price of the Class A Common Stock for the twenty business day
period ending on the business day prior to the closing) and $8.5 million
payable in five equal annual installments beginning on the first anniversary of
the closing date. In addition, the Company will issue to the seller options to
purchase 100,000 shares of the Company's Class A Common Stock. The closing will
be subject to customary closing conditions, including the entry into a
definitive acquisition agreement. Cellar Door is a leading promoter and
producer of live entertainment events.
The Marquee Merger, the Magicworks Acquisition, and the Cellar Door Acquisition
are collectively referred to herein as the "Pending Acquisitions." The Company
expects to complete the Pending Acquisitions during the third and fourth
quarters of 1998. However, the timing and completion of the Pending
Acquisitions are subject to a number of conditions, certain of which are beyond
the Company's control, and there can be no assurance that any of the Pending
Acquisitions will be consummated during such period, on the terms described
herein, or at all. The Company is also currently pursuing certain additional
acquisitions; however, it has not entered into any definitive agreements with
respect to such acquisitions and there can be no assurance that it will do so.
INCENTIVE STOCK GRANT PROGRAM
The Company's compensation committee has recommended that the Company adopt an
incentive stock grant program. The Company has engaged an outside compensation
consultant to assist in finalizing the details of the plan. It is presently
anticipated that the plan will involve approximately 1.3 million shares of the
Company's Common Stock which will be issuable to members of the Company's
senior management based upon the achievement of significant increases in the
trading price of the Company's Class A Common Stock. Adoption of the plan may
be subject to stockholder approval depending upon its final terms. The Company
expects that the plan will be finalized prior to the end of the third quarter.
RESULTS OF OPERATIONS
The Company's operations consist primarily of (a) concert promotion and venue
operation, (b) the promotion and production of theatrical events, particularly
Touring Broadway Shows, (c) the promotion and production of motor sports events
and (d) representation of professional athletes. The Company also engages in
various other activities ancillary to their live entertainment businesses.
Concert Promotion and Venue Operation
The Company's concert promotion and venue operation business consists primarily
of the promotion of concerts and operation of venues primarily for use in the
presentation of musical events. The Company's primary source of revenues from
its concert promotion activities is from ticket sales at events promoted by the
Company. As a venue operator, the Company's primary sources of revenue are
sponsorships, concessions, parking and other ancillary services, derived
principally from events promoted by the Company.
Revenue from ticket sales is affected primarily by the number of events the
Company promotes, the average ticket price and the number of tickets sold. The
average ticket price depends on the popularity of the artist whom the Company
is promoting, the size and type of venue and the general economic conditions
and consumer tastes in the market where the event is being held. Revenue and
margins are also affected significantly by the type of contract entered into
with the artist or the artist's representative. Generally, the promoter or
venue operator will agree to pay the artist the greater of a minimum guarantee
or a profit sharing payment based on ticket revenue, less certain show
expenses. The promoter or venue operator assumes the financial risk of ticket
sales and is responsible for local production and advertising of the event.
However, in certain instances, the promoter agrees to accept a fixed fee from
the artist for its services, and the artist assumes all financial risk. When
the promoter or venue operator assumes the financial risk, all revenue and
expenses associated with the event are recorded. When the artist assumes the
risk, only the fee is recorded. As a result, operating margins would be
significantly greater for fee-based events as opposed to events for which the
Company assumes the risk of ticket sales, although profits per event would tend
to be lower. Operating margins can vary from period to period.
The Company's most significant operating expenses are talent fees, production
costs, venue operating expenses (including rent), advertising costs and
insurance expense. The booking of talent in the concert promotion business
generally involves
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contracts for limited engagements, often involving a small number of
performances. Talent fees depend primarily on the popularity of the artist, the
ticket price that the artist can command at a particular venue and the expected
level of ticket sales. Production costs and venue operating expenses have
substantial fixed cost components and lesser variable costs primarily related
to expected attendance.
Theatrical
The Company's theatrical operations are directed mainly towards the promotion
and production of Touring Broadway Shows, which generate revenues primarily
from ticket sales and sponsorships. The Company may also participate in
ancillary revenues, such as concessions and merchandise sales, depending on its
agreement with a particular local promoter/venue operator. Revenue from ticket
sales is primarily affected by the popularity of the production and the general
economic conditions and consumer tastes in the particular market and venue
where the production is presented. In order to reduce its dependency on the
success of any single touring production, the Company sells advance annual
subscriptions that provide the purchaser with tickets for all of the shows that
the Company intends to tour in the particular market during the touring season.
Historically, approximately 34% of ticket sales for Touring Broadway Shows
presented by the Company are sold through advance annual subscriptions.
Subscription related revenues received prior to the event date are initially
recorded on the balance sheet as deferred revenue; after the event occurs, they
are recorded on the statement of operations as gross revenue. Expenses are
capitalized on the balance sheet as prepaid expenses until the event occurs.
Subscriptions for Touring Broadway Shows typically cover approximately
two-thirds of the Company's break-even cost point for those shows.
Principal operating expenses related to touring shows include talent, rent,
advertising and royalties. Talent costs are generally fixed once a production
is cast. Rent and advertising expense may be either fixed or variable based on
the arrangement with the particular local promoter/venue operator. Royalties
are generally paid as a percentage of gross ticket sales.
The Company also makes minority equity investments in original Broadway
productions, principally as a means to obtain rights for touring shows, and in
certain Touring Broadway Shows. These investments are accounted for using
either the equity method or the cost method of accounting, based on the
relative size of the investment. The Company monitors the recoverability of
these investments on a regular basis, and the Company may be required to take
write-offs if the original production closes or if the Company determines that
the production will not recoup the investment. The timing of any write-off
could adversely affect operating results in a particular quarter.
Motor Sports
The Company's motor sports activities consist principally of the promotion and
production of specialized motor sports, which generate revenues primarily from
ticket sales and sponsorships, as well as merchandising and video rights
associated with producing motor sports events. Ticket prices for these events
are generally lower than for theatrical or music concert events, generally
ranging from $5 to $30. Revenue from these sources is primarily affected by the
type of event and the general economic conditions and consumer tastes in the
particular markets and venues where the events are presented. Event-related
revenues received prior to the event date are initially recorded on the balance
sheet as deferred revenue; after the event occurs, they are recorded on the
statement of operations as gross revenue. Expenses are deferred on the balance
sheet as prepaid expenses until the event occurs.
Operating expenses associated with motor sports activities include talent,
rent, track preparation costs, security and advertising. These operating
expenses are generally fixed costs that vary based on the type of event and
venue where the event is held.
Under certain circumstances, the Company may be required to sell either its
motor sports or theatrical lines of business.
Representation of Professional Athletes
Through FAME, the Company's talent representation activities consist
principally of the representation of team sports athletes, primarily in the
National Basketball Association, in player contract and endorsement
negotiations. FAME also provides certain investment advisory services to its
clients through an affiliate. FAME typically receives a percentage of monies
earned by a player, generally approximately 4% of a player's sports contract
and typically from 15% to 25% of endorsement deals. Revenue from these sources
is recognized as the player receives his salary or endorsement payments based
on the terms of the negotiated agreement. Revenue from these sources is
dependent upon a number of variables, many of which are outside the Company's
control, including a player's skill, health, public appeal and the appeal of
the sport in which the player participates. Principal operating expenses
include salaries, wages and travel and entertainment expenses.
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Other Businesses
The Company's other principal businesses include (a) the production and
distribution of radio industry trade magazines, (b) the production of radio
programming content and show-prep material and (c) the provision of radio air
play and music retail research services. The primary sources of revenues from
these activities include (a) the sale of advertising space in its publications
and the sale of advertising time on radio stations that carry its syndicated
shows, (b) subscription fees for its trade publications and (c) subscription
fees for access to its database of radio play list and audience data. Revenues
generally vary based on the overall advertising environment and competition.
The Company also provides marketing and consulting services pursuant to
contracts with individual clients for specific projects. Revenues from and
costs related to these services vary based on the type of service being
provided and the incremental associated costs.
Seasonality
The Company's operations and revenues are largely seasonal in nature, with
generally higher revenue generated in the second and third quarters of the
year. For example, on a pro forma basis for the 1997 Acquisitions, the Company
generated approximately 68% of its revenues in the second and third quarters
for the twelve months ended December 31, 1997. The Company's outdoor venues are
primarily utilized in the summer months and do not generate substantial revenue
in the late fall, winter and early spring. Similarly, the musical concerts that
the Company promotes largely occur in the second and third quarters. To the
extent that the Company's entertainment marketing and consulting relate to
musical concerts, they also predominantly generate revenues in the second and
third quarters. Therefore, the seasonality of the Company's business causes
(and, upon consummation of the Pending Acquisitions, will probably continue to
cause) a significant variation in the Company's quarterly operating results.
These variations in demand could have a material adverse effect on the timing
of the Company's cash flows and, therefore, on its ability to service its
obligations with respect to its indebtedness. However, the Company believes
that this variation may be somewhat offset with the acquisition of typically
non-summer seasonal businesses in the 1998 Acquisitions, such as motor sports
(which is winter-seasonal) and Touring Broadway Shows (which typically tour
between September and May).
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1997
The Company's revenue increased by $208.2 million to $231.3 million for the
three months ended June 30, 1998, compared to $23.2 million for the three
months ended June 30, 1997, primarily as a result of the 1998 Acquisitions and
the acquisition of Sunshine in June of 1997. The 1998 Acquisitions
significantly increased the concert promotion and venues operation business and
expanded the Company's business to include theatrical promotion and production,
motor sports promotion and production, representation of professional athletes
and radio magazine publishing, programming and research. On a pro forma basis,
assuming all companies owned as of June 30, 1998 were owned as of January 1,
1998, revenue for the three months ended June 30, 1998 would have been $237.3
million.
Cost of revenue increased by $192.8 million to $212.5 million for the three
month period ended June 30, 1998, compared to $19.7 million for the three
months ended June 30, 1997, primarily as a result of the 1998 Acquisitions and
the acquisition of Sunshine in June of 1997. On a pro forma basis, cost of
revenue would have been $219.8 million for the three month period ended June
30, 1998.
Depreciation and amortization expense increased to $14.7 million for the three
month period ended June 30, 1998 compared to $1.0 million for the three month
period ended June 30, 1997, due to the inclusion of depreciation and
amortization expense related to the 1998 Acquisitions, the acquisition of
Sunshine in June 1997 and the completion of capacity expansion projects at two
amphitheaters. The company recorded the fixed assets of the 1998 Acquisitions
and the Sunshine Acquisition at fair value and recorded intangible assets equal
to the excess of purchase price over the fair value of the net tangible assets,
which are being amortized over a 15 year period. In addition, a $2.7 million
write down of the remaining balance of the deferred expense relating to the
Triathlon Broadcasting Company ("Triathlon") agreement was recorded in the
second quarter of 1998 as a result of Triathlon's recent agreement to be
acquired by a third party. If Triathlon is acquired by a third party, it is
unlikely that the consulting fees would continue for the remainder of the
agreement's term. The write down was recorded as a charge to amortization
expense.
Corporate expenses were $2.0 million for the three month period ended June 30,
1998, net of $132,000 fees received from Triathlon, compared to $190,000 for
the three months ended June 30, 1997, net of Triathlon fees of $641,000.
S-A-24
<PAGE>
Non-cash charges recorded in the second quarter of 1998 of $32.1 million
consisted of (a) $23.9 million of compensation related to sale of 650,000
shares of Class B Common Stock and 190,000 shares of Class A Common Stock at a
purchase price of $2.00 per share to certain executive officers pursuant to
employment agreements (b) $7.5 million associated with the issuance of 247,177
shares of Class A Common Stock to Mr. Sillerman in connection with the Meadows
Repurchase and (c) $573,000 related to the issuance of stock options to certain
executive officers pursuant to employment agreements exercisable for an
aggregate of 252,500 shares of Class A Common Stock. These options vest over
three years and have an exercise price of $5.50 per share. The Company is
recording non-cash compensation charges of approximately $3.3 million annually
over the three-year exercise period.
The operating loss was $30.0 million for the three month period ended June 30,
1998, compared to income of $2.2 million for the three months June 30, 1997,
due to the results discussed above.
Interest expense, net of investment income, was $9.9 million in the three
months ended June 30, 1998, compared to $383,000 for the three months ended
June 30, 1997, primarily as a result of assumption of additional debt related
to the 1998 Acquisitions and the debt assumed in connection with Meadows and
Sunshine acquisitions.
Minority interest was $316,000 million for the three months June 30, 1998 as a
result of the 1998 Acquisitions.
Income from equity investments was $1.4 million for the three months June 30,
1998 as a result of the 1998 Acquisitions.
Income tax expense was $850,000 for the three month period ended June 30, 1998.
The provision is for state and local taxes. No federal tax benefit has been
recognized due to the uncertainty of realizing a tax benefit for the Company's
losses.
The Company's net loss increased to $39.6 million for the three month period
ended June 30, 1998, as compared to net income of $1.8 million for the three
months ended March 31, 1997, due to the factors discussed above.
EBITDA defined as earnings before interest, taxes, other income, net equity
income (loss) from investments and depreciation and amortization, and excluding
non-cash charges, increased to $16.8 million for the three month period ended
June 30, 1998, compared to $3.3 million for the three months ended June 30,
1997, primarily as a result of the 1998 Acquisitions and the acquisition of
Sunshine in June 1997. On a pro forma basis, EBITDA would have been $17.2
million for the three month period ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
The Company's revenue increased by $261.3 million to $292.3 million for the six
months ended June 30, 1998, compared to $31.0 million for the six months ended
June 30, 1997, primarily as a result of the 1998 Acquisitions and the
acquisitions of the Meadows in March 1997 and Sunshine in June of 1997. The
1998 Acquisitions significantly increased the concert promotion and venues
operation business and expanded the Company's business to include theatrical
promotion and production, motor sports promotion and production, representation
of professional athletes and radio magazine publishing, programming and
research. On a pro forma basis, assuming all companies owned as of June 30,
1998 were owned as of January 1, 1998, revenue for the six months ended
June 30, 1998 would have been $420.5 million.
Cost of revenue increased by $243.2 million to $270.7 million for the six month
period ended June 30, 1998, compared to $27.5 million for the six months ended
June 30, 1997, primarily as a result of the 1998 Acquisitions and the
acquisition of Sunshine in June of 1997. On a pro forma basis, cost of revenue
would have been $386.2 million for the six month period ended June 30, 1998.
Depreciation and amortization expense increased to $19.2 million for the six
month period ended June 30, 1998 compared to $1.7 million for the six month
period ended June 30, 1997, due to the inclusion of depreciation and
amortization expense related to the 1998 Acquisitions, the acquisition of
Sunshine in June 1997 and the completion of capacity expansion projects at two
amphitheaters. The company recorded the fixed assets of the 1998 Acquisitions
and the Sunshine Acquisition at fair value and recorded intangible assets equal
to the excess of purchase price over the fair value of the net tangible assets,
which are being amortized over a 15 year period. In addition, a $2.7 million
write down of the remaining balance of the deferred expense relating to the
Triathlon agreement was recorded in the second quarter of 1998 as a result of
Triathlon's recent agreement to be acquired by a third party. If Triathlon is
acquired by a third party, it is unlikely that the consulting fees would
continue for the remainder of the agreement's term. The write down was recorded
as a charge to amortization expense.
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<PAGE>
Corporate expenses were $3.3 million for the six month period ended June 30,
1998, net of $264,000 fees received from Triathlon, compared to $1.0 million
for the six months ended June 30, 1997, net of Triathlon fees of $1.2 million.
Non-cash charges recorded in the second quarter of 1998 of $32.1 million
consisted of (a) $23.9 million of compensation related to sale of 650,000
shares of Class B Common Stock and 190,000 shares of Class A Common Stock at a
purchase price of $2.00 per share to certain executive officers pursuant to
employment agreements (b) $7.5 million associated issuance of 247,177 shares of
Class A Common Stock to Mr. Sillerman in connection with the Meadows Repurchase
and (c) $573,000 related to the issuance of stock options to certain executive
officers pursuant to employment agreements exercisable for an aggregate of
252,500 shares of Class A Common Stock. These options vest over six years and
have an exercise price of $5.50 per share. The Company is recording non-cash
compensation charges of approximately $3.3 million annually over the three-year
exercise period.
The operating loss was $32.9 million for the six month period ended June 30,
1998, compared to income of $751,000 for the six months June 30, 1997, due to
the results discussed above.
Interest expense, net of investment income, was $15.7 million in the six months
ended June 30, 1998, compared to $460,000 for the six months ended June 30,
1997, primarily as a result of assumption of additional debt related to the
1998 Acquisitions and the debt assumed in connection with Meadows and Sunshine
acquisitions.
Minority interest was $398,000 for the six months June 30, 1998 as a result of
the 1998 Acquisitions.
Income from equity investees was $1.8 million for the six months June 30, 1998
as a result of the 1998 Acquisitions. The provision is for state and local
taxes. No federal tax benefit has been recognized due to the uncertainty of
realizing a tax benefit for the Company's losses.
Income tax expense was $1.4 million for the six month period ended June 30,
1998. No federal tax benefit has been recognized due to the uncertainty of
realizing a tax benefit for the Company's losses.
The Company's net loss increased to $48.5 million for the six month period
ended June 30, 1998, as compared to net income of $291,000 for the six months
ended June 30, 1997, due to the factors discussed above.
EBITDA defined as earnings before interest, taxes, other income, net equity
income (loss) from investments and depreciation and amortization, and excluding
non-cash charges, increased to $18.3 million for the six month period ended
June 30, 1998, compared to $2.5 million for the six months ended June 30, 1997,
primarily as a result of the 1998 Acquisitions and the acquisition of Sunshine
in June 1997. On a pro forma basis, EBITDA would have been $33.6 million for
the six month period ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for funds has been for acquisitions, interest
expense, working capital needs, to make certain payments in connection with the
Spin-Off and, to a lesser extent, capital expenditures. The Company's principal
sources of funds has been proceeds from the Note Offering, the Equity Offering,
borrowings under the Credit Agreement and cash flows from operations. The
Company will require additional financing to complete the Pending Acquisitions
and to make certain other payments, as discussed below.
Historical Cash Flows
Net cash provided by operations was $71.3 million for the six months ended June
30, 1998 as compared to $7.6 million for the six months ended June 30, 1997.
The increase was primarily attributable to changes in working capital related
to the 1998 Acquisitions.
Net cash used in investing activities for the six months ended June 30, 1998
was $551.8 million as compared to $70.7 million for the six months ended June
30, 1997. The increase was primarily the result of the 1998 Acquisitions.
During the six months ended June 30, 1997, the Company completed the
acquisitions of Delsener/Slater, the Meadows and Sunshine.
Net cash provided by financing activities for the six months ended June 30,
1998 was $719.0 million as compared to $79.3 million for the six months ended
June 30, 1997. During 1998, the Company completed the issuance of its Senior
Subordinated Notes for $350.0 million, borrowed $150.0 million under the Credit
Agreement and completed the Equity Offering for $329.0 million, net, offset by
tax indemnification payments and Spin-Off related payments to SFX Broadcasting
of $84.2 million and the payment of debt issuance costs of $17.5 million.
S-A-26
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Pending Acquisitions
The aggregate cash consideration in the Pending Acquisitions is expected to
consist of approximately $199.2 million (including $8.5 million to be paid over
five years). In addition, the Company expects to incur approximately $7.0
million in fees and expenses related to the Pending Acquisitions.
The Company expects to complete the Pending Acquisitions during the third and
fourth quarters of 1998. However, the timing and completion of the Pending
Acquisitions is subject to a number of closing conditions certain of which are
beyond the control of the Company. No assurance can be given that the Company
will be able to complete the Pending Acquisitions on the terms described herein
or at all.
Future Contingent Payments
Certain of the agreements relating to the 1998 Acquisitions provide for
purchase price adjustments and other future contingent payments under certain
circumstances. The PACE acquisition agreement provides that each PACE seller
will have an option, exercisable for 90 days after the fifth anniversary of the
closing of the PACE acquisition, to require the Company to repurchase up to
500,000 shares of the Class A Common Stock received by that seller for $33.00
in cash per share (an aggregate of up to $16.5 million). Pursuant to the terms
of the Brian Becker's Employment Agreement with the Company, during the period
between December 12, 1999 and December 27, 1999, Mr. Becker, an Executive Vice
President, Director and a Member of the Office of the Chairman of the Company,
will have the option to, among other things, require the Company to purchase
any stock or portion thereof (including vested and unvested options) granted to
him by the Company and/or pay him an amount equal to the present value of the
compensation payable during the remaining term of his employment agreement.
Moreover, pursuant to the Contemporary acquisition agreement, if the average
trading price of the 1,402,850 shares of Class A Common Stock issued in the
Contemporary acquisition is less than $13.33 during the twenty days prior to
the second anniversary of the Contemporary acquisition, the Company will be
required to pay one-half of such difference for each share held by the sellers
of Contemporary on such date. Pursuant to the Network acquisition agreement,
the Company has agreed to increase the purchase price for Network based on
Network's actual 1998 EBITDA (as defined in the acquisition agreement) as
follows: (a) by $4.0 million if the 1998 EBITDA equals or exceeds $9.0 million;
(b) by an additional $4 for each $1 of additional 1998 EBITDA between $9.0
million and $10.0 million; and (c) by an additional $6 for each $1 of
additional 1998 EBITDA between $10.0 million and $11.0 million. This contingent
consideration of up to $14.0 million is payable in shares of Class A Common
Stock or, in certain circumstances, in cash by no later than March 20, 1999.
Pursuant to the agreement relating to the acquisition of FAME, the Company is
obligated to pay to the FAME sellers additional amounts up to $15.0 million in
equal annual installments over five years contingent on the achievement by FAME
of certain EBITDA targets. The FAME agreement also provides for additional
payments by the Company to the FAME sellers if FAME's EBITDA performance exceed
the targets by certain amounts. Futhermore, if the Company disposes of all or
substantially all of the assets or voting interests of FAME during the five
years following the closing of the FAME acquisition, certain payments may
become due to the FAME sellers out of the proceeds of such sale. In addition,
pursuant to the agreement relating to the acquisition certain assets of
Oakdale, if the combined EBITDA (as defined in the Oakdale acquisition
agreement) of the Oakdale Music Theater and Meadows exceeds $5.5 million in
1999, the Company will be obligated to pay the Oakdale sellers between 5.0 to
5.8 times the amount of such excess. No assurance can be given that the Company
will have sufficient cash or other available sources of capital to make any or
all of the future or contingent payments described above.
Spin-Off
In connection, with the Spin-Off, the Company entered into a tax sharing
agreement with SFX Broadcasting, Pursuant to the tax sharing agreement, as
amended, the Company is responsible for certain taxes incurred by SFX
Broadcasting, including income taxes imposed with respect to income generated
by the Company for periods prior to the Spin-Off and taxes resulting from gain
recognized by SFX Broadcasting in the Spin-Off. The Company believes that the
amount of taxes it will be required to pay in connection with the Spin-Off will
be approximately $120.0 million, of which $67.5 million was paid on June 30,
1998. The remaining portion of the tax indemnity payment will be paid as
follows: $26.3 million on September 30, 1998 and $26.3 million on December 31,
1998. Management's estimates of the amount of the indemnity payment are based
on assumptions which management believes are reasonable. However, upon the
completion of all final tax returns, including any potential tax audits, such
assumptions could be modified in a manner that would result in a significant
variance in the actual amount of the tax indemnity.
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Interest on Notes and Borrowings under the Credit Facility
On February 11, 1998, the Company completed the private placement of $350.0
million of 9 1/8% Senior Subordinated Notes, which were subsequently exchanged
for the Exchange Notes on July 15, 1998. Interest is payable on the Exchange
Notes on February 1 and August 1 of each year. In addition, the Company
borrowed $150.0 million under the Credit Facility at an interest rate of
approximately 8.07%. As of August 14, 1998, the Company had borrowed $65.0
million under the revolving portion of the Credit Agreement to fund the
Subsequent Acquisitions.
The degree to which the Company is leveraged will have material consequences to
the Company. The Company's ability to obtain additional financing in the future
for acquisitions, working capital, capital expenditures, general corporate or
other purposes are subject to the covenants contained in the instruments
governing its indebtedness. A substantial portion of the Company's cash flow
from operations will be required to be used to pay principal and interest on
its debt and will not be available for other purposes. The Indenture and the
credit agreement with respect to the credit facility (the "Credit Agreement")
contain restrictive financial and operating covenants, and the failure by the
Company to comply with those covenants would result in an event of default
under the applicable instruments, which in turn would permit acceleration of
the debt under the instruments (and in some cases acceleration of debt under
other instruments that contain cross-default or cross-acceleration provisions).
Although the Company believes that it is currently in compliance with the
covenants under the Indenture and the Credit Facility, there can be no
assurance that it will be able to maintain such compliance in the future. The
Company will be more vulnerable to economic downturns and could also be limited
in its ability to withstand competitive pressures and in its flexibility in
reacting to changes in its industry and general economic conditions. These
consequences are not exhaustive; the Company's indebtedness could also have
other adverse consequences.
The Company's ability to make scheduled payments of principal, to pay interest
on or to refinance its debt depends on its future financial performance, which,
to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors beyond its control, as well as the
success of the businesses to be acquired and the integration of these
businesses into the Company's operations. There can be no assurance that the
Company will be able to make planned borrowings (including under the Credit
Facility), that the Company's business will generate sufficient cash flow from
operations, or that future borrowings will be available in an amount to enable
the Company to service its debt and to make necessary capital or other
expenditures. The Company may be required to refinance a portion of the
principal amount of its indebtedness prior to their respective maturities.
There can be no assurance that the Company will be able to raise additional
capital through the sale of securities, the disposition of assets or otherwise
for any refinancing.
Capital Expenditures
Capital expenditures totaled $36.0 million for the six months ended June 30,
1998. The Company expects that capital expenditures for the full fiscal year
1998 will be substantially higher than historical levels, due to the planned
capital expenditures of approximately $32 million for 1998 at existing venues
(including $20.0 million for the expansion and renovation of the Jones Beach
Amphitheater and $9.5 million for the expansion and renovation of the PNC Bank
Arts Center) and capital expenditures requirements of the acquired businesses,
including $2.5 million for the construction of a new amphitheater serving the
Seattle, Washington market. The Company expects to fund its remaining capital
expenditures for 1998 (estimated by the Company to be approximately $9.0
million (including $5.0 million of major projects and $4.0 million of other
capital expenditures)) from its cash on hand.
Year 2000 Compliance
The Company has addressed the risks associated with Year 2000 compliance with
respect to its accounting and financial reporting systems and is in the process
of installing new accounting and reporting systems. These systems are expected
to provide better reporting, to allow for more detailed analysis, to handle
both the completed acquisitions and the Pending Acquisitions and to be Year
2000 compliant. The Company anticipates that the cost of implementing these
systems will be approximately $3.0 million. The Company is in the process of
examining Year 2000 compliance issues with respect to its vendors and does not
anticipate that it will be subject to a material impact in this area.
SOURCES OF LIQUIDITY
As of June 30, 1998, the Company's cash and cash equivalents totaled $244.4
million and its working capital totaled $74.5 million. In February of 1998, the
Company received the proceeds from the $350.0 million Note Offering and
borrowed $150.0 million under the Credit Facility. On May 27, 1998, the Company
received approximately $326.5 million
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in net proceeds from the Equity Offering. A portion of the proceeds were used
to repay certain indebtedness and consummate the FAME acquisition and Oakdale
acquisition. On May 29, 1998, the Company received a third party payment, net
of the estimated Working Capital payment by the Company, of approximately $2.0
million in connection with the Meadows Repurchase.
The Company has incurred and will continue to incur substantial amounts of
indebtedness. As of June 30, 1998, the Company's consolidated indebtedness was
approximately $543.5 million. In addition, the Company borrowed an additional
$65.0 million under the Credit Agreement to complete the Subsequent
Acquisition. The Company will incur additional indebtedness to finance the
Pending Acquisitions and may incur indebtedness from time to time to finance
acquisitions, for capital expenditures or for other purposes.
The Credit Facility consists of a $150.0 million seven-year reducing revolving
facility (the "Revolver") and a $150.0 million eight-year term loan (the "Term
Loan"). In addition, in August 1998, the Company received a commitment from its
lenders to increase its borrowing availability under the Revolver by $50.0
million, which increases the Company's remaining borrowing availability under
the Credit Agreement to approximately $135.0 million. Loans outstanding under
the Credit Facility will bear interest, at the Company's option, at 1.875 to
2.375 percentage points over LIBOR or the greater of the Federal Funds rate
plus 0.50% or BNY's prime rate. The interest rate spreads on the Term Loan and
the Revolver will be adjusted based on the Company's Total Leverage Ratio (as
defined in the Credit Agreement). The Company will pay a per annum commitment
fee on unused availability under the Revolver of 0.50% (to the extent that the
Company's Leverage Ratio is greater than or equal to 4.0 to 1.0), or 0.375% (if
such ratio is less than 4.0 to 1.0) and a per annum letter of credit fee equal
to the Applicable LIBOR Margin (as defined in the Credit Agreement) for the
Revolver then in effect.
The Revolver and Term Loan contain usual and customary covenants, including
limitations on (a) line of business, (b) additional indebtedness, (c) liens,
(d) acquisitions, (e) asset sales, (f) dividends, repurchases of stock and
other cash distributions, (g) total leverage, (h) senior leverage and (i)
ratios of Operating Cash Flow (as defined in the Credit Agreement) to pro forma
interest expense, debt service and fixed charges. The Company's obligations
under the Revolver and Term Loan are secured by substantially all of its
assets, including property, stock of subsidiaries and accounts receivable and
are guaranteed by the Company's subsidiaries.
The Company intends to finance the Magicworks Acquisition (approximately $120.7
million) and the tax indemnity payment due on September 30, 1998 ($26.3
million) with its cash on hand and additional borrowings under the Credit
Facility. However, there can be no assurance that the Company will have
sufficient cash on hand or sufficient cash flows at the time of borrowing to
permit it to make borrowings under the Credit Facility.
The Company will require additional financing in order to consummate the Cellar
Door Acquisition, to repay the indebtedness of Marquee upon the consummation of
the Marquee Merger (including any indebtedness which Marquee may incur in
connection with its pending acquisitions) and to pay for the remaining portion
of the tax indemnity. The Company is currently negotiating with its existing
lenders in order to further increase its borrowing availability under the
Credit Facility. However, there can be no assurance that the Company's lenders
will agree to increase the amount of borrowings available under the Credit
Facility, or that the Company will be able to otherwise finance such
transactions.
Furthermore, certain agreements of the Company, including the Distribution
Agreement, the Tax Sharing Agreement, Employee Benefits Agreement, certain
employment agreements and the agreements relating to the completed acquisitions
and the Pending Acquisitions provide for tax and other indemnities, purchase
price adjustments and future contingent payments in certain circumstances.
There can be no assurance that the Company will have sufficient sources of
funds to make such payments should they come due. In addition, consistent with
its operating strategy, the Company is currently negotiating additional
acquisitions and expects to pursue additional acquisitions in the live
entertainment business in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("FAS 131"), which is effective for years
beginning after December 15, 1997. FAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
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information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. FAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore
the Company will adopt the new requirements in 1998. Management has not yet
completed its review of FAS 131 and as such has not determined what reportable
segments will be presented.
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 Marquee (collectively, the "Defendants"). The complaint
alleges that the Company proposed an acquisition of Marquee and that the
proposed acquisition will be unfair to Marquee's public stockholders. The
complaint seeks an order enjoining the proposed transaction to date, 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 the
Company improving the terms of its offer to acquire Marquee. The Settlement
also provides for the Defendants to pay plaintiffs' counsel in aggregate of
$310,000, including all fees and expenses as approved by the court. The
Settlement is conditioned on the (a) consummation of the Marquee 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
Exhibit
Number Description of Exhibit
- ------ ----------------------
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 Company's Report
on Form 8-K (File No. 0-24017) filed with the Commission on August 5, 1998).
10.2 Agreement and Plan of Merger, dated as of August 6, 1998, among SFX Entertainment, Inc., MWE
Acquisition Corp. and Magicworks Entertainment Incorporated (incorporated by reference to the
Company's Schedule 14d-1 filed with the Commission on August 13, 1998).
10.3 Asset Purchase Agreement, dated April 29, 1998, by and among Blackstone Entertainment LLC, its
members, DLC Acquisition Corp., and SFX Entertainment, Inc. (incorporated by reference to
Amendment No. 1 to Form S-1 (File No. 333-50079) filed with the Commission on May 5, 1998).
10.4 Stock Purchase Agreement, dated as of April 29, 1998, among SFX Sports Group, Inc., SFX
Entertainment, Inc. and David Falk, Curtis Polk and G. Michael Higgins (incorporated by reference
to Amendment No. 1 to Form S-1 (File No. 333-50079) filed with the Commission on May 5, 1998).
10.5 Purchase Agreement, dated April 29, 1998, by and among Oakdale Theater Concerts, LLC, Oakdale
Development Limited Partnership and Oakdale Theater Concerts, Inc. (incorporated by reference to
Amendment No. 1 to Form S-1 (File No. 333-50079) filed with the Commission on May 5, 1998).
10.6 Stock Purchase and Redemption Agreement, dated May 1, 1998, among Event Merchandising, Inc., its
stockholders and EMI Acquisition Sub, Inc. (incorporated by reference to Amendment No. 1 to Form
S-1 (File No. 333-50079) filed with the Commission on May 5, 1998).
10.7 Purchase Agreement, dated as of May 13, 1998, among SFX Entertainment, Inc., TBA Entertainment,
Inc., TBA Entertainment Corporation and AWC Acquisition Corp. (incorporated by reference to
Amendment No. 2 to Form S-1 (File No. 333-50079) filed with the Commission on May 19, 1998).
</TABLE>
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<TABLE>
<S> <C>
10.8 Purchase Agreement, dated as of May 13, 1998, among SFX Entertainment, Inc., Irving Azoff, Peach
Street Partners, Ltd., Robert E. Geddes, individually and as trustee of the Robert E Geddes Family
Trust, Miserendino Family Trust and Brian Murphy (incorporated by reference to Amendment No. 2
to Form S-1 (File No. 333-50079) filed with the Commission on May 19, 1998).
10.9 Employment Agreement between the SFX Entertainment, Inc. and David Falk, dated as of April 29,
1998 (incorporated by reference to Amendment No. 2 to Form S-1 (File No. 333-50079) filed with the
Commission on May 19, 1998).
10.10 Employment Agreement between SFX Entertainment, Inc. and Robert F.X. Sillerman, dated as of
May 28, 1998 (incorporated by reference to Amendment No. 2 to Form S-1 (File No. 333-50079) filed
with the Commission on May 19, 1998).
10.11 Employment Agreement between SFX Entertainment, Inc. and Michael G. Ferrel, dated as of May 28,
1998 (incorporated by reference to Amendment No. 2 to Form S-1 (File No. 333-50079) filed with the
Commission on May 19, 1998).
10.12 Employment Agreement between Sfx Entertainment, Inc. and Thomas P. Benson, dated as of May 28,
1998 (incorporated by reference to Amendment No. 2 to Form S-1 (File No. 333-50079) filed with the
Commission on May 19, 1998).
10.13 Employment Agreement between SFX Entertainment, Inc. and Howard J. Tytel, dated as of May 28,
1998 (incorporated by reference to Amendment No. 2 to Form S-1 (File No. 333-50079) filed with the
Commission on May 19, 1998).
10.14 Underwriting Agreement (incorporated by reference to Exhibit 1.1 to Current Report on Form 8-K
filed with the Commission on June 3, 1998).
11.1 Statement Regarding Calculation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
On March 10, 1998, the Company filed a Report on Form 8-K pursuant to Item
2 disclosing the consummation of its acquisitions of PACE Entertainment
Corporation, BG Presents, Inc., The Contemporary Group, The Network Magazine
Group, SJS Entertainment and Concert Southern Promotions. In addition, pursuant
to Item 5, the Company disclosed its execution of a credit agreement with
respect to a $300.0 million senior secured credit facility. The Form 8-K was
amended on April 7, 1998, to include certain pro-forma financial information
with respect to such acquisitions.
On June 3, 1998, the Company filed a Report on Form 8-K pursuant to Item 5
in order to attach certain pro-forma financial information.
On July 10, 1998, the Company filed a Report on Form 8-K pursuant to Item
2 disclosing the consummation of its acquisition of Blackstone Entertainment
LLC.
On August 5, 1998, the Company filed a Report on Form 8-K pursuant to Item
5 disclosing its entry into an agreement to acquire The Marquee Group, Inc.
S-A-31
<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.
SFX ENTERTAINMENT, INC.
Date: August 14, 1998 By: /s/ Thomas P. Benson
---------------------------
Thomas P. Benson
Chief Financial Officer and
Vice President
S-A-32
<PAGE>
ANNEX B
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Financial Statements
and notes thereto contain forward-looking statements that involve risks and
uncertainties, therefore, the actual results of the Company may differ
materially from those discussed herein. 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.
In the opinion of management, all adjustments necessary to fairly present
this pro forma information have been made. The Unaudited Pro Forma Condensed
Combined Financial Statements are based upon, and should be read in conjunction
with, the historical financial statements of the Company, Magicworks, Don Law
and certain of the businesses previously acquired by the company and the
respective notes to such financial statements previously filed with the SEC.
The pro forma information is based upon tentative allocations of purchase price
and does not purport to be indicative of the results that would have been
reported had such events actually occurred on the date specified, nor is it
indicative of the Company's future results. Purchase accounting is based upon
preliminary asset valuations, which are subject to change.
The Company entered the live entertainment business in January 1997 with
the acquisition of Delsener/Slater Enterprises, Ltd. ("Delsener/Slater"). In
March 1997, the Company acquired the Meadows Music Theater ("Meadows") and in
June 1997 the Company acquired Sunshine Promotions, Inc. and certain other
related companies ("Sunshine Promotions"). The acquisitions of Delsener/Slater,
Sunshine Promotions and the Meadows are collectively referred to herein as the
"1997 Acquisitions."
In January 1998, the Company acquired Westbury Music Fair. In February
1998, the Company acquired PACE Entertainment Corporation ("PACE"), Pavilion
Partners ("Pavilion"), The Contemporary Group of Companies, (collectively
"Contemporary"), BG Presents, Inc. ("BGP"), and Album Network, Inc., SJS
Entertainment Corporation and the Network 40 (collectively "Network"). In March
1998, the Company acquired Concert/Southern Promotions ("Concert/Southern") and
United Sports of America Motor Sports ("USA Motorsports"). In May 1998, the
Company acquired Irvine Meadows Amphitheater, New Avalon, Inc., TBA Media, Inc.
and West Coast Amphitheater (collectively "Avalon"). In June 1998 the Company
acquired Oakdale Concerts, LLC and Oakdale Development Limited Partnership
(collectively "Oakdale") and Falk Associates Management Enterprises, Inc. and
Financial Advisory Management Enterprises, Inc. (collectively "FAME"). The
acquisitions of Westbury Music Fair, PACE, Pavilion Partners, Contemporary,
BGP, Network, Concert/Southern, USA Motorsports, Avalon, Oakdale and FAME are
collectively referred to herein as the "Transactions."
Since June 30, 1998, the Company has completed the acquisition of
Magicworks for an aggregate consideration of $120.1 million, the acquisition of
Don Law for an aggregate consideration of approximately $92.2 million and has
also completed the acquisition of five other entertainment related companies in
the theatrical and music segments, principally in the areas of programming, the
acquisition of tours and merchandising (the "Other Subsequent Acquisitions")
for an aggregate purchase price of $101.6 million in cash and $10.0 million in
stock. Magicworks, Don Law and the Other Subsequent Acquisitions are
collectively referred to herein as the "Subsequent Acquisitions."
The Unaudited Pro Forma Condensed Combined Balance Sheet at June 30, 1998
is presented as if the Company had completed the Magicworks, Don Law and the
Other Subsequent Acquisitions as of June 30, 1998.
The Unaudited Pro Forma Condensed Combined Statements of Operations for
the year ended December 31, 1997 and the six months ended June 30, 1998 are
presented as if the Company had completed the 1997 Acquisitions, the
Transactions and the Subsequent Acquisitions as of January 1, 1997.
In addition, the Unaudited Pro Forma Condensed Combined Financial
Statements do not reflect certain purchase price adjustments and future
contingent payments, which may be payable pursuant to the various acquisition
agreements.
S-B-1
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA FOR THE
SUBSEQUENT ACQUISITIONS
I
SFX ----------------------------------------- PRO FORMA
ENTERTAINMENT MAGICWORKS DON LAW OTHER ADJUSTMENTS
(ACTUAL) A B C II PRO FORMA
--------------- ------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets .................. $ 350,396 $ (97,016) $ (73,101) $ (67,724) $182,000 $ 294,555
Property and equipment, net ..... 235,664 2,105 27,481 2,659 -- 267,909
Intangible assets, net .......... 625,125 108,657 62,761 107,067 -- 903,610
Other assets .................... 31,976 5,676 149 584 38,385
---------- --------- --------- --------- -------- ----------
Total Assets .................... $1,243,161 $ 19,422 $ 17,290 $ 42,586 $182,000 $1,504,459
========== ========= ========= ========= ======== ==========
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Current liabilities ............. $ 275,938 $ 18,509 $ 16,234 $ 19,951 $ -- $ 330,632
Deferred taxes .................. 47,358 -- -- 10,000 -- 57,358
Senior Subordinated Notes ....... 350,000 -- -- -- -- 350,000
Credit Facility ................. 150,000 -- -- -- 182,000 332,000
Other long-term debt ............ 23,743 913 170 -- -- 24,826
Capital lease obligations ....... 6,042 -- -- -- -- 6,042
Other liabilities ............... 2,835 -- 886 510 -- 4,231
Minority interest ............... 3,023 -- -- 2,125 -- 5,148
Temporary equity--stock
subject to
redemption ..................... 16,500 -- -- -- -- 16,500
Stockholders' equity ............ 367,722 -- -- 10,000 -- 377,722
---------- --------- --------- --------- -------- ----------
Total Liabilities &
Stockholders' Equity ........... $1,243,161 $ 19,422 $ 17,290 $ 42,586 $182,000 $1,504,459
========== ========= ========= ========= ======== ==========
</TABLE>
S-B-2
<PAGE>
I. PRO FORMA FOR THE SUBSEQUENT ACQUISITIONS
A. MAGICWORKS
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 (000'S)
-------------------------------------------------------
MAGICWORKS PRO FORMA MAGICWORKS
AS REPORTED ADJUSTMENTS ACQUISITION (A)
------------- -------------------- ----------------
<S> <C> <C> <C>
ASSETS:
Current assets ................................... $18,941 $ (113,447)(b) $ (97,016)
(2,510)(c)
Property and equipment, net ...................... 2,105 2,105
Intangible assets, net ........................... 374 108,283 (e) 108,657
Other assets ..................................... 5,676 -- 5,676
------- ----------- ---------
Total Assets ..................................... $27,096 $ (7,674) $ 19,422
======= =========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities .............................. $14,509 $ 4,000(b) $ 18,509
Long-term debt ................................... 6,116 (2,693)(b) 913
(2,510)(c)
Other liabilities ................................ -- --
Stockholders' equity ............................. 6,471 (6,471)(d) --
------- ----------- ---------
Total Liabilities & Stockholders' Equity ......... $27,096 $ (7,674) $ 19,422
======= =========== =========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) The pro forma financial statements do not include two immaterial
acquisitions by Magicworks subsequent to June 30, 1998.
(b) To reflect the Magicworks acquisition for $113,447,000 in cash, excluding
$4,000,000 in estimated fees and expenses and the assumption of
$2,693,000 in convertible notes, which the Company is required to repay
upon presentation for conversion into Magicworks Common Stock.
(c) To reflect the repayment of $2,510,000 of debt by Magicworks subsequent
to June 30, 1998.
(d) To reflect the elimination of Magicworks stockholder's equity.
(e) To reflect the excess of the purchase price paid over the fair value of
net tangible assets acquired of $108,283,000.
S-B-3
<PAGE>
B. DON LAW
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 (IN THOUSANDS)
---------------------------------------------------
DON LAW PRO FORMA
AS REPORTED ADJUSTMENTS DON LAW
------------- ------------------- -------------
<S> <C> <C> <C>
ASSETS:
Current assets ................................... $19,098 $ (92,199)(a) $ (73,101)
Property and equipment, net ...................... 10,223 17,258 (b) 27,481
Intangible assets, net ........................... -- 62,761 (c) 62,761
Other assets ..................................... 149 149
------- ---------- ---------
Total Assets ..................................... $29,470 $ (12,180) $ 17,290
======= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities .............................. $16,234 $ -- $ 16,234
Long-term debt ................................... 8,940 (8,770)(a) 170
Other liabilities ................................ 886 -- 886
Minority interest ................................ --
Stockholders' equity ............................. 3,410 (3,410)(d) --
------- ---------- ---------
Total Liabilities & Stockholders' Equity ......... $29,470 $ (12,180) $ 17,290
======= ========== =========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) To reflect the Don Law acquisition for $92,199,000 in cash (including the
repayment of $8,770,000 of the seller's debt).
(b) To reflect the increase in fair value allocated to certain fixed assets,
primarily the Great Woods Amphitheater.
(c) To reflect the excess of the purchase price paid over the fair value of
net tangible assets acquired of $62,761,000.
(d) To reflect the elimination of Don Law's historical stockholders' equity.
S-B-4
<PAGE>
C. OTHER SUBSEQUENT ACQUISITIONS
Reflects the combined historical balance sheets of the five businesses
acquired by the Company in July and August of 1998. In the aggregate, such
acquisitions are not material to the Company's financial position or results of
operations.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 (000'S) (IN THOUSANDS)
-----------------------------------------------------
OTHER
SUBSEQUENT OTHER
ACQUISITIONS PRO FORMA SUBSEQUENT
AS REPORTED ADJUSTMENTS ACQUISITIONS
-------------- -------------------- -------------
<S> <C> <C> <C>
ASSETS:
Current assets ................................... $33,862 $ (101,586)(a) $ (67,724)
--
--
--
Property and equipment, net ...................... 2,659 -- 2,659
--
Intangible assets, net ........................... 512 96,555 (d) 107,067
10,000 (g) --
--
--
--
Other assets ..................................... 584 -- 584
--
------- ----------- ---------
Total Assets ..................................... $37,617 $ 4,969 $ 42,586
======= =========== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Current liabilities .............................. $17,951 $ 2,000(f) $ 19,951
Deferred taxes ................................... -- 10,000 (g) 10,000
Long-term debt ................................... 10,000 (10,000)(e) --
Other liabilities ................................ 510 510
Minority Interest ................................ -- 2,125 (b) 2,125
Stockholders' equity ............................. 9,156 10,000 (a) 10,000
(9,156)(c)
------- ----------- ---------
Total Liabilities & Stockholders' Equity ......... $37,617 $ 4,969 $ 42,586
======= =========== =========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) To reflect the Other Subsequent Acquisitions for $101,586,000 in cash and
$10,000,000 in stock.
(b) To record minority interest for the 20% of a certain entity not purchased
by the Company.
(c) To reflect the elimination of the historical stockholders' equity of the
Other Subsequent Acquisitions.
(d) To reflect the excess purchase price paid over the fair value of net
tangible assets acquired.
(e) To reflect the repayment of debt.
(f) To reflect expected future acquisition related payments based on
projected future earnings.
(g) To reflect deferred taxes of $10,000,000 associated with the differences
between the book and tax basis of assets and liabilities acquired.
II. PRO FORMA ADJUSTMENTS:
Represents an additional $182,000,000 borrowed under the Company's credit
facility to finance the Subsequent Acquisitions.
S-B-5
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
SFX FOR THE 1997 PRO FORMA FOR
ENTERTAINMENT ACQUISITIONS THE TRANSACTIONS
(ACTUAL) I II
--------------- -------------- ------------------
<S> <C> <C> <C>
Revenue ...................... $96,144 $14,243 $590,913
Operating expenses ........... 83,417 13,293 520,944
Depreciation &
amortization ................ 5,431 1,402 43,414
Corporate expenses, net of
Triathlon fees .............. 2,206 3,500
------- --------
Operating income (loss) ...... 5,090 (452) 23,055
Interest expense ............. 1,590 171 --
Other (income) expenses ...... (295) (1) (521)
Equity (income) loss from
investments ................. (509) -- (4,908)
Other expenses ............... -- -- (38)
------- -------- --------
Income/(loss) before
income tax expense .......... 4,304 (622) 28,522
Income tax expense
(benefit) ................... 490 -- 4,200
------- -------- --------
Net income (loss) ............ $ 3,814 $ (622) $ 24,322
======== ========
Accretion on put option ...... --
-------
Net income (loss)
applicable to common
share ....................... $ 3,814
=======
Net income (loss) per
common share ................ $ .26
=======
Weighted average common
shares outstanding (2) ...... 14,445
=======
<CAPTION>
PRO FORMA FOR
THE SUBSEQUENT ACQUISITIONS
III
-------------------------------------
PRO FORMA
MAGICWORKS DON LAW OTHER ADJUSTMENTS PRO FORMA
A B C IV V
------------ ----------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue ...................... $ 63,916 $50,588 $ 93,050 $ 908,854
Operating expenses ........... 60,475 43,741 89,240 811,110
Depreciation &
amortization ................ 7,545 5,322 10,298 73,412
--
--
Corporate expenses, net of
Triathlon fees .............. -- -- -- 2,294 (c) 8,000
-------- ------- -------- ----- ---------
Operating income (loss) ...... (4,104) 1,525 (6,488) (2,294) 16,332
Interest expense ............. 91 -- 59,778 (a) 61,630
Other (income) expenses ...... (150) -- (31) (998)
Equity (income) loss from
investments ................. -- -- (1,561) 1,463 (d) (5,515)
Other expenses ............... 407 (329) -- (1,463)(d) (1,423)
-------- ------- -------- ------ ---------
Income/(loss) before
income tax expense .......... (4,452) 1,854 (4,896) (62,072) (37,362)
Income tax expense
(benefit) ................... 985 -- 22 (840)(b) 4,857
-------- ------- -------- ------- ---------
Net income (loss) ............ $ (5,437) $ 1,854 $ (4,918) $ (61,232) $ (42,219)
======== ======= ======== ==========
Accretion on put option ...... (3,300)
---------
Net income (loss)
applicable to common
share ....................... $ (45,519)
=========
Net income (loss) per
common share ................ $ (1.52)
=========
Weighted average common
shares outstanding (2) ...... 30,390
=========
</TABLE>
- ----------
(1) The Pro Forma Financial Statements do not include expected cost savings
in connection with certain acquisitions associated with the elimination
of duplicitive staffing and general and administrative expenses of
$6,440,000.
(2) Includes 500,000 shares of Class A Common Stock issued to the PACE
sellers in connection with the Fifth Year Put Option (such shares are not
included in calculating the net loss per common share).
S-B-6
<PAGE>
I. PRO FORMA FOR THE 1997 ACQUISITIONS
The Company acquired Delsener/Slater, the Meadows Music Theater and
Sunshine Promotions on January 2, 1997, March 20, 1997 and June 24, 1997,
respectively. These adjustments represent the historical operating results of
the Meadows Music Theater and Sunshine Promotions prior to their respective
acquisitions by the Company.
II. PRO FORMA FOR THE TRANSACTIONS
The Company acquired PACE and Pavilion, Contemporary, BGP, Network,
Concerts/Southern, and FAME on February 25, 1998, February 27, 1998, February
24, 1998, February 27, 1998, March 4, 1998, and June 4, 1998, respectively. In
June 1998, the Company acquired Avalon and Oakdale, herein referred to as the
Other Acquisitions. The following represents the historical operating results
of these companies prior to their acquisition by the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
--------------------------------------------------------
PACE
AND
PAVILION CONTEMPORARY BGP NETWORK
ACQUISITION ACQUISITION ACQUISITION ACQUISITION
A B C D
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue ................ $284,360 $103,300 $105,553 $28,322
Operating expenses ..... 260,256 91,220 96,630 19,577
Depreciation &
amortization .......... 6,053 1,320 1,027 351
Corporate expenses ..... -- -- -- --
-------- -------- -------- -------
Operating income
(loss) ................ 18,051 10,760 7,896 8,394
Interest expense ....... 6,772 266 917 195
Other (income)
expenses .............. 1,328 (357) (270) (78)
Equity (income) loss
from investments ...... (7,399) -- -- --
Other expenses ......... (38) -- -- --
-------- -------- -------- -------
Income (loss) before
income tax expense..... 17,388 10,851 7,249 8,277
Income tax expense
(benefit) ............. 3,569 -- 1,687 127
-------- -------- -------- -------
Net income (loss) ...... $ 13,819 $ 10,851 $ 5,562 $ 8,150
======== ======== ======== =======
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
--------------------------------------------------------------------------
CONCERTS/
SOUTHERN FAME OTHER PRO FORMA PRO FORMA
ACQUISITION ACQUISITION ACQUISITIONS ADJUSTMENTS FOR THE
E F G H TRANSACTIONS
------------- ------------- -------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue ................ $14,797 $10,881 $43,700 $ -- $590,913
Operating expenses ..... 12,520 3,457 37,284 -- 520,944
Depreciation &
amortization .......... 79 115 461 34,008 (a) 43,414
Corporate expenses ..... -- -- -- 3,500 (b) 3,500
------- ------- ------- ---------- --------
Operating income
(loss) ................ 2,198 7,309 5,955 (37,508) 23,055
Interest expense ....... -- 79 1,602 (9,831)(c) --
Other (income)
expenses .............. (60) (143) (79) (862)(d) (521)
Equity (income) loss
from investments ...... 48 -- -- 862 (d) (4,908)
-- 1,581 (f) --
Other expenses ......... -- -- -- (38)
------- ------- ------- ---------- --------
Income (loss) before
income tax expense..... 2,210 7,373 4,432 (29,258) 28,522
Income tax expense
(benefit) ............. -- 700 949 (2,832)(e) 4,200
------- ------- ------- ---------- --------
Net income (loss) ...... $ 2,210 $ 6,673 $ 3,483 $ (26,426) $ 24,322
======= ======= ======= ========== ========
</TABLE>
S-B-7
<PAGE>
A. PACE AND PAVILION ACQUISITIONS
Reflects the PACE acquisition, the separate acquisition of two partners'
interest in the Pavilion partnership that owns certain amphitheaters operated
by PACE and the acquisition of USA Motor Sports by PACE in March 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
------------------------------------------------------------------------------
PACE PACE AND
AS PAVILION USA MOTOR PRO FORMA PAVILION
REPORTED AS REPORTED SPORTS ADJUSTMENTS ACQUISITIONS
------------ ------------- ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue .............................. $176,168 $ 98,632 $8,560 $ 1,000(a) $284,360
Operating expenses ................... 170,169 83,258 8,306 (1,477)(b) 260,256
Depreciation & amortization .......... 1,985 4,045 23 -- 6,053
Other expenses ....................... 1,139 -- -- (1,139)(c) --
-------- -------- ------ --------- --------
Operating income (loss) .............. $ 2,875 $ 11,329 $ 231 $ 3,616 $ 18,051
Interest expense ..................... 2,384 4,388 -- -- 6,772
Other (income) expenses .............. 53 1,304 (29) -- 1,328
Equity (income) loss from
investments ......................... (8,134) (1,831) -- 2,566 (d) (7,399)
Other expenses ....................... -- -- (38) -- (38)
-------- -------- ------ --------- --------
Income/(loss) before income tax
expense ............................. $ 8,572 $ 7,468 $ 298 $ 1,050 $ 17,388
Income tax expense (benefit) ......... 3,569 -- -- -- 3,569
-------- -------- ------ --------- --------
Net income (loss) .................... $ 5,003 $ 7,468 $ 298 $ 1,050 $ 13,819
======== ======== ====== ========= ========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) To reflect non-cash revenue resulting from SFX granting Blockbuster
naming rights to three venues for two years for no future consideration
as part of its agreement to acquire Blockbuster's indirect 33 1/3%
interest in Pavilion.
(b) Reflects the elimination of $570,000 of certain officers' salaries and
bonuses which will not be paid under SFX's new employment contracts and
of $907,000 of non-recurring costs incurred in connection with PACE's
previously planned initial public offering, which was canceled. The
amount of the pro forma adjustment to eliminate salaries and bonuses is
based on SFX's agreements with the affected employees that a bonus will
not be paid unless there is a significant improvement in the results of
the PACE acquisition. Accordingly, no such bonus is reflected in the pro
forma statement of operations because, if PACE's results were similar to
those in these pro forma statements of operations, SFX would not be
contractually obligated to pay a bonus.
(c) Reflects the elimination of non-recurring restricted stock compensation
to PACE executives.
(d) To eliminate PACE's income from its 33 1/3% equity investment in Pavilion
Partners.
S-B-8
<PAGE>
B. CONTEMPORARY ACQUISITION
Reflects the Contemporary acquisition and the separate acquisition of the
remaining 50% interest in Riverport Amphitheater Partners, a partnership that
owns an amphitheater in St. Louis, Missouri that is operated by Contemporary.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
-------------------------------------------------------------------
CONTEMPORARY RIVERPORT PRO FORMA CONTEMPORARY
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITION
-------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Revenue ......................................... $ 89,053 $14,247 $ -- $103,300
Operating expenses .............................. 90,820 11,630 (11,230)(a) 91,220
Depreciation & amortization ..................... 541 779 -- 1,320
--------- ------- ---------- --------
Operating income (loss) ......................... $ (2,308) $ 1,838 $ 11,230 $ 10,760
Interest expense ................................ 192 74 -- 266
Other (income) expenses ......................... (117) (240) -- (357)
Equity (income) from investments ................ (1,002) -- 1,002 (b) --
--------- ------- ---------- --------
Income/(loss) before income tax expense ......... $ (1,381) $ 2,004 $ 10,228 $ 10,851
Income tax expense (benefit) .................... -- -- -- --
--------- ------- ---------- --------
Net income (loss) ............................... $ (1,381) $ 2,004 $ 10,228 $ 10,851
========= ======= ========== ========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses and
other consulting expenses which will not be paid under SFX's new
employment and other contracts. The amount of the pro forma adjustment to
eliminate salaries and bonuses is based on SFX's agreements with the
affected employees that a bonus will not be paid unless there is a
significant improvement in the results of Contemporary. Accordingly, no
such bonus is reflected in the pro forma statement of operations because,
if Contemporary's results were similar to those in these pro forma
statements of operations, SFX would not be contractually obligated to pay
a bonus.
(b) Reflects the elimination of Contemporary's equity income in Riverport
Amphitheater Partners. Contemporary has acquired its partners' 50%
interest in this venture.
C. BGP ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
------------------------------------------------
AS REPORTED PRO FORMA BGP
(A) ADJUSTMENTS ACQUISITION
------------- ----------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $105,553 $ -- $105,553
Operating expenses .............................. 99,958 (3,328)(b) 96,630
Depreciation & amortization ..................... 1,027 -- 1,027
-------- --------- --------
Operating income ................................ $ 4,568 $ 3,328 $ 7,896
Interest expense ................................ 917 -- 917
Other (income) expenses ......................... (270) -- (270)
-------- --------- --------
Income/(loss) before income tax expense ......... $ 3,921 $ 3,328 $ 7,249
Income tax expense (benefit) .................... 1,687 -- 1,687
-------- --------- --------
Net income ...................................... $ 2,234 $ 3,328 $ 5,562
======== ========= ========
</TABLE>
S-B-9
<PAGE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects BGP's operating results for the twelve months ended January 31,
1998.
(b) Reflects the elimination of certain officers' salaries and bonuses and
other consulting expenses which will not be paid under SFX's new
employment and other contracts. The amount of the pro forma adjustment to
eliminate salaries and bonuses is based on SFX's agreements with the
affected employees that a bonus will not be paid unless there is a
significant improvement in the results of BGP. Accordingly, no such bonus
is reflected in the pro forma statement of operations because, if BGP's
results were similar to those in these pro forma statements of
operations, SFX would not be contractually obligated to pay a bonus.
D. NETWORK ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
------------------------------------------------------------------
THE
NETWORK
MAGAZINE SJS PRO FORMA NETWORK
AS REPORTED AS REPORTED ADJUSTMENTS ACQUISITIONS
------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Revenue ......................................... $16,274 $14,218 $ (2,170)(b) $28,322
Operating expenses .............................. 14,651 14,422 (2,170)(b) 19,577
(7,326)(a)
Depreciation & amortization ..................... 224 127 351
------- ------- -------
Operating income (loss) ......................... $ 1,399 $ (331) $ 7,326 $ 8,394
Interest expense, net ........................... 159 36 -- 195
Other (income) expenses ......................... -- (78) -- (78)
------- ------- --------- -------
Income/(loss) before income tax expense ......... $ 1,240 $ (289) $ 7,326 $ 8,277
Income tax expense (benefit) .................... -- 127 -- 127
------- ------- --------- -------
Net income (loss) ............................... $ 1,240 $ (416) $ 7,326 $ 8,150
======= ======= ========= =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses which
will not be paid under SFX's new employment contracts. The amount of the
pro forma adjustment to eliminate salaries and bonuses is based on SFX's
agreements with the affected employees that a bonus will not be paid
unless there is a significant improvement in the results of the Network
acquisitions. Accordingly, no such bonus is reflected in the pro forma
statement of operations because, if Network's results were similar to
those in these pro forma statements of operations, SFX would not be
contractually obligated to pay a bonus.
(b) Reflects the elimination of transactions between Network Magazine and
SJS.
S-B-10
<PAGE>
E. CONCERTS/SOUTHERN ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
----------------------------------------------
CONCERTS/
PRO FORMA SOUTHERN
AS REPORTED ADJUSTMENTS ACQUISITION
------------- --------------- ------------
<S> <C> <C> <C>
Revenue ....................................... $14,797 $ -- $14,797
Operating expenses ............................ 12,949 (429)(a) 12,520
Depreciation & amortization ................... 79 -- 79
------- ------- -------
Operating income .............................. $ 1,769 $ 429 $ 2,198
Other (income) expenses ....................... (60) -- (60)
Equity (income) loss from investments ......... 80 (32)(b) 48
------- ------- -------
Income before income tax expense .............. $ 1,749 $ 461 $ 2,210
Income tax expense (benefit) .................. -- -- --
------- ------- -------
Net income .................................... $ 1,749 $ 461 $ 2,210
======= ======= =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' salaries and bonuses which
will not be paid under SFX's new employment contracts. The amount of the
pro forma adjustment to eliminate salaries and bonuses is based on SFX's
agreements with the affected employees that a bonus will not be paid
unless there is a significant improvement in the results of
Concert/Southern. Accordingly, no such bonus is reflected in the pro
forma statement of operations because, if Concert/Southern's results were
similar to those in these pro forma statements of operations, SFX would
not be contractually obligated to pay a bonus.
(b) Reflects the elimination of equity loss of a non-entertainment affiliated
entity which was not acquired by SFX.
F. FAME ACQUISITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
--------------------------------------------------
PRO FORMA FAME
AS REPORTED ADJUSTMENTS ACQUISITION
------------- ------------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $ 10,881 $10,881
Operating expenses .............................. 13,002 $ (10,595)(a) 3,457
1,050 (b)
Depreciation & amortization ..................... 115 115
-------- ---------- -------
Operating income (loss) ......................... (2,236) 9,545 7,309
Interest expense ................................ 79 79
Other (income) expenses ......................... (143) (143)
-------- ---------- -------
Income/(loss) before income tax expense ......... (2,172) 9,545 7,373
Income tax expense (benefit) .................... 700 (c) 700
-------- ---------- -------
Net income (loss) ............................... $ (2,172) $ 8,845 $ 6,673
======== ========== =======
</TABLE>
S-B-11
<PAGE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' distributions of earnings
which will not be paid under SFX's new employment contracts. The FAME
acquisition agreement provides for payments by SFX to the FAME sellers of
additional amounts up to an aggregate of $15.0 million in equal annual
installments over 5 years contingent on the achievement of certain EBITDA
targets and for additional payments by SFX if FAME's EBITDA performance
exceeds the target by certain amounts.
(b) Reflects salaries and officers' life insurance premiums to be paid by
SFX.
(c) Reflects an adjustment to the provision for state and local income taxes.
G. OTHER ACQUISITIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
---------------------------------------------------------------------
AVALON OAKDALE PRO FORMA OTHER
ACQUISITION ACQUISITION ADJUSTMENTS ACQUISITIONS
------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Revenue ......................................... $27,265 $16,435 $43,700
Operating expenses .............................. 24,404 14,720 $ (1,840)(a) 37,284
Depreciation & amortization ..................... 410 51 461
Corporate expenses .............................. --
------- ------- --------- -------
Operating income (loss) ......................... 2,451 1,664 1,840 5,955
Interest expense ................................ 94 1,508 1,602
Other (income) expenses ......................... -- (79) (79)
Other expenses .................................. 1,581 (1,581)(b) --
------- ------- --------- -------
Income/(loss) before income tax expense ......... $ 776 $ 235 3,421 4,432
Income tax expense (benefit) .................... 249 700 (c) 949
------- ------- --------- -------
Net income (loss) ............................... $ 527 $ 235 $ 2,721 $ 3,483
======= ======= ========= =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the elimination of certain officers' bonuses and wages not
expected to be paid under the Company's new employment contracts for
Avalon. The amount of the pro forma adjustment to eliminate salaries and
bonuses is based on the Company's agreements with the affected employees
that a bonus will not be paid unless there is a significant improvement
in the results of Avalon. Accordingly, no such bonus is reflected in the
pro forma statement of operations because, if Avalon's results were
similar to those in these pro forma statements of operations, the Company
would not be contractually obligated to pay a bonus.
(b) To reclassify PACE's equity income in Avalon following the Avalon
acquisition.
(c) Reflects an adjustment to the provision for state and local income taxes.
H. PRO FORMA ADJUSTMENTS
(a) Reflects the increase in depreciation and amortization resulting from the
preliminary purchase accounting treatment of the acquisitions. The
Company amortizes goodwill over 15 years.
(b) To record incremental corporate overhead charges associated with
headquarters personnel and general and administrative expenses that
management estimates will be necessary as a result of the SFX
acquisitions.
(c) Reflects the elimination of $9,831,000 of historical interest expense.
S-B-12
<PAGE>
(d) To reclassify Delsener/Slater's equity income in the PNC Bank Arts Center
venue following the acquisition of Pavilion Partners, which owns the
other 50% equity interest in the venue.
(e) Represents an adjustment to the provision for state and local income
taxes to reflect an approximate pro forma tax provision of $4,200,000.
The calculation treats all companies acquired as "C" Corporations. The
tax provision reflects the non-deductibility of approximately $17,000,000
of goodwill amortization, and tax savings related to the pro forma
adjustments.
(f) To reclassify PACE's equity income in Avalon following the Avalon
acquisition.
III. PRO FORMA FOR THE SUBSEQUENT ACQUISITIONS
A. MAGICWORKS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 IN (000'S)
----------------------------------------------
PRO FORMA MAGICWORKS
AS REPORTED ADJUSTMENTS ACQUISITION
------------- --------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $63,916 $ 63,916
Operating expenses .............................. 60,475 60,475
Depreciation & amortization ..................... 634 $ 6,911(a) 7,545
------- ------- --------
Operating income (loss) ......................... 2,807 (6,911) (4,104)
Interest expenses ............................... 686 (595)(b) 91
Other (income) .................................. (150) (150)
Other expenses .................................. 407 407
------- ------- --------
Income/(loss) before income tax expense ......... $ 1,864 $(6,316) $ (4,452)
Income tax expense .............................. 747 238 (c) 985
------- ------- --------
Net income (loss) ............................... $ 1,117 $(6,554) $ (5,437)
======= ======= ========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the increase of $6,911,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of
Magicworks. The Company amortizes goodwill over 15 years.
(b) Reflects the elimination of $595,000 of historical interest expense.
(c) To reflect a federal tax provision for the elimination of interest
expense.
B. DON LAW
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 IN (000'S)
------------------------------------------------
DON LAW PRO FORMA
AS REPORTED ADJUSTMENTS DON LAW
------------- ------------------- ----------
<S> <C> <C> <C>
Revenue ......................................... $50,588 $50,588
Operating expenses .............................. 44,401 $ (610)(a) 43,741
(50) (b)
Depreciation & amortization ..................... 2,033 3,289 (c) 5,322
Corporate expenses .............................. --
Other expenses .................................. --
------- ---------- -------
Operating income (loss) ......................... 4,154 (2,629) 1,525
Interest expense ................................ 1,072 (1,072) (d) --
Other (income) expenses ......................... (329) (329)
------- ---------- -------
Income/(loss) before income tax expense ......... $ 3,411 $ (1,557) $ 1,854
Income tax expense (benefit) .................... --
------- ---------- -------
Net income (loss) ............................... $ 3,411 $ (1,557) $ 1,854
======= ========== =======
</TABLE>
S-B-13
<PAGE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects adjustment to eliminate payments made to employees associated
with membership interest.
(b) Reflects the elimination of certain officer's bonuses and wages not
expected to be paid under the Company's new employment contracts. The
amount of the pro forma adjustment to eliminate salaries and bonuses is
based on the Company's agreements with the affected employees that a
bonus will not be paid unless there is a significant improvement in the
results of Don Law. Accordingly, no such bonus is reflected in the pro
forma statement of operations as should Don Law's results be at a similar
level to that in these pro forma statements of operations no bonus would
be paid, and the Company would not be contractually obligated to pay a
bonus.
(c) Reflects the increase of $3,289,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of Don Law.
The Company amortizes goodwill over 15 years.
(d) Reflects the elimination of $1,072,000 of historical interest expense.
C. OTHER SUBSEQUENT ACQUISITIONS
Reflects the historical balance sheets of the five businesses acquired by
the Company in July and August of 1998. In the aggregate, such acquisitions are
not material to the Company's financial position or results of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 IN (000'S)
------------------------------------------------
OTHER
SUBSEQUENT OTHER
ACQUISITIONS PRO FORMA SUBSEQUENT
AS REPORTED ADJUSTMENTS ACQUISITIONS
-------------- --------------- -------------
<S> <C> <C> <C>
Revenue ......................................... $ 93,050 $ 93,050
Operating expenses .............................. 89,240 89,240
--
Depreciation & amortization ..................... 430 $ 9,868(a) 10,298
--
Corporate expenses .............................. -- --
Other expenses ..................................
-------- ------- --------
Operating income (loss) ......................... 3,380 (9,868) (6,488)
Interest expense ................................ 254 (254)(b) --
Other (income) expenses ......................... (31) (31)
Equity (income) loss from investments ........... (1,561) (1,561)
-------- ------- --------
Income/(loss) before income tax expense ......... $ 4,718 $(9,614) $ (4,896)
Income tax expense (benefit) .................... 22 -- 22
-------- ------- --------
Net income (loss) ............................... $ 4,696 $(9,614) $ (4,918)
======== ======= ========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the increase of $9,868,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of the Other
Subsequent Acquisitions. The Company amortizes goodwill related to these
five businesses over periods ranging from 10-15 years.
(b) Reflects the elimination of historical interest expense of $254,000.
IV. PRO FORMA ADJUSTMENTS
(a) Reflects the incremental interest expense associated with additional
borrowings under the credit facility and other debt and deferred
compensation costs related to the Transactions and Subsequent
Acquisitions.
(b) To reflect a federal tax benefit for interest expense.
(c) To record incremental corporate overhead charges associated with
headquarters personnel and general and administrative expenses that
management estimates will be necessary as a result of the SFX
acquisitions.
(d) To reflect the elimination of Pace's equity income in certain Magicworks
tours.
S-B-14
<PAGE>
SFX ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA FOR THE
SUBSEQUENT ACQUISITIONS
PRO FORMA II
SFX FOR THE ----------------------------------
ENTERTAINMENT TRANSACTIONS MAGICWORKS DON LAW OTHER
(ACTUAL) I A B C
--------------- -------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue ......................... $ 292,342 $123,226 $ 37,135 $21,443 $52,956
Operating expenses .............. 270,681 111,568 35,039 18,577 38,317
Depreciation & amortization 19,174 8,317 3,772 2,661 5,149
Corporate expenses, net of
Triathlon fees ................. 3,329 -- --
Other expenses .................. 32,052 -- -- --
---------- -------- -------- ------- -------
Operating income (loss) ......... (32,894) 3,341 (1,676) 205 9,490
Interest expense ................ 18,221 -- 91 --
Other (income) expenses ......... (2,499) (403) (74) (166) --
Equity (income) loss from
investments .................... (1,825) 569 -- (985)
Other expenses .................. 398 132 --
---------- -------- -------- ------- -------
Income/(loss) before income
tax expense .................... $ (47,189) 3,043 (1,693) 371 10,475
Income tax expense (benefit)..... 1,350 150 666 --
---------- -------- -------- ------- -------
Net income (loss) ............... (48,539) $ 2,893 $ (2,359) $ 371 $10,475
======== ======== ======= =======
Accretion on put option ......... (1,100)
----------
Net income (loss) applicable
to common shares ............... $ (49,639)
==========
Net income (loss) per
common share ................... $ (2.56)
==========
Weighted average common
shares outstanding (2) ......... 19,381
==========
<CAPTION>
PRO FORMA
ADJUSTMENTS
III PRO FORMA(1)
----------------- -------------
<S> <C> <C>
Revenue ......................... $ 527,102
Operating expenses .............. 474,182
Depreciation & amortization $ -- 39,073
Corporate expenses, net of
Triathlon fees ................. 671 (c) 4,000
Other expenses .................. 32,052
---------
Operating income (loss) ......... (671) (22,205)
Interest expense ................ 12,549 (a) 30,861
Other (income) expenses ......... (3,142)
Equity (income) loss from
investments .................... (2,241)
Other expenses .................. -- 530
---------- ---------
Income/(loss) before income
tax expense .................... (13,220) (48,213)
Income tax expense (benefit)..... (569)(b) 1,597
---------- ---------
Net income (loss) ............... $ (12,651) $ (49,810)
==========
Accretion on put option ......... (1,650)
---------
Net income (loss) applicable
to common shares ............... $ (51,460)
=========
Net income (loss) per
common share ................... $ (1.72)
=========
Weighted average common
shares outstanding (2) ......... 30,390
=========
</TABLE>
- ----------
(1) The Pro Forma Financial Statements do not include expected cost savings
in connection with certain acquisitions associated with the elimination
of duplicative staffing and general and administrative expenses of
$1,733,000.
(2) Includes 500,000 shares of Class A Common Stock issued to the PACE
sellers in connection with the Fifth Year Put Option (such shares are not
included in calculating the net loss per common share).
S-B-15
<PAGE>
I. PRO FORMA FOR THE TRANSACTIONS
The Company acquired PACE (including USA Motor Sports), Pavilion,
Contemporary, BGP, Network, Concerts Southern, and FAME on February 25, 1998,
February 27, 1998, February 24, 1998, February 27, 1998, March 4, 1998, June 4,
1998, respectively. The following represent the operating results of these
companies prior to their acquisition by the Company.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS)
---------------------------------------------------------
PACE &
PAVILION CONTEMPORARY BGP NETWORK
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITION
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue ................ $ 84,199 $7,882 $16,075 $4,154
Operating expenses ..... 83,643 8,255 16,801 3,949
Depreciation &
amortization .......... 1,049 254 213 51
Corporate expenses .....
Other expenses .........
-------- ------ ------- ------
Operating income
(loss) ................ (493) (627) (939) 154
Interest expense ....... 1,148 -- 165 37
--
Other (income)
expense ............... (195) (122) (46) (14)
8quity (income) loss
from investments ...... 549
Other expenses ......... 19 113
-------- ------ ------- ------
Income/(loss) before
income tax expense..... (2,014) (505) (1,171) 131
Income tax expense
(benefit) ............. (475) 3
-------- ------ ------- ------
Net income (loss) ...... $ (1,539) $ (505) $(1,171) $ 128
======== ====== ======= ======
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS)
--------------------------------------------------------------
CONCERTS/ PRO FORMA PRO FORMA
SOUTHERN FAME OTHER ADJUSTMENTS FOR THE
ACQUISITION ACQUISITION ACQUISITIONS A TRANSACTIONS
------------- ------------- -------------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue ................ $ 524 $2,144 $ 8,248 $123,226
Operating expenses ..... 638 2,037 9,167 $ (13,185)(a) 111,568
263 (b)
Depreciation &
amortization .......... 9 27 248 6,466 (c) 8,317
Corporate expenses ..... --
Other expenses ......... -- --
------- ------ --------- ---------- -------
Operating income
(loss) ................ (123) 80 (1,167) 6,456 3,341
Interest expense ....... 42 40 (1,432)(d) --
Other (income)
expense ............... (26) -- (403)
Equity (income) loss
from investments ...... 20 -- 569
Other expenses ......... (370) 370 (e) 132
------- ------ --------- ---------- -------
Income/(loss) before
income tax expense..... (143) 64 (837) 7,518 3,043
Income tax expense
(benefit) ............. 622 (f) 150
------- ------ --------- ---------- -------
Net income (loss) ...... $ (143) $ 64 $ (837) $ 6,896 $ 2,893
======= ====== ========= ========== =======
</TABLE>
- ----------
A. PRO FORMA ADJUSTMENTS:
(a) To reflect the elimination of $10,723,000 of PACE's non-cash stock and
other non-recurring compensation, $1,173,000 and $1,289,000 of Network's
and FAME's excess compensation, respectively.
(b) Reflects salaries and officers' life insurance premiums to be paid by the
Company.
(c) Reflects the increase of $6,466,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of the
Transaction and Subsequent Acquisitions. The Company amortizes goodwill
over 15 years.
(d) Reflects the elimination of $1,432,000 of historical interest expense.
(e) To reclassify $370,000 of PACE's equity income in Avalon following the
Avalon acquisition.
(f) Represents an adjustment to the provision for their state and local
income taxes to reflect an approximate pro forma tax provision of
$622,000. The calculation treats all companies to be acquired as "C"
Corporations.
S-B-16
<PAGE>
II. PRO FORMA FOR THE SUBSEQUENT ACQUISITIONS
A. MAGICWORKS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 IN (000'S)
----------------------------------------------
PRO FORMA MAGICWORKS
AS REPORTED ADJUSTMENTS ACQUISITION
------------- --------------- ------------
<S> <C> <C> <C>
Revenue ......................................... $37,135 $ 37,135
Operating expenses .............................. 35,039 35,039
Depreciation & amortization ..................... 188 $ 3,584(a) 3,772
------- ------- --------
Operating income (loss) ......................... 1,908 (3,584) (1,676)
Interest expense ................................ 611 (520)(b) 91
Other (income) .................................. (74) (74)
------- ------- --------
Income/(loss) before income tax expense ......... 1,371 (3,064) (1,693)
Income tax expense (benefit) .................... 458 208 (c) 666
------- ------- --------
Net income (loss) ............................... $ 913 $(3,272) $ (2,359)
======= ======= ========
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the increase of $3,584,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of
Magicworks. The Company amortizes goodwill over 15 years.
(b) Reflects the elimination of $520,000 of historical interest expense.
(c) To reflect a federal tax provision for the elimination of interest
expense.
B. DON LAW
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 IN (000'S)
--------------------------------------------------------
DON LAW PRO FORMA
AS REPORTED ADJUSTMENTS PENDING ACQUISITION
------------- ----------------- --------------------
<S> <C> <C> <C>
Revenue ...................................................... $21,443 $ -- $21,443
Operating expenses ........................................... 18,577 -- 18,577
Depreciation & amortization .................................. 690 (1,971)(a) 2,661
Corporate expenses ........................................... --
Other expenses ............................................... -- -- --
------- --------- -------
Operating income (loss) ...................................... 2,176 (1,971) 205
Interest expense ............................................. 384 (384)(b) --
Other (income) ............................................... (166) -- (166)
Equity (income) loss from investments ........................ -- -- --
Other expenses principally related to the (Spin-Off) ......... -- -- --
------- --------- -------
Income/(loss) before income tax expense ...................... 1,958 (1,587) 371
Income tax expense (benefit) ................................. -- -- --
------- --------- -------
Net income (loss) ............................................ $ 1,958 $ (1,587) $ 371
======= ========= =======
</TABLE>
- ----------
(a) Reflects the increase of $1,971,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of Don Law.
The Company amortizes goodwill over 15 years.
(b) Reflects the elimination of $384,000 of historical interest expense.
S-B-17
<PAGE>
C. OTHER SUBSEQUENT ACQUISITIONS
Reflects the historical Balance sheets of the five businesses acquired by
the Company in July and August of 1998. In the aggregate, such acquisitions are
not material to the Company's financial position or results of operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 IN (000'S)
-------------------------------------------------
OTHER
SUBSEQUENT OTHER
ACQUISITIONS PRO FORMA SUBSEQUENT
AS REPORTED ADJUSTMENTS ACQUISITIONS
-------------- ---------------- -------------
<S> <C> <C> <C>
Revenue ...................................................... $52,956 $52,956
Operating expenses ........................................... 38,317 38,317
Depreciation & amortization .................................. 191 $ 4,958 (a) 5,149
Corporate expenses ........................................... -- --
Other expenses ...............................................
------- -------- -------
Operating income (loss) ...................................... 14,448 (4,958) 9,490
Interest expense ............................................. 404 (404)(b) --
Other (income) expenses ...................................... -- --
Equity (income) loss from investments ........................ (985) (985)
Other expenses principally related to the (Spin-Off) ......... -- -- --
------- -------- -------
Income/(loss) before income tax expense ...................... 15,029 (4,554) 10,475
Income tax expense (benefit) ................................. -- --
------- -------- -------
Net income (loss) ............................................ $15,029 $ (4,554) $10,475
======= ======== =======
</TABLE>
- ----------
PRO FORMA ADJUSTMENTS:
(a) Reflects the increase of $4,958,000 in depreciation and amortization
resulting from the preliminary purchase accounting treatment of the
Subsequent Acquisitions, excluding Don Law. The Company amortizes
goodwill related to these five businesses over periods ranging from 10-15
years.
(b) Reflects the elimination of $404,000 of historical interest expense
III. PRO FORMA ADJUSTMENTS
(a) Reflects the recording of incremental interest expense associated with
the borrowings under the credit facility and other debt and deferred
compensation costs related to the Transactions and Subsequent
Acquisitions.
(b) To reflect a federal tax benefit for interest expense.
(c) To record incremental corporate overhead charges associated with
headquarters personnel and general and administrative expenses that
management estimates will be necessary as a result of the SFX
acquisitions.
S-B-18
