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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 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: 333-43287
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 [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of MAY 4, 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 18,512,170 and
1,697,037, respectively.
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SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at March 31, 1998 (Unaudited) and
December 31,1997.................................................. 2
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997 (Unaudited)......................... 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 (Unaudited)......................... 4
Notes to Consolidated Financial Statements (Unaudited)............. 5
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 13
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds.......................... 27
Item 6 Exhibits and Reports on Form 8-K................................... 28
SIGNATURES......................................................... 29
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SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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MARCH 31, DECEMBER 31,
1998 1997
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(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 93,992 $ 5,979
Accounts receivable ........................................... 36,251 3,831
Prepaid expenses and other current assets ..................... 19,132 1,410
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Total current assets ........................................... 149,375 11,220
Property and equipment, net .................................... 196,732 59,685
Deferred acquisition costs ..................................... -- 6,213
Goodwill and other intangible assets, net ...................... 470,721 60,306
Investment in equity investees ................................. 18,506 937
Note receivable from employees ................................. 4,060 900
Other assets ................................................... 19,032 7,681
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TOTAL ASSETS ................................................... $858,426 $146,942
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LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses ......................... $ 50,501 $ 2,715
Deferred revenue .............................................. 54,943 3,603
Income taxes payable .......................................... 15,160 1,707
Due to SFX Broadcasting ....................................... 125,378 11,539
Current portion of long-term debt ............................. 12,127 755
Current portion of capital lease obligations .................. 326 168
Current portion of deferred purchase consideration ........... 1,730 1,950
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Total current liabilities ...................................... 260,165 22,437
Long-term debt, less current portion ........................... 518,574 14,929
Capital lease obligations, less current portion ................ 11,976 326
Deferred purchase consideration, less current portion ......... 4,128 4,289
Deferred income taxes .......................................... 50,559 2,817
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Total liabilities .............................................. 845,402 44,798
Minority interest .............................................. 1,570 --
Temporary equity-Stock subject to redemption ................... 16,500 --
Shareholder's equity (deficit):
Net capital transferred from SFX Broadcasting .................. (21,410) 98,184
Preferred Stock, $.01 par value, 25,000,000 shares authorized,
10 shares issued and outstanding at March 31, 1998 and no
shares issued and outstanding at December 31, 1997 ........... -- --
Class A common stock, $.01 par value, 100,000,000 shares
authorized, 13,579,024 shares issued and outstanding ......... 136 136
Class B common stock, $.01 par value, 10,000,000 shares
authorized, 1,047,037 shares issued and outstanding .......... 10 10
Paid-in capital ................................................ 39,975 --
Accumulated (deficit) earnings ................................. (23,757) 3,814
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Total shareholder's equity (deficit)............................ (5,046) 102,144
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TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT) ........... $858,426 $146,942
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</TABLE>
See accompanying notes.
2
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SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
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1998 1997
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Revenue .................................................. $ 60,994 $ 7,789
Operating expenses:
Cost of revenue ......................................... 58,175 7,738
Depreciation and amortization............................ 4,428 660
Corporate expenses, net of Triathlon fees of $133 in
1998 and $641 in 1997 .................................. 1,314 858
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63,917 9,256
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Loss from operations ..................................... (2,923) (1,467)
Investment income ........................................ (897) (26)
Interest expense ......................................... 6,748 103
Other expenses, principally relating to the Spin-Off .... 18,385 --
Minority interest ........................................ 82 --
Pretax income of equity investees ........................ (445) --
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Loss before provision for income taxes ................... (26,796) (1,544)
Provision for income taxes ............................... 500 --
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Net loss ................................................. (27,296) (1,544)
Accretion on stock subject to redemption.................. (275) --
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Net loss applicable to Common Shares...................... $(27,571) $(1,544)
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</TABLE>
See accompanying notes.
3
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SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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THREE MONTHS ENDED MARCH
31,
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1998 1997
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Operating activities:
Net loss ............................................................ $ (27,296) $ (1,544)
Adjustment to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization ...................................... 4,428 660
Pretax income of equity investees, net of distributions received .. (351) --
Other expenses, principally relating to Spin-Off.................... 18,385 --
Minority interest................................................... 82 --
Changes in operating assets and liabilities, net of amounts
acquired:
Accounts receivable................................................ 3,390 (260)
Prepaid expenses and other current assets.......................... (1,207) (603)
Other assets....................................................... (1,150) 1,384
Accounts payable and accrued expenses.............................. 4,586 (81)
Deferred revenue................................................... 8,273 751
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Net cash provided by operating activities............................ 9,140 307
Investing activities:
Acquisition of businesses, net of cash acquired..................... (367,997) (22,590)
Purchase of property and equipment.................................. (11,785) (22)
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Net cash used in investing activities................................ (379,782) (22,612)
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Financing activities:
Capital transferred from SFX Broadcasting........................... -- 24,956
Repayment of debt................................................... (1,158) (29)
Proceeds from issuance of senior subordinated notes and borrowings
under credit agreement............................................. 500,000 --
Spin-Off related payments .......................................... (17,107) --
Due to SFX Broadcasting ............................................ (6,161) --
Other, principally debt issuance costs ............................. (16,920) --
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Net cash provided by financing activities............................ 458,654 24,927
Net increase in cash and cash equivalents............................ 88,012 2,622
Cash and cash equivalents at beginning of period..................... 5,980 0
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Cash and cash equivalents at end of period........................... $ 93,992 $ 2,622
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Supplemental disclosure of cash flow information:
Cash paid for interest............................................... $ 274 $ --
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Cash paid for income taxes........................................... $ -- $ --
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</TABLE>
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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 which have
been contributed by SFX Broadcasting to the Company in connection with
the Spin-Off.
See accompanying notes.
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SFX ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
SFX Entertainment, Inc. ("SFX" or the "Company") was formed as a
wholly-owned subsidiary of SFX Broadcasting, Inc. ("SFX Broadcasting") 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. During 1997 and 1998, the Company made several
acquisitions as described below. The Company had no substantive operations
until its acquisition of Delsener/Slater Enterprises, Ltd. and Affiliated
Companies ("Delsener/Slater") in January 1997.
Information with respect to the three months ended March 31, 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 but does not expect that its adoption will
have a material effect on the Company's statement of position or revenues,
only on the composition of its reportable segments.
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.
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 is expected to be
completed in the second quarter of 1998.
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, SFX Broadcasting will contribute its positive
Working Capital (as defined in the Broadcasting Merger Agreement) to the
Company. If Working Capital is negative, the Company must pay the amount of
the shortfall to SFX Broadcasting. Alternatively, SFX Broadcasting must pay
to the Company any net positive Working Capital. As of March 31, 1998, SFX
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Broadcasting had advanced approximately $5,378,000 to the Company for use in
connection with certain acquisitions and capital expenditures. This
obligation and other costs subsequently incurred in connection with the
Spin-Off were reimbursed in April 1998.
SFX Broadcasting and the Company have entered into a tax sharing
agreement, pursuant to which the Company is responsible for certain taxes,
including income taxes imposed with respect to income generated by the
Company for the periods prior to the Spin-Off and taxes resulting from gain
recognized in the Spin-Off. The Company will be allowed to offset any gain or
income by the net operating losses of SFX Broadcasting (including net
operating losses generated in the current year prior to the Spin-Off) which
are available to offset such gain or income. The Company believes that the
amount of taxes that it will be required to pay in connection with the
Spin-Off will be determined by reference to the average of the high and low
sales price of the Class A Common Stock on April 27, 1998 (the date of the
distribution of Common Stock pursuant to the Spin-Off). Increases or
decreases in the value of the Common Stock subsequent to such date will not
affect the tax liability. The average of the high and low sales price of the
Class A Common Stock on the Nasdaq National Market on April 27, 1998 was
$30.50 per share and management estimates that the Company will be required
to pay approximately $120.0 million pursuant to such indemnification
obligation. Most of the tax liability relates to certain deferred
intercompany transactions creating taxable income for the Company. Management
believes that these deferred intercompany transactions will give rise to
additional tax basis which will be available to offset future taxable income
of the Company. Management's estimates of the amount of the indemnity payment
and additional taxable basis are based on certain assumptions which
management believes are reasonable. However, upon completion of the relevant
tax forms, including any potential audits, such assumptions could be modified
in a manner which would result in a significant variance in the actual
amounts of the tax indemnity and of the additional basis. The Company intends
to use a substantial portion of the net proceeds from an equity offering to
make such payment and expects that such payment will be due on or about June
15, 1998. Such payment will not result in any corresponding increase in the
Company's assets or cash flows.
2. RECENT ACQUISITIONS
Delsener/Slater
In January 1997, SFX Broadcasting acquired Delsener/Slater, a leading
concert promotion company, for an aggregate consideration of approximately
$27,600,000, including $2,900,000 for working capital and the present value
of deferred payments of $3,000,000 to be paid without interest over five
years and $1,000,000 to be paid without interest over ten years.
Delsener/Slater has long-term leases or is the exclusive promoter for seven
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.
Meadows
In March 1997, the Company acquired the stock of certain companies which
own and operate the Meadows Music Theater (the "Meadows"), a 25,000-seat
indoor/outdoor complex located in Hartford, Connecticut for $900,000 in cash,
250,838 shares of SFX Broadcasting Class A Common Stock with a value of
approximately $7,500,000 and the assumption of approximately $15,400,000 in
debt.
In connection with the acquisition of the Meadows, SFX Broadcasting
obtained an option to repurchase 250,838 shares of its Class A common stock
(the "Meadows Shares") for an aggregate purchase price of $8.3 million (the
"Meadows Repurchase"). Pursuant to the terms of the SFX Merger Agreement, if
the Meadows Shares are outstanding at the effective time of the SFX Merger,
Working Capital would be decreased by approximately $10.5 million. However,
SFX Broadcasting was restricted from exercising the Meadows Repurchase by
certain loan covenants and other restrictions.
In January 1998, Robert F.X. Sillerman, the Executive Chairman of the
Company, committed to finance the $8.3 million exercise price of the Meadows
Repurchase in order to avoid the $10.5 million
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reduction to Working Capital. In consideration for such commitment, the board
of directors of SFX Broadcasting agreed that Mr. Sillerman would receive
approximately the number of shares of Class A Common Stock to be issued in
the Spin-Off with respect to the Meadows Shares. At the time SFX Broadcasting
accepted Mr. Sillerman's commitment, the board of directors of SFX
Broadcasting valued the Class A Common Stock to be issued in the Spin-Off at
$4.20 per share, the value attributed to such shares in the fairness opinion
obtained by SFX Broadcasting in connection with the Broadcasting Merger. In
April 1998, SFX Broadcasting assigned the option for the Meadows Shares to an
unaffiliated third party and, in connection therewith, paid such party a fee
of $75,000. Mr. Sillerman subsequently advanced such party the $8.3 million
exercise price for the Meadows Repurchase which will become due on the
earlier of the date on which the Meadows Shares are disposed of by the third
party or January 16, 1999. If the SFX Merger is consummated, the Meadows
Shares will be tendered in the SFX Merger without any gain or loss to the
third party. In the event that the SFX Merger is not consummated on or before
December 31, 1998, SFX Broadcasting has the option, for a limited time, to
repurchase the Meadows Shares for an aggregate consideration of approximately
$10.0 million. The third party has agreed to transfer to Mr. Sillerman the
Class A Common Stock to be issued in the Spin-Off with respect to the Meadows
Shares. The transaction has been approved by SFX Broadcasting's board of
directors, including the independent directors. A non-cash charge to earnings
of approximately $7.5 million will be recorded in the second quarter of 1998
based on the fair value of the shares received by Mr. Sillerman as of the
date of the Meadows Repurchase.
Sunshine Promotions
In June 1997, the Company acquired the stock of Sunshine Promotions, Inc.
and certain other related Companies ("Sunshine Promotions"), one of the
largest concert promoters in the Midwest, for $53,900,000 in cash, of which
$2,000,000 is payable over five years, 62,792 shares of SFX Broadcasting
Class A Common Stock issued with a value of approximately $2,000,000, shares
of SFX Broadcasting stock issuable over a two year period with a value of
approximately $2,000,000 and the assumption of approximately $1,600,000 of
debt. The shares of stock to be issued in the future are classified as
deferred purchase consideration on the balance sheet. Sunshine Promotions
owns the Deer Creek Music Theater, a 21,000-seat complex located in
Indianapolis, Indiana, and the Polaris Amphitheater, a 20,000-seat complex
located in Columbus, Ohio, and has a long-term lease to operate the Murat
Centre (the "Murat"), a 2,700-seat theater and 2,200-seat ballroom located in
Indianapolis, Indiana. Pursuant to the Broadcasting Merger Agreement, the
Company is responsible for the payments owing under the Sunshine note, which
by its terms accelerates upon the change in control of SFX Broadcasting
resulting from the consummation of the Broadcasting Merger.
The Delsener/Slater, Meadows, and Sunshine Promotions acquisitions are
collectively referred to herein as the "1997 Acquisitions." The cash portion
of the 1997 Acquisitions were financed through capital contributions from SFX
Broadcasting and were accounted for under the purchase method of accounting.
The purchase price of Sunshine Promotions has been preliminarily allocated to
the assets acquired and liabilities assumed and is subject to change.
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 and an agreement to issue 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. The purchase price was financed from the Company's cash on hand.
BGP
On February 24, 1998, the Company acquired all of the outstanding capital
stock of BG Presents ("BGP"), one of the oldest promoters of, and
owner-operators of venues for, live entertainment in the
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United States, and a leading promoter in the San Francisco Bay area (the "BGP
Acquisition"), for total consideration of approximately $80,300,000
(including the repayment of $12,000,000 in BGP debt and the issuance upon the
Spin-Off of 562,640 shares of common stock of the Company valued by the
parties at $7,500,000). 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"), one of the largest
diversified producers and promoters of live entertainment in the United
States, having what the Company believes to be the largest distribution
network in the United States in each of its music, theater and specialized
motor sports businesses (the "PACE Acquisition"), for total consideration of
approximately $150,100,000 (including issuance upon the Spin-Off of 1,500,000
shares of the Company's common stock valued by the parties at $20,000,000 and
assumption of approximately $20,600,000 of debt). In related transactions,
the Company acquired, for total consideration of $90,600,000 comprised of
$41,400,000 in cash, the repayment of approximately $43,100,000 of debt and
the assumption of approximately $6,100,000 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 $4,000,000 to acquire a 67%
interest in certain assets and liabilities of USA Motor Sports. The remaining
33% interest is owned by the Contemporary Group.
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 $101,400,000 comprised of $72,800,000 in
cash, a payment for working capital of approximately $9,900,000 and the
issuance of preferred stock of the Company valued by the parties at
$18,700,000 which, upon the Spin-Off, was converted into 1,402,850 shares of
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.
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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 $66,800,000
comprised of $52,000,000 in cash, a payment for working capital of
approximately $1,800,000, reimbursed sellers costs of $500,000, the purchase
of an office building and property for $2,500,000 and the issuance upon the
Spin-Off of approximately 750,000 shares of common stock of the Company
valued by the parties at $10,000,000. The $2,500,000 purchase of the office
building and property is comprised of cash of approximately $700,000 and the
assumption of debt of approximately $1,800,000. The Company is also obligated
to pay the sellers an additional payment in 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
$14,000,000. 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 $16,900,000, which includes a $300,000 payment
for working capital.
The PACE Acquisition, the Contemporary Acquisition, the Network
Acquisition, the BGP Acquisition and the Concert/Southern Acquisition are
collectively referred to herein as the "1998 Acquisitions." The cash portion
of the 1998 Acquisitions were financed with the proceeds of the Notes
offering and Credit Agreement (see Note 3) and were accounted for under the
purchase method of accounting. The purchase prices of the 1998 Acquisitions
have been preliminarily allocated to the assets acquired and liabilities
assumed and are subject to change.
The accompanying consolidated financial statements as of March 31, 1998
include the accounts of the Company, its subsidiaries and certain assets and
liabilities which were contributed by SFX Broadcasting to the Company in the
Spin-Off. 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 to be
contributed by SFX Broadcasting are included herein. SFX Broadcasting
provides various administrative services to the Company. It is SFX
Broadcasting's policy to allocate these expenses on the basis of direct
usage. In the opinion of management, this method of allocation is reasonable
and allocated expenses approximate 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 three months ended March 31, 1998 and 1997 as if the 1997 Acquisitions
and the 1998 Acquisitions had occurred at the beginning of such period 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).
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<CAPTION>
PRO FORMA
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
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Revenues .. $173,828 $127,446
Net loss .. $(26,633) $(17,129)
</TABLE>
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3. FINANCING
On February 11, 1998, SFX completed an offering of $350.0 million of
9 1/8% Senior Subordinated Notes (the "Notes" or "Note Offering") due 2008.
Interest is payable on the Notes on February 1 and August 1 of each year.
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. 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 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, 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. The Revolver and Term Loan contain provisions
providing that, at its option and subject to certain conditions, the Company
may increase the amount of either the Revolver or Term Loan by $50.0 million.
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 May 4, 1998 there were no borrowings under the Revolver.
The Company intends to draw down approximately $125 million of the Revolver
to fund the Pending Acquisitions (see Note 6).
4. CAPITAL STOCK
In order to facilitate the Spin-Off, the Company recently 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 were
placed in escrow to be 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 addition, the Board, upon
recommendation of the Compensation Committee, has approved the issuance of
stock options exercisable for 1,002,500 shares of the Company's Class A Common
Stock. Of these options, 750,000 will vest over five years and will have an
exercise price of $30.50 and 252,000 will vest over three years and will have
an exercise price of $5.50 per share. The Company will record non-cash
compensation charges over the three-year period of approximately $2 million
annually.
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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 will be recorded by the
Company in the second quarter of approximately $24 million associated with
the sale.
The Board of Directors has 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. 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.
6. SUBSEQUENT EVENTS
In April and May of 1998, the Company entered into agreements and/or
letters of intent to acquire the following live entertainment and talent
representation businesses:
FAME
The Company has entered into an agreement to acquire Falk Associates
Management Enterprises, Inc. and Financial Advisory Management Enterprises,
Inc. (collectively, "FAME"), a leading 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
will be approximately $82.0 million in cash (including approximately $7.9
million which the Company anticipates paying in order to reimburse the FAME
sellers for certain taxes which they will be subject to) and 1.0 million
shares of Class A Common Stock. The agreement provides for payments by the
Company to the FAME sellers of additional amounts up to $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.
Don Law
The Company has entered into an agreement to acquire certain assets of
Blackstone Entertainment, LLC ("Don Law"), a leading concert and theater
promoter in New England, for an aggregate consideration of approximately
$90.0 million (subject to adjustment under certain circumstances), including
the repayment of approximately $10.0 million in debt. The Company may, at its
option, pay up to $16.0 million of the purchase price in shares of Class A
Common Stock. 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.
Avalon
The Company entered into letters of intent to acquire 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 $27.0 million (subject to adjustment under
certain circumstances). Avalon is a leading concert promoter and producer
that operates predominantly in the Los Angeles area. In addition, the Company
will be obligated to reimburse the Avalon sellers' third party out of pocket
costs and expenses incurred in the development of the Camarillo Creek
Amphitheater (expected to be
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approximately $400,000). The Company may also be obligated to pay an
additional $1.0 million to the Avalon sellers if the Camarillo Creek
Amphitheater has been completed pursuant to certain budget projections and
the production of entertainment events at the site has commenced.
Oakdale
The Company has entered into an agreement to acquire 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 Oakdale Music Theater, for a purchase price of $11.9 million in cash. At
the closing the Company will also make a non-recourse loan to Oakdale in the
amount of $11.4 million. In addition, the Company may be obligated to make an
additional payment based on the combined operating performance (as defined in
the acquisition agreement) of the Oakdale Music Theater and Meadows for 1999.
EMI
The Company has entered into an agreement to acquire an approximately 80%
interest in Event Merchandising, Inc. ("EMI"), a leading event merchandising
contractor in the United States for approximately $8.5 million. In addition,
the Company is required to make a loan to the EMI sellers in an amount equal
to certain taxes incurred by the EMI sellers in connection with the
transaction. The Company expects that the amount of the loan will be
approximately $750,000. EMI has concession contracts with 26 amphitheaters,
including 13 venues owned and/or operated by the Company.
The acquisitions of FAME, Don Law, Avalon, Oakdale and EMI are
collectively referred to herein as the "Pending Acquisitions." The Company
intends to use a portion of the proceeds from an equity offering and
additional borrowings under the Credit Agreement (collectively, the
"Financing") to consummate the Pending Acquisitions. The Company expects to
complete all of the Pending Acquisitions in the second quarter 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the 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 the 1998 Acquisitions, the Pending Acquisitions and
other risks related to the recent acquisitions, 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, working
capital adjustments, control by management, dependence on key personnel,
potential conflicts of interest, indemnification agreements, seasonality,
competition, regulatory matters, environmental matters, economic conditions
and consumer tastes and availability of artists and events. 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 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, the Company's music businesses
comprised approximately 67%, theater comprised approximately 13%, specialized
motor sports comprised approximately 6% and other operations comprised
approximately 14% of the Company's total net revenues for the twelve months
ended March 31, 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 and premium box seats. 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.
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 for aggregate
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consideration of $27.6 million. 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, for aggregate
consideration of $23.8 million, 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 for an aggregate consideration of $57.5 million. 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.
RECENT ACQUISITIONS
In January 1998, the Company acquired Westbury Music Theater. 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. The acquisitions of Westbury Music Theater, PACE, Pavilion
Partners, Contemporary, BGP, Network, Concert/Southern and USA Motorsports
are collectively referred to herein as the "Recent Acquisitions."
ACQUISITION OF 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 ("Pavilion"), 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.
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 the
Contemporary Group.
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.
ACQUISITION OF CONTEMPORARY
On February 27, 1998, the Company acquired Contemporary Group (the
"Contemporary Acquisition"). The Contemporary Acquisition involved the merger
of Contemporary International Productions
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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. The purchase price was financed by the borrowings under
the Credit Facility and with the proceeds of the Note Offering.
ACQUISITION OF 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 the proceeds of the Note Offering.
ACQUISITION OF 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 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. In connection with the Network Acquisition, the selling
stockholders were reimbursed working capital (as defined in the acquisition
agreement) in excess of $500,000.
ACQUISITION OF 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 (including the payments of the $1.6
million representing the present value of a deferred purchase obligation and
$300,000 for the working capital adjustment.) The purchase price was financed
by the borrowings under the Credit Facility.
ACQUISITION OF 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 and an agreement to issue 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. The purchase price was financed from the Company's cash on hand.
The foregoing descriptions do not purport to be complete descriptions of
the terms of the acquisition agreements and are qualified by reference to the
acquisition agreements, copies of which are attached hereto as exhibits and
incorporated herein by reference. Pursuant to the acquisition agreements and
the agreements related thereto, the Company, (a) under certain circumstances,
may be required to repurchase shares of its Class A Common Stock or make
additional payments in connection therewith,
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(b) has granted certain rights of first refusal certain of which are
exercisable at 95% of the proposed purchase price and (c) in connection with
the PACE Acquisition, has granted Brian Becker, the Executive Vice President,
a Member of the Office of the Chairman, and a director of the Company, the
option to acquire, after the second anniversary of the consummation of the
PACE Acquisition, the Company's then existing motor sports line of business
(or, if that business has previously been sold, the Company's then existing
theatrical line of business) at its then fair market value.
The Recent 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.
PENDING ACQUISITIONS
In April and May of 1998, the Company entered into agreements or letters
of intent to acquire all of the capital stock of FAME, certain assets of Don
Law, all of the outstanding equity interests of Avalon, certain assets of
Oakdale and 80% of the outstanding capital stock of EMI for an aggregate
consideration consisting of approximately $216.1 million in cash, including
the repayment of approximately $10.0 million in debt, and the issuance of
1,531,782 million shares of Class A Common Stock. The acquisitions of FAME,
Don Law, Avalon, Oakdale and EMI are referred to collectively herein as the
"Pending Acquisitions."
ACQUISITION OF FAME
On April 29, 1998 the Company entered into an agreement to acquire all of
the outstanding capital stock of FAME (the "FAME Acquisition"). The aggregate
purchase price for FAME is approximately $82.9 million in cash (including
approximately $7.9 million which the Company anticipates paying in connection
with certain taxes which FAME and the FAME sellers will be subject to) 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 $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.
ACQUISITION OF DON LAW
On April 29, 1998 the Company entered into an agreement to acquire certain
assets of Blackstone Entertainment, LLC (the "Don Law Acquisition"). The
aggregate purchase price for the Don Law Acquisition is approximately $90.0
million, including the repayment of $10.0 million in debt. The Company may,
at its option, pay up to $16.0 million of the purchase price in 531,782
shares of Class A Common Stock. The purchase price will be increased or
decreased, as applicable, to the extent that Don Law's Net Working Capital
(as defined in the acquisition agreement) is positive or negative at the
closing. The Company has made a $100,000 non-refundable deposit in connection
with the Don Law Acquisition.
ACQUISITION OF AVALON
On March 6 and 9, 1998, the Company entered into two binding letters of
intent to acquire all the outstanding equity interests in Avalon for a total
cash purchase price of $27.4 million, including approximately $400,000 that
the Company is obligated to pay 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 Company may also
be obligated to pay an additional $1.0 million to the Avalon sellers if the
Camarillo Creek Amphitheater has been completed pursuant to certain budget
projections and the production of entertainment events at the site have
commenced.
ACQUISITION OF OAKDALE
On April 22, 1998, the Company entered into an agreement to acquire
certain assets of Oakdale for a purchase price of $11.9 million in cash (the
"Oakdale Acquisition"). At the closing the Company will also
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make a non-recourse loan to the Oakdale sellers in the amount of $11.3
million, a portion of which will be 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 to 5.8.
ACQUISITION OF EMI
On May 1, 1998, the Company entered into an agreement to acquire an 80%
equity interest in EMI for $8.5 million in cash (the "EMI Acquisition"). In
addition, the Company is required to make a loan to the EMI sellers in an
amount equal to twenty percent of certain taxes incurred by the EMI sellers
in connection with the transaction. The Company expects that the amount of
the loan will be approximately $750,000.
The Pending 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.
The Company expects to complete all of the Pending Acquisitions as soon as
practicable after the consummation of the Offering. The Company anticipates
that it will consummate all of the Pending Acquisitions in the second quarter
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 periods, on the terms described herein, or at
all.
THE SPIN-OFF AND THE SFX MERGER
SFX Broadcasting was formed in 1992 principally to acquire and operate
radio broadcasting stations. In August 1997, SFX Broadcasting agreed to merge
with a subsidiary of SFX Buyer, and to Spin-Off the Company to certain
stockholders of SFX Broadcasting on a pro rata basis. The Spin-Off was
consummated on April 27, 1998. The Spin-Off separated the entertainment
business from SFX Broadcasting's radio broadcasting business and will enable
SFX Buyer to acquire only SFX Broadcasting's radio broadcasting business in
the SFX Merger. SFX Broadcasting has indicated that it expects the SFX Merger
to be completed in the second quarter of 1998.
Prior to the Spin-Off, pursuant to the Distribution Agreement, SFX
Broadcasting contributed to the Company all of its assets relating to the
entertainment business. In addition, the Company, SFX Broadcasting and SFX
Buyer also entered into the Tax Sharing Agreement and the Employee Benefits
Agreement. Each of the agreements provides for certain indemnification
obligations by the Company and SFX Broadcasting. Pursuant to the Distribution
Agreement, at the time of the SFX Merger, if Working Capital is negative, the
Company must pay the amount of the shortfall to SFX Broadcasting, and if
positive SFX Broadcasting must pay such Working Capital to the Company.
Copies of the Distribution Agreement (containing a description of the Working
Capital calculation), Tax Sharing Agreement and Employee Benefits Agreement
have been filed as exhibits to the Company's Registration Statement on Form
S-1 (File No. 333-50079).
In the Spin-Off, shares of Common Stock were distributed pro rata to
holders on the Spin-Off record date of SFX Broadcasting's Class A common
stock, Class B common stock, Series D preferred stock and interests in SFX
Broadcasting's director deferred stock ownership plan, and the remaining
shares were placed in escrow to be issued upon the exercise of certain
warrants of SFX Broadcasting.
RECENT DEVELOPMENTS
The Company has indicated to The Marquee Group Inc. ("Marquee"), a
publicly-traded company, its potential interest in acquiring Marquee. Marquee
provides integrated event management, television production, marketing and
consulting services in the sports, news and entertainment industries. In
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addition, Marquee books tours and appearances for a variety of entertainers.
Mr. Sillerman, the Executive Chairman of the Company, has an aggregate equity
interest of approximately 9.1% in Marquee and is the chairman of its board of
directors, and Mr. Tytel, a Director and Executive Vice President of the
Company, is one of its directors. The Company has been informed that Marquee
has formed a committee of independent directors to consider the proposal, as
well as other strategic alternatives. However, the Company has not entered
into any agreement, arrangement or understanding with Marquee, and there can
be no assurance that the Company will enter into a definitive agreement with
Marquee.
RESULTS OF OPERATIONS
GENERAL
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, and (c) the promotion and production of
motor sports events. The Company and the Acquired Businesses also engage in
various other activities ancillary to their live entertainment businesses.
On a pro forma basis, after giving effect to the Transactions (defined
collectively as the 1997 Acquisitions, the 1998 Acquisitions, the Note
Offering, initial borrowings under the Credit Agreement, the Spin-Off and the
Broadcasting Merger), the Pending Acquisitions and the Financing (defined as
additional borrowings under the Credit Agreement and the proposed equity
Offering), the Company's revenues for the year ended December 31, 1997 and
the three months ended March 31, 1998, would have been $779.0 million and
$187.3 million, respectively.
On a pro forma basis, after giving effect to the Transactions, the Pending
Acquisitions and the Financing, operating expenses for the year ended
December 31, 1997 and the three months ended March 31, 1998, would have been
$688.4 million and $172.4 million, respectively. Pro forma operating expenses
do not reflect the Company's expectation that it will be able to achieve
substantial economies of scale upon completion of the Recent Acquisitions and
reductions in operating expenses as a result of the elimination of
duplicative staffing and general and administrative expenses.
On a pro forma basis, after giving effect to the Transactions, the Pending
Acquisitions and the Financing, the Company's net loss for the year ended
December 31, 1997 and the three months ended March 31, 1998, would have been
$22.8 million and $32.2 million, respectively. Net loss per share, after
accretion of the Fifth Year Put Option issued in connection with the PACE
Acquisition, would have been $.92 and $1.17 for the year ended December 31,
1997 and three months ended March 31, 1998, respectively. The pro forma
operating results include the impact of significant non-cash amortization
expense arising from the Recent Acquisitions and interest expense relating to
the Financing.
As of March 31, 1998, on a pro forma basis after giving effect to the
Financing, Spin-Off and SFX Merger, the Company had net current assets of
$167.0 million (included in net current assets is cash and cash equivalents
of $105.7 million), net property and equipment (principally concert venues)
of $243.8 million, net intangible assets of $695.2 million and long-term debt
of $628.0 million. The long-term debt is comprised of $350.0 million of
Notes, borrowings of $235.0 million under the Credit Facility and other debt
obligations of $43.0 million.
CONCERT PROMOTION/VENUE OPERATION
The Company's concert promotion and venue operation business consist
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
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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 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. For the year ended December 31,
1997, on a pro forma basis approximately 34% of ticket sales for Touring
Broadway Shows presented by the Company were 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
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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 in 1996.
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 capitalized 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
FAME'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
20% 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.
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 have been 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.
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However, the Company believes that this variation may be somewhat offset with
the acquisition of typically non-summer seasonal businesses in the Recent
Acquisitions, such as motor sports (which is winter-seasonal) and Touring
Broadway Shows (which typically tour between September and May).
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1997
The Company's revenue increased by $53.2 million to $61.0 million for the
three months ended March 1998, compared to $7.8 million for three months
ended March 31, 1997, as a result of the acquisitions of Sunshine and Meadows
in 1997 and the Recent Acquisitions. On a pro forma basis after giving effect
to the Transactions, the pending Acquisitions and the Financing, revenue for
the three months ended March 31, 1998 would have been $187.3 million.
Operating expenses increased by $50.5 million to $58.2 million for the
three month period ended March 31, 1998, compared to $7.7 million for three
months ended March 31, 1997, primarily as a result of the acquisition of
Sunshine and Meadows in 1997 and the Recent Acquisitions. On a pro forma
basis, after giving effect to the Transactions, the Pending Acquisitions and
the Financing, operating expenses would have been $172.4 million for the
three month period ended March 31, 1998.
Depreciation and amortization expense increased to $4.4 million for the
three month period ended March 31, 1998 compared to $660,000 for the three
month period ended March 31, 1997, due to the inclusion of depreciation and
amortization expense related to the acquisitions of Sunshine and Meadows in
1997 and the Recent Acquisitions. The Company recorded the fixed assets the
these acquisitions at fair value and recorded intangible asset 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.
Corporate expenses were $1.3 million for the three month period ended
March 31, 1998, net of $133,000 fees received from Triathlon, compared to
$858,000 million for the three months ended March 31, 1997, net of Triathlon
fees of $651,000. The fees receivable from Triathlon are based on consulting
services provided by or on behalf of Sillerman Communications Management
Corporation, a private investment company in which Messrs. Sillerman and
Tytel have economic interests, that makes investments in and provides
financial consulting services to companies engaged in the music business
("SCMC"). The fees will fluctuate (above the minimum annual fee of $500,000)
based on the level of acquisition financing activities of Triathlon. SCMC
previously assigned its rights to receive fees payable from Triathlon to SFX
Broadcasting, and SFX Broadcasting will assign its rights to receive the fees
to the Company, pursuant to the Distribution Agreement. Triathlon has
announced that it is exploring ways of maximizing stockholder value,
including possible sale to a third party. If Triathlon is acquired by a third
party, it is possible that the consulting fees would not continue for the
remainder of the agreement's term.
Non-recurring and unusual charges relating to the Spin-Off included $16.6
million of consent fees and $1.8 million of legal, accounting and other
costs.
The operating loss was $2.9 million for the three month period ended March
31, 1998, compared to a loss of $1.5 million for the three months March 31,
1997, due to the results discussed above.
Interest expense, net of investment income, was $5.9 million in the three
months ended March 31, 1998, compared to $77,000 for the three months ended
March 31, 1997, primarily as a result of assumption of additional debt
related to the Recent Acquisitions and the debt assumed in connection with
Meadows and Sunshine acquisitions.
Equity income in unconsolidated subsidiaries were $445,000 for the three
months March 31, 1998 as a result of Recent Acquisitions.
Income tax expense was $500,000 for the three month period ended March 31,
1998.
The Company's net loss increased to $27.3 million for the three month
period ended March 31, 1998, as compared to a net loss of $1.5 million for
the three months ended March 31, 1997, due to the factors discussed above.
EBITDA increased to $1.5 million for the three month period ended March
31, 1998, compared to negative $807,000 for the three months ended March 31,
1997, primarily as a result of the 1997 and Recent Acquisitions.
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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
anticipates that its principal sources of funds will be the proceeds from an
anticipated equity offering (the "Offering") remaining proceeds from the Note
Offering, borrowings under the Credit Facility and cash flows from
operations.
Net cash provided by operations was $9.1 million for the three months
ended March 31, 1998 as compared to $307,000 for the three months ended March
31, 1997. The increase was primarily attributable to changes in working
capital.
Net cash used in investing activities for the three months ended March 31,
1998 was $379.8 million as compared to $22.6 million for the three months
ended March 31, 1997. The increase was primarily the result of the 1998
Acquisitions. During the three months ended March 31, 1997, the Company
completed the acquisition of Delsener/Slater.
Net cash provided by financing activities for the three months ended March
31, 1998 was $458.7 million as compared to $24.9 million for the three months
ended March 31, 1997. During 1998, the Company completed the issuance of its
Senior Subordinated Notes for $350.0 million and borrowed $150.0 under the
Credit Agreement, offset by Spin-Off related payments of $17.1 million and
the payment of debt issuance costs of $16.9 million.
PENDING ACQUISITIONS
The aggregate consideration in the Pending Acquisitions is expected to
consist of approximately $216.1 million (including the repayment of
approximately $10 million in debt, and 1,531,782 shares of Class A Common
Stock). In addition, the Company expects to incur approximately $6.0 million
in fees and expenses related to the Pending Acquisitions. In addition, the
agreements relating to the Pending Acquisitions provide for future contingent
payments under certain circumstances. The Company has also placed a deposit
in connection with the Pending Acquisitions of $100,000, which will be
applied against the applicable purchase price at closing. In addition, the
agreements relating to the Pending Acquisitions provide for certain future
contingent payments.
The 1,531,782 shares to be issued in connection with acquisitions of FAME
and Don Law were not registered under the Securities Act or state securities
laws, as may have been required. The Company has filed a registration
statement in order to make a rescission offer with respect to such
transactions which could result in the unwinding of all or a portion of the
FAME and/or Don Law acquisitions. The Company does not expect the sellers to
accept such recission offer.
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
any of the Pending Acquisitions on the terms described or at all, or that the
Company will have sufficient funds available to make any of the contingent
payments described above should they come due.
FUTURE CONTINGENT PAYMENTS
Certain of the agreements relating to the Recent 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 $1.5 million). Pursuant to
the terms of the Becker Employment Agreement (as defined herein), 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
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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. 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.
In addition, certain of the agreements relating to the Pending
Acquisitions provide for future contingent payments under certain
circumstances. 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. See "Agreements Related to the Pending Acquisitions."
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.
FUTURE ACQUISITIONS
The Company is in the process of negotiating certain additional
acquisitions in the live entertainment business and related businesses,
however, it has not yet entered into any definitive agreements with respect
to such acquisitions and there can be no assurance that it will do so or have
the necessary resources to consummate any of such acquisitions.
SPIN-OFF
Pursuant to the Tax Sharing Agreement, the Company is responsible for
certain taxes of SFX Broadcasting, including taxes imposed with respect to
income generated by the Company for the periods prior to the Spin-Off and
taxes resulting from gain recognized in the Spin-Off. The Company will be
allowed to offset any gain or income by the net operating losses of SFX
Broadcasting (including net operating losses generated in the current year
prior to the Spin-Off) which are available to offset such gain or income. The
Company believes that the amount of taxes that it will be required to pay in
connection with the Spin-Off will be determined by reference to the average
of the high and low sales price of the Class A Common Stock on April 27, 1998
(the date of the distribution of Common Stock pursuant to the Spin-Off).
Increases or decreases in the value of the Common Stock subsequent to such
date will not affect the tax liability. The average of the high and low sales
price of the Class A Common Stock on April 27, 1998 was $30.50 per share, and
Management estimates that the Company will be required to pay approximately
$120 million pursuant to such indemnification obligation. Most of the tax
liability relates to certain deferred intercompany transactions creating
taxable income for the Company. Management believes that these deferred
intercompany transactions will give rise to additional tax basis which will
be available to offset future taxable income of the Company. Management's
estimates of the amount of the indemnity payment and additional taxable basis
are based on certain assumptions which management believes are reasonable.
However, upon completion of the relevant tax forms, including
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any potential audits, such assumptions could be modified in a manner which
would result in a significant variance in the actual amount of the tax
indemnity. The Company intends to use a substantial portion of the net
proceeds from the Offering to make such payment and expects that such payment
will be due on or about June 15, 1998. Such payment will not result in any
corresponding increase in the Company's assets or cash flows and, therefore,
the purchasers of Class A Common Stock in the Offering will experience
substantial dilution. For a more complete description of the tax
indemnification obligations, see the Tax Sharing Agreement filed as an
exhibit hereto.
The Company also incurred approximately $18.0 million in fees and expenses
in connection with the Spin-Off which the Company will fund from its cash on
hand. In addition, pursuant to the SFX Merger Agreement, the Company has
agreed to assume SFX Broadcasting's obligations under the employment
agreements of certain employees and senior management, including the
obligation to make change of control payments to Messrs. Sillerman, Ferrel
and Benson aggregating approximately $3.3 million, $1.5 million and $0.2
million, respectively. The assumed obligations will also include the duty to
indemnify Messrs. Sillerman and Ferrel for one-half of any excise taxes that
may be assessed against them in connection with the change of control
payments. It is also anticipated that Mr. Sillerman's employment agreement
with the Company will provide for certain indemnities relating to the SFX
Merger. In addition, pursuant to the Distribution Agreement, the Company will
be required to indemnify SFX Broadcasting and each of its directors, officers
and employees for any losses relating to the Company's assets and
liabilities.
In addition, pursuant to the Distribution Agreement, the Company will
assume certain obligations of SFX Broadcasting, including two real estate
leases on its executive offices. Such leases provide for annual rent of
approximately $1.4 million.
WORKING CAPITAL
As required by the Distribution Agreement, SFX Broadcasting contributed to
the Company all of its concert and other live entertainment assets. At that
time, the Company assumed all of SFX Broadcasting's liabilities relating to
the live entertainment businesses, along with certain other liabilities. At
the time of the SFX Merger, if Working Capital is negative, then the Company
must pay the amount of the shortfall to SFX Broadcasting. If positive, SFX
Broadcasting must pay such Working Capital to the Company. As of March 31,
1998, the Company estimates that Working Capital to be paid by SFX
Broadcasting to the Company would have been approximately $3.3 million. The
Company does not expect that the amount of Working Capital will be materially
different at the time of the SFX Merger, but the actual amount of Working
Capital as of the SFX Merger will be a function of, among other things, the
operating results of SFX Broadcasting through the date of the SFX Merger, the
actual date of the closing of the SFX Merger and the actual cost of
consummating the SFX Merger and related transactions. In February 1998, the
Company reimbursed SFX Broadcasting approximately $25.3 million for consent
fees, capital expenditures and other acquisition related fees previously
funded by SFX Broadcasting.
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. Interest is payable on
the 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%.
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
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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). 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 of, 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 $11.8 million for the three months ended
March 31, 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 $29.0 million for 1998 at
existing venues (including $17.0 million for the expansion and renovation of
the Jones Beach Amphitheater and $12.0 million for the expansion and
renovation of the PNC Bank Arts Center) and capital expenditures requirements
of the Acquired Businesses, including $12.0 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 $32 million (including $25.0 million of major projects
and $7.0 of other capital expenditures)) from its cash on hand.
FUTURE CHARGES TO EARNINGS
The Company anticipates entering into or amending employment agreements
with certain of its executive officers before the Spin-Off. In connection
with these agreements, the Company sold to the executive officers an
aggregate 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. The Company will
record a non-cash compensation charge in the second quarter of approximately
$24 million in connection with this sale. In addition, the Company will
recognize a charge to earnings of approximately $7.5 million in the second
quarter associated with the Meadows Repurchase resulting from 247,177 shares
of Class A Common Stock issued to Mr. Sillerman in connection with the
Meadows Repurchase. The amount of such charge would be equal to the fair
value of Class A Common Stock to be received by Mr. Sillerman at the time of
the Meadows Repurchase.
Further, the Board, on the recommendation of its Compensation Committee,
also has approved the issuance of certain "below market" stock options
exercisable for an aggregate of 252,500 shares of Class A Common Stock. These
options will vest over three years and will have an exercise price of $5.50
per share. The Company will record non-cash compensation charges of
approximately $2 million annually over the three-year exercise period.
The consummation of the Recent Acquisitions and other future acquisitions
will also result in substantial charges to earnings relating to interest
expense and the recognition and amortization of goodwill and other intangible
assets. As of March 31, 1998, the Company's goodwill was approximately $470.7
million. This balance will substantially increase due to the Pending
Acquisitions. Goodwill and other intangible assets are being amortized using
the straight line method over 15 years.
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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 1997, Recent 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.
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 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 but does not expect that its adoption
will have a material effect on the Company's statement of position or
revenues, only on the composition of its reportable segments.
SOURCES OF LIQUIDITY
As of March 31, 1998, the Company's cash and cash equivalents totaled
$94.0 million and its working capital deficiency totaled $110.8 million. In
February of 1998, the Company received proceeds of $350.0 million from the
Note Offering and borrowed $150.0 million under the Credit Facility in order
to consummate the Recent Acquisitions (approximately $446.1 million) and pay
certain fees and expenses related to the Recent Acquisitions (approximately
$6.0 million). On a pro forma basis, after giving effect to the Transactions,
the Pending Acquisitions and the Financing as if they had occurred on March
31, 1998, the Company's working capital would have been approximately $27.8
million at March 31, 1998.
The Company has incurred and will continue to incurr substantial amounts
of indebtedness. As of March 31, 1998, the Company's consolidated
indebtedness would have been approximately $628.0 million on a pro forma
basis giving effect to the Transactions, the Pending Acquisitions and the
Financing (assuming that the Spin-Off and the SFX Merger occur on the terms
currently contemplated). The Company 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"). Upon consummation of the Financing, the Company will have
$65.1 million in remaining borrowing availability under the Credit Agreement
(subject to the ability of the Company to increase borrowing availability by
up to an additional $50.0 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, 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. The Revolver and Term Loan contain provisions
providing that, at its option and subject to certain conditions, the Company
may increase the amount of either the Revolver or Term Loan by $50.0 million.
The Revolver and Term Loan contain usual and customary
26
<PAGE>
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 guaranteed by the Company's
subsidiaries.
The net proceeds of the Offering, together with anticipated borrowings
under the Credit Facility, are expected to be approximately $347.0 million,
which the Company intends to use to pay the anticipated tax indemnification
obligation to SFX Broadcasting (approximately $120.0 million), to pay the
cash portion of the purchase price of the Pending Acquisitions (approximately
$216.1 million), to pay certain fees and expenses related to the Financing
(approximately $17.9 million), to pay certain fees and expenses related to
the Pending Acquisitions (approximately $6.0 million) and to make certain
change of control payments to executive officers ($5.0 million). The
foregoing represents the Company's best estimate of the allocation of the net
proceeds of the Offering based on the current status of its business and as
noted elsewhere herein could be subject to significant change. On a pro forma
basis for the twelve months ended March 31, 1998, amounts available for
borrowing under the Credit Facility plus the net proceeds from the Offering,
would be sufficient for the uses of funds described herein. However, there
can be no assurance that the Company will have sufficient cash flows at the
time of borrowing to permit it to make borrowings under the Credit Facility
in the amounts required.
Future events, including the actual amount of the tax indemnity payment,
the ability of the Company to identify appropriate acquisition candidates,
the availability of other financing and funds generated from operations and
the status of the Company's business from time to time, may make changes in
the allocation of the net proceeds of the Offering necessary or desirable.
Furthermore, certain agreements of the Company, including the Distribution
Agreement, the Tax Sharing Agreement, certain employment agreements and the
agreements relating to the Recent 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 intends to pursue additional expansion opportunities and expects
to continue to identify and negotiate with respect to substantial
acquisitions in the live entertainment business. However, it may be unable to
identify and acquire additional suitable businesses or obtain the financing
necessary to acquire the businesses. Future acquisitions by the Company could
result in (a) potentially dilutive issuance of equity securities, (b) the
incurrence of substantial additional indebtedness and/or (c) the amortization
of expenses related to goodwill and other intangible assets, any or all of
which could materially adversely affect the Company's business, financial
condition and results of operations.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On February 11, 1998, the Company sold $350.0 million in aggregate
principal amount of its 9 1/8% Senior Subordinated Notes due 2008. Lehman
Brothers, Goldman Sachs, & Co., BNY Capital Markets, Inc. and ING Barings
(the "Initial Purchasers") were the purchasers of the Notes and resold the
Notes (i) to certain "qualified institutional buyers," as defined in Rule
144A of the Securities Act, and (ii) outside the United States to certain
persons in reliance upon Regulation S promulgated under the Securities Act.
The aggregate cash offering price of the Notes was $350.0 million and the
aggregate discounts and commissions related to the sale were $10.5 million.
The Company relied upon an exemption from registration under Section 4(2) of
the Securities Act as a transaction not involving a public offering. The
Company has agreed to register the Notes (or a new series of securities
identical in all respects to the Notes) under the Securities Act within a
certain time period.
27
<PAGE>
On February 25, 1998, the Company consummated its acquisition of PACE. In
connection with such acquisition, the Company issued to the sellers of PACE
1.5 million shares of Class A Common Stock upon consummation of the Spin-Off.
On February 27, 1998, the Company consummated its acquisition of
Contemporary. In connection with such acquisition, the Company issued to the
sellers of Contemporary shares of the Company's series A redeemable
convertible preferred stock which automatically converted into 1,402,850
shares of Class A Common Stock upon consummation of the Spin-Off.
On February 24, 1998, the Company consummated its acquisition of BGP. In
connection with such acquisition, the Company issued to the sellers of BGP
options to purchase an aggregate of 562,640 shares of Class A Common Stock
upon consummation of the Spin-Off.
On February 27, 1998, the Company consummated its acquisition of Network.
In connection with such acquisition, the Company issued to the sellers of
Network 750,188 shares of Class A Common Stock upon consummation of the
Spin-Off.
On May 1, 1998, upon the consummation of the Spin-Off, the Company issued
526,566 shares of Class A Common Stock to the holders of certain options and
SAR's issued by SFX Broadcasting.
In May 1998, the Company sold 190,000 shares of Class A Common Stock and
650,000 shares of Class B Common Stock to certain executive officers for a
purchase price $2.00 per share.
The sales of securities to the sellers of PACE, Contemporary, BGP and
Network and the issuance of shares to the holders of options and SARs were
private transactions not involving a public offering and were exempt from the
registration provisions of the Securities Act pursuant to Section 4(2)
thereof. Each of these sales was made without the use of an underwriter.
In addition, the Company has agreed to issue 1,531,782 shares of Class A
Common Stock in connection with the acquisition of FAME and Don Law.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
**2.1 Distribution Agreement among the Company, SFX Broadcasting and SFX Buyer
**2.2 Tax Sharing Agreement among the Company, SFX Broadcasting and SFX Buyer
**2.3 Employee Benefits Agreement among the Company, SFX Broadcasting and SFX Buyer
**3.1 Amended and Restated Certificate of Incorporation of the Company
3.2 Certificate of Amendment to the Certificate of Incorporation of SFX Entertainment, Inc., as
filed with the Secretary of State of the State of Delaware on February 25, 1998
(incorporated by reference to Exhibit 3.1 to Form 8-K of SFX Entertainment, Inc. (Commission
File No. 333-43287) filed with the Securities and Exchange Commission on March 11, 1998).
3.3 Certificate of Designation relating to the Series A Preferred Stock of SFX Entertainment,
Inc., as filed with the Secretary of State of the State of Delaware on February 27, 1998
(incorporated by reference to Exhibit 3.1 to Form 8-K of SFX Entertainment, Inc. (Commission
File No. 333-43287) filed with the Securities and Exchange Commission on March 11, 1998).
4.1 Indenture, dated February 11, 1998, by and among SFX Entertainment, Inc., certain of its
subsidiaries and The Chase Manhattan Bank (incorporated by reference to Exhibit 10.2 to the
Form 8-K of SFX Broadcasting, Inc. (Commission File No. 0-22486) filed with the Securities
and Exchange Commission on February 18, 1998).
28
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.1 Registration Rights Agreement, dated as of February 11, 1998, relating to the 9 1/8% Senior
Subordinated Notes due 2008 of SFX Entertainment, Inc., the subsidiaries of SFX
Entertainment named therein, Lehman Brother Inc., Goldman Sachs & Co., BNY Capital Markets,
Inc. and ING Barings (incorporated by reference to Exhibit 10.3 to the Form 8-K of SFX
Broadcasting, Inc. (Commission File No. 0-22486) filed with the Securities and Exchange
Commission on February 18, 1998).
10.2 Credit and Guarantee Agreement, dated as of February 26, 1998, by and among SFX
Entertainment, the Subsidiary Guarantors party thereto, the Lenders party thereto, Goldman
Sachs Credit Partners, L.P., as co-documentation agent, Lehman Commercial Paper Inc., as
co-documentation agent, and The Bank of New York, as administrative agent (incorporated by
reference to Exhibit 10.2 to the Form 8-K of SFX Entertainment, Inc. (Commission File No.
333-43287) filed with the Securities and Exchange Commission on March 11, 1998).
10.3 Purchase Agreement, dated February 5, 1998, relating to the 9 1/8% Senior Subordinated Notes
due 2008 of SFX Entertainment, Inc., the subsidiaries of SFX Entertainment named therein,
Lehman Brother Inc., Goldman Sachs & Co., BNY Capital Markets, Inc. and ING Barings
(incorporated by reference to Exhibit 10.4 to the Form 8-K of SFX Entertainment, Inc.
(Commission File No. 333-43287) filed with the Securities and Exchange Commission on March
11, 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
**10.5 Asset Purchase Agreement, dated April 29, 1998, by and among Blackstone Entertainment LLC,
its members, DLC Acquisition Corp., and SFX Entertainment, Inc.
**10.6 Purchase and Sale Agreement, dated April 22, 1998, by and among Oakdale Concerts, LLC,
Oakdale Development Limited Partnership and Oakdale Theater Concerts, Inc.
**10.7 Stock Purchase and Redemption Agreement, dated May 1, 1998, among Event Merchandising, Inc.,
its stockholders and EMI Acquisition Sub, Inc.
**10.8 Letter of Intent, dated March 6, 1998, among SFX Entertainment, Inc., TBA Entertainment
Corporation, Brian F. Murphy, Randy Brogna and Matt Curto
**10.9 Letter of intent, dated March 9, 1998, among SFX Entertainment Inc., TBA Entertainment
Corporation, Robert E. Geddes, Thomas Miserendino and Brian E. Murphy
27.1* Financial Data Schedule.
</TABLE>
- ------------
* Filed herewith.
** Incorporated by reference to Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-50079) filed with the Commission on
May 5, 1998.
(b) Reports on Form 8-K
On March 11, 1998, the Company filed a Form 8-K under Item 2 (Acquisition
or Disposition of Assets) thereof disclosing the acquisition by the Company
of (i) BG Presents. Inc., (ii) PACE Entertainment Corporation, (iii) The
Contemporary Group, (iv) The Album Network, Inc., SJS Entertainment
Corporation and The Network 40, Inc. and (v) Concert/Southern Promotions; and
under Item 5 (Other Events) thereof, disclosing the execution of a Credit and
Guarantee Agreement.
29
<PAGE>
SIGNATURES
Pursuant to the requirement 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: May 4, 1998 By: /s/ Howard Tytel
-------------------------------
Howard J. Tytel
Executive Vice President,
General Counsel,
Secretary and Director
Date: May 4, 1998 By: /s/ Thomas P. Benson
-------------------------------
Thomas P. Benson
Chief Financial Officer,
Vice President and Director
30
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 93,992,000
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<BONDS> 350,000,000
0
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